Chapters 1-6 – Principles of Accounting II

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Chapters 1-6
Principles of Accounting II

1. Maintenance costs at a Tierce Corporation factory are listed below:

Machine – Hours

Maintenance Cost

January

4,198

$ 60,787

February

4,161

$ 60,545

March

4,114

$ 59,859

April

4,156

$ 55,785

May

4,177

$ 60,650

June

4,135

$ 59,670

July

4,190

$ 60,726

August

4,169

$ 60,546

September

4,068

$ 59,352

Management believes that maintenance cost is a mixed cost that depends on machine-hours. Using the
high-low method to estimate the variable and fixed components of this cost, these estimates would be
closest to:

$6.54 per machine-hour; $33,332 per month

$13.42 per machine-hour; $55,785 per month

$11.04 per machine-hour; $14,441 per month

$11.04 per machine-hour; $15,876 per month

2.

Sperberg Corporation’s operating leverage is 4.8. If the company’s sales increase by 13.75%, its net
operating income should increase by about:

13.75%

4.80%

57.05%

66.00%

3.

The following partially completed T-accounts summarize transactions for Fabatz
Company during the year:

Raw Materials

Beg Bal

1,650

8,800

8,800

Work in Process

Beg Bal

2,800

22,100

7,650

8,200

4,800

Finished Goods

Beg Bal

6,400

23,300

22,100

Manufacturing Overhead

1,150

4,800

2,500

1,700

Wages and Salaries Payable

13,700

Beg Bal

1,250

13,700

Cost of Goods Sold

23,300

The manufacturing overhead was:

$550 underapplied

$1,700 overapplied

$550 overapplied

$1,700 underapplied

4.

Candice Corporation has decided to introduce a new product. The product can be manufactured using
either a capital-intensive or labor-intensive method. The manufacturing method will not affect the quality
or sales of the product. The estimated manufacturing costs of the two methods are as follows:

Capital-

Labor-Intensive

Intensive

Variable manufacturing cost per unit

$

14.00

$

17.60

Fixed manufacturing cost per year

$

2,524,000

$

1,382,400

The company’s market research department has recommended an introductory selling price of $30 per
unit for the new product. The annual fixed selling and administrative expenses of the new product are
$500,000. The variable selling and administrative expenses are $2 per unit regardless of how the new
product is manufactured.

Required:

a.

Calculate the break-even point in units if Candice Corporation uses the (Do not round intermediate
calculations.):

Break-even point
in units

Capital-intensive manufacturing method

Labor-intensive manufacturing method

b.

Determine the unit sales volume at which the net operating income is the same for the two
manufacturing methods. (Do not round intermediate calculations. Round your answer to the
nearest whole number.)

Sales volume

c.

Assuming sales of 310,000 units, what is the degree of operating leverage if the company uses
the: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Degree of operating
leverage

Capital-intensive manufacturing method

Labor-intensive manufacturing method

d.

What is your recommendation to management concerning which manufacturing method should be
used, if the sales volume is in excess of the one calculated under Requirement (b)?

Labor-intensive manufacturing method

Capital-intensive manufacturing method

5.

Ermoin Inc. uses the FIFO method in its process costing system. The following data concern the
operations of the company’s first processing department for a recent month.

Work in process, beginning:

Units in process

1,300

Percent complete with respect to materials

80

%

Percent complete with respect to conversion

20

%

Costs in the beginning inventory:

Materials cost

$

3,040

Conversion cost

$

5,165

Units started into production during the month

16,800

Units completed and transferred out

16,800

Costs added to production during the month:

Materials cost

$

113,960

Conversion cost

$

507,900

Work in process, ending:

Units in process

1,300

Percent complete with respect to materials

40

%

Percent complete with respect to conversion

30

%

Required:

Using the FIFO method:

a.

Determine the equivalent units of production for materials and conversion costs.

Materials

Conversion

Equivalent units of production

b.

Determine the cost per equivalent unit for materials and conversion costs. (Round your answers to
2 decimal places.)

Materials

Conversion

Cost per equivalent unit

$

$

c.

Determine the cost of ending work in process inventory. (Round your intermediate calculations to
2 decimal places and final answer to the nearest dollar amount.)

Cost of ending work in process inventory

$

d.

Determine the cost of units transferred out of the department during the month. (Round your
intermediate calculations to 2 decimal places and final answer to the nearest dollar amount.)

Cost of units transferred out

$

6.

Erkkila Inc. reports that at an activity level of 8,100 machine-hours in a month, its total variable inspection
cost is $231,579 and its total fixed inspection cost is $196,830.

What would be the total variable inspection cost at an activity level of 8,300 machine-hours in a month?

Assume that this level of activity is within the relevant range. (Do not round your intermediate
calculations. Round your final answer to nearest whole dollar.)

$231,579

$201,690

$428,409

$237,297

7.

Mannarelli Corporation uses the FIFO method in its process costing system. Operating data for the
Casting Department for the month of September appear below:

Units

Percent Complete
with Respect to
Conversion

Beginning work in process inventory

30,000

20%

Transferred in from the prior department during September

121,000

Ending work in process inventory

40,000

90%

According to the company’s records, the conversion cost in beginning work in process inventory was
$17,260 at the beginning of September. Additional conversion costs of $542,568 were incurred in the
department during the month.

The cost per equivalent unit for conversion costs for September is closest to (Round off to three decimal
places.):

$4.484

$3.707

$3.654

$3.848

8.

Budget data for the Bidwell Company are as follows:

Sales (130,000 units)

$1,300,000

Expenses:

Fixed

Variable

Raw materials

$ 390,000

Direct labor

260,000

Overhead

$ 130,000

195,000

Selling and administrative

143,000

65,000

Total expenses

$ 273,000

$ 910,000

1,183,000

Net operating income

$ 117,000

The number of units Bidwell would have to sell to earn a net operating income of $195,000 is:

130,000 units

91,000 units

156,000 units

195,000 units

9.

Wilson Company has a process costing system. The Assembly Department had the following costs for
May:

Materials

Labor & Overhead

Work in process inventory, May 1

$ 64,000

$ 51,000

Costs added during May

$ 238,000

$ 119,000

Assume that Wilson uses the weighted-average method and that for May the company computed 17,000
equivalent units for labor and overhead. The cost per equivalent unit for labor and overhead for the
month would have been:

$10.00

$21.00

$7.00

$3.00

10.

DeAnne Company produces a single product. The company’s variable costing income statement
for August appears below:

DeAnne Company
Income statement
For the month ended August 31

Sales ($19 per unit)

$798,000

Variable expenses:

Variable cost of goods sold

378,000

Variable selling expense

84,000

Total variable expenses

462,000

Contribution margin

336,000

Fixed expenses:

Fixed manufacturing

111,000

Fixed selling and administrative

37,000

Total fixed expenses

148,000

Net operating income

$188,000

The company produced 37,000 units in August and the beginning inventory consisted of 10,000
units. Variable production costs per unit and total fixed costs have remained constant over the
past several months.
The value of the company’s inventory on August 31 under the absorption costing method is (Do
not round your intermediate calculations.):

$45,000

$60,000

$74,405

$70,000

11.

Carr Company produces a single product. During the past year, Carr manufactured 43,000 units
and sold 29,000 units. Production costs for the year were as follows:

Fixed manufacturing overhead

$ 430,000

Variable manufacturing overhead

$ 548,250

Direct labor

$ 361,200

Direct materials

$ 464,400

Sales totaled $2,233,000, variable selling expenses totaled $438,600, and fixed selling and
administrative expenses totaled $188,000. There were no units in beginning inventory. Assume
that direct labor is a variable cost.
Under absorption costing, the ending inventory for the year would be valued at (Do not round
your intermediate calculations.):

$678,059

$788,509

$587,300

$753,997

12.

Hickory Company manufactures two products—15,000 units of Product Y and 7,000 units of Product Z.
The company uses a plantwide overhead rate based on direct labor-hours. It is considering implementing
an activity-based costing (ABC) system that allocates all of its manufacturing overhead to four cost pools.
The following additional information is available for the company as a whole and for Products Y and
Z: (The total estimated overhead cost may not agree with the sum of allocated overhead costs to
each product.)

Activity Cost Pool

Activity Measure

Estimated
Overhead
Cost

Expected Activity

Machining

Machine-hours

$

213,400

11,000

MHs

Machine setups

Number of setups

$

61,600

140

setups

Production design

Number of products

$

78,000

2

products

General factory

Direct labor-hours

$

244,000

10,000

DLHs

Activity Measure

Product Y

Product Z

Machining

6,400

4,600

Number of setups

60

80

Number of products

1

1

Direct labor-hours

7,400

2,600

Required:

What is the activity rate for the Machining activity cost pool? (Round your answer to 2 decimal places.)

Machining activity cost pool

$ per MH

13.

Tsuchiya Corporation manufactures a variety of products. Last year, the company’s variable
costing net operating income was $78,500. Fixed manufacturing overhead costs deferred in
inventory under absorption costing amounted to $48,000. What was the absorption costing net
operating income last year?

$48,000

$126,500

$30,500

$78,500

14.

Smith Company sells a single product at a selling price of $30 per unit. Variable expenses are $12 per
unit and fixed expenses are $62,100. Smith’s break-even point is:

10,350 units

3,450 units

2,070 units

5,175 units

15.

On April 1, Stelter Corporation had $38,000 of raw materials on hand. During the month, the company
purchased an additional $64,000 of raw materials. During April, $74,000 of raw materials were
requisitioned from the storeroom for use in production. These raw materials included both direct and
indirect materials. The indirect materials totaled $7,400. Prepare journal entries to record these events.
Use those journal entries to answer the following question:

The credits to the Work in Process account as a consequence of the raw materials transactions in
April total:

65,700

74,000

0

64,000

16.

Temblador Corporation purchased a machine 7 years ago for $342,500 when it launched product E26T.
Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by
a new model 330 machine costing $346,500 or by a new model 230 machine costing $308,500.
Management has decided to buy the model 230 machine. It has less capacity than the model 330
machine, but its capacity is sufficient to continue making product E26T. Management also considered,
but rejected, the alternative of dropping product E26T and not replacing the old machine. If that were
done, the $308,500 invested in the new machine could instead have been invested in a project that
would have returned a total of $308,500.

In making the decision to invest in the model 230 machine, the opportunity cost was:

$342,500

$409,500

$346,500

$308,500

17.

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

1,000 units

2,000 units

Direct materials

$ 67.70 per unit

$ 67.70 per unit

Direct labor

$ 67.00 per unit

$ 67.00 per unit

Manufacturing overhead

$ 93.60 per unit

$ 66.90 per unit

The best estimate of the total monthly fixed manufacturing cost is (Do not round your intermediate
calculations. Round your final answer to nearest whole dollar.):

$133,800

$53,400

$93,600

$224,300

18.

A manufacturing company that produces a single product has provided the following data concerning its most recent
month of operations:

Units in beginning inventory

0

Units produced

8,000

Units sold

7,800

Units in ending inventory

200

Variable costs per unit:

Direct materials

$47

Direct labor

$45

Variable manufacturing overhead

$13

Variable selling and administrative

$10

Fixed costs:

Fixed manufacturing overhead

$276,000

Fixed selling and administrative

$88,000

What is the absorption costing unit product cost for the month? (Round your intermediate calculations to whole dollar
value.)

$105

$140

$115

$150

19.

The following data were taken from the accounting records of Abacus Company which uses the FIFO
method in its process costing system:

Beginning work in process inventory:

31,000 units (materials 100% complete, labor and overhead
55% complete)

Started in process during the period:

102,000 units

Ending work in process inventory:

41,000 units (materials 100% complete, labor and overhead
65% complete)

The equivalent units are:

Material, 102,000 units; labor and overhead, 101,600 units

Material, 117,450 units; labor and overhead, 113,750 units

Material, 73,150 units; labor and overhead, 74,700 units

Material, 133,000 units; labor and overhead, 118,650 units

20.

The following partially completed T-accounts summarize transactions for Fabatz Company
during the year:

Raw Materials

Beg Bal

3,000

8,400

10,400

Work in Process

Beg Bal

4,400

23,700

7,400

10,900

6,900

Finished Goods

Beg Bal

8,000

24,900

23,700

Manufacturing Overhead

2,100

6,900

4,100

3,300

Wages and Salaries Payable

16,300

Beg Bal

2,600

12,800

Cost of Goods Sold

24,900

The manufacturing overhead applied was:

6,900

4,100

3,300

16,100

21.

Job 731 was recently completed. The following data have been recorded on its job cost sheet:

Direct materials

$

3,291

Direct labor-hours

78

labor-hours

Direct labor wage rate

$

13

per labor-
hour

Machine-hours

138

machine-
hours

The company applies manufacturing overhead on the basis of machine-hours. The predetermined
overhead rate is $14 per machine-hour. The total cost that would be recorded on the job cost sheet for
Job 731 would be:

$4,305

$6,237

$3,318

$5,397

22.

The activity in Nolan Company’s Blending Department for the month of April is given below:

Number of
units

Labor and
overhead
percent complete

Work in process inventory, April 1

24,000

40%

Started into process during the month

82,000

Work in process inventory, April 30

26,000

50%

All materials are added at the beginning of processing in the Blending Department.

The equivalent units for material for the month, using the FIFO method, are:

91,600 units

106,000 units

82,000 units

108,000 units

23.

During April, Division D of Carney Company had a segment margin ratio of 15%, a variable expense ratio of 60% of
sales, and traceable fixed expenses of $33,000. Division D’s sales were closest to:

$49,500

$220,000

$73,333

$132,000

24.

During the month of September, direct labor cost totaled $12,000 and direct labor cost was 40% of prime
cost. If total manufacturing costs during September were $76,000, the manufacturing overhead was:

$30,000

$64,000

$46,000

$18,000

25.

Gangwer Corporation produces a single product and has the following cost structure:

Number of units produced each year

7,200

Variable costs per unit:

Direct materials

$49

Direct labor

$19

Variable manufacturing overhead

$11

Variable selling and administrative expense

$7

Fixed costs per year:

Fixed manufacturing overhead

$266,400

Fixed selling and administrative expense

$187,200

The absorption costing unit product cost is (Do not round your intermediate calculations.):

$37.0

$86.0

$123.0

$116.0

26.

The Donaldson Company uses a job-order costing system. The following data were recorded for
July:

July 1

Added During July

Work in Process

Job Number

Inventory

Direct Materials

Direct Labor

475

$

1,150

$

430

$

230

476

$

650

$

630

$

830

477

$

830

$

650

$

1,150

478

$

630

$

850

$

1,650

Overhead is applied to jobs at the rate of 90% of direct materials cost. Jobs 475, 477, and 478 were
completed during July and transferred to finished goods. Jobs 475 and 478 have been delivered to the
customer. Donaldson’s Work in Process inventory balance on July 31 was:

$2,677

$2,110

$5,829

$3,054

27.

Compton Company uses a predetermined overhead rate in applying overhead to production orders on a
labor cost basis in Department A and on a machine-hours basis in Department B. At the beginning of the
most recently completed year, the company made the following estimates:

Dept.A

Dept.B

Direct labor cost

$

63,000

$

40,000

Manufacturing overhead

$

80,010

$

68,450

Direct labor-hours

8,700

9,700

Machine-hours

4,700

18,500

What predetermined overhead rate would be used in Department A and Department B,
respectively?

79% and $4.12

79% and $7.06

79% and $3.70

127% and $3.70

28.

Rothe Company manufactures and sells a single product that it sells for $90 per unit and has a
contribution margin ratio of 35%. The company’s fixed expenses are $54,900. If Rothe desires a monthly
target net operating income equal to 15% of sales, the amount of sales in units will have to be
(rounded):

1,220 units

1,743 units

4,067 units

3,050 units

29.

Gambarini 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 $199.00
per unit.

Sales volume (units)

6,000

7,000

Cost of goods sold

$ 522,600

$ 609,700

Selling and administrative costs

$ 636,600

$ 660,400

The best estimate of the total monthly fixed cost is (Do not round your intermediate calculations. Round
your final answer to nearest whole dollar.):

$ 493,800

$ 1,159,200

$ 1,214,650

$ 1,270,100

30.

During February, Degan Inc. transferred $55,000 from Work in Process to Finished Goods and recorded
a Cost of Goods Sold of $60,000 (assume there was enough beginning balance in the Finished goods
inventory account). The journal entries to record these transactions would include a:

credit to Cost of Goods Sold of $60,000

credit to Finished Goods of $55,000

debit to Finished Goods of $60,000

credit to Work in Process of $55,000

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