Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises

1. Rainier Manufacturing uses absorption costing in its job-order costing system. Selected ledger
accounts for the year just ended are presented below. Each question mark (?) represents a debit or credit
that is missing from the account(s). BB = Beginning Balance, EB = Ending Balance.
BB
RM
Purchases
EB

BB

Raw Materials
12,000
?
58,000
8,000

Finished Goods
15,200

COGS

EB

BB
DM
DL
MOH
EB

WIP
7,000
?
?
?
9,770

Unadjusted
COGS

12,500

Factory Wages Payable

- BB
50,000

46,000

IM
IL
Other
MOH
Total

MOH
?
?
55,200

4,000 EB

Additional Information: (I suggest you look over the above accounts carefully and read all the
information below before you start to respond to. any of the items on the next page)

The cost of both direct (DM) and indirect materials (IM) are debited to the Raw Materials
Inventory account when materials are purchased.
Of the raw materials issued to production during the year, 90% were direct materials and 10%
were indirect materials.
Of the factory wages incurred during the year, 80% was for direct labor and 20% was for indirect
labor.
The other MOH of $55,200 indicated in the MOH account includes depreciation, insurance,
utilities, and maintenance costs incurred during the year related to production.
During the year, Rainier applied manufacturing overhead to production using a single, plant-wide
predetermined application rate based on direct labor (DL) cost. Any over- or under-applied
overhead is adjusted directly to cost of goods sold at the end of the year.
The balance of Work in Process (WIP) at the end of the year related to the only job still in
production at that time. Its job cost sheet shows DM of $3,500, DL of $2,200, and MOH applied
(MOHA) of $4,070 as of the end of the year.

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises

Required: Please respond to the items on the next page. You might find it helpful to use the T-accounts
above for your work; however, please write your answers in the spaces provided on the next page
(a) The cost of direct materials issued to production was ____________; indirect materials cost incurred
was ____________

(b) The cost of direct labor used in production was ____________; indirect labor cost incurred was
____________

(c) The predetermined overhead application rate being used during the year is ____________ based on
direct labor cost.

(d) Total manufacturing overhead applied during the year was ____________.

(e) Cost of goods manufactured during the year was ____________.

(f) Was manufacturing overhead over- or under-applied by the end of the year? ____________ Provide
the journal entry that would have been necessary to clear the manufacturing overhead account at
the end of the year.

(g) As a result of the entry you have made in (f) above, operating income will increase/decrease/be
unaffected (circle one) by ____________ and inventory balances will increase/decrease/be
unaffected (circle one) by ____________.

(h) Specific to Rainiers data for the year, speculate as to whether its production output was equal to, less
than, or greater than (circle one) expected output. What evidence do you have to support your
answer? Explain.

(i) If sales revenue for the year was $250,000, the gross margin reported on Rainiers income statement
for the year was ____________.

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises

2. Parkland Manufacturing applies manufacturing overhead to production on the basis of direct

labor hours. It uses two (2) direct labor hours per unit produced. Direct labor hours and
costs at two different production and sales levels are presented in the table below.
9,000 Units

15,000 Units

18,000 DLH

30,000 DLH

$135,000

$225,000

Total manufacturing overhead

$72,700

$86,500

Total selling and administrative expenses

$43,700

$51,500

Direct labor hours used

Total prime manufacturing costs

Parkland estimates that $32,000 of its selling and administrative expenses are fixed costs.
(a) Using high-low analysis, determine the cost formula (equation) for estimating manufacturing
overhead. (i.e. Determine estimated variable MOH per direct labor hour and the total estimated
fixed MOH.) Clearly show your work and present a complete answer.

(b) Assume Parkland plans to manufacture and sell 13,000 units next year.
(i)

What would be the total estimated manufacturing (product) cost at that level of
production?

(ii)

What would be the estimated manufacturing (product) cost per unit produced next year?

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises

(c)
Suppose, rather than 13,000 units, Parkland plans to manufacture and sell 11,000 units
next year. Would the estimated manufacturing cost per unit be higher/lower/the same (circle
one) as your answer to Part (b.ii)? Explain. (Calculations are not required.)

(d)
How comfortable would you be using the cost formula you have presented in Part (a) to
estimate total manufacturing overhead if Parkland wanted to product 16,000 units next year?
Explain.

(e)

What is the variable selling and administrative cost per unit?

(f)

If Parklands selling price is $30 per unit, what is the contribution margin per unit?

(g)
How many units should Parkland plan to sell if it wants to earn a target profit of $75,000
next year? (Give your answer rounded up to the next whole unit.)

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises

3. A company has provided the following data:

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.

4. 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

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises

5. Vaccaro Corporation produces and sells a single product. Data concerning that product appear
below:

Fixed expenses are $293,000 per month. The company is currently selling 3,000 units per month.
Management is considering using a new component that would increase the unit variable cost by
$13. Since the new component would increase the features of the company's product, the
marketing manager predicts that monthly sales would increase by 400 units. What should be the
overall effect on the company's monthly net operating income of this change?
A. increase of $600
B. increase of $39,600
C. decrease of $600
D. decrease of $39,600

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises

6. Similien Corporation produces and sells a single product. Data concerning that product appear
below:

Fixed expenses are $300,000 per month. The company is currently selling 5,000 units per month.
The marketing manager would like to cut the selling price by $14 and increase the advertising
budget by $17,000 per month. The marketing manager predicts that these two changes would
increase monthly sales by 1,400 units. What should be the overall effect on the company's
monthly net operating income of this change?
A. increase of $64,200
B. increase of $215,400
C. decrease of $64,200
D. decrease of $5,800

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises

7. Moloney Corporation produces and sells a single product. Data concerning that product appear
below:

Fixed expenses are $898,000 per month. The company is currently selling 9,000 units per month.
The marketing manager would like to introduce sales commissions as an incentive for the sales
staff. The marketing manager has proposed a commission of $16 per unit. In exchange, the sales
staff would accept a decrease in their salaries of $117,000 per month. (This is the company's
savings for the entire sales staff.) The marketing manager predicts that introducing this sales
incentive would increase monthly sales by 100 units. What should be the overall effect on the
company's monthly net operating income of this change?
A. increase of $115,400
B. decrease of $16,600
C. decrease of $250,600
D. increase of $1,063,400