Midterm (Mar 22, 2015)

A. Exercise 1-13. Explain your answer.

Exercise 1-13 (20 minutes)
The purpose of this exercise is to present students with an opportunity to debate the
ethicality of competing courses of action. Some students may argue that the ethical choice
is to report all gambling winnings to the Internal Revenue Service even though it will force
them to pay additional federal income taxes. Other students may argue that it is okay to
evade the additional income tax for various reasons, such as everybody else does it so it is
okay.
The power of rationalization is a very important topic when discussing ethics and decision
making. When students are asked a generic question about the ethicality of breaking the law
or lying, they quickly condemn these actions as unethical. However, when given specific
contexts, such as the one presented in this problem, many students will rationalize unlawful
or dishonest conduct.
Note to instructors: Before beginning a classroom discussion, allow students to anonymously
answer the question in writing. Summarize the results of the written responses and ask
students to comment on them.

B. Exercise 3-12
Exercise 3-12 (15 minutes)
1. Actual manufacturing overhead costs

$473,000

Manufacturing overhead cost applied: 19,400 MH

$25 per MH

485,000

Overapplied overhead cost

$12,000

2. Direct materials:
Raw materials inventory, beginning
Add purchases of raw materials
Raw materials available for use
Deduct raw materials inventory, ending
Raw materials used in production
Less indirect materials

$20,000
400,000
420,000
30,000
390,000
15,000

$375,000

Direct labor

60,000

Manufacturing overhead cost applied to work in

process

485,000

Total manufacturing costs

920,000

Add: Work in process, beginning

40,000
960,000

Deduct: Work in process, ending

70,000

Cost of goods manufactured

$890,000

C.Problem 3-22. Answer questions 1 & 2 only.

Problem 3-22 (30 minutes)
1.

The predetermined overhead rate was:

Y = $795,000 + $1.40 per hour 75,000 hours

Estimated fixed manufacturing overhead

$795,000

Estimated variable manufacturing overhead

$1.40 per computer hour 75,000 hours
Estimated total manufacturing overhead cost

105,000
$900,000

The predetermined overhead rate is computed as follows:

2
.

Estimated total manufacturing overhead

$900,000

Estimated total computer hours

75,000

Hours

= Predetermined overhead rate

$12.00

per hour

Actual manufacturing overhead cost

Manufacturing overhead cost applied to Work in Process
during the year: 60,000 actual MHs $12 per MH
Underapplied overhead cost

D. Problem 3-25. Answer questions 1, 2, 3, & 5 only.

$850,000
720,000
$130,000

Problem 3-25 (60 minutes)

1.

a.

Predetermined= Estimated total manufacturing overhead cost

overhead rate Estimated total amount of the allocation base
=

$800,000
=160%
$500,000 direct materials cost

b.
Before the underapplied or overapplied overhead can be computed, we
must determine the amount of direct materials used in production for the year.
Raw materials inventory, beginning
Add, Purchases of raw materials
Raw materials available

$20,000
510,000
530,000

Deduct: Raw materials inventory, ending

Raw materials used in production

80,000
$450,000

Actual manufacturing overhead costs:

Indirect labor

$170,000

Property taxes

48,000

Depreciation of equipment

260,000

Maintenance

95,000

Insurance

7,000

Rent, building
Total actual costs

180,000
760,000

Applied manufacturing overhead costs:

$450,000 160%
Underapplied overhead

720,000
$ 40,000

Problem 3-25 (continued)

Gitano Products
2.

Schedule of Cost of Goods Manufactured

Direct materials:
Raw materials inventory, beginning
Add purchases of raw materials
Total raw materials available

$20,000
510,000
530,000

Deduct raw materials inventory, ending

80,000

Raw materials used in production

$ 450,000

Direct labor

90,000

Manufacturing overhead applied to work in process

720,000

Total manufacturing costs

1,260,000

Add: Work in process, beginning

150,000
1,410,000

Deduct: Work in process, ending

70,000

Cost of goods manufactured

$1,340,000

3. Unadjusted cost of goods sold:

$ 260,000

Finished goods inventory, beginning

Add: Cost of goods manufactured

1,340,000

Goods available for sale

1,600,000

Deduct: Finished goods inventory, ending

400,000

Unadjusted cost of goods sold

$1,200,000

The underapplied overhead can either be closed out to Cost of Goods Sold or
allocated between Work in Process, Finished Goods, and Cost of Goods Sold based on the
overhead applied during the year in the ending balance in each of these accounts.

$8,500

4. Direct materials
Direct labor

2,700

Overhead applied ($8,500 160%)

13,600

Total manufacturing cost

$24,800

$24,800 125% = $31,000 price to the customer

Problem 3-25 (continued)
5.

The amount of overhead cost in Work in Process was:

$24,000 direct materials cost 160% = $38,400
The amount of direct labor cost in Work in Process is:

Total ending work in process

Deduct: Direct materials

$70,000
$24,000

Manufacturing overhead

38,400

Direct labor cost

62,400
$ 7,600

The completed schedule of costs in Work in Process was:

Direct materials

$24,000

Direct labor

7,600

Manufacturing overhead
Work in process inventory

38,400
$70,000

Ass III (May 2, 2015)

Exercise 5-13, Page 221
Exercise 5-13 (20 minutes)

1. Sales (20,000 units 1.15 = 23,000 units)

Variable expenses
Contribution margin
Fixed expenses
Net operating income

2. Sales (20,000 units 1.25 = 25,000 units)

Variable expenses
Contribution margin
Fixed expenses
Net operating income

3. Sales (20,000 units 0.95 = 19,000 units)

Variable expenses

Total

Per Unit

$345,000

$ 15.00

207,000
138,000

9.00
$ 6.00

70,000
$68,000

$337,500
225,000
112,500

$13.50
9.00
$ 4.50

70,000
$42,500

$313,500
171,000

$16.50
9.00

Contribution margin
Fixed expenses
Net operating income

4. Sales (20,000 units 0.90 = 18,000 units)

Variable expenses
Contribution margin
Fixed expenses
Net operating income

142,500

$ 7.50

90,000
$52,500

$302,400
172,800
129,600
70,000
$59,600

$16.80
9.60
$ 7.20

Exercise 5-14, Page 221 (Answer questions 1 & 2 ONLY)

Exercise 5-14 (30 minutes)
1.

Variable expenses: $40 (100% 30%) = $28

2. a. Selling price

$40

Variable expenses
Contribution margin

100%

28

70%

$12

30%

Profit

= Unit CM Q Fixed expenses

$0

= $12 Q $180,000

$12Q

= $180,000

= $180,000 $12

= 15,000 units
In dollar sales: 15,000 units $40 per unit = $600,000
Alternative solution:
Profit

= CM ratio Sales Fixed expenses

$0

= 0.30 Sales $180,000

0.30 Sales

= $180,000

Sales

= $180,000 0.30

Sales

= $600,000
In unit sales: $600,000 $40 per unit = 15,000 units

b. Profit

= Unit CM Q Fixed expenses

$60,000

= $12 Q $180,000

$12Q

= $60,000 + $180,000

$12Q

= $240,000

= $240,000 $12

= 20,000 units
In dollar sales: 20,000 units $40 per unit = $800,000

Alternative solution:
Profit

= CM ratio Sales Fixed expenses

$60,000

= 0.30 Sales $180,000

0.30 Sales

= $240,000

Sales

= $240,000 0.30

Sales

= $800,000

In unit sales: $800,000 $40 per unit = 20,000 units

c.

The companys new cost/revenue relation will be:

Selling price

$40

Variable expenses ($28 $4)

Contribution margin

100%

24

60%

$16

40%

Profit

= Unit CM Q Fixed expenses

$0

= ($40 $24) Q $180,000

$16Q

= $180,000

= $180,000 $16 per unit

= 11,250 units

In dollar sales: 11,250 units $40 per unit = $450,000

Alternative solution:
Profit

= CM ratio Sales Fixed expenses

$0

= 0.40 Sales $180,000

0.40 Sales

= $180,000

Sales

= $180,000 0.40

Sales

= $450,000
In unit sales: $450,000 $40 per unit = 11,250 units

Problem 5-23, Page 225 (Answer questions 1,2,3,4 ONLY)

1. The CM ratio is 60%:
Sales price
Variable expenses
Contribution margin

$20.00
8.00
$12.00

100%
40%
60%

2.

Dollar sales to = Fixed expenses

break even
CM ratio
=

$180,000
0.60

= $300,000
3.
$75,000 increased sales 0.60 CM ratio = $45,000 increased contribution
margin. Because the fixed costs will not change, net operating income should also increase
by $45,000.
4.

a.

Contribution margin
Degree of
=
operating leverage
Net operating income
=

$240,000
$60,000

=4
b.
4 20% = 80% increase in net operating income. In dollars, this
increase would be 80% $60,000 = $48,000.