Practice problems for Chapters 1, 2, 3, 4 and 6/6A Fall 2020
1. Lilah’s Toy Company (LTC) manufactures children’s toys. LTC estimates that its manufacturing overhead costs for 2013 will be $2,500,000 (variable overhead of $1,600,000 and fixed overhead of $900,000). LTC applies manufacturing overhead to inventory using direct labor hours as its base. LTC estimates its 2013 direct labor hours to be 10,000 hours.
The actual 2013 manufacturing overhead costs were $2,900,000 (variable overhead of $1,900,000 and fixed overhead of $1,000,000) and actual direct labor hours were 12,000. What is the over or under applied overhead in 2013? a. Under applied overhead of $400,000. b. Over applied overhead of $20,000. c. Under applied overhead of $300,000. d. Under applied overhead of $100,000 e. Over applied overhead of $100,000.
2. The following information was taken from the books of GMS Corporation for June: Raw materials inventory, beginning $ 200 Raw materials, ending $ 300 Purchases of raw materials $1,500 Direct labor $1,800 Manufacturing overhead $2,300 Work in process inventory, beginning $ 800 Work in process inventory, ending $ 300 Finished goods inventory, beginning $1,200 Finished goods inventory, ending $1,000
What was the cost of goods sold for June? a. $2,200 b. $6,000 c. $6,200 d. $5,600 e. $4,100
3. Complex Company has the following estimated costs for next year: Direct materials $15,000 Direct labor $55,000 Sales commissions $75,000 Salary of production supervisor $35,000 Indirect materials $ 5,000 Advertising expense $11,000 Rent on factory equipment $16,000
Complex estimates that 15,000 direct labor and 20,000 machine-hours will be worked during the year. If overhead is applied on the basis of machine-hours, the predetermined overhead rate per hour will be:
a. $6.30 b. $10.60 c. $7.10 d. $2.80 e. $3.73
4. Debbie’s Bakery Company (DBC) has prepared the following traditional 2012 income statement:
Sales Revenues $1,000,000 Cost of goods sold 400,000 Gross Margin 600,000 Selling and Administrative Expenses 350,000 Net Income $ 250,000
You determine that cost of goods sold, selling and administrative costs are variable and fixed expenses as follows:
Variable Fixed Total Cost of goods sold $300,000 $100,000 $400,000 Selling expenses 200,000 50,000 250,000 Administrative expense 25,000 75,000 100,000 Total VC $525,000
What is the 2012 contribution margin for DBC? a) $250,000 b) $600,000 c) $475,000 d) $700,000 e) $775,000
Use the following information to answer questions 5 – 6: Ellyn’s Doll House Company (EDHC) manufactures large and small doll houses. Historically, EDHC has utilized a traditional job order costing system to allocate manufacturing overhead. They are considering switching to an Activity Based Costing System. (All per unit answers are rounded to the nearest dollar.)
EDHC has the following Direct Labor and Direct Material Costs for a large doll house and a small doll house.
Large Small Direct Materials $50 $30 Direct Labor 25 15 OH applied Total
5. Overhead is applied on the basis of machine hours. It takes 3 machine hours to produce a large doll house and 2 machine hours to produce a small doll house. EDHC produces 2,000 large doll houses and 10,000 small doll houses in a year. Total manufacturing overhead is $780,000. Under the traditional job order costing system, what is the cost of one small doll house (rounded to nearest dollar)?
a. $45 b. $105 c. $110 d. $30 e. $75
6. EDHC does an Activity Based Cost Analysis and identifies 3 major activities. Here is an analysis of their findings:
Expected Activity Activity/Measure Overhead Large Small Total Labor related/direct labor hrs ($58) $580,000 4,000 6,000 10,000 direct labor hrs Machine related/machine hrs ($4) $104,000 6,000 20,000 26,000 machine hrs Production orders/no. of orders ($320) $ 96,000 100 200 300 orders
$780,000 Under an Activity Based Costing System, what is the cost of one small doll house (rounded to nearest dollar)? a) $45 b) $94 c) $110 d) $92 e) $30
7. At a break-even point of 400 units sold, variable expenses were $4,000 and fixed expenses were $2,000. What will the 401st unit sold contribute to profit?
a. $0 b. $5 c. $10 d. $15 e. Cannot be determined from information provided.
8. Danny’s Consulting Company (DCC) bills clients by the hour. DCC bills clients $250 per hour of consulting provided. DCC has variable costs of $100 per hour. DCC has fixed costs of $300,000. How many hours must DCC bill to clients to break even?
a. Cannot be determined with information provided. b. 1,200 c. 3,000 d. 2,500 e. 2,000
9. Juliet’s Children’s Clothes Company (JCCC) has a target profit of $100,000. That profit requires unit sales to be 2,000. JCCC’s variable cost per unit is $100 and fixed expenses are $50,000. If JCCC achieves that target profit, what is the margin of safety in units sold (round to nearest unit)?
a. 1,333 b. 667 c. 2,000 d. 571 e. Cannot be determined from information provided.
Use the following information to answer questions 10 – 11:
Rori’s Bridal Shoe Company (Rori’s) has provided the following data: Sales 3,000 shoes Sales price $70 per shoe Variable cost $50 per shoe Fixed cost $25,000
10. What is Rori’s net operating profit for the year? a. $35,000 b. $60,000 c. $210,000 d. $185,000 e. $125,000
11. If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, net operating income will:
a. Increase by $61,000. b. Increase by $20,000. c. Increase by $3,500. d. Increase by $11,000. e. Cannot be determined from information provided.
12. Jonathan’s Golf Club Company (JGCC) is in the process of analyzing its selling costs. For the prior 4 quarters, it had the following selling costs and golf clubs sold:
Selling Golf Clubs Costs ($) Sold (units)
Quarter 1 $1,000,000 50,000 Quarter 2 1,300,000 80,000 Quarter 3 1,700,000 120,000 Quarter 4 1,100,000 60,000
JGCC uses the high-low method to determine what its selling costs will be in the next quarter, when it anticipates selling 100,000 units. That cost will be:
a. $2,000,000 b. $1,500,000 c. $1,416,000 d. $1,645.000 e. $1,588,000
13. The number of X-rays taken and X-ray costs over the last nine months in a hospital are given below:
X-Ray January 6,250 $28,000
February 7,000 $29,000 March 5,000 $23,000 April 4,250 $20,000 May 4,500 $22,000 June 3,000 $17,000 July 3,750 $18,000 August 5,500 $24,000 September 6,750 $28,500
Using the high-low method, what is the hospital’s estimated monthly fixed X-ray cost?
a. $8,000 b. $6,500 c. $6,000 d. $5,850 e. None of the above
14. A company sells a single product for $50 per unit. The company’s variable manufacturing costs are $20 per unit, its variable selling costs are $10 per unit, and total annual fixed expenses are $80,000. What number of units must be sold to generate an annual target profit of $100,000?
a. 2,000 units b. 5,000 units c. 6,000 units d. 4,500 units e. 9,000 units
15. A company manufactures two products: A and B. The company’s accounting records revealed the following per-unit costs for direct material and direct labor:
Produc t A Produc
Production volume (units) 2,500 10,000 Direct material $16 $84 Direct labor:
4 hours at $12/hour $48 1 hour at $12/hour $12
Management is considering a shift to activity-based costing and gathered the following data: Expected Activity
Activity Cost Pool Estimated Cost Activity cost driver Product A Product B Total Setups $240,000 Number of setups 80 40 120
General factory $600,000 Direct labor hours 10,000 10,000 20,000 Machine processing $120,000 Machine hours 2,000 1,000 3,000
Assuming that actual activity is the same as expected activity, what is the unit product cost of Product B under activity-based costing? a. $138 b. $123 c. $118 d. $96 e. None of the above
16. Last year, a company reported sales of $640,000, a contribution margin of $160,000, and a net operating income of $40,000. Based on this information, the break-even point in sales dollars was:
a) $240,000 b) $480,000 c) $800,000 d) $400,000 e) None of the above
17. Company operates a job-order costing system and applies overhead cost to jobs on the basis of direct labor cost. Its predetermined overhead rate was based on a cost formula that estimated $135,000 of manufacturing overhead and an estimated allocation base of $90,000 in direct labor cost. The company has provided the following data:
Beginning Ending Raw Materials Inventory (all direct)
Work in Process Inventory 45,000 36,000 Finished Goods Inventory 71,000 61,000 The following actual costs were incurred during the year: Purchase of raw materials (all direct) $130,000 Direct labor cost $100,000 Manufacturing overhead cost $110,000
Suppose the company closes out any under- or over-applied overhead cost to Cost of Goods Sold. How much was the company’s adjusted Cost of Goods Sold? a. $377,000 b. $357,000 c. $337,000 d. $363,000 e. None of the above
18. The Work in Process inventory account of a manufacturing company shows a balance of $2,600 at the end of an accounting period. The job cost sheets of the two uncompleted jobs show charges of $400 and $200 for direct materials, and charges of $300 and $500 for direct labor. From this information, it appears that the company is using a predetermined overhead rate, as a percentage of direct labor cost ($) of: a. 80% b. 125% c. 100% d. 150% e. 200%
19. A company distributes a product that sells for $50 per unit. Variable expenses are $10 per unit, and fixed expenses total $15,000 annually. Assume that the company sold 4,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising expenditures, would increase annual unit sales by 50%. If these changes were made, by how much would net operating income increase or decrease?
a. $20,000 increase b. $16,000 increase c. $12,000 decrease d. $10,000 decrease e. None of the above
20. A company produces toys. The following information is available: Selling price per doll $26.40 Variable costs per
Current annual sales 80,000 units
Current fixed costs $360,000
The sales manager projects that next year a 10% reduction in selling price, combined with an increase of $50,000 in advertising spending would result in an increase of 50% in unit sales. By how much will net income increase if they do so?
a) $166,000 b) $157,000 c) $187,600 d) $145,000 e) $209,200
21. A company uses direct labor-hours as the allocation base in its predetermined overhead rate. At the beginning of the year, the estimated direct labor-hours were 1,500 hours and the total estimated manufacturing overhead was $30,000. At the end of the year, actual direct labor- hours for the year were 1,300 hours and the actual manufacturing overhead for the year was
$29,000. What is the amount of overapplied or underapplied manufacturing overhead for the year?
A. $3,000 underapplied B. $1,000 overapplied C. $5,000 underapplied D. $3,000 overapplied E. None of the above
22. A company revealed the following figures:
Sales revenue $840,000
Contribution margin $504,000
Net operating income $54,000
How much is the company’s margin of safety in dollars?
A. $140,000 B. $90,000 C. $120,000 D. $336,000 E. None of the above
23. A company’s total overhead cost at various levels of activity is presented below:
Month Machine-Hours Total Overhead Cost March ……………………………….. 5,000 $21,750 April ………………………………….. 4,000 $19,000 May ………………………………….. 6,000 $25,000 June …………………………………. 7,000 $28,750
Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 4,000 machine-hour level of activity is as follows:
Utilities (variable) …………………………. $ 8,000 Supervisory salaries (fixed) …………….. 4,000 Maintenance (mixed) …………………….. 7,000 Total overhead cost ………………………. $19,000
Suppose the company uses the high-low method to estimate a cost formula for maintenance. What is the total maintenance cost the company expects to incur at an activity level of 7,600 machine hours?
a. $12,640 b. $13,400 c. $12,800 d. $11,500 e. None of the above