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Alternative solution:
2. An increase in the variable expenses as a percentage of the selling price would result in a higher
break-even point. The reason is that if variable expenses increase as a percentage of sales, then the
contribution margin will decrease as a percentage of sales. A lower CM ratio would mean that more
tackle boxes would have to be sold to generate enough contribution margin to cover the fixed costs.
Exercise 4-16 (continued)
Present: Proposed:
3. 2,600 Tackle Boxes 3,120 Tackle Boxes*
Total Per Unit Total Per Unit
Sales.............................. $124,800 $48 $131,040 $42 **
Variable expenses........... 93,600 36 112,320 36
Contribution margin......... 31,200 $12 18,720 $6
Fixed expenses............... 18,000 18,000
Operating income............ $ 13,200 $ 720
Alternative solution:
$18,000 + $14,400
= = 5,400 units
$6 per unit
$ 16,800
$ 18,000+
1.3
$6
$ 18,000+$ 24,000
=7,000 units
$6
Exercise 5-15 (30 minutes)
1. The predetermined overhead rate is computed as follows:
Predetermined = Estimated total manufacturing overhead cost
overhead rate Estimated total amount of the allocation base
$170,000
= =$2.00 per machine-hour
85,000 machine-hours
2. The amount of overhead cost applied to Work in Process for the year would be: 80,000 machine-
hours $2.00 per machine-hour = $160,000. This amount is shown in entry (a) below:
Manufacturing Overhead
(Utilities) 14,000 (a) 160,000
(Insurance) 9,000
(Maintenance) 33,000
(Indirect materials) 7,000
(Indirect labour) 65,000
(Depreciation) 40,000
Balance 8,000
Work in Process
(Direct materials) 530,000
(Direct labour) 85,000
(Overhead) (a) 160,000
Exercise 5-15 (continued)
3. Overhead is underapplied by $8,000 for the year, as shown in the Manufacturing Overhead account
above. The entry to close out this balance to Cost of Goods Sold would be:
Cost of Goods Sold...................................... 8,000
Manufacturing Overhead........................... 8,000
4. When overhead is applied using a predetermined rate based on machine-hours, it is assumed that
overhead cost is proportional to machine-hours. When the actual level of activity turns out to be
80,000 machine-hours, the costing system assumes that the overhead will be 80,000 machine-hours
$2.00 per machine-hour, or $160,000. This is a drop of $10,000 from the initial estimated total
manufacturing overhead cost of $170,000. However, the actual total manufacturing overhead did not
drop by this much. The actual total manufacturing overhead was $168,000a drop of only $2,000
from the estimate. The manufacturing overhead did not decline by the full $10,000 because of the
existence of fixed costs and/or because overhead spending was not under control. These issues will
be covered in more detail in later chapters.
Exercise 6-7 (10 minutes)
Weighted-Average Method
* Beginning WIP 25,000 + Started 25,000 Ending WIP 5,000 = 45,000 litres .
Exercise 7-10 (15 minutes)
Teller wages................................ $150,000
Assistant branch manager salary... $70,000
Branch manager salary................. $85,000
Processing
Processing Other
Opening Deposits and Customer Other
Accounts Withdrawals Transactions Activities Totals
Teller wages................................ $ 0 $112,500 $22,500 $ 15,000 $150,000
Assistant branch manager salary... 7,000 10,500 17,500 35,000 70,000
Branch manager salary................. 0 0 17,000 68,000 85,000
Total cost..................................... $7,000 $123,000 $57,000 $118,000 $305,000
Teller wages are $150,000 and 75% of the tellers time is spent processing deposits and withdrawals:
$150,000 75% = $112,500
Other entries in the table are similarly determined.
Exercise 8-8 (20 minutes)
1. The company is using variable costing. The computations are:
Variable Absorption
Costing Costing
Direct materials.............................. $10 $10
Direct labour.................................. 5 5
Variable manufacturing overhead.... 2 2
Fixed manufacturing overhead
($90,000 30,000 units)............. 3
Unit product cost............................ $17 $20
Total cost, 5,000 units.................... $85,000 $100,000
2. a. The total cost based on variable costing of $85,000 would be acceptable for tax purposes, but not
for external reporting.
b. The finished goods inventory account should be stated at $100,000, which represents the
absorption cost of the 5,000 unsold units. Thus, the account should be increased by $15,000 for
external reporting purposes. This $15,000 consists of the amount of fixed manufacturing overhead
cost that is allocated to the 5,000 unsold units under absorption costing:
5,000 units $3 per unit fixed manufacturing overhead cost = $15,000
Exercise 9-10 (30 minutes)
Air Assurance Corporation
Comprehensive
Performance Report
For the Month Ended March 31
Flexible
Budget Flexible Sales Volume Static
Actual Variance Budget Variance Budget
Jobs 98 98 100
Spending Variance, Efficiency Variance,
250 U -1,750 F
Alternative solution:
Variable Overhead Spending Variance = (AH AR) (AH SR)
(26,500) (15,000 MHs 1.75 per MH) = 250 U
Variable Overhead Efficiency Variance = SR (AH SH)
1.75 per MH (15,000 MHs 16,000 MHs) = -1,750 F
Problem 10-21 (continued)
Fixed overhead variances:
Fixed Overhead Cost
Actual Fixed Budgeted Fixed Applied to
Overhead Cost Overhead Cost Work in Process
70,000 72,000 16,000 MHs
4 per MH
= 64,000
Budget Variance, Volume Variance,
-2,000 F 8,000 U
Fixed overhead
Budget variance: This variance is simply the difference between the budgeted fixed cost and the
actual fixed cost. In this case, the variance is favourable, which indicates that actual fixed costs were
lower than anticipated in the budget.
Volume variance: This variance occurs as a result of actual activity being different from the
denominator activity that was used in the predetermined overhead rate. In this case, the variance is
unfavourable, so actual activity was less than the denominator activity. It is difficult to place much of
a meaningful economic interpretation on this variance. It tends to be large, so it often swamps the
other, more meaningful variances if they are simply netted against each other.
Problem 11-15 (45 minutes)
1. Segments defined as product lines:
Product Line
Leather
Division Garments Shoes Handbags
Sales......................................... R1,500,000 R500,000 R700,000 R300,000
Variable expenses...................... 761,000 325,000 280,000 156,000
Contribution margin................... 739,000 175,000 420,000 144,000
Traceable fixed expenses:
Advertising.............................. 312,000 80,000 112,000 120,000
Administration......................... 107,000 30,000 35,000 42,000
Depreciation............................ 114,000 25,000 56,000 33,000
Total traceable fixed expenses.... 533,000 135,000 203,000 195,000
Product line segment margin...... 206,000 R40,000 R217,000 R (51,000)
Common fixed expenses:
Administrative*....................... 110,000
Divisional segment margin.......... R 96,000
*R217,000 R107,000 = R110,000.
Problem 11-15 (continued)
2. Segments defined as markets for the handbag product line:
Sales Market
Handbags
Domestic Foreign
Sales......................................... R300,000
R200,000 R100,000
Variable expenses...................... 156,00086,000 70,000
Contribution margin................... 144,000
114,000 30,000
Traceable fixed expenses:
Advertising.............................. 120,000 40,000 80,000
Market segment margin.............. 24,000 R74,000 R(50,000)
Common fixed expenses:
Administrative......................... 42,000
Depreciation............................ 33,000
Total common fixed expenses..... 75,000
Product line segment margin...... R(51,000)
3. Garments Shoes
Contribution margin (a)............................. R175,000 R420,000
Sales (b).................................................. R500,000 R700,000
Contribution margin ratio (a) (b)............ 35% 60%
Yes, the go-cart track meets the requirement. The payback period is
less than the maximum 6 years required.
Yes, the new go-cart track satisfies the criterion. Its 10.7% return
exceeds the requirement of a 10% return.