# Test Bank of Managerial Accounting 16th edition By Garrison

\$36.50

## Description

Test Bank of Managerial Accounting 16th edition By Garrison

Managerial Accounting, 16e (Garrison)

Appendix 2A  Activity-Based Absorption Costing

1) Feauto Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, I63E and E76I, about which it has provided the following data:

 Direct materials per unit \$ 19.90 \$ 54.40 Direct labor per unit \$ 12.00 \$ 31.50 Direct labor-hours per unit 0.80 2.10 Annual production (units) 30,000 10,000

The company’s estimated total manufacturing overhead for the year is \$2,063,250 and the company’s estimated total direct labor-hours for the year is 45,000.

The company is considering using a form of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Assembling products (DLHs) \$ 720,000 Preparing batches (batches) 263,250 Product support (product variations) 1,080,000 Total \$ 2,063,250

 Expected Activity I63E E76I Total DLHs 24,000 21,000 45,000 Batches 1,080 675 1,755 Product variations 2,115 1,485 3,600

The manufacturing overhead that would be applied to a unit of product I63E under the company’s traditional costing system is closest to:

1. A) \$12.80
2. B) \$39.35
3. C) \$76.03
4. D) \$36.68

Explanation:

 Product I63E 30,000 units × 0.80 direct labor-hours per unit 24,000 Product E76I 10,000 units × 2.10 direct labor-hours per unit 21,000 Total direct labor-hours 45,000

Predetermined overhead rate = \$2,063,250 ÷ 45,000 direct labor-hours = \$45.85 per direct labor-hour

Overhead applied to a unit of product I63E = \$45.85 per direct labor-hours × 0.80 direct labor-hours per unit = \$36.68 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

2) Feauto Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, I63E and E76I, about which it has provided the following data:

 I63E E76I Direct materials per unit \$ 19.90 \$ 54.40 Direct labor per unit \$ 12.00 \$ 31.50 Direct labor-hours per unit 0.80 2.10 Annual production (units) 30,000 10,000

The company’s estimated total manufacturing overhead for the year is \$2,063,250 and the company’s estimated total direct labor-hours for the year is 45,000.

The company is considering using a form of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Assembling products (DLHs) \$ 720,000 Preparing batches (batches) 263,250 Product support (product variations) 1,080,000 Total \$ 2,063,250

 Expected Activity I63E E76I Total DLHs 24,000 21,000 45,000 Batches 1,080 675 1,755 Product variations 2,115 1,485 3,600

The manufacturing overhead that would be applied to a unit of product E76I under the activity-based costing system is closest to:

1. A) \$88.28
2. B) \$96.29
3. C) \$184.57
4. D) \$10.13

Explanation:  The activity rates for each activity cost pool are computed as follows:

 Total Cost Total Activity Activity Rate Assembling products \$ 720,000 45,000 DLHs \$ 16 per DLH Preparing batches 263,250 1,755 batches \$ 150 per batch Product support \$ 1,080,000 3,600 variations \$ 300 per variation

The overhead cost charged to Product E76I is:

 Total Per Unit Percent of Sales Assembling products \$ 16 per DLH 21,000 DLHs \$ 336,000 Preparing batches \$ 150 per batch 675 batches 101,250 Product support \$ 300 per variation 1,485 variations 445,500 \$ 882,750

Manufacturing overhead applied to a unit of product E76I = \$882,750 ÷ 10,000 units = \$88.28 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

3) Coudriet Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, P93S and N40S, about which it has provided the following data:

 P93S N40S Direct materials per unit \$ 21.90 \$ 54.80 Direct labor per unit \$ 8.80 \$ 13.20 Direct labor-hours per unit 0.80 1.20 Annual production (units) 35,000 15,000

The company’s estimated total manufacturing overhead for the year is \$2,172,580 and the company’s estimated total direct labor-hours for the year is 46,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Direct labor support (DLHs) \$ 552,000 Setting up machines (setups) 419,980 Part administration (part types) 1,200,600 Total \$ 2,172,580

 Expected Activity P93S N40S Total DLHs 28,000 18,000 46,000 Setups 2,162 1,656 3,818 Part types 1,886 2,116 4,002

The unit product cost of product P93S under the company’s traditional costing system is closest to:

1. A) \$68.48
2. B) \$63.26
3. C) \$30.70
4. D) \$40.30

Explanation:  Direct labor-hour calculation:

 Product P93S 35,000 units × 0.80 direct labor-hours per unit 28,000 Product R28K 15,000 units × 1.20 direct labor-hours per unit 18,000 Total direct labor-hours 46,000

Predetermined overhead rate = \$2,172,580 ÷ 46,000 direct labor-hours = \$47.23 per direct labor-hour

Overhead per unit of product P93S = \$47.23 per direct labor-hour × 0.80 direct labor-hours per unit = \$37.78 per unit

 Direct materials \$ 21.9 Direct labor 8.8 Overhead 37.78 Unit product cost \$ 68.48

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

4) Coudriet Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, P93S and N40S, about which it has provided the following data:

 P93S N40S Direct materials per unit \$ 21.90 \$ 54.80 Direct labor per unit \$ 8.80 \$ 13.20 Direct labor-hours per unit 0.80 1.20 Annual production (units) 35,000 15,000

The company’s estimated total manufacturing overhead for the year is \$2,172,580 and the company’s estimated total direct labor-hours for the year is 46,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Direct labor support (DLHs) \$ 552,000 Setting up machines (setups) 419,980 Part administration (part types) 1,200,600 Total \$ 2,172,580

 Expected Activity P93S N40S Total DLHs 28,000 18,000 46,000 Setups 2,162 1,656 3,818 Part types 1,886 2,116 4,002

The unit product cost of product N40S under the activity-based costing system is closest to:

1. A) \$68.00
2. B) \$68.86
3. C) \$124.68
4. D) \$136.86

Explanation:  The activity rates for each activity cost pool are computed as follows:

 Total Cost Total Activity Activity Rate Direct labor support \$ 552,000 46,000 DLHs \$ 12 per DLH Setting up machines \$ 419,980 3,818 per setup \$ 110 per setup Part administration \$ 1,200,600 4,002 per part type \$ 300 per part type

The overhead cost charged to Product N40S is:

 Activity Rate Activity ABC Cost Direct labor support \$ 12 per DLH 18,000 DLHs \$ 216,000 Setting up machines \$ 110 per setup 1,656 per setup 182,160 Part administration \$ 300 per part type 2,116 per part type 634,800 1,032,960

Overhead cost per unit of Product N40S = \$1,032,960 ÷ 15,000 units = \$68.86 per unit

 Direct materials \$ 54.80 Direct labor 13.20 Overhead 68.86 Unit product cost \$ 136.86

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

5) Poma Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R78S and N32Y, about which it has provided the following data:

 R78S N32Y Direct materials per unit \$ 27.20 \$ 54.70 Direct labor per unit \$ 8.80 \$ 22.00 Direct labor-hours per unit 0.4 1.0 Annual production (units) 35,000 10,000

The company’s estimated total manufacturing overhead for the year is \$1,427,040 and the company’s estimated total direct labor-hours for the year is 24,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Assembling products (DLHs) \$ 672,000 Preparing batches (batches) 255,840 Product support (product variations) 499,200 Total \$ 1,427,040

 Expected Activity R78S N32Y Total DLHs 14,000 10,000 24,000 Batches 816 1,152 1,968 Product variations 840 408 1,248

The unit product cost of product R78S under the company’s traditional costing system is closest to:

1. A) \$36.00
2. B) \$59.83
3. C) \$47.20
4. D) \$59.78

Explanation:  Direct labor-hour calculation:

 Product R78S 35,000 units × 0.4 direct labor-hours per unit 14,000 Product N32Y 10,000 units × 1.0 direct labor-hours per unit 10,000 Total direct labor-hours 24,000

Predetermined overhead rate = \$1,427,040 ÷ 24,000 direct labor-hours = \$59.46 per direct labor-hour

Overhead applied to each unit of product R78S = \$59.46 per direct labor-hour × 0.4 direct labor-hours per unit = \$23.78 per unit

 Direct materials \$ 27.2 Direct labor 8.8 Overhead 23.78 Unit product cost \$ 59.78

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

6) Poma Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, R78S and N32Y, about which it has provided the following data:

 R78S N32Y Direct materials per unit \$ 27.20 \$ 54.70 Direct labor per unit \$ 8.80 \$ 22.00 Direct labor-hours per unit 0.4 1.0 Annual production (units) 35,000 10,000

The company’s estimated total manufacturing overhead for the year is \$1,427,040 and the company’s estimated total direct labor-hours for the year is 24,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Assembling products (DLHs) \$ 672,000 Preparing batches (batches) 255,840 Product support (product variations) 499,200 Total \$ 1,427,040

 Expected Activity R78S N32Y Total DLHs 14,000 10,000 24,000 Batches 816 1,152 1,968 Product variations 840 408 1,248

The unit product cost of product N32Y under the activity-based costing system is closest to:

1. A) \$136.00
2. B) \$76.70
3. C) \$59.30
4. D) \$136.16

Explanation:  The activity rates for each activity cost pool are computed as follows:

 Total Cost Total Activity Activity Rate Assembling products \$ 672,000 24,000 DLHs \$ 28 per DLH Preparing batches \$ 255,840 1,968 batches \$ 130 per batch Product support \$ 499,200 1,248 variations \$ 400 per variation

The overhead cost charged to Product N32Y is:

 Activity Rate Activity ABC Cost Assembling products \$ 28 per DLH 10,000 DLHs \$ 280,000 Preparing batches \$ 110 per setup 1,656 per setup 182,160 Product support \$ 400 per variation 408 variations 163,200 592,960

Overhead per unit of Product N32Y = \$592,960 ÷ 10,000 units = \$59.30 per unit

 Direct materials \$ 54.7 Direct labor 22 Overhead 59.3 Unit product cost \$ 136

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

7) Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is \$68,756.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:

 Expected Activity Activity Cost Pool Estimated Overhead Costs Product A Product B Total Activity 1 \$ 31,031 1,000 300 1,300 Activity 2 \$ 22,249 1,600 300 1,900 General Factory \$ 15,476 200 200 400 Total \$ 68,756

(Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.)

The predetermined overhead rate under the traditional costing system is closest to:

1. A) \$11.71
2. B) \$38.69
3. C) \$171.89
4. D) \$23.87

Explanation:  Direct labor-hour calculation:

 Product A 500 units × 0.4 direct labor-hours 200 Product B 1,000 units × 0.2 direct labor-hours 200 Total direct labor-hours 400

Predetermined overhead rate = Total estimated overhead ÷ Total estimated direct labor-hours

= \$68,756 ÷ 400 direct labor-hours = \$171.89 per direct labor-hour

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

8) Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is \$68,756.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:

 Expected Activity Activity Cost Pool Estimated Overhead Costs Product A Product B Total Activity 1 \$ 31,031 1,000 300 1,300 Activity 2 \$ 22,249 1,600 300 1,900 General Factory \$ 15,476 200 200 400 Total \$ 68,756

(Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.)

The overhead cost per unit of Product B under the traditional costing system is closest to:

1. A) \$2.34
2. B) \$7.74
3. C) \$4.77
4. D) \$34.38

Explanation:  Direct labor-hour calculation:

 Product A 500 units × 0.4 direct labor-hours 200 Product B 1,000 units × 0.2 direct labor-hours 200 Total direct labor-hours 400

Predetermined overhead rate = Total estimated overhead ÷ Total estimated direct labor-hours

= \$68,756 ÷ 400 direct labor-hours = \$171.89 per direct labor-hour

Overhead cost per unit of B = \$171.89 per direct labor-hour × 0.2 direct labor-hours per unit

= \$34.38 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

9) Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is \$68,756.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:

 Expected Activity Activity Cost Pool Estimated Overhead Costs Product A Product B Total Activity 1 \$ 31,031 1,000 300 1,300 Activity 2 \$ 22,249 1,600 300 1,900 General Factory \$ 15,476 200 200 400 Total \$ 68,756

(Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.)

The predetermined overhead rate (i.e., activity rate) for Activity 2 under the activity-based costing system is closest to:

1. A) \$13.91
2. B) \$11.71
3. C) \$74.16
4. D) \$36.19

Explanation:  Activity rate for Activity 2 = \$22,249 ÷ 1,900 = \$11.71

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

10) Adelberg Corporation makes two products: Product A and Product B. Annual production and sales are 500 units of Product A and 1,000 units of Product B. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.4 direct labor-hours per unit and Product B requires 0.2 direct labor-hours per unit. The total estimated overhead for next period is \$68,756.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:

 Expected Activity Activity Cost Pool Estimated Overhead Costs Product A Product B Total Activity 1 \$ 31,031 1,000 300 1,300 Activity 2 \$ 22,249 1,600 300 1,900 General Factory \$ 15,476 200 200 400 Total \$ 68,756

 (Note: The General Factory activity cost pool’s costs are allocated on the basis of direct labor-hours.)

The overhead cost per unit of Product B under the activity-based costing system is closest to:

1. A) \$45.84
2. B) \$7.74
3. C) \$34.38
4. D) \$18.41

Explanation:  The activity rates for each activity cost pool are computed as follows:

 Total Cost Total Activity Activity Rate Activity 1 \$ 31,031 1,300 \$ 23.87 Activity 2 \$ 22,249 1,900 \$ 11.71 General Factory \$ 15,476 400 \$ 38.69

The overhead cost charged to Product B is:

 Activity Rate Activity ABC Cost Activity 1 \$ 23.87 300 \$ 7,161 Activity 2 \$ 11.71 300 \$ 3,513 General Factory \$ 38.69 200 \$ 7,738 \$ 18,412

Overhead cost per unit of Product B = \$18,412 ÷ 1,000 units = \$18.41 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

11) Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

 Activity Cost Pool Activity Measure Estimated Activity Estimated Overhead Cost Machine Setups Number of setups 400 \$ 150,000 Quality Control Number of inspections 1,500 \$ 180,000 Other Overhead Machine hours 30,000 \$ 480,000

Information (on a per unit basis) related to three popular products at Njombe are as follows:

 Model #19 Model #36 Model #58 Direct material cost \$ 400 \$ 540 \$ 310 Direct labor cost \$ 810 \$ 600 \$ 220 Number of setups 2 3 1 Number of inspections 1 3 1 Number of machine hours 4 8 10

Under the traditional costing system, what would be the selling price of one unit of Model #36?

1. A) \$2,536
2. B) \$2,712
3. C) \$4,080
4. D) \$5,506

Explanation:

 Direct materials \$ 540 Direct labor 600 Manufacturing overhead (1.5 × \$600) 900 Unit product cost \$ 2,040 Selling price (2.00 × \$2,040) \$ 4,080

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

12) Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

 Activity Cost Pool Activity Measure Estimated Activity Estimated Overhead Cost Machine Setups Number of setups 400 \$ 150,000 Quality Control Number of inspections 1,500 \$ 180,000 Other Overhead Machine hours 30,000 \$ 480,000

Information (on a per unit basis) related to three popular products at Njombe are as follows:

 Model #19 Model #36 Model #58 Direct material cost \$ 400 \$ 540 \$ 310 Direct labor cost \$ 810 \$ 600 \$ 220 Number of setups 2 3 1 Number of inspections 1 3 1 Number of machine hours 4 8 10

Under the activity-based costing system, what would be the selling price of one unit of Model #36?

1. A) \$2,536
2. B) \$2,712
3. C) \$4,080
4. D) \$5,506

Explanation:  The activity rates are computed as follows:

 Activity Cost Pools Total Cost Total Activity Activity Rate Machine Setups \$ 150,000 400 setups \$ 375 per setup Quality Control \$ 180,000 1,500 inspections \$ 120 per inspection Other Overhead \$ 480,000 30,000 machine-hours \$ 16 per machine-hour

The overhead cost charged to Model #36 is:

 Activity Cost Pools Activity Rate Activity ABC Cost Machine Setups \$ 375 per setup 3 setups \$ 1,125 Quality Control \$ 120 per inspection 3 inspections 360 Other Overhead \$ 16 per machine-hour 8 machine-hours 128 Total overhead cost \$ 1,613

 Direct materials \$ 540 Direct labor 600 Manufacturing overhead (1.5 × \$600) 1,613 Unit product cost \$ 2,753 Selling price (2.00 × \$2,753) \$ 5,506

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

13) Njombe Corporation manufactures a variety of products. In the past, Njombe has been using a traditional costing system in which the predetermined overhead rate was 150% of direct labor cost. Selling prices had been set by multiplying total product cost by 200%. Sensing that this system was distorting costs and selling prices, Njombe has decided to switch to an activity-based costing system for manufacturing overhead costs that uses the three activity cost pools listed below. Selling prices are still to be set at 200% of unit product cost under the new system. Information on these cost pools for next year are as follows:

 Activity Cost Pool Activity Measure Estimated Activity Estimated Overhead Cost Machine Setups Number of setups 400 \$ 150,000 Quality Control Number of inspections 1,500 \$ 180,000 Other Overhead Machine hours 30,000 \$ 480,000

Information (on a per unit basis) related to three popular products at Njombe are as follows:

 Model #19 Model #36 Model #58 Direct material cost \$ 400 \$ 540 \$ 310 Direct labor cost \$ 810 \$ 600 \$ 220 Number of setups 2 3 1 Number of inspections 1 3 1 Number of machine hours 4 8 10

In comparing the traditional system with the activity-based costing system, which of Njombe’s Models had higher unit product costs under the traditional system?

1. A) #19
2. B) #58
3. C) #19 and #58
4. D) #36 and #58

Explanation:  The activity rates are computed as follows:

 Activity Cost Pools Total Cost Total Activity Activity Rate Machine Setups \$ 150,000 400 setups \$ 375 per setup Quality Control \$ 180,000 1,500 inspections \$ 120 per inspection Other Overhead \$ 480,000 30,000 machine-hours \$ 16 per machine-hour

The overhead cost charged to Model #19 is:

 Activity Cost Pools Activity Rate Activity ABC Cost Machine Setups \$ 375 per setup 2 setups \$ 750 Quality Control \$ 120 per inspection 1 inspection 120 Other Overhead \$ 16 per machine-hour 4 machine-hours 64 Total overhead cost \$ 934

The overhead cost charged to Model # 36 is:

 Activity Cost Pools Activity Rate Activity ABC Cost Machine Setups \$ 375 per setup 3 setups \$ 1,125 Quality Control \$ 120 per inspection 3 inspections 360 Other Overhead \$ 16 per machine-hour 8 machine-hours 128 Total overhead cost \$ 1,613

The overhead cost charged to Model # 58 is:

 Activity Cost Pools Activity Rate Activity ABC Cost Machine Setups \$ 375 per setup 1 setup \$ 375 Quality Control \$ 120 per inspection 1 inspection 120 Other Overhead \$ 16 per machine-hour 10 machine-hours 160 Total overhead cost \$ 655

 Model #19 Model #36 Model #58 Direct labor cost \$ 810 \$ 600 \$ 220 Overhead cost (150% of direct labor cost) \$ 1,125 \$ 900 \$ 330

The overhead costs are the only difference in unit product costs between the traditional costing system and the activity-based costing system. Therefore, Model #19 is the only product that has a higher unit product cost under the traditional system.

Difficulty: 3 Hard

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

14) Look Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, N06D and M09K, about which it has provided the following data:

 N06D M09K Direct materials per unit \$ 17.70 \$ 62.50 Direct labor per unit \$ 5.00 \$ 16.00 Direct labor-hours per unit 0.50 1.60 Annual production (units) 40,000 15,000

The company’s estimated total manufacturing overhead for the year is \$2,532,200 and the company’s estimated total direct labor-hours for the year is 44,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Supporting direct labor (DLHs) \$ 880,000 Setting up machines (setups) 376,200 Parts administration (part types) 1,276,000 Total \$ 2,532,200

 Expected Activity N06D M09K Total DLHs 20,000 24,000 44,000 Setups 1,408 1,100 2,508 Part types 1,540 1,012 2,552

The manufacturing overhead that would be applied to a unit of product N06D under the company’s traditional costing system is closest to:

1. A) \$28.78
2. B) \$10.00
3. C) \$63.31
4. D) \$34.53

Explanation:  Direct labor-hour calculation:

 Product N06D 40,000 units × 0.50 direct labor-hours per unit 20,000 Product M09K 15,000 units × 1.60 direct labor-hours per unit 24,000 Total direct labor-hours 44,000

 Predetermined overhead rate = Total estimated overhead cost ÷ Total estimated direct labor-hours = \$2,532,200 ÷ 44,000 direct labor-hours = \$57.55 per direct labor-hour

Overhead applied to product N06D = \$57.55 per direct labor-hour × 0.50 direct labor-hours per unit

= \$28.78 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

15) Look Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, N06D and M09K, about which it has provided the following data:

 N06D M09K Direct materials per unit \$ 17.70 \$ 62.50 Direct labor per unit \$ 5.00 \$ 16.00 Direct labor-hours per unit 0.50 1.60 Annual production (units) 40,000 15,000

The company’s estimated total manufacturing overhead for the year is \$2,532,200 and the company’s estimated total direct labor-hours for the year is 44,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Supporting direct labor (DLHs) \$ 880,000 Setting up machines (setups) 376,200 Parts administration (part types) 1,276,000 Total \$ 2,532,200

 Expected Activity N06D M09K Total DLHs 20,000 24,000 44,000 Setups 1,408 1,100 2,508 Part types 1,540 1,012 2,552

The manufacturing overhead that would be applied to a unit of product M09K under the activity-based costing system is closest to:

1. A) \$76.73
2. B) \$92.08
3. C) \$11.00
4. D) \$168.81

Explanation:  The activity rates for each activity cost pool are computed as follows:

 Total Cost Total Activity Activity Rate Supporting direct labor \$ 880,000 44,000 DLHs \$ 20 per DLH Setting up machines 376,200 2,508 setups \$ 150 per setup Parts administration \$ 1,276,000 2,552 part types \$ 500 per part type

The overhead cost charged to Product M09K is:

 Activity Rate Activity ABC Cost Supporting direct labor \$ 20 per DLH 24,000 DLHs \$ 480,000 Setting up machines \$ 150 per setup 1,100 setups 165,000 Parts administration \$ 500 per part type 1,012 part types 506,000 \$ 1,151,000

Overhead applied to a unit of product M09K = \$1,151,000 ÷ 15,000 units = \$76.73 per unit

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

16) Bullie Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, D31X and U75X, about which it has provided the following data:

 D31X U75X Direct materials per unit \$ 29.20 \$ 47.40 Direct labor per unit \$ 1.10 \$ 23.10 Direct labor-hours per unit 0.10 2.10 Annual production (units) 35,000 15,000

The company’s estimated total manufacturing overhead for the year is \$1,147,650 and the company’s estimated total direct labor-hours for the year is 35,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Assembling products (DLHs) \$ 140,000 Preparing batches (batches) 241,150 Axial milling (MHs) 766,500 Total \$ 1,147,650

 D31X U75X Total Assembling products 3,500 31,500 35,000 Preparing batches 560 1,295 1,855 Axial milling 1,540 1,015 2,555

Required:

1. Determine the manufacturing overhead cost per unit of each of the company’s two products under the traditional costing system.
2. Determine the manufacturing overhead cost per unit of each of the company’s two products under activity-based costing system.

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = \$1,147,650 ÷ 35,000 DLHs = \$32.79 per DLH

 D31X U75X Direct labor-hours 0.10 2.10 Predetermined overhead rate per DLH \$ 32.79 \$ 32.79 Manufacturing overhead cost per unit \$ 3.28 \$ 68.86

 Estimated Overhead Cost Total Expected Activity Activity Rate Assembling products \$ 140,000 35,000 DLHs \$ 4 per DLH Preparing batches \$ 241,150 1,855 batches \$ 130 per batch Axial milling \$ 766,500 2,555 MHs \$ 300 per MH

 Activity Rate Activity ABC Cost Assembling products \$ 4 per DLH 3,500 DLHs \$ 14,000 Preparing batches \$ 130 per batch 560 batches 72,800 Axial milling \$ 300 per MH 1,540 MHs 462,000 Total \$ 548,800 Annual production (units) 35,000 Manufacturing overhead cost per unit \$ 15.68

 Activity Rate Activity ABC Cost Assembling products \$ 4 per DLH 31,500 DLHs \$ 126,000 Preparing batches \$ 130 per batch 1,295 batches 168,350 Axial milling \$ 300 per MH 1,015 MHs 304,500 Total \$ 598,850 Annual production (units) 15,000 Manufacturing overhead cost per unit \$ 39.92

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

17) Torri Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, B40W and C63J, about which it has provided the following data:

 B40W C63J Direct materials per unit \$ 34.90 \$ 63.70 Direct labor per unit \$ 20.80 \$ 62.40 Direct labor-hours per unit 0.80 2.40 Annual production (units) 35,000 15,000

The company’s estimated total manufacturing overhead for the year is \$2,656,000 and the company’s estimated total direct labor-hours for the year is 64,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Assembling products (DLHs) \$ 1,216,000 Preparing batches (batches) 480,000 Milling (MHs) 960,000 Total \$ 2,656,000

 Activities B40W C63J Total Assembling products 28,000 36,000 64,000 Preparing batches 2,304 2,496 4,800 Milling 1,088 2,112 3,200

Required:

1. Determine the unit product cost of each of the company’s two products under the traditional costing system.
2. Determine the unit product cost of each of the company’s two products under activity-based costing system.

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = \$2,656,000 ÷ 64,000 DLHs= \$41.50 per DLH

 B40W C63J Direct materials \$ 34.90 \$ 63.70 Direct labor 20.80 62.40 Manufacturing overhead (0.8 DLHs × \$41.50 per DLH; 2.4 DLHs × \$41.50 per DLH) 33.20 99.60 Unit product cost \$ 88.90 \$ 225.70

 Estimated Overhead Cost Total Expected Activity Activity Rate Assembling products \$ 1,216,000 64,000 DLHs \$ 19 per DLH Preparing batches \$ 480,000 4,800 batches \$ 100 per batch Milling \$ 960,000 3,200 MHs \$ 300 per MH

 Activity Rate Activity ABC Cost Assembling products \$ 19 per DLH 28,000 DLHs \$ 532,000 Preparing batches \$ 100 per batch 2,304 batches 230,400 Milling \$ 300 per MH 1,088 MHs 326,400 Total \$ 1,088,800

 Activity Rate Activity ABC Cost Assembling products \$ 19 per DLH 36,000 DLHs \$ 684,000 Preparing batches \$ 100 per batch 2,496 batches 249,600 Milling \$ 300 per MH 2,112 MHs 633,600 Total \$ 1,567,200

 B40W C63J Direct materials \$ 34.90 \$ 63.70 Direct labor 20.80 62.40 Manufacturing overhead (\$1,088,800 ÷ 35,000 units; \$1,567,200 ÷ 15,000 units) 31.11 104.48 Unit product cost \$ 86.81 \$ 230.58

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

18) Cabigas Corporation manufactures two products, Product C and Product D. The company estimated it would incur \$167,140 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor-hours. Data concerning the current period’s operations appear below:

 Product C Product D Estimated volume 2,000 units 2,700 units Direct labor per unit 2.00 hours 0.80 hour Direct labor-hours per unit \$ 21.50 \$ 24.10 Annual production (units) \$ 24.00 \$ 9.60

Required:

1. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.
2. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor-hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below:

 Expected Activity Activity Cost Pool Estimated Overhead Costs Product C Product D Total Machine setups \$ 13,630 130 190 290 Purchase orders 85,750 750 1,000 1,750 General Factory 67,760 4,000 2,160 6,160 Total \$ 167,140

Determine the unit product cost of each product for the current period using the activity-based costing approach. General factory overhead is allocated based on direct labor-hours.

1. The expected total direct labor-hours during the period are computed as follows:

 Product C: 2,000 units × 2.0 hours per unit 4,000 hours Product D: 2,700 units × 0.8 hours per unit 2,160 hours Total direct labor-hours 6,160 hours

Using these hours as a base, the predetermined overhead using direct labor-hours would be:

Predetermined overhead rate = Estimated total overhead cost ÷ Estimated total direct labor-hours = \$167,140 ÷ 6,160 DLHs = \$27.13 per DLH

Using this overhead rate, the unit product costs are:

 Product C Product D Direct materials \$ 21.50 \$ 24.10 Direct labor 24.00 9.60 Manufacturing overhead (2.0 DLHs × \$27.13 per DLH; 0.8 DLHs × \$27.13 per DLH) 54.27 21.71 Total unit product cost \$ 99.77 \$ 55.41

1. The activity rates for each activity cost pool are as follows:

 Estimated Overhead Cost Expected Activity Activity Rate Machine setups \$ 13,630 290 setups \$ 47.00 per setup Purchase orders \$ 85,750 1,750 orders \$ 49.00 per order General factory \$ 67,760 6,160 DLHs \$ 11.00 per DLH

The overhead cost charged to Product C is:

 Activity Rate Activity Amount Machine setups \$ 53.00 per setup 130 setups \$ 6,110 Purchase orders \$ 38.00 per order 750 orders 36,750 General factory \$ 13.00 per DLH 4,000 DLHs 44,000 Total overhead cost \$ 86,860

The overhead cost charged to Product D is:

 Activity Rate Activity Amount Machine setups \$ 53.00 per setup 160 setups \$ 7,520 Purchase orders \$ 38.00 per order 1,000 orders 49,000 General factory \$ 13.00 per DLH 2,160 DLHs 23,760 Total overhead cost \$ 80,280

Product C: \$86,860 ÷ 2,000 units = \$43.43 per unit.

Product D: \$80,280 ÷ 2,700 units = \$29.73 per unit.

Using activity based costing, the unit product cost of each product would be:

 Product C Product D Direct materials \$ 21.50 \$ 24.10 Direct labor 24.00 9.60 Manufacturing overhead 43.43 29.73 Total unit product cost \$ 88.93 \$ 63.43

Difficulty: 3 Hard

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

19) Welk Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, H16Z and P25P, about which it has provided the following data:

 H16Z P25P Direct materials per unit \$ 10.20 \$ 50.50 Direct labor per unit \$ 8.40 \$ 25.20 Direct labor-hours per unit 0.40 1.20 Annual production (units) 30,000 10,000

The company’s estimated total manufacturing overhead for the year is \$1,464,480 and the company’s estimated total direct labor-hours for the year is 24,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Supporting direct labor (DLHs) \$ 552,000 Setting up machines (setups) 132,480 Parts administration (part types) 780,000 Total \$ 1,464,480

 H16Z P25P Total Supporting direct labor 12,000 12,000 24,000 Setting up machines 864 240 1,104 Parts administration 600 960 1,560

 Required:

1. Determine the manufacturing overhead cost per unit of each of the company’s two products under the traditional costing system.
2. Determine the manufacturing overhead cost per unit of each of the company’s two products under activity-based costing system.

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = \$1,464,480 ÷ 24,000 DLHs = \$61.02 per DLH

 D31X U75X Direct labor-hours 0.40 1.20 Predetermined overhead rate per DLH \$ 61.02 \$ 61.02 Manufacturing overhead cost per unit \$ 24.41 \$ 73.22

 Estimated Overhead Cost Total Expected Activity Activity Rate Supporting direct labor \$ 552,000 24,000 DLHs \$ 23 per DLH Setting up machines \$ 132,480 1,104 setups \$ 120 per setup Parts administration \$ 780,000 1,560 part types \$ 500 per part type

 Activity Rate Activity ABC Cost Supporting direct labor \$ 23 per DLH 12,000 DLHs \$ 276,000 Setting up machines \$ 120 per setup 864 setups 103,680 Parts administration \$ 500 per part type 600 part types 300,000 Total \$ 679,680 Annual production (units) 30,000 Manufacturing overhead cost per unit \$ 22.66

 Activity Rate Activity ABC Cost Supporting direct labor \$ 23 per DLH 12,000 DLHs \$ 276,000 Setting up machines \$ 120 per setup 240 setups 28,800 Parts administration \$ 500 per part type 960 part types 480,000 Total \$ 784,800 Annual production (units) 10,000 Manufacturing overhead cost per unit \$ 78.48

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

20) Werger Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, W82R and L48S, about which it has provided the following data:

 W82R L48S Direct materials per unit \$ 11.50 \$ 62.90 Direct labor per unit \$ 2.00 \$ 13.00 Direct labor-hours per unit 0.20 1.30 Annual production (units) 45,000 10,000

The company’s estimated total manufacturing overhead for the year is \$1,521,960 and the company’s estimated total direct labor-hours for the year is 22,000.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

 Activities and Activity Measures Estimated Overhead Cost Supporting direct labor (DLHs) \$ 352,000 Setting up machines (setups) 201,960 Parts administration (part types) 968,000 Total \$ 1,521,960

 Activities W82R L48S Total Supporting direct labor 9,000 13,000 22,000 Setting up machines 814 374 1,188 Parts administration 924 1,012 1,936

Required:

1. Determine the unit product cost of each of the company’s two products under the traditional costing system.
2. Determine the unit product cost of each of the company’s two products under activity-based costing system.

a.

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = \$1,521,960 ÷ 22,000 DLHs = \$69.18 per DLH

 W82R L48S Direct materials \$ 11.50 \$ 62.90 Direct labor 2.00 13.00 Manufacturing overhead (0.20 DLHs × \$69.18 per DLH; 1.3 DLHs × \$69.18 per DLH) 13.84 89.93 Unit product cost \$ 27.34 \$ 165.83

b.

ABC Unit Product Costs.

 Estimated Overhead Cost Total Expected Activity Activity Rate Supporting direct labor \$ 352,000 22,000 DLHs \$ 16 per DLH Setting up machines \$ 201,960 1,188 setups 170 per setup Parts administration \$ 968,000 1,936 part types 500 per part type

 Activity Rate Activity ABC Cost Supporting direct labor \$ 16 per DLH 9,000 DLHs \$ 144,000 Setting up machines \$ 170 per setup 814 setups 138,380 Parts administration \$ 500 per part type 924 part types 462,000 Total \$ 744,380

 Activity Rate Activity ABC Cost Supporting direct labor \$ 16 per DLH 13,000 DLHs \$ 208,000 Setting up machines \$ 170 per setup 374 setups 63,580 Parts administration \$ 500 per part type 1,012 part types 506,000 Total \$ 777,580

 W82R L48S Direct materials \$ 11.50 \$ 62.90 Direct labor 2.00 13.00 Manufacturing overhead (\$744,400 ÷ 45,000 units; \$777,600 ÷ 10,000 units) 16.54 77.76 Unit product cost \$ 30.04 \$ 153.66

Difficulty: 2 Medium

Topic:  Activity-Based Absorption Costing

Learning Objective:  02-05 (Appendix 2A) Use activity-based absorption costing to compute unit product costs.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement; BB Critical Thinking

Managerial Accounting, 16e (Garrison)

Appendix 2B  The Predetermined Overhead Rate and Capacity

1) When the fixed costs of capacity are spread over the estimated activity of the period rather than the level of activity at capacity, the units that are produced must shoulder the costs of unused capacity.

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

2) When the predetermined overhead rate is based on the level of activity at capacity, an item called the Cost of Unused Capacity may appear to be treated as a period expense on income statements prepared for internal management use.

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

3) If the predetermined overhead rate is based on the estimated level of activity for the current period, then products will be charged only for the capacity that they use and will not be charged for the capacity they don’t use.

Difficulty: 2 Medium

Topic:  The Predetermined Overhead Rate and Capacity

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

4) Risser Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated jointer. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 14,256 Capacity of the jointer 240 hours Actual results: Sales \$ 62,310 Direct materials \$ 14,100 Direct labor \$ 16,000 Actual total fixed manufacturing overhead \$ 14,256 Selling and administrative expense \$ 8,900 Actual hours of jointer use 220 hours

The gross margin that would be reported on the income statement prepared for internal management purposes would be closest to:

1. A) \$10,242
2. B) \$19,142
3. C) \$17,954
4. D) \$62,310

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$14,256 ÷ 240 hours = \$59.40 per hour

 Sales \$ 62,310 Cost of Goods Sold: Direct materials \$ 14,100 Direct labor 16,000 Manufacturing overhead applied 260 hours × \$59.40 per hour 13,068 43,168 Gross margin \$ 19,142

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead; Computation of Total Job Costs and Unit Product Costs

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.; 02-03 Compute the total cost and the unit product cost of a job using a plantwide predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

5) The management of Garn Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated activity for the coming year. The Corporation’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated activity for the upcoming year is 69,000 machine-hours. Capacity is 85,000 machine-hours. All of the manufacturing overhead is fixed and is \$4,105,500 per year within the range of 69,000 to 85,000 machine-hours. If the Corporation bases its predetermined overhead rate on capacity but the actual level of activity for the year turns out to be 69,700 machine-hours, the cost of unused capacity shown on the income statement prepared for internal management purposes would be closest to:

1. A) \$772,800
2. B) \$780,640
3. C) \$738,990
4. D) \$41,650

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$4,105,500 ÷ 85,000 machine-hours = \$48.30 per machine-hour

 Actual manufacturing overhead cost incurred \$ 4,105,500 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 48.30 per machine-hour Actual hours 69,700 machine-hours Manufacturing overhead applied to jobs \$ 3,366,510 Cost of unused capacity \$ 738,990

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

6) The management of Krach Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 10,000 machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is assumed to be 9,500 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$12,000 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

1. A) \$2,000
2. B) \$2,500
3. C) \$1,900
4. D) \$600

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$12,000 ÷ 12,000 machine-hours = \$1.00 per machine-hour

 Actual manufacturing overhead cost incurred \$ 12,000 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 1.00 per machine-hour Actual hours 9,500 machine-hours Manufacturing overhead applied to jobs \$ 9,500 Cost of unused capacity \$ 2,500

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

7) The management of Winterroth Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The Corporation’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours.

 Estimated at the Beginning of the Year Capacity Actual Machine-hours 53,000 63,000 49,000 Manufacturing overhead \$ 1,803,060 \$ 1,803,060 \$ 1,803,060

If the Corporation bases its predetermined overhead rate on capacity, then as shown on the income statement prepared for internal management purposes, the cost of unused capacity would be closest to:

1. A) \$286,200
2. B) \$400,680
3. C) \$264,600
4. D) \$136,080

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$1,803,060 ÷ 63,000 machine-hours = \$28.62 per machine-hour

 \$ 1,803,06 Actual manufacturing overhead cost incurred 0 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 28.62 per machine-hour Actual hours 49,000 machine-hours Manufacturing overhead applied to jobs 1,402,380 Cost of unused capacity \$ 400,680

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

8) Dowty Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated lathe. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 19,964 Capacity of the lathe 280 hours Actual results: Actual total fixed manufacturing overhead \$ 19,964 Actual hours of lathe use 230 hours

The manufacturing overhead applied is closest to:

1. A) \$19,964
2. B) \$16,399
3. C) \$7,639
4. D) \$9,300

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$19,964 ÷ 280 hours = \$71.30 per hour

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = 230 hours × \$71.30 per hour = \$16,399

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

9) Rapier Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated jointer. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 3,740 Capacity of the jointer 200 hours Actual results: Actual total fixed manufacturing overhead \$ 3,740 Actual hours of jointer use 170 hours

The predetermined overhead rate based on hours at capacity is closest to:

1. A) \$58.24 per hour
2. B) \$49.50 per hour
3. C) \$22.00 per hour
4. D) \$18.70 per hour

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$3,740 ÷ 200 hours = \$18.70 per hour

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

10) Traeger Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated bandsaw. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 26,936 Capacity of the bandsaw 280 hours Actual results: Actual total fixed manufacturing overhead \$ 26,936 Actual hours of bandsaw use 260 hours

The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:

1. A) \$1,924
2. B) \$18,136
3. C) \$0
4. D) \$18,765

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$26,936 ÷ 280 hours = \$96.20 per hour

Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (280 hours − 260 hours) × \$96.20 per hour = \$1,924

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

11) Mausser Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated jointer. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 11,648 Capacity of the jointer 280 hours Actual results: Sales \$ 52,760 Direct materials \$ 13,300 Direct labor \$ 16,000 Actual total fixed manufacturing overhead \$ 11,648 Selling and administrative expense \$ 9,300 Actual hours of jointer use 260 hours

The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:

1. A) \$0
2. B) \$2,348
3. C) \$832
4. D) \$3,012

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$11,648 ÷ 280 hours = \$41.60 per hour

Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (280 hours − 260 hours) × \$41.60 per hour = \$832

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

12) Mausser Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated jointer. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 11,648 Capacity of the jointer 280 hours Actual results: Sales \$ 52,760 Direct materials \$ 13,300 Direct labor \$ 16,000 Actual total fixed manufacturing overhead \$ 11,648 Selling and administrative expense \$ 9,300 Actual hours of jointer use 260 hours

The gross margin that would be reported on the income statement prepared for internal management purposes would be closest to:

1. A) \$52,760
2. B) \$3,344
3. C) \$12,644
4. D) \$11,812

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$11,648 ÷ 280 hours = \$41.60 per hour

 Sales \$ 52,760 Cost of Goods Sold: Direct materials \$ 13,300 Direct labor 16,000 Manufacturing overhead applied 260 hours × \$41.60 per hour 10,816 40,116 Gross margin \$ 12,644

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead; Computation of Total Job Costs and Unit Product Costs

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.; 02-03 Compute the total cost and the unit product cost of a job using a plantwide predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

13) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated shaper. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 33,075 Capacity of the shaper 270 hours Actual results: Sales \$ 79,268 Direct materials \$ 12,200 Direct labor \$ 17,400 Actual total fixed manufacturing overhead \$ 33,075 Selling and administrative expense \$ 8,100 Actual hours of shaper use 250 hours

The predetermined overhead rate based on hours at capacity is closest to:

1. A) \$30.00 per hour
2. B) \$122.50 per hour
3. C) \$32.40 per hour
4. D) \$132.30 per hour

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$33,075 ÷ 270 hours = \$122.50 per hour

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

14) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated shaper. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 33,075 Capacity of the shaper 270 hours Actual results: Sales \$ 79,268 Direct materials \$ 12,200 Direct labor \$ 17,400 Actual total fixed manufacturing overhead \$ 33,075 Selling and administrative expense \$ 8,100 Actual hours of shaper use 250 hours

The manufacturing overhead applied is closest to:

1. A) \$7,500
2. B) \$33,075
3. C) \$8,100
4. D) \$30,625

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$33,075 ÷ 270 hours = \$122.50 per hour

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = 250 hours × \$122.50 per hour = \$30,625

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

15) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated shaper. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 33,075 Capacity of the shaper 270 hours Actual results: Sales \$ 79,268 Direct materials \$ 12,200 Direct labor \$ 17,400 Actual total fixed manufacturing overhead \$ 33,075 Selling and administrative expense \$ 8,100 Actual hours of shaper use 250 hours

The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:

1. A) \$2,450
2. B) \$0
3. C) \$24,975
4. D) \$25,575

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$33,075 ÷ 270 hours = \$122.50 per hour

Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (270 hours − 250 hours) × \$122.50 per hour = \$2,450

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

16) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated shaper. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 33,075 Capacity of the shaper 270 hours Actual results: Sales \$ 79,268 Direct materials \$ 12,200 Direct labor \$ 17,400 Actual total fixed manufacturing overhead \$ 33,075 Selling and administrative expense \$ 8,100 Actual hours of shaper use 250 hours

The gross margin that would be reported on the income statement prepared for internal management purposes would be closest to:

1. A) \$19,043
2. B) \$16,593
3. C) \$10,943
4. D) \$79,268

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$33,075 ÷ 270 hours = \$122.50 per hour

 Sales \$ 79,268 Cost of Goods Sold: Direct materials \$ 12,200 Direct labor 17,400 Manufacturing overhead applied 250 hours × \$122.50 per hour 30,625 60,225 Gross margin \$ 19,043

Difficulty: 1 Easy

Topic:  The Predetermined Overhead Rate and Capacity; Computing Predetermined Overhead Rates; Applying Manufacturing Overhead; Computation of Total Job Costs and Unit Product Costs

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.; 02-03 Compute the total cost and the unit product cost of a job using a plantwide predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

17) Dunnings Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated router. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 10,998 Capacity of the router 180 hours Actual results: Actual total fixed manufacturing overhead \$ 10,998 Actual hours of router use 130 hours

The predetermined overhead rate based on hours at capacity is closest to:

1. A) \$84.60 per hour
2. B) \$61.10 per hour
3. C) \$61.54 per hour
4. D) \$44.44 per hour

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$10,998 ÷ 180 hours = \$61.10 per hour

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

18) Dunnings Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated router. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 10,998 Capacity of the router 180 hours Actual results: Actual total fixed manufacturing overhead \$ 10,998 Actual hours of router use 130 hours

The manufacturing overhead applied is closest to:

1. A) \$7,943
2. B) \$8,000
3. C) \$5,778
4. D) \$10,998

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$10,998 ÷ 180 hours = \$61.10 per hour

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = 130 hours × \$61.10 per hour = \$7,943

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

19) The management of Bullinger Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 9,000 machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is assumed to be 7,700 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$11,880 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

If the company bases its predetermined overhead rate on the estimated amount of the allocation base for the upcoming year, then the predetermined overhead rate is closest to:

1. A) \$1.32 per machine-hour
2. B) \$1.49 per machine-hour
3. C) \$0.99 per machine-hour
4. D) \$1.54 per machine-hour

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total amount of the allocation base

= \$11,880 ÷ 9,000 machine-hours = \$1.32 per machine-hour

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

20) The management of Bullinger Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 9,000 machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is assumed to be 7,700 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$11,880 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

If the company bases its predetermined overhead rate on capacity, then the predetermined overhead rate is closest to:

1. A) \$1.54 per machine-hour
2. B) \$1.32 per machine-hour
3. C) \$1.49 per machine-hour
4. D) \$0.99 per machine-hour

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$11,880 ÷ 12,000 machine-hours = \$0.99 per machine-hour

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

21) The management of Bullinger Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 9,000 machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is assumed to be 7,700 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$11,880 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

1. A) \$2,970
2. B) \$2,541
3. C) \$1,716
4. D) \$4,257

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$11,880 ÷ 12,000 machine-hours = \$0.99 per machine-hour

 Actual manufacturing overhead cost incurred \$ 11,880 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 0.99 per machine-hour Actual hours 7,700 machine-hours Manufacturing overhead applied to jobs \$ 7,623 Cost of unused capacity \$ 4,257

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

22) Zackery Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated lathe. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 7,452 Capacity of the lathe 230 hours Actual results: Actual total fixed manufacturing overhead \$ 7,452 Actual hours of lathe use 180 hours

The manufacturing overhead applied is closest to:

1. A) \$9,900
2. B) \$5,832
3. C) \$7,748
4. D) \$7,452

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$7,452 ÷ 230 hours = \$32.40 per hour

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = 180 hours × \$32.40 per hour = \$5,832

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

23) Zackery Woodworking Corporation produces fine cabinets. The company uses a job-order costing system in which its predetermined overhead rate is based on capacity. The capacity of the factory is determined by the capacity of its constraint, which is an automated lathe. Additional information is provided below for the most recent month:

 Estimates at the beginning of the month: Estimated total fixed manufacturing overhead \$ 7,452 Capacity of the lathe 230 hours Actual results: Actual total fixed manufacturing overhead \$ 7,452 Actual hours of lathe use 180 hours

The cost of unused capacity that would be reported as a period expense on the income statement prepared for internal management purposes would be closest to:

1. A) \$2,448
2. B) \$296
3. C) \$0
4. D) \$1,620

Explanation:  Predetermined overhead rate based on capacity = Estimated total fixed manufacturing overhead cost at capacity ÷ Estimated total amount of the allocation base at capacity = \$7,452 ÷ 230 hours = \$32.40 per hour

Cost of unused capacity = (Amount of the allocation base at capacity − Actual amount of the allocation base) × Predetermined overhead rate = (230 hours − 180 hours) × \$32.40 per hour = \$1,620

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

24) The management of Holdaway Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 79,000 machine-hours. Capacity is 88,000 machine-hours and the actual level of activity for the year is assumed to be 74,900 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$5,700,640 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

If the company bases its predetermined overhead rate on capacity, then the predetermined overhead rate is closest to:

1. A) \$72.16 per machine-hour
2. B) \$70.38 per machine-hour
3. C) \$76.11 per machine-hour
4. D) \$64.78 per machine-hour

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$5,700,640 ÷ 88,000 machine-hours = \$64.78 per machine-hour

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

25) The management of Holdaway Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 79,000 machine-hours. Capacity is 88,000 machine-hours and the actual level of activity for the year is assumed to be 74,900 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$5,700,640 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

1. A) \$295,856
2. B) \$848,618
3. C) \$583,020
4. D) \$552,762

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$5,700,640 ÷ 88,000 machine-hours = \$64.78 per machine-hour

 Actual manufacturing overhead cost incurred \$ 5,700,640 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 64.78 per machine-hour Actual hours 74,900 machine-hours Manufacturing overhead applied to jobs \$ 4,852,022 Cost of unused capacity \$ 848,618

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

26) The management of Featheringham Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 62,000 machine-hours. Capacity is 75,000 machine-hours and the actual level of activity for the year is assumed to be 59,000 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$2,836,500 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Z77W which required 410 machine-hours.

If the company bases its predetermined overhead rate on capacity, then the predetermined overhead rate is closest to:

1. A) \$48.08 per machine-hour
2. B) \$37.82 per machine-hour
3. C) \$48.91 per machine-hour
4. D) \$45.75 per machine-hour

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$2,836,500 ÷ 75,000 machine-hours = \$37.82 per machine-hour

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

27) The management of Featheringham Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 62,000 machine-hours. Capacity is 75,000 machine-hours and the actual level of activity for the year is assumed to be 59,000 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$2,836,500 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Z77W which required 410 machine-hours.

If the company bases its predetermined overhead rate on capacity, then the amount of manufacturing overhead charged to job Z77W is closest to:

1. A) \$15,506.20
2. B) \$19,065.00
3. C) \$20,051.12
4. D) \$19,711.27

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$2,836,500 ÷ 75,000 machine-hours = \$37.82 per machine-hour

 Manufacturing overhead applied to Job Z77W Number of hours for the job 410 machine-hours Predetermined overhead rate \$ 37.82 per machine-hour Manufacturing overhead applied to the job \$ 15,506.20

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  FN Measurement

28) The management of Featheringham Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 62,000 machine-hours. Capacity is 75,000 machine-hours and the actual level of activity for the year is assumed to be 59,000 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$2,836,500 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Z77W which required 410 machine-hours.

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

1. A) \$137,250
2. B) \$605,120
3. C) \$491,660
4. D) \$467,870

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$2,836,500 ÷ 75,000 machine-hours = \$37.82 per machine-hour

 Actual manufacturing overhead cost incurred \$ 2,836,500 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 37.82 per machine-hour Actual hours 59,000 machine-hours Manufacturing overhead applied to jobs \$ 2,231,380 Cost of unused capacity \$ 605,120

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

29) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

If the company bases its predetermined overhead rate on the estimated amount of the allocation base for the upcoming year, then the predetermined overhead rate is closest to:

1. A) \$57.05 per machine-hour
2. B) \$60.83 per machine-hour
3. C) \$59.86 per machine-hour
4. D) \$50.37 per machine-hour

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total amount of the allocation base = \$4,130,340 ÷ 69,000 machine-hours = \$59.86 per machine-hour

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

30) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

If the company bases its predetermined overhead rate on the estimated amount of the allocation base for the upcoming year, then the amount of manufacturing overhead charged to Job Q20L is closest to:

1. A) \$23,673.90
2. B) \$26,812.98
3. C) \$28,589.98
4. D) \$28,134.20

Explanation:  Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = \$59.86 per machine-hour × 470 machine-hours = \$28,134.20

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

31) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

If the company bases its predetermined overhead rate on capacity, then the predetermined overhead rate is closest to:

1. A) \$57.05 per machine-hour
2. B) \$59.86 per machine-hour
3. C) \$50.37 per machine-hour
4. D) \$60.83 per machine-hour

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$4,130,340 ÷ 82,000 machine-hours = \$50.37 per machine-hour

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

32) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

If the company bases its predetermined overhead rate on capacity, then the amount of manufacturing overhead charged to Job Q20L is closest to:

1. A) \$28,589.98
2. B) \$26,592.60
3. C) \$26,812.98
4. D) \$23,673.90

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$4,130,340 ÷ 82,000 machine-hours = \$50.37 per machine-hour

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the allocation base = \$50.37 per machine-hour × 470 machine-hours = \$23,673.90

Difficulty: 1 Easy

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  FN Measurement

33) The management of Plitt Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be \$4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

If the company bases its predetermined overhead rate on capacity, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

1. A) \$654,810
2. B) \$687,076
3. C) \$547,669
4. D) \$483,552

Explanation:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$4,130,340 ÷ 82,000 machine-hours = \$50.37 per machine-hour

 Actual manufacturing overhead cost incurred \$ 4,130,340 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 50.37 per machine-hour Actual hours 72,400 machine-hours Manufacturing overhead applied to jobs \$ 3,646,788 Cost of unused capacity \$ 483,552

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

34) The management of Kotek Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 8,000 machine-hours. In addition, capacity is 10,000 machine-hours and the actual activity for the year is 8,700 machine-hours. All of the manufacturing overhead is fixed and is \$6,400 per year. Job L77S, which required 220 machine-hours, is one of the jobs worked on during the year.

Required:

1. Determine the predetermined overhead rate if the predetermined overhead rate is based on activity at capacity.
2. Determine how much overhead would be applied to Job L77S if the predetermined overhead rate is based on activity at capacity.
3. Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

Answer:  a. Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$6,400 ÷ 10,000 MHs = \$0.64 per MH

1. Manufacturing overhead applied to Job L77S

 Number of hours for the job 220 MHs Predetermined overhead rate 0.64 per MH Manufacturing overhead applied to the job \$ 140.8

c.

 Actual manufacturing overhead cost incurred \$ 6,400 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 0.64 per MH Actual hours 8,700 MHs Manufacturing overhead applied to jobs \$ 5,568 Cost of unused capacity \$ 832

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

35) The management of Schneiter Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 42,000 machine-hours. In addition, capacity is 46,000 machine-hours and the actual activity for the year is 43,000 machine-hours. All of the manufacturing overhead is fixed and is \$734,160 per year.

Required:

1. Determine the predetermined overhead rate if the predetermined overhead rate is based on activity at capacity.
2. Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$734,160 ÷ 46,000 MHs = \$15.96 per MH

b.

 Actual manufacturing overhead cost incurred \$ 734,160 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 15.96 per MH Actual hours 43,000 MHs Manufacturing overhead applied to jobs \$ 686,280 Cost of unused capacity \$ 47,880

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

36) The management of Bouyer Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 34,000 machine-hours. In addition, capacity is 37,000 machine-hours and the actual activity for the year is 34,700 machine-hours. All of the manufacturing overhead is fixed and is \$377,400 per year.

Required:

Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

Answer:  Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = \$377,400 ÷ 37,000 MHs = \$10.20 per MH

 Actual manufacturing overhead cost incurred \$ 377,400 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 10.20 per MH Actual hours 34,700 MHs Manufacturing overhead applied to jobs \$ 353,940 Cost of unused capacity \$ 23,460

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

37) The management of Buelow Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work.

 Estimated activity for the upcoming year 76,000 machine-hours Capacity 94,000 machine-hours Actual activity for the year 82,800 machine-hours Manufacturing overhead (all fixed) \$ 5,572,320 per year

 Job Q58A, which required 130 machine-hours, is one of the jobs worked on during the year.

 Required:

1. Determine the predetermined overhead rate if the predetermined overhead rate is based on the estimated activity for the upcoming year.
2. Determine how much overhead would be applied to Job Q58A if the predetermined overhead rate is based on estimated activity for the upcoming year.
3. Determine the predetermined overhead rate if the predetermined overhead rate is based on the activity at capacity.
4. Determine how much overhead would be applied to Job Q58A if the predetermined overhead rate is based on activity at capacity.
5. Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

a.

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = \$5,572,320 ÷ 76,000 MHs = \$73.32 per MH

b.

 Manufacturing overhead applied to Job Q58A Number of hours for the job 120 MHs Predetermined overhead rate \$ 73.32 per MH Manufacturing overhead applied to the job \$ 9,531.60

c.

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = \$5,572,320 ÷ 94,000 MHs = \$59.28 per MH

d.

 Manufacturing overhead applied to Job Q58A Number of hours for the job 130 MHs Predetermined overhead rate \$ 59.28 per MH Manufacturing overhead applied to the job \$ 7,706.40

e.

 Actual manufacturing overhead cost incurred \$ 5,572,320 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 59.28 per MH Actual hours 82,800 MHs Manufacturing overhead applied to jobs \$ 4,908,384 Cost of unused capacity \$ 663,936

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

38) The management of Wrights Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. The company’s controller has provided an example to illustrate how this new system would work.

 Estimated activity for the upcoming year 15,000 machine-hours Capacity 18,000 machine-hours Actual activity for the year 15,800 machine-hours Manufacturing overhead (all fixed) \$ 43,200 per year

 Required:

1. Determine the predetermined overhead rate if the predetermined overhead rate is based on the estimated activity for the upcoming year.

1. Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.

a.

Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total amount of the allocation base = \$43,200 ÷ 15,000 MHs = \$2.88 per MH

b.

Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total amount of the allocation base = \$43,200 ÷ 18,000 MHs = \$2.40 per MH

 Actual manufacturing overhead cost incurred \$ 43,200 Manufacturing overhead applied to jobs: Predetermined overhead rate \$ 2.40 per MH Actual hours 15,800 MHs Manufacturing overhead applied to jobs \$ 37,920 Cost of unused capacity \$ 5,280

Difficulty: 2 Medium

Learning Objective:  02-06 (Appendix 2B) Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period.; 02-01 Compute a predetermined overhead rate.; 02-02 Apply overhead cost to jobs using a predetermined overhead rate.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

Managerial Accounting, 16e (Garrison)

Appendix 5A  Analyzing Mixed Costs

1) The engineering approach to the analysis of mixed costs involves a detailed statistical analysis of cost behavior using methods that minimize the squared errors.

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

2) A major advantage of the high-low method of cost estimation is that it omits all data from the analysis other than the lowest and highest costs.

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

3) The highest and lowest costs are always used to analyze a mixed cost under the high-low method.

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

4) The high and low points used in the high-low method tend to be unusual and therefore the cost formula for the mixed cost may not accurately represent all of the data.

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

5) In a scattergraph of cost and activity, activity is the independent variable because it causes variations in the cost.

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

6) Managers can use a variety of methods to estimate the fixed and variable components of a mixed cost. In account analysis, an account is classified as either variable or fixed based on the analyst’s prior knowledge of how the cost in the account behaves.

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

7) The least-squares regression method computes the regression line that minimizes the sum of the squared deviations from the plotted points to the line.

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

8) The R2 (i.e., R-squared) tells us the percentage of the variation in the dependent variable (cost) that is explained by variation in the independent variable (activity).

Difficulty: 1 Easy

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

9) The R2 (i.e., R-squared) varies from 0% to 100%, and the lower the percentage, the better the fit of the data to a straight line.

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

10) A quick look at a scattergraph of cost versus activity can reveal that there is little relation between the cost and the activity or that the relation is something other than a simple straight line. In such cases, least square regression is highly recommended for estimating fixed and variable costs.

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

11) Least-squares regression selects the values for the intercept and slope of a straight line that minimize the sum of the errors.

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

12) Which of the following statements is true when referring to the high-low method of cost analysis?

1. A) The high-low method has no major weaknesses.
2. B) The high-low method is very hard to apply.
3. C) In essence, the high-low method draws a straight line through two data points.
4. D) The high-low method uses all of the available data to estimate fixed and variable costs.

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

13) In describing the cost formula equation, Y = a + bX, which of the following is correct:

1. A) “Y” is the independent variable.
2. B) “a” is the variable cost per unit.
3. C) “a” and “b” are valid for all levels of activity.
4. D) in the high-low method, “b” equals the change in cost divided by the change in activity.

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking; FN Measurement

14) Larker Brothers, Inc., used the high-low method to derive its cost formula for electrical power cost. According to the cost formula, the variable cost per unit of activity is \$4 per machine-hour. Total electrical power cost at the high level of activity was \$19,200 and at the low level of activity was \$18,400. If the high level of activity was 3,300 machine hours, then the low level of activity was:

1. A) 3,100 machine hours
2. B) 3,200 machine hours
3. C) 3,000 machine hours
4. D) 2,900 machine hours

Explanation:  Total cost = Total fixed cost + Total variable cost

High level of activity:

\$19,200 = Total fixed cost + (\$4 per machine-hour × 3,300 machine hours)

Total fixed cost = \$19,200 − \$13,200 = \$6,000

Low level of activity:

\$18,400 = \$6,000 + (\$4 per machine-hour × Low level of activity)

\$4 per machine-hour × Low level of activity = \$18,400 − \$6,000 = \$12,400

Low level of activity = 3,100 machine hours.

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

15) Gamach Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for \$104.50 per unit.

 Sales volume (units) 5,000 6,000 Cost of sales \$ 295,000 \$ 354,000 Selling and administrative costs \$ 186,000 \$ 202,800

The best estimate of the total monthly fixed cost is:

1. A) \$102,000
2. B) \$518,900
3. C) \$556,800
4. D) \$481,000

Explanation:  Fixed cost of sales:

 Total cost at 6,000 units \$ 354,000 Less variable cost element: 6,000 units × \$59.00 per unit 354,000 Fixed cost \$ 0

Variable selling and administrative cost per unit = Change in cost ÷ Change in activity

= (\$202,800 – \$186,000) ÷ (6,000 units – 5,000 units)

= \$16,800 ÷ 1,000 units

= \$16.80 per unit

Fixed cost of sales:

 Total cost at 6,000 units \$ 202,800 Less variable cost element: 6,000 units × \$16.80 per unit 100,800 Fixed cost \$ 102,000

Total fixed cost = \$0 + \$102,000 = \$102,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

16) Hara Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for \$159.80 per unit.

 Sales volume (units) 6,000 7,000 Cost of sales \$ 363,600 \$ 424,200 Selling and administrative costs \$ 531,000 \$ 547,400

The best estimate of the total variable cost per unit is:

1. A) \$77.00
2. B) \$60.60
3. C) \$149.10
4. D) \$138.80

Explanation:  Variable cost of sales = Change in cost ÷ Change in activity

= (\$424,200 – \$363,600) ÷ (7,000 units – 6,000 units)

= \$60,600 ÷ 1,000 units

= \$60.60 per unit

Variable selling and administrative cost = Change in cost ÷ Change in activity

= (\$547,400 – \$531,000) ÷ (7,000 units – 6,000 units)

= \$16,400 ÷ 1,000 units

= \$16.40 per unit

Total variable cost = Variable cost of sales + Variable selling and administrative cost

= \$60.60 per unit + \$16.40 per unit

= \$77.00 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

17) Maintenance costs at a Straiton Corporation factory are listed below:

 Machine- Hours Maintenance Cost March 3,627 \$ 54,384 April 3,588 \$ 53,980 May 3,637 \$ 54,453 June 3,638 \$ 54,491 July 3,572 \$ 53,843 August 3,611 \$ 54,196 September 3,644 \$ 54,550 October 3,609 \$ 54,181 November 3,669 \$ 54,767

Management believes that maintenance cost is a mixed cost that depends on machine-hours. Use the high-low method to estimate the variable and fixed components of this cost. Compute the variable component first and round off to the nearest whole cent. Compute the fixed component second and round off to the nearest whole dollar. These estimates would be closest to:

1. A) \$0.10 per machine-hour; \$54,382 per month
2. B) \$15.00 per machine-hour; \$54,316 per month
3. C) \$9.12 per machine-hour; \$21,309 per month
4. D) \$9.53 per machine-hour; \$19,801 per month

Explanation:

 Machine- Hours Maintenance Cost High level of activity (November) 3,669 \$ 54,767 Low level of activity (July) 3,572 53,843 Change 97 \$ 924

Variable cost per unit = Change in cost ÷ Change in activity

= \$924 ÷ 97 machine-hours

= \$9.53 per machine-hour

Fixed cost = Total cost – Variable cost element

= \$54,767 − (\$9.53 per machine-hour × 3,669 machine-hours)

= \$54,767 − \$34,966

= \$19,801

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

18) Iacob Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for \$103.40 per unit.

 Sales volume (units) 5,000 6,000 Cost of sales \$ 315,500 \$ 378,600 Selling and administrative costs \$ 162,500 \$ 177,600

The best estimate of the total contribution margin when 5,300 units are sold is:

1. A) \$56,710
2. B) \$133,560
3. C) \$41,340
4. D) \$213,590

Explanation:  Used the high-low method to estimate variable components of the costs:

Variable cost of sales = Change in cost ÷ Change in activity

= (\$378,600 – \$315,500) ÷ (6,000 units – 5,000 units)

= \$63,100 ÷ 1,000 units

= \$63.10 per unit

Variable selling and administrative cost = Change in cost ÷ Change in activity

= (\$177,600 – \$162,500) ÷ (6,000 units – 5,000 units)

= \$15,100 ÷ 1,000 units

= \$15.10 per unit

Total variable cost per unit = Variable cost of sales + Variable selling and administrative cost

= \$63.10 per unit + \$15.10 per unit = \$78.20 per unit

Contribution margin per unit = Selling price per unit – Total variable cost per unit

= \$103.40 per unit – \$78.20 per unit = \$25.20 per unit

Total contribution margin = Contribution margin per unit × Total unit sales

= \$25.20 per unit × 5,300 units = \$133,560

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

19) Edal Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 Production volume 5,000 units 6,000 units Direct materials \$ 266,500 \$ 319,800 Direct labor \$ 52,000 \$ 62,400 Manufacturing overhead \$ 748,500 \$ 769,200

The best estimate of the total variable manufacturing cost per unit is:

1. A) \$63.70
2. B) \$84.40
3. C) \$53.30
4. D) \$20.70

Explanation:  Direct materials cost per unit = Change in cost ÷ Change in activity

= (\$319,800 – \$266,500) ÷ (6,000 units – 5,000 units)

= \$53,300 ÷ 1,000 units

= \$53.30 per unit

Direct labor cost per unit = Change in cost ÷ Change in activity

= (\$62,400 – \$52,000) ÷ (6,000 units – 5,000 units)

= \$10,400 ÷ 1,000 units

= \$10.40 per unit

Variable manufacturing overhead per unit = Change in cost ÷ Change in activity

= (\$769,200 – \$748,500) ÷ (6,000 units – 5,000 units)

= \$20,700 ÷ 1,000 units

= \$20.70 per unit

Total variable manufacturing cost per unit = Direct materials per unit + Direct labor per unit + Variable manufacturing overhead per unit = \$53.30 per unit + \$10.40 per unit + \$20.70 per unit = \$84.40 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

20) Bakan Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

 Production volume 3,000 units 4,000 units Direct materials \$ 86.30 per unit \$ 86.30 per unit Direct labor \$ 26.40 per unit \$ 26.40 per unit Manufacturing overhead \$ 75.90 per unit \$ 60.40 per unit

The best estimate of the total variable manufacturing cost per unit is:

1. A) \$126.60
2. B) \$86.30
3. C) \$13.90
4. D) \$112.70

Explanation:  Total manufacturing overhead at 4,000 units = 4,000 units × \$60.40 per unit = \$241,600

Total manufacturing overhead at 3,000 units = 3,000 units × \$75.90 per unit = \$227,700

Variable manufacturing overhead per unit = Change in cost ÷ Change in activity

= (\$241,600 – \$227,700) ÷ (4,000 units – 3,000 units)

= \$13,900 ÷ 1,000 units

= \$13.90 per unit

Total variable manufacturing cost = Direct materials + Direct labor + Variable manufacturing overhead

= \$86.30 per unit + \$26.40 per unit + \$13.90 per unit

= \$126.60 per unit

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

21) Supply costs at Coulthard Corporation’s chain of gyms are listed below:

 Client- Visits Supply Cost March 12,855 \$ 23,598 April 12,283 \$ 23,278 May 13,104 \$ 23,742 June 12,850 \$ 23,607 July 12,493 \$ 23,415 August 12,794 \$ 23,562 September 12,686 \$ 23,496 October 12,765 \$ 23,541 November 13,018 \$ 23,687

Management believes that supply cost is a mixed cost that depends on client-visits. Use the high-low method to estimate the variable and fixed components of this cost. Compute the variable component first, rounding off to the nearest whole cent. Then compute the fixed component, rounding off to the nearest whole dollar. Those estimates are closest to:

1. A) \$1.85 per client-visit; \$23,547 per month
2. B) \$1.77 per client-visit; \$557 per month
3. C) \$0.55 per client-visit; \$16,579 per month
4. D) \$0.57 per client-visit; \$16,273 per month

Explanation:

 Client- Visits Supply Cost High level of activity (May) 13,104 \$ 23,742 Low level of activity (April) 12,283 23,278 Change 821 \$ 464

Variable cost per unit = Change in cost ÷ Change in activity

= \$464 ÷ 821 client-visits

= \$0.57 per client-visit

Fixed cost = Total cost – Variable cost element

= \$23,742 – (\$0.57 per client-visit × 13,104 client-visits)

= \$23,742 – \$7,469

= \$16,273

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

22) Electrical costs at one of Finfrock Corporation’s factories are listed below:

 Machine- Hours Electrical Cost March 3,642 \$ 40,537 April 3,616 \$ 40,319 May 3,667 \$ 40,706 June 3,634 \$ 40,462 July 3,665 \$ 40,703 August 3,659 \$ 40,680 September 3,644 \$ 40,547 October 3,612 \$ 40,268 November 3,624 \$ 40,364

Management believes that electrical cost is a mixed cost that depends on machine-hours. Use the high-low method to estimate the variable and fixed components of this cost. Compute the variable component first, rounding off to the nearest whole cent. Then compute the fixed component, rounding off to the nearest whole dollar. Those estimates are closest to:

1. A) \$7.96 per machine-hour; \$11,517 per month
2. B) \$11.13 per machine-hour; \$40,510 per month
3. C) \$9.61 per machine-hour; \$5,533 per month
4. D) \$0.13 per machine-hour; \$40,246 per month

Explanation:

 Machine- Hours Electrical Cost High level of activity (May) 3,667 \$ 40,706 Low level of activity (October) 3,612 40,268 Change 55 \$ 438

Variable cost per unit = Change in cost ÷ Change in activity

= \$438 ÷ 55 machine-hours

= \$7.96 per machine-hour

Fixed cost = Total cost – Variable cost element

= \$40,706 – (\$7.96 per machine-hour × 3,667 machine-hours)

= \$40,706 – \$29,189

= \$11,517

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

23) Deidoro Company has provided the following data for maintenance cost:

 Prior Year Current Year Machine hours 8,000 10,000 Maintenance cost \$ 26,600 \$ 31,000

Maintenance cost is a mixed cost with variable and fixed components. The fixed and variable components of maintenance cost are closest to:

1. A) \$26,600 per year; \$3.10 per machine hour
2. B) \$9,000 per year; \$2.20 per machine hour
3. C) \$9,000 per year; \$3.10 per machine hour
4. D) \$26,600 per year; \$2.20 per machine hour

Explanation:

 Machine- Hours Maintenance Cost High level of activity 10,000 \$ 31,000 Low level of activity 8,000 26,600 Change 2,000 \$ 4,400

Variable cost per unit = Change in cost ÷ Change in activity

= \$4,400 ÷ 2,000 machine-hours

= \$2.20 per machine-hour

Fixed cost = Total cost − Variable cost element

= \$31,000 − (\$2.20 per machine-hour × 10,000 machine-hours)

= \$31,000 − \$22,000

= \$9,000

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

24) Caraco Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

 Production volume 7,000 units 8,000 units Direct materials \$ 87.40 per unit \$ 87.40 per unit Direct labor \$ 20.20 per unit \$ 20.20 per unit Manufacturing overhead \$ 101.50 per unit \$ 90.80 per unit

The best estimate of the total cost to manufacture 7,300 units is closest to:

1. A) \$1,487,375
2. B) \$1,448,320
3. C) \$1,500,750
4. D) \$1,526,430

Explanation:  Total manufacturing overhead at 8,000 units = 8,000 units × \$90.80 per unit = \$726,400

Total manufacturing overhead at 7,000 units = 7,000 units × \$101.50 per unit = \$710,500

Variable manufacturing overhead per unit = Change in cost ÷ Change in activity

= (\$726,400 – \$710,500) ÷ (8,000 units – 7,000 units)

= \$15,900 ÷ 1,000 units

= \$15.90 per unit

Fixed cost element of manufacturing overhead = Total cost – Variable cost element

= \$726,400 – (8,000 units × \$15.90 per unit)

= \$726,400 – \$127,200

= \$599,200

Total variable manufacturing cost = Direct materials + Direct labor + Manufacturing overhead

= (\$87.40 per unit + \$20.20 per unit) + \$15.90 per unit

= \$123.50 per unit

Total manufacturing cost = Total variable manufacturing cost per unit × Total units manufactured + Total fixed manufacturing cost

= (\$123.50 per unit × 7,300 units) + \$599,200

= \$901,550 + \$599,200

= \$1,500,700

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

25) A soft drink bottler incurred the following factory utility cost: \$9,246 for 5,200 cases bottled and \$8,997 for 4,900 cases bottled. Factory utility cost is a mixed cost containing both fixed and variable components. The variable factory utility cost per case bottled is closest to:

1. A) \$1.81
2. B) \$1.78
3. C) \$1.84
4. D) \$0.83

Explanation:

 Units Utility Cost High level of activity 5,200 \$ 9,246 Low level of activity 4,900 8,997 Change 300 \$ 249

Variable cost per unit = Change in cost ÷ Change in activity

= \$249 ÷ 300 units

= \$0.83 per unit

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

26) Andom Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product.

 Production volume 1,000 units 2,000 units Direct materials \$ 15.20 per unit \$ 15.20 per unit Direct labor \$ 30.50 per unit \$ 30.50 per unit Manufacturing overhead \$ 54.10 per unit \$ 37.40 per unit

The best estimate of the total monthly fixed manufacturing cost is:

1. A) \$74,800
2. B) \$54,100
3. C) \$99,800
4. D) \$33,400

Explanation:  Both direct materials and direct labor are variable costs.

Total manufacturing overhead at 1,000 units = \$54.10 per unit × 1,000 units = \$54,100

Total manufacturing overhead at 2,000 units = \$37.40 per unit × 2,000 units = \$74,800

Variable element of manufacturing overhead = Change in cost ÷ Change in activity

= (\$74,800 – \$54,100) ÷ (2,000 units – 1,000 units)

= \$20,700 ÷ 1,000 units

= \$20.70 per unit

Fixed cost element of manufacturing overhead = Total cost – Total variable cost

= \$74,800 – (\$20.70 per unit × 2,000 units)

= \$74,800 – \$41,400

= \$33,400

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

27) The following data pertains to activity and maintenance cost for two recent periods:

 Activity level (units) 8,000 7,000 Maintenance cost \$ 34,000 \$ 31,500

Maintenance cost is a mixed cost with both fixed and variable components. Using the high-low method, the cost formula for maintenance cost is:

1. A) Y = \$4.25 X
2. B) Y = \$14,000 + \$2.50 X
3. C) Y = \$2,500 + \$4.25 X
4. D) Y = \$4.50 X

Explanation:

 Units Maintenance Cost High level of activity 8,000 \$ 34,000 Low level of activity 7,000 31,500 Change 1,000 \$ 2,500

Variable cost per unit = Change in cost ÷ Change in activity

= \$2,500 ÷ 1,000 units

= \$2.50 per unit

Fixed cost = Total cost − Variable cost element

= \$34,000 − (\$2.50 per unit × 8,000 units)

= \$34,000 − \$20,000

= \$14,000

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

28) Farac Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 Production volume 4,000 units 5,000 units Direct materials \$ 208,800 \$ 261,000 Direct labor \$ 119,200 \$ 149,000 Manufacturing overhead \$ 319,200 \$ 329,500

The best estimate of the total cost to manufacture 4,300 units is closest to:

1. A) \$674,890
2. B) \$665,855
3. C) \$695,740
4. D) \$635,970

Explanation:  Direct materials is a variable cost, so it can be computed as follows:

Direct materials cost per unit = \$208,800 / 4,000 units = \$52.20 per unit

Direct labor could also be computed the same way, but just to make sure it is purely a variable cost, we’ll use the high-low method:

Variable direct labor cost per unit = Change in cost ÷ Change in activity

= (\$149,000 – \$119,200) ÷ (5,000 units – 4,000 units)

= \$29,800 ÷ 1,000 units

= \$29.80 per unit

Direct labor fixed cost element = Total cost – Variable cost element

= \$149,000 – (\$29.80 per unit × 5,000 units)

= \$149,000 – \$149,000 = \$0

Variable manufacturing overhead cost per unit = Change in cost ÷ Change in activity

= (\$329,500 – \$319,200) ÷ (5,000 units – 4,000 units)

= \$10,300 ÷ 1,000 units

= \$10.30 per unit

Manufacturing overhead fixed cost element = Total cost – Variable cost element

= \$329,500 – (\$10.30 per unit × 5,000 units)

= \$329,500 – \$51,500 = \$278,000

Total variable cost = Direct materials + Direct labor + Variable manufacturing overhead

= \$52.20 per unit + \$29.80 per unit + \$10.30 per unit

= \$92.30 per unit

Total fixed overhead cost = \$278,000

Total cost to manufacture 4,300 units = Total fixed cost + Total variable cost

= \$278,000 + (\$92.30 per unit × 4,300 units)

= \$278,000 + \$396,890

= \$674,890

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

29) The following data pertains to activity and utility cost for two recent periods:

 Activity level (units) 15,000 12,000 Utility cost \$ 24,750 \$ 21,000

Utility cost is a mixed cost with both fixed and variable components. Using the high-low method, the cost formula for utility cost is:

1. A) Y = \$1.65 X
2. B) Y = \$1.75 X
3. C) Y = \$3,750 + \$1.75 X
4. D) Y = \$6,000 + \$1.25 X

Explanation:

 Units Utility Cost High level of activity 15,000 \$ 24,750 Low level of activity 12,000 21,000 Change 3,000 \$ 3,750

Variable cost per unit = Change in cost ÷ Change in activity

= \$3,750 ÷ 3,000 units

= \$1.25 per unit

Fixed cost = Total cost – Variable cost element

= \$24,750 – (\$1.25 per unit × 15,000 units)

= \$24,750 – \$18,750

= \$6,000

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

30) Dacosta Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 Production volume 6,000 units 7,000 units Direct materials \$ 369,600 \$ 431,200 Direct labor \$ 309,600 \$ 361,200 Manufacturing overhead \$ 919,800 \$ 937,300

The best estimate of the total monthly fixed manufacturing cost is:

1. A) \$1,599,000
2. B) \$1,664,350
3. C) \$814,800
4. D) \$1,729,700

Explanation:  Direct materials and direct labor are both strictly variable costs in this company.

Variable manufacturing overhead cost per unit = Change in cost ÷ Change in activity

= (\$937,300 – \$919,800) ÷ (7,000 units – 6,000 units)

= \$17,500 ÷ 1,000 units

= \$17.50 per unit

Fixed cost element of manufacturing overhead = Total cost – Variable cost element

= \$937,300 – (7,000 units × \$17.50 per unit)

= \$937,300 – \$122,500

= \$814,800

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

31) Seifer Inc.’s inspection costs are listed below:

 Units Produced Inspection Costs April 119 \$ 8,558 May 117 \$ 8,535 June 113 \$ 8,415 July 125 \$ 8,736 August 152 \$ 9,357 September 108 \$ 8,320 October 120 \$ 8,603 November 192 \$ 10,337

Management believes that inspection cost is a mixed cost that depends on the number of units produced. Using the least-squares regression method, the estimates of the variable and fixed components of inspection cost would be closest to:

1. A) \$24.08 per unit plus \$5,709 per month
2. B) \$67.74 per unit plus \$8,858 per month
3. C) \$24.37 per unit plus \$5,658 per month
4. D) \$24.01 per unit plus \$5,727 per month

Explanation:  Using Microsoft Excel, the solution is:

 Intercept \$ 5,709 Fixed cost Slope \$ 24.08 Variable cost R2 1.00

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

32) Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost over four recent periods appear below.

 Activity Cost Period 1 22 \$ 121 Period 2 28 \$ 132 Period 3 21 \$ 117 Period 4 29 \$ 134

Using the least-squares regression method, what is the cost formula for this cost?

1. A) Y = \$75.89 + \$1.02X
2. B) Y = \$72.64 + \$2.13X
3. C) Y = \$ 0.00 + \$5.04X
4. D) Y = \$75.50 + \$2.02X

Explanation:  Using Microsoft Excel, the slope and intercept are:

 Intercept \$ 75.5 Slope \$ 2.02 R2 0.99

Therefore, the cost formula is \$75.50 per activity plus \$2.02 per unit or:

Y = \$75.50 + \$2.02X

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

33) The management of Hamano Corporation would like for you to analyze their repair costs, which are listed below:

 Machine- Hours Repair Costs April 4,459 \$ 98,523 May 4,426 \$ 98,296 June 4,493 \$ 98,781 July 4,417 \$ 98,207 August 4,432 \$ 98,349 September 4,446 \$ 98,420 October 4,489 \$ 98,749 November 4,475 \$ 98,654

Management believes that repair cost is a mixed cost that depends on the number of machine-hours. Using the least-squares regression method, the estimates of the variable and fixed components of repair cost would be closest to:

1. A) \$22.11 per machine-hour plus \$98,497 per month
2. B) \$7.37 per machine-hour plus \$65,670 per month
3. C) \$8.19 per machine-hour plus \$62,015 per month
4. D) \$7.55 per machine-hour plus \$64,859 per month

Explanation:  Using Microsoft Excel, the solution is:

 Intercept \$ 65,670 Fixed cost Slope \$ 7.37 Variable cost R2 0.997

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

34) One of Matthew Corporation’s competitors has learned that Matthew has a total expense per unit of \$1.50 at the 15,000 unit level of activity and total expense per unit of \$1.45 at the 20,000 unit level of activity. Assume that the relevant range includes all of the activity levels mentioned in this problem.

What would be the competitor’s prediction of variable cost per unit for Matthew Corporation?

1. A) \$1.30
2. B) \$0.77
3. C) \$1.50
4. D) \$1.45

Explanation:

 Units Total Expense High activity level (\$1.45 per unit × 20,000 units) 20,000 \$ 29,000 Low activity level (\$1.50 per unit × 15,000 units) 15,000 22,500 Change 5,000 \$ 6,500

Variable cost = Change in cost ÷ Change in activity = \$6,500 ÷ 5,000 units = \$1.30 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

35) One of Matthew Corporation’s competitors has learned that Matthew has a total expense per unit of \$1.50 at the 15,000 unit level of activity and total expense per unit of \$1.45 at the 20,000 unit level of activity. Assume that the relevant range includes all of the activity levels mentioned in this problem.

What would be the competitor’s prediction of total fixed cost per period?

1. A) \$22,500
2. B) \$28,000
3. C) \$13,600
4. D) \$ 3,000

Explanation:

 Units Total Expense High activity level (\$1.45 per unit × 20,000 units) 20,000 \$ 29,000 Low activity level (\$1.50 per unit × 15,000 units) 15,000 22,500 Change 5,000 \$ 6,500

Variable cost = Change in cost ÷ Change in activity = \$6,500 ÷ 5,000 units = \$1.30 per unit

Fixed cost element = Total cost – Variable cost element

= \$29,000 – (\$1.30 per unit × 20,000 units) = \$3,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

36) One of Matthew Corporation’s competitors has learned that Matthew has a total expense per unit of \$1.50 at the 15,000 unit level of activity and total expense per unit of \$1.45 at the 20,000 unit level of activity. Assume that the relevant range includes all of the activity levels mentioned in this problem.

What would be the competitor’s prediction of total expected costs at 18,000 units?

1. A) \$16,860
2. B) \$26,400
3. C) \$29,100
4. D) \$30,000

Explanation:

 Units Total Expense High activity level (\$1.45 per unit × 20,000 units) 20,000 \$ 29,000 Low activity level (\$1.50 per unit × 15,000 units) 15,000 \$ 22,500 Change 5,000 \$ 6,500

Variable cost = Change in cost ÷ Change in activity = \$6,500 ÷ 5,000 units = \$1.30 per unit

Fixed cost element = Total cost – Variable cost element

= \$29,000 – (\$1.30 per unit × 20,000 units) = \$3,000

Y = a + bX = \$3,000 + (\$1.30 per unit × 18,000 units) = \$26,400

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

37) The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:

 Production volume 2,000 units 4,000 units Direct materials \$ 88.40 per unit \$ 88.40 per unit Direct labor \$ 20.60 per unit \$ 20.60 per unit Manufacturing overhead \$ 86.90 per unit \$ 55.30 per unit

The best estimate of the total monthly fixed manufacturing cost is:

1. A) \$221,200
2. B) \$391,800
3. C) \$173,800
4. D) \$126,400

Explanation:  Total manufacturing overhead at 2,000 units = 2,000 units × \$86.90 per unit = \$173,800

Total manufacturing overhead at 4,000 units = 4,000 units × \$55.30 per unit = \$221,200

 Units Produced Total Manufacturing Overhead High level of activity 4,000 \$ 221,200 Low level of activity 2,000 173,800 Change 2,000 \$ 47,400

Variable cost per unit = Change in cost ÷ Change in activity

= \$47,400 ÷ 2,000 units

= \$23.70 per unit

Fixed cost = Total cost – Variable cost element

= \$221,200 – (\$23.70 per unit × 4,000 units)

= \$221,200 – \$94,800

= \$126,400

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

38) The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:

 Production volume 2,000 units 4,000 units Direct materials \$ 88.40 per unit \$ 88.40 per unit Direct labor \$ 20.60 per unit \$ 20.60 per unit Manufacturing overhead \$ 86.90 per unit \$ 55.30 per unit

The best estimate of the total variable manufacturing cost per unit is:

1. A) \$132.70
2. B) \$88.40
3. C) \$23.70
4. D) \$109.00

Explanation:  Total manufacturing overhead at 2,000 units = 2,000 units × \$86.90 per unit = \$173,800

Total manufacturing overhead at 4,000 units = 4,000 units × \$55.30 per unit = \$221,200

 Units Produced Total Manufacturing Overhead High level of activity 4,000 \$ 221,200 Low level of activity 2,000 173,800 Change 2,000 \$ 47,400

Variable cost per unit = Change in cost ÷ Change in activity

= \$47,400 ÷ 2,000 units

= \$23.70 per unit

Total variable cost per unit = Direct materials per unit + Direct labor per unit + variable manufacturing overhead per unit

= \$88.40 + \$20.60 + \$23.70

= \$132.70

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

39) The following production and average cost data for two levels of monthly production volume have been supplied by a company that produces a single product:

 Production volume 2,000 units 4,000 units Direct materials \$ 88.40 per unit \$ 88.40 per unit Direct labor \$ 20.60 per unit \$ 20.60 per unit Manufacturing overhead \$ 86.90 per unit \$ 55.30 per unit

The best estimate of the total cost to manufacture 2,200 units is closest to:

1. A) \$396,220
2. B) \$430,980
3. C) \$361,460
4. D) \$418,340

Explanation:  Total manufacturing overhead at 2,000 units = 2,000 units × \$86.90 per unit = \$173,800

Total manufacturing overhead at 4,000 units = 4,000 units × \$55.30 per unit = \$221,200

 Units Produced Total Manufacturing Overhead High level of activity 4,000 \$ 221,200 Low level of activity 2,000 173,800 Change 2,000 \$ 47,400

Variable cost per unit = Change in cost ÷ Change in activity

= \$47,400 ÷ 2,000 units

= \$23.70 per unit

Fixed cost = Total cost – Variable cost element

= \$221,200 – (\$23.70 per unit × 4,000 units)

= \$221,200 – \$94,800

= \$126,400

Total variable cost per unit = Direct materials per unit + Direct labor per unit + variable manufacturing overhead per unit

= \$88.40 + \$20.60 + \$23.70

= \$132.70

Total cost = Total fixed cost + Total variable cost

= \$126,400 + (\$132.70 per unit × 2,200 units)

= \$126,400 + \$291,940

= \$418,340

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

40) Wilson Corporation’s activity for the first six of the current year is as follows:

 Machine-Hours Electrical Cost January 2,000 \$ 1,560 February 3,000 \$ 2,200 March 2,400 \$ 1,750 April 1,900 \$ 1,520 May 1,800 \$ 1,480 June 2,100 \$ 1,600

Using the high-low method, the variable cost per machine hour would be:

1. A) \$0.67
2. B) \$0.64
3. C) \$0.40
4. D) \$0.60

Explanation:

 Machine- Hours Electrical Cost High activity level (February) 3,000 \$ 2,200 Low activity level (May) 1,800 \$ 1,480 Change 1,200 \$ 720

Variable cost = Change in cost ÷ Change in activity

Variable cost = \$720 ÷ 1,200 machine-hours = \$0.60 per machine-hour

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

41) Wilson Corporation’s activity for the first six of the current year is as follows:

 Machine-Hours Electrical Cost January 2,000 \$ 1,560 February 3,000 \$ 2,200 March 2,400 \$ 1,750 April 1,900 \$ 1,520 May 1,800 \$ 1,480 June 2,100 \$ 1,600

Using the high-low method, the fixed portion of the electrical cost each month would be:

1. A) \$400
2. B) \$760
3. C) \$280
4. D) \$190

Explanation:

 Machine- Hours Electrical Cost High activity level (February) 3,000 \$ 2,200 Low activity level (May) 1,800 \$ 1,480 Change 1,200 \$ 720

Variable cost = Change in cost ÷ Change in activity

Variable cost = \$720 ÷ 1,200 machine-hours = \$0.60 per machine-hour

Fixed cost = Total cost – Variable cost

Fixed cost = \$2,200 – (\$0.60 per machine-hour × 3,000 machine-hours) = \$400

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

42) Inspection costs at one of Ratulowski Corporation’s factories are listed below:

 Units Produced Inspection Costs April 777 \$ 10,176 May 807 \$ 10,404 June 798 \$ 10,355 July 835 \$ 10,665 August 822 \$ 10,542 September 795 \$ 10,313 October 805 \$ 10,409 November 853 \$ 10,795 December 796 \$ 10,310

Management believes that inspection cost is a mixed cost that depends on units produced.

Using the high-low method, the estimate of the variable component of inspection cost per unit produced is closest to:

1. A) \$8.14
2. B) \$7.05
3. C) \$0.12
4. D) \$12.89

Explanation:

 Units Produced Inspection Cost High level of activity (November) 853 \$ 10,795 Low level of activity (April) 777 10,176 Change 76 \$ 619

Variable cost per unit = Change in cost ÷ Change in activity

= \$619 ÷ 76 units

= \$8.14 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

43) Inspection costs at one of Ratulowski Corporation’s factories are listed below:

 Units Produced Inspection Costs April 777 \$ 10,176 May 807 \$ 10,404 June 798 \$ 10,355 July 835 \$ 10,665 August 822 \$ 10,542 September 795 \$ 10,313 October 805 \$ 10,409 November 853 \$ 10,795 December 796 \$ 10,310

Management believes that inspection cost is a mixed cost that depends on units produced.

Using the high-low method, the estimate of the fixed component of inspection cost per month is closest to:

1. A) \$10,344
2. B) \$10,441
3. C) \$3,852
4. D) \$10,176

Explanation:

 Units Produced Inspection Cost High level of activity (November) 853 \$ 10,795 Low level of activity (April) 777 10,176 Change 76 \$ 619

Variable cost per unit = Change in cost ÷ Change in activity

= \$619 ÷ 76 units

= \$8.14 per unit

Total fixed cost = Total cost – Variable cost element

= \$10,795 – (\$8.14 per unit × 853 units)

= \$10,795 – \$6,943

= \$3,852

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

44) Compton Corporation is a wholesale distributor of educational CD-ROMs. The company’s records indicate the following:

 This Year Last Year Units Sold 250,000 200,000 Sales \$ 1,250,000 \$ 1,000,000 Cost of goods sold 875,000 700,000 Gross margin 375,000 300,000 Selling and administrative expenses 222,000 210,000 Net operating income \$ 153,000 \$ 90,000

Using the high-low method of analysis, what are the company’s estimated variable selling and administrative expenses per unit?

1. A) \$0.24
2. B) \$4.17
3. C) \$0.88
4. D) \$0.96

Explanation:

 Units Sold Cost Incurred High activity level 250,000 \$ 222,000 Low activity level 250,000 \$ 210,000 Change 50,000 \$ 12,000

Variable cost = Change in cost ÷ Change in activity = \$12,000 ÷ 50,000 units = \$0.24 per unit

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

45) Compton Corporation is a wholesale distributor of educational CD-ROMs. The company’s records indicate the following:

 This Year Last Year Units Sold 250,000 200,000 Sales \$ 1,250,000 \$ 1,000,000 Cost of goods sold 875,000 700,000 Gross margin 375,000 300,000 Selling and administrative expenses 222,000 210,000 Net operating income \$ 153,000 \$ 90,000

Using the high-low method of analysis, what are the company’s estimated total fixed selling and administrative expenses per year?

1. A) \$60,000
2. B) \$174,000
3. C) \$150,000
4. D) \$162,000

Explanation:

 Units Sold Cost Incurred High activity level 250,000 \$ 222,000 Low activity level 200,000 \$ 210,000 Change 50,000 \$ 12,000

Variable cost = Change in cost ÷ Change in activity = \$12,000 ÷ 50,000 units = \$0.24 per unit

Fixed cost = Total cost − Variable cost

Fixed cost = \$222,000 − (\$0.24 per unit × 250,000 units) = \$162,000

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

46) Compton Corporation is a wholesale distributor of educational CD-ROMs. The company’s records indicate the following:

 This Year Last Year Units Sold 250,000 200,000 Sales \$ 1,250,000 \$ 1,000,000 Cost of goods sold 875,000 700,000 Gross margin 375,000 300,000 Selling and administrative expenses 222,000 210,000 Net operating income \$ 153,000 \$ 90,000

What is the company’s contribution margin for this year?

1. A) \$315,000
2. B) \$(667,500)
3. C) \$375,000
4. D) \$213,000

Explanation:

 Units Sold Cost Incurred High activity level 250,000 \$ 222,000 Low activity level 250,000 \$ 210,000 Change 50,000 \$ 12,000

Variable cost = Change in cost ÷ Change in activity = \$12,000 ÷ 50,000 units = \$0.24 per unit

 Sales \$ 1,250,000 Variable expenses: Cost of goods sold \$ 875,000 Variable selling and administrative (\$0.24 per unit × 250,000 units) 60,000 935,000 Contribution margin \$ 315,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

47) The Blaine Corporation is a highly automated manufacturer. At an activity level of 6,000 machine setups, total overhead costs equal \$240,000. Of this amount, depreciation totals \$80,000 (all fixed) and lubrication totals \$72,000 (all variable). The remaining \$88,000 of the total overhead cost consists of utility cost (mixed). At an activity level of 9,000 setups, utility cost totals \$112,000.

Assume that the relevant range includes all of the activity levels mentioned in this problem.

The variable cost per setup for utilities is most likely closest to:

1. A) \$ 8.00 per setup
2. B) \$12.44 per setup
3. C) \$ 4.00 per setup
4. D) \$14.66 per setup

Explanation:

 Machine setups Utility cost High activity level 9,000 \$ 112,000 Low activity level 6,000 \$ 88,000 Change 3,000 \$ 24,000

Variable cost = Change in cost ÷ Change in activity = \$24,000 ÷ 3,000 machine setups = \$8.00 per setup

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

48) The Blaine Corporation is a highly automated manufacturer. At an activity level of 6,000 machine setups, total overhead costs equal \$240,000. Of this amount, depreciation totals \$80,000 (all fixed) and lubrication totals \$72,000 (all variable). The remaining \$88,000 of the total overhead cost consists of utility cost (mixed). At an activity level of 9,000 setups, utility cost totals \$112,000.

Assume that the relevant range includes all of the activity levels mentioned in this problem.

The total fixed overhead costs for Blaine Corporation are most likely closest to:

1. A) \$112,000
2. B) \$120,000
3. C) \$ 40,000
4. D) \$ 80,000

Explanation:

 Machine setups Utility cost High activity level 9,000 \$ 112,000 Low activity level 6,000 \$ 88,000 Change 3,000 \$ 24,000

Variable cost = Change in cost ÷ Change in activity = \$24,000 ÷ 3,000 machine setups = \$8.00 per setup

Fixed cost element = Total cost – Variable cost element

= \$112,000 – (\$8.00 per setup × 9,000 units) = \$40,000

 Depreciation \$ 80,000 Fixed utility cost 40,000 Total \$ 120,000

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

49) The Blaine Corporation is a highly automated manufacturer. At an activity level of 6,000 machine setups, total overhead costs equal \$240,000. Of this amount, depreciation totals \$80,000 (all fixed) and lubrication totals \$72,000 (all variable). The remaining \$88,000 of the total overhead cost consists of utility cost (mixed). At an activity level of 9,000 setups, utility cost totals \$112,000.

Assume that the relevant range includes all of the activity levels mentioned in this problem.

If 7,800 setups are projected for the next period, total expected overhead cost would be closest to:

1. A) \$156,000
2. B) \$236,000
3. C) \$214,400
4. D) \$276,000

Explanation:

 Machine setups Utility cost High activity level 9,000 \$ 112,000 Low activity level 6,000 \$ 88,000 Change 3,000 \$ 24,000

Variable cost = Change in cost ÷ Change in activity = \$24,000 ÷ 3,000 machine setups = \$8.00 per setup

Fixed cost element = Total cost – Variable cost element

= \$112,000 – (\$8.00 per setup × 9,000 units) = \$40,000

Fixed costs:

 Depreciation \$ 80,000 Fixed utility cost 40,000 Total \$ 120,000

Variable costs:

 Lubrication (\$72,000 ÷ 6,000 machine setups) \$ 12 Variable utility cost 8 Total variable cost \$ 20

Y = a + bX = \$120,000 + (\$20 per machine setup × 7,800 machine setups) = \$276,000

Difficulty: 3 Hard

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

50) Babuca Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 Production volume 5,000 units 6,000 units Direct materials \$ 103,500 \$ 124,200 Direct labor \$ 282,500 \$ 339,000 Manufacturing overhead \$ 667,000 \$ 679,800

The best estimate of the total monthly fixed manufacturing cost is:

1. A) \$1,098,000
2. B) \$1,053,000
3. C) \$1,143,000
4. D) \$603,000

Explanation:  Direct materials is a variable cost.

Direct labor is usually a variable cost, but it doesn’t hurt to check.

Variable cost per unit = Change in cost ÷ Change in activity

= (\$339,000 – \$282,500) ÷ (6,000 units – 5,000 units)

= \$56,500 ÷ 1,000 units

= \$56.50 per unit

Fixed cost = Total cost – Variable cost element

= \$339,000 – (\$56.50 per unit × 6,000 units)

= \$339,000 – 339,000

= \$0

Variable cost per unit = Change in cost ÷ Change in activity

= (\$679,800- \$667,000) ÷ (6,000 units – 5,000 units)

= \$12,800 ÷ 1,000 units

= \$12.80 per unit

Fixed cost = Total cost – Variable cost element

= \$679,800 – (\$12.80 per unit × 6,000 units)

= \$679,800 – \$76,800

= \$603,000

Total fixed cost per month = \$0 + \$603,000 = \$603,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

51) Babuca Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 Production volume 5,000 units 6,000 units Direct materials \$ 103,500 \$ 124,200 Direct labor \$ 282,500 \$ 339,000 Manufacturing overhead \$ 667,000 \$ 679,800

The best estimate of the total variable manufacturing cost per unit is:

1. A) \$90.00
2. B) \$77.20
3. C) \$12.80
4. D) \$20.70

Explanation:  Note: There are several ways to compute the variable cost per unit for direct materials and direct labor.

Direct materials:

Variable cost per unit = Change in cost ÷ Change in activity

= (\$124,200 – \$103,500) ÷ (6,000 units – 5,000 units)

= \$20,700 ÷ 1,000 units

= \$20.70 per unit

Direct labor:

Variable cost per unit = Change in cost ÷ Change in activity

= (\$339,000 – \$282,500) ÷ (6,000 units – 5,000 units)

= \$56,500 ÷ 1,000 units

= \$56.50 per unit

Variable cost per unit = Change in cost ÷ Change in activity

= (\$679,800- \$667,000) ÷ (6,000 units – 5,000 units)

= \$12,800 ÷ 1,000 units

= \$12.80 per unit

Total variable cost per unit = \$20.70 per unit + \$56.50 per unit + \$12.80 per unit = \$90.00 per unit

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

52) Babuca Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

 Production volume 5,000 units 6,000 units Direct materials \$ 103,500 \$ 124,200 Direct labor \$ 282,500 \$ 339,000 Manufacturing overhead \$ 667,000 \$ 679,800

The best estimate of the total cost to manufacture 5,300 units is closest to:

1. A) \$1,116,180
2. B) \$1,062,915
3. C) \$1,080,000
4. D) \$1,009,650

Explanation:  Note: There are several ways to compute the variable cost per unit for direct materials and direct labor.

Direct materials:

Variable cost per unit = Change in cost ÷ Change in activity

= (\$124,200 – \$103,500) ÷ (6,000 units – 5,000 units)

= \$20,700 ÷ 1,000 units

= \$20.70 per unit

Direct labor:

Variable cost per unit = Change in cost ÷ Change in activity

= (\$339,000 – \$282,500) ÷ (6,000 units – 5,000 units)

= \$56,500 ÷ 1,000 units

= \$56.50 per unit

Variable cost per unit = Change in cost ÷ Change in activity

= (\$679,800- \$667,000) ÷ (6,000 units – 5,000 units)

= \$12,800 ÷ 1,000 units

= \$12.80 per unit

Total variable cost per unit = \$20.70 per unit + \$56.50 per unit + \$12.80 per unit = \$90.00 per unit

Fixed cost = Total cost – Variable cost element

= \$679,800 – (\$12.80 per unit × 6,000 units)

= \$679,800 – \$76,800

= \$603,000

Total fixed cost per month = \$0 + \$603,000 = \$603,000

Total cost = Total fixed cost + Total variable cost

= \$603,000 + (\$90.00 per units × 5,300 units)

= \$603,000 + \$477,000

= \$1,080,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

53) Wuensch Inc., an escrow agent, has provided the following data concerning its office expenses:

 Escrows Completed Office Expenses April 53 \$ 7,427 May 94 \$ 9,201 June 37 \$ 6,769 July 87 \$ 8,902 August 40 \$ 6,875 September 38 \$ 6,797 October 82 \$ 8,681 November 35 \$ 6,678 December 62 \$ 7,836

Management believes that office expense is a mixed cost that depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.

Using the high-low method, the estimate of the variable component of office expense per escrow completed is closest to:

1. A) \$45.44
2. B) \$42.76
3. C) \$88.22
4. D) \$131.00

Explanation:

 Escrows Completed Office Expenses High activity level (May) 94 \$ 9,201 Low activity level (November) 35 6,678 Change 59 \$ 2,523

Variable cost per unit = Change in cost ÷ Change in activity

= \$2,523 ÷ 59 escrows

= \$42.76 per escrow

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

54) Wuensch Inc., an escrow agent, has provided the following data concerning its office expenses:

 Escrows Completed Office Expenses April 53 \$ 7,427 May 94 \$ 9,201 June 37 \$ 6,769 July 87 \$ 8,902 August 40 \$ 6,875 September 38 \$ 6,797 October 82 \$ 8,681 November 35 \$ 6,678 December 62 \$ 7,836

Management believes that office expense is a mixed cost that depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.

Using the high-low method, the estimate of the fixed component of office expense per month is closest to:

1. A) \$7,685
2. B) \$7,182
3. C) \$6,678
4. D) \$5,182

Explanation:

 Escrows Completed Office Expenses High level of activity (May) 94 \$ 9,201 Low level of activity (November) 35 6,678 Change 59 \$ 2,523

Variable cost per unit = Change in cost ÷ Change in activity

= \$2,523 ÷ 59 escrows

= \$42.76 per escrow

Total fixed cost = Total cost – Variable cost element

= \$9,201 – (\$42.76 per escrow × 94 escrows)

= \$9,201 – \$4,019

= \$5,182

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

55) Electrical costs at one of Rome Corporation’s factories are listed below:

 Machine-Hours Electrical Cost March 458 \$ 1,007 April 423 \$ 934 May 440 \$ 979 June 409 \$ 902 July 426 \$ 952 August 372 \$ 822 September 414 \$ 926 October 431 \$ 949 November 468 \$ 1,025

Management believes that electrical cost is a mixed cost that depends on machine-hours.

Using the high-low method, the estimate of the variable component of electrical cost per machine-hour is closest to:

1. A) \$2.11
2. B) \$1.80
3. C) \$2.21
4. D) \$0.47

Explanation:

 Machine- Hours Electrical Cost High level of activity (November) 468 \$ 1,025 Low level of activity (August) 372 \$ 822 Change 96 \$ 203

Variable cost per unit = Change in cost ÷ Change in activity

= \$203 ÷ 96 machine-hours

= \$2.11 per machine hour

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

56) Electrical costs at one of Rome Corporation’s factories are listed below:

 Machine-Hours Electrical Cost March 458 \$ 1,007 April 423 \$ 934 May 440 \$ 979 June 409 \$ 902 July 426 \$ 952 August 372 \$ 822 September 414 \$ 926 October 431 \$ 949 November 468 \$ 1,025

Management believes that electrical cost is a mixed cost that depends on machine-hours

Using the high-low method, the estimate of the fixed component of electrical cost per month is closest to:

1. A) \$822
2. B) \$743
3. C) \$38
4. D) \$944

Explanation:

 Machine-Hours Electrical Cost High level of activity (November) 468 \$ 1,025 Low level of activity (August) 372 \$ 822 Change 96 \$ 203

Variable cost per unit = Change in cost ÷ Change in activity

= \$203 ÷ 96 machine-hours

= \$2.11 per machine hour

Total fixed cost = Total cost – Variable cost element

= \$1,025 – (\$2.11 per machine-hour × 468 machine-hours)

= \$1,025 – \$987

= \$38

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

57) Callander Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for \$140.50 per unit.

 Sales volume (units) 6,000 7,000 Cost of sales \$ 497,400 \$ 580,300 Selling and administrative costs \$ 273,600 \$ 294,700

The best estimate of the total monthly fixed cost is:

1. A) \$875,000
2. B) \$147,000
3. C) \$771,000
4. D) \$823,000

Variable cost per unit = Change in cost ÷ Change in activity

= (\$294,700 – \$273,600) ÷ (7,000 units – 6,000 units)

= \$21,100 ÷ 1,000 units

= \$21.10 per unit

Fixed cost = Total cost – Variable cost element

= \$294,700 – (\$21.10 per unit × 7,000 units)

= \$294,700 – \$147,700

= \$147,000

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

58) Callander Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for \$140.50 per unit.

 Sales volume (units) 6,000 7,000 Cost of sales \$ 497,400 \$ 580,300 Selling and administrative costs \$ 273,600 \$ 294,700

The best estimate of the total variable cost per unit is:

1. A) \$82.90
2. B) \$128.50
3. C) \$104.00
4. D) \$125.00

Explanation:  Cost of sales:

Because cost of sales is a variable cost, there are several ways to compute the variable cost per unit. Here is one:

Variable cost per unit = Change in cost ÷ Change in activity

= (\$580,300 – \$497,400) ÷ (7,000 units – 6,000 units)

= \$82,900 ÷ 1,000 units

= \$82.90 per unit

Variable cost per unit = Change in cost ÷ Change in activity

= (\$294,700 – \$273,600) ÷ (7,000 units – 6,000 units)

= \$21,100 ÷ 1,000 units

= \$21.10 per unit

Total variable cost per unit = \$82.90 per unit + \$21.10 per unit = \$104.00

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

59) Callander Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for \$140.50 per unit.

 Sales volume (units) 6,000 7,000 Cost of sales \$ 497,400 \$ 580,300 Selling and administrative costs \$ 273,600 \$ 294,700

The best estimate of the total contribution margin when 6,300 units are sold is:

1. A) \$75,600
2. B) \$97,650
3. C) \$362,880
4. D) \$229,950

Explanation:  Variable cost per unit = Change in cost ÷ Change in activity

= (\$580,300 – \$497,400) ÷ (7,000 units – 6,000 units)

= \$82,900 ÷ 1,000 units

= \$82.90 per unit

Variable cost per unit = Change in cost ÷ Change in activity

= (\$294,700 – \$273,600) ÷ (7,000 units – 6,000 units)

= \$21,100 ÷ 1,000 units

= \$21.10 per unit

Total variable cost per unit = \$82.90 per unit + \$21.10 per unit = \$104.00

Contribution margin per unit = Selling price per unit – Variable cost per unit

= \$140.50 per unit – \$104.00 per unit

= \$36.50 per unit

Total contribution margin = Contribution margin per unit × Unit sales

= \$36.50 per unit × 6,300 units

= \$229,950

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

60) The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost. Shown below are machine-hours and total overhead costs for the past six months:

 Machine-Hours Overhead Cost Jan 150,000 \$ 339,000 Feb 140,000 \$ 339,000 Mar 160,000 \$ 350,000 Apr 130,000 \$ 319,500 May 170,000 \$ 362,500 Jun 200,000 \$ 400,000

Assume that the relevant range includes all of the activity levels mentioned in this problem

If Casablanca expects to incur 185,000 machine hours next month, what will the estimated total overhead cost be using the high-low method?

1. A) \$212,750
2. B) \$359,750
3. C) \$382,750
4. D) \$381,700

Explanation:

 Machine- Hours Overhead Cost High activity level (Jun) 200,000 \$ 400,000 Low activity level (Apr) 130,000 \$ 319,500 Change 70,000 \$ 80,500

 Variable cost = Change in cost ÷ Change in activity = \$80,500 ÷ 70,000 MHs = \$1.15 per MH

 Fixed cost element = Total cost – Variable cost element = \$400,000 – (\$1.15 per MH × 200,000 MHs) = \$170,000

Y = a + bX= \$170,000 + (\$1.15 per MH × 185,000 MHs) = \$382,750

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

61) The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost. Shown below are machine-hours and total overhead costs for the past six months:

 Machine- Hours Overhead Cost Jan 150,000 \$ 339,000 Feb 140,000 \$ 339,000 Mar 160,000 \$ 350,000 Apr 130,000 \$ 319,500 May 170,000 \$ 362,500 Jun 200,000 \$ 400,000

Assume that the relevant range includes all of the activity levels mentioned in this problem.

What is Casablanca’s independent variable?

1. A) the year
2. B) the machine hours
3. C) the total overhead cost
4. D) the relevant range

Explanation:  The independent variable is the measure of activity which is machine-hours in this case.

Difficulty: 1 Easy

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

62) Hiss Corporation’s activity for the last six months is as follows:

 Machine Hours Electrical Cost July 2,000 \$ 1,560 August 3,000 \$ 2,230 September 2,400 \$ 1,750 October 1,900 \$ 1,520 November 1,800 \$ 1,450 December 2,100 \$ 1,600

Using the high-low method of analysis, the estimated variable cost per machine hour for electricity is closest to:

1. A) \$0.40
2. B) \$0.65
3. C) \$0.70
4. D) \$0.67

Explanation:

 Machine-Hours Electrical Cost High activity level (August) 3,000 \$ 2,230 Low activity level (November) 1,800 \$ 1,450 Change 1,200 \$ 780

Variable cost = Change in cost ÷ Change in activity

Variable cost = \$780 ÷ 1,200 machine-hours = \$0.65 per machine-hour

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

63) Hiss Corporation’s activity for the last six months is as follows:

 Machine Hours Electrical Cost July 2,000 \$ 1,560 August 3,000 \$ 2,230 September 2,400 \$ 1,750 October 1,900 \$ 1,520 November 1,800 \$ 1,450 December 2,100 \$ 1,600

Using the high-low method of analysis, the estimated fixed cost per month for electricity is closest to:

1. A) \$260
2. B) \$235
3. C) \$280
4. D) \$800

Explanation:

 Machine-Hours Electrical Cost High activity level (August) 3,000 \$ 2,230 Low activity level (November) 1,800 \$ 1,450 Change 1,200 \$ 780

Variable cost = Change in cost ÷ Change in activity

Variable cost = \$780 ÷ 1,200 machine-hours = \$0.65 per machine-hour

Fixed cost = Total cost − Variable cost

Fixed cost = \$2,230 − (\$0.65 per machine-hour × 3,000 machine-hours) = \$280

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

64) Jorgenson Corporation has provided the following data for the first five months of the year:

 Machine Hours Lubrication Cost January 240 \$ 1,500 February 320 \$ 1,600 March 400 \$ 1,740 April 300 \$ 1,580 May 340 \$ 1,680

Using the high-low method of analysis, the estimated variable lubrication cost per machine hour is closest to:

1. A) \$1.50
2. B) \$1.25
3. C) \$0.67
4. D) \$1.40

Explanation:

 Machine-Hours Electrical Cost High activity level (March) 400 \$ 1,740 Low activity level (January) 240 \$ 1,500 Change 160 \$ 240

Variable cost = Change in cost ÷ Change in activity = \$240 ÷ 160 machine hours = \$1.50 per machine hour

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

65) Jorgenson Corporation has provided the following data for the first five months of the year:

 Machine Hours Lubrication Cost January 240 \$ 1,500 February 320 \$ 1,600 March 400 \$ 1,740 April 300 \$ 1,580 May 340 \$ 1,680

Using the high-low method of analysis, the estimated monthly fixed component of lubrication cost is closest to:

1. A) \$1,120
2. B) \$1,140
3. C) \$1,170
4. D) \$1,130

Explanation:

 Machine-Hours Lubrication Cost High activity level (March) 400 \$ 1,740 Low activity level (January) 240 \$ 1,500 Change 160 \$ 240

Variable cost = Change in cost ÷ Change in activity = \$240 ÷ 160 machine hours = \$1.50 per machine hour

Fixed cost = Total cost – Variable cost

Fixed cost = \$1,740 – (\$1.50 per machine hour × 400 machine hours) = \$1,140

Difficulty: 2 Medium

Topic:  Diagnosing Cost Behavior with a Scattergraph

Learning Objective:  05-10 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the high-low method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

66) Jorgenson Corporation has provided the following data for the first five months of the year:

 Machine- Hours Lubrication Cost January 240 \$ 1,500 February 320 \$ 1,600 March 400 \$ 1,740 April 300 \$ 1,580 May 340 \$ 1,680

Using the least-squares regression method of analysis, the estimated variable lubrication cost per machine hour is closest to:

1. A) \$0.80
2. B) \$1.56
3. C) \$1.40
4. D) \$1.28

Explanation:  The regression line is Y = 1,121.18 + 1.5588X and the R2 is 0.9607.

Therefore, the variable cost per machine hour for lubrication is closest to \$1.56.

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

67) Jorgenson Corporation has provided the following data for the first five months of the year:

 Machine-Hours Lubrication Cost January 240 \$ 1,500 February 320 \$ 1,600 March 400 \$ 1,740 April 300 \$ 1,580 May 340 \$ 1,680

Using the least-squares regression method of analysis, the estimated monthly fixed component of lubrication cost is closest to:

1. A) \$1,050
2. B) \$1,060
3. C) \$1,121
4. D) \$1,144

Explanation:  The regression line is Y = 1121.2 + 1.5588X and the R2 is 0.9607.

Therefore, the fixed component of lubrication cost is closest to \$1,121.

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

68) Lacourse Inc.’s inspection costs are listed below:

 Units Produced Inspection Costs January 647 \$ 15,309 February 724 \$ 15,965 March 694 \$ 15,715 April 645 \$ 15,271 May 696 \$ 15,745 June 665 \$ 15,442 July 718 \$ 15,933 August 699 \$ 15,739

Management believes that inspection cost is a mixed cost that depends on units produced.

Using the least-squares regression method, the estimate of the variable component of inspection cost per unit produced is closest to:

1. A) \$22.80
2. B) \$8.82
3. C) \$8.27
4. D) \$8.78

Explanation:  Using Microsoft Excel functions, the solution is: Variable cost per unit produced = Slope = \$8.82

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

69) Lacourse Inc.’s inspection costs are listed below:

 Units Produced Inspection Costs January 647 \$ 15,309 February 724 \$ 15,965 March 694 \$ 15,715 April 645 \$ 15,271 May 696 \$ 15,745 June 665 \$ 15,442 July 718 \$ 15,933 August 699 \$ 15,739

Management believes that inspection cost is a mixed cost that depends on units produced.

Using the least-squares regression method, the estimate of the fixed component of inspection cost per month is closest to:

1. A) \$9,608
2. B) \$15,640
3. C) \$9,587
4. D) \$15,271

Explanation:  Using Microsoft Excel functions, the solution is:

Fixed cost per month = Intercept = \$9,587

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

70) Recent maintenance costs of Divers Corporation are listed below:

 Machine-Hours Maintenance Costs February 527 \$ 5,144 March 499 \$ 5,033 April 542 \$ 5,220 May 541 \$ 5,196 June 489 \$ 4,973 July 543 \$ 5,200 August 558 \$ 5,288 September 513 \$ 5,060

Management believes that maintenance cost is a mixed cost that depends on machine-hours.

Using the least-squares regression method, the estimate of the variable component of maintenance cost per machine-hour is closest to:

1. A) \$9.76
2. B) \$6.00
3. C) \$4.43
4. D) \$4.57

Explanation:  Using Microsoft Excel functions, the solution is:

Maintenance cost per machine-hour = Slope = \$4.43

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

71) Recent maintenance costs of Divers Corporation are listed below:

 Machine-Hours Maintenance Costs February 527 \$ 5,144 March 499 \$ 5,033 April 542 \$ 5,220 May 541 \$ 5,196 June 489 \$ 4,973 July 543 \$ 5,200 August 558 \$ 5,288 September 513 \$ 5,060

Management believes that maintenance cost is a mixed cost that depends on machine-hours.

Using the least-squares regression method, the estimate of the fixed component of maintenance cost per month is closest to:

1. A) \$5,139
2. B) \$2,806
3. C) \$4,973
4. D) \$2,738

Explanation:  Using Microsoft Excel functions, the solution is:

Fixed maintenance cost per month = Intercept = \$2,806

Difficulty: 2 Medium

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

72) Grawburg Inc. maintains a call center to take orders, answer questions, and handle complaints. The costs of the call center for a number of recent months are listed below:

 Calls Taken Call Center Cost April 9,030 \$ 112,323 May 9,017 \$ 112,278 June 9,035 \$ 112,341 July 9,065 \$ 112,458 August 9,015 \$ 112,290 September 9,061 \$ 112,419 October 9,070 \$ 112,463 November 9,067 \$ 112,439

Management believes that the cost of the call center is a mixed cost that depends on the number of calls taken.

Required:

Estimate the variable cost per call and fixed cost per month using the least-squares regression method.

Answer:  Using Microsoft Excel functions, the solution is:

Variable cost per call = Slope = \$3.27

Fixed cost per month = Intercept = \$82,758

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

73) Furlan Printing Corp., a book printer, has provided the following data:

 Titles Printed Press Setup Cost May 40 \$ 6,649 June 38 \$ 6,438 July 25 \$ 5,307 August 28 \$ 5,564 September 33 \$ 6,030 October 27 \$ 5,505 November 39 \$ 6,551 December 36 \$ 6,275

Management believes that the press setup cost is a mixed cost that depends on the number of titles printed. (A specific book that is to be printed is called a “title”. Typically, thousands of copies will be printed of each title. Specific steps must be taken to setup the presses for printing each title-for example, changing the printing plates. The costs of these steps are the press setup costs.)

Required:

Estimate the variable cost per title printed and the fixed cost per month using the least-squares regression method.

Answer:  The solution using Microsoft Excel functions is:

Variable cost per title printed = Slope = \$88.21

Fixed cost per month = Intercept = \$3,107

The solution using the formulas in the text is:

n = 8

ΣX = 266

ΣY = \$48,319

ΣXY = \$1,628,085

ΣX2 = 9,088

b = [n(ΣXY) − (ΣX)(ΣY)]/[n(ΣX2) − (ΣX)2]

= [8(\$1,628,085) − (266)(\$48,319)]/[8(9,088) − (266)2]

= \$88.21

a = [(ΣY) − b(ΣX)]/n

= [(\$48,319) − \$88.21(266)]/8

= \$3,107

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

74) The management of Rutledge Corporation would like to better understand the behavior of the company’s warranty costs. Those costs are listed below for a number of recent months:

 Product Returns Warranty Cost March 30 \$ 3,648 April 37 \$ 4,074 May 43 \$ 4,460 June 41 \$ 4,330 July 32 \$ 3,756 August 48 \$ 4,782 September 35 \$ 3,932 October 33 \$ 3,823

Management believes that warranty cost is a mixed cost that depends on the number of product returns.

Required:

Estimate the variable cost per product return and the fixed cost per month using the least-squares regression method.

Answer:  The solution using Microsoft Excel functions is:

Variable cost per product return = Slope = \$63.59

Fixed cost per month = Intercept = \$1,724

The solution using the formulas in the text is:

n = 8

ΣX = 299

ΣY = \$32,805

ΣXY = \$1,242,995

ΣX2 = 11,441

b = [n(ΣXY) − (ΣX)(ΣY))]/[n(ΣX2) − (ΣX)2]

= [8(\$1,242,995) − (299)(\$32,805))]/[8(11,441) − (299)2]

= \$63.59

a = [(ΣY) − b(ΣX)]/n

= [(\$32,805) − \$63.59(299)]/8

= \$1,724

Any difference in the solutions is due to rounding errors when the formulas are used.

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

75) Below are cost and activity data for a particular cost over the last four periods. Your boss has asked you to analyze this cost so that management will have a better understanding of how this cost changes in response to changes in activity.

 Activity Cost Period 1 46 \$ 791 Period 2 40 \$ 738 Period 3 47 \$ 807 Period 4 41 \$ 746

Required:

Using the least-squares regression method, estimate the cost formula for this cost.

Answer:  The solution using Microsoft Excel functions is:

Variable cost = Slope = \$9.57

Fixed cost = Intercept = \$354.31

Therefore, the cost formula is \$354.31 per period plus \$9.57 per unit of activity or:

Y = \$354.31 + \$9.57X

The solution using the formulas in the text is:

n = 4

ΣX = 174

ΣY = 3,082

ΣXY = 134,421

ΣX^2 = 7,606

b = [n(ΣXY)-(ΣX)(ΣY)]/[n(ΣX^2)-(ΣX)^2]

= [4(134,421)-(174)(3,082)]/[4(7,606)-(174)^2]

= \$9.57 (rounded to nearest whole cent)

a = [(ΣY)-b(ΣX)]/n

= [(3,082)- 9.57(174)]/4

= \$354 (rounded to nearest whole dollar)

Cost formula: Y = \$354 + \$9.57X.

Difficulty: 3 Hard

Topic:  The Least-Squares Regression Method

Learning Objective:  05-11 (Appendix 5A) Analyze a mixed cost using a scattergraph plot and the least-squares regression method.

Bloom’s:  Apply

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking; FN Measurement

## Reviews

There are no reviews yet.