Chapter 4 Exercise 7

7. Overhead application: Working backward

The Towson Manufacturing Corporation applies overhead on the basis of machine hours. The following
divisional information is presented for your review:

Actual machine hours

Estimated machine hours
Overhead application rate
Actual overhead
Estimated overhead
Applied overhead
Over- (under-) applied
overhead

Division
A
22,500
20,000
$4.50
$110,000
?
?
?

Division
B
?
?
$5.00
?
$90,000
$86,000
$6,500

FIND THE UNKNOWNS FOR EACH OF THE DIVISIONS.

Solution: Computation of the missing Figures
Division A:
Estimated Overhead = 20000 x $4.50 = $90,000
Applied Overhead = 22500 x $4.50 = $101,250
Over /Under Applied Overhead = 101250 110000 = $8,750 Underapplied

Division B:
Actual Machine Hours = 86000 / 5 = 17,200
Estimated Machine Hours = 90000 / 5 = 18,000
Actual Overhead = 86000 6500 = $79,500

Chapter 4 Problem 2
2. Computations using a job order system
General Corporation employs a job order cost system. On May 1 the following balances were extracted
from the general ledger;
Work in process

$ 35,200

Finished goods
Cost of goods sold

86,900
128,700

Work in Process consisted of two jobs, no. 101 ($20,400) and no. 103 ($14,800). During May, direct
materials requisitioned from the storeroom amounted to $96,500, and direct labor incurred totaled
$114,500. These figures are subdivided as follows:
Direct Materials
Direct
Labor
Job No.
101
115
116
Other

Amount
$5,000
19,500
36,200
35,800
$96,500

Job No.
101
103
115
116
Other

Amount
$7,800
20,800
42,000
18,000
25,900
$114,500

Job no. 115 was the only job in process at the end of the month. Job no. 101 and three "other" jobs were
sold during May at a profit of 20% of cost. The "other" jobs contained material and labor charges of
$21,000 and $17,400, respectively.
General applies overhead daily at the rate of 150% of direct labor cost as labor summaries are posted to
job orders. The firm's fiscal year ends on May 31.
Instructions:
a. Compute the total overhead applied to production during May.
Solution: Computation of the total overhead applied to production during May
Total overhead applied = 114500 x 1.50 = $171,750
b. Compute the cost of the ending work in process inventory.
Solution: Computation of the cost of the ending work in process inventory
Cost of ending work in process inventory = 21000 + 17400 + (17400 x 1.50)
Cost of ending work in process inventory = 21000 + 17400 + 26100 = $64,500
c. Compute the cost of jobs completed during May.
Solution: Computation of the cost of jobs completed during May

Cost of jobs completed during May = 35200 + 96500 + 114500 + 171750 64500
Cost of jobs completed during May = $353,450

d. Compute the cost of goods sold for the year ended May 31.
Solution: Computation of the following
Cost of goods sold year ended May 31 = 353450 + 128700
Cost of goods sold year ended May 31 = $482,150

Chapter 5 Exercise 1
1. High-low method
The following cost data pertain to 20X6 operations of Heritage Products:
Quarter 1
Shipping costs
Orders shipped

Quarter 2

$58,200
120

Quarter 3

$58,620
140

$60,125
175

Quarter 4
$59,400
150

The company uses the high-low method to analyze costs.

a. Determine the variable cost per order shipped.
Solution: Computation of the variable cost per order shipped
Variable cost per order shipped = (60125 58200) / (175 120)
Variable cost per order shipped = 1925 / 55 = $35
b. Determine the fixed shipping costs per quarter.
Solution: Computation of the fixed shipping costs per quarter
Fixed shipping costs per quarter = 60125 (35 x 175)
Fixed shipping costs per quarter = 60125 6125 = $54,000

c. If present cost behavior patterns continue, determine total shipping costs for 20X7 if activity

amounts to 570 orders.

Solution: Computation of the following
Total shipping costs for 570 orders = 54000 + (35 x 570)
Total shipping costs for 570 orders = 54000 + 19950 = $73,950

Chapter 5 Exercise 2
The treasurer anticipates the following costs for the event, which will be held at the Regency Hotel:
Room rental

$300

Dinner cost (per person)

25

Chartered buses

500

Favors and souvenirs (per person)

Band

900

Each person would pay $40 to attend; 200 attendees are expected.
a. Will the event be profitable for the sorority? Show computations.
Solution: Computation of the following
Yes, the event will be profitable in the total amount of $300. See computations below :
Total revenues = 40 x 200 = $8,000
Total variable costs = (25 + 5) x 200 = $6,000
Total fixed costs = 300 + 500 + 900 = $1,700
Net Income/Profit = 8000 6000 1700 = $300
b. How many people must attend for the sorority to break even?
Solution: Computation of the following
Number of people must attend to BREAK-EVEN = 1700 / (40 -25-5)
Number of people must attend to Break-even = 1700 / 10 = 170
c. Suppose the sorority encouraged its members to drive to the hotel and did not charter the buses.
Further, a planned menu change will reduce the cost per meal by $2. If each member will still be
charged $40, compute the contribution margin per person.
Solution: Computation of the following
Contribution margin per person = 40 (25 2 +5)
Contribution margin per person = 40 28 = $12
Chapter 5 Exercise 3

3. Break-even and other CVP relationships

Cedars Hospital has average revenue of $180 per patient day. Variable costs are $45 per patient day;
fixed costs total $4,320,000 per year.
a. How many patient days does the hospital need to break even?
Solution: Computation of the patient days does the hospital need to break even
Number of patient days needed to break even = 4320000 / (180 45)
Number of patient days needed to break even = 4320000 / 135 = 32,000
b. What level of revenue is needed to earn a target income of $540,000?
Solution: Computation of the revenue is needed to earn a target income of $540,000
Revenue needed = (540000 + 432000) / (135/180)
Revenue needed = 4860000 / .75 = $6,480,000
c. If variable costs drop to $36 per patient day, what increase in fixed costs can be tolerated without
changing the break-even point as determined in part (a)?
Solution: Computation of the following
Total fixed cost allowed = (180 36) x 32000 = 144 x 32000 = $4,608,000
Increase in fixed cost by = 4608000 4320000 = $288,000
Chapter 5 Problem 6
6. Direct and absorption costing
The information that follows pertains to Consumer Products for the year ended December 31, 20X6.
Inventory, 1/1/X6
Units manufactured
Units sold
Inventory, 12/31/X6
Manufacturing costs:
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Selling & administrative expenses:
Variable
Fixed

24,000 units
80,000
82,000
? units
$3 per unit
$5 per unit
$9 per unit
$280,000
$2 per unit
$136,000

The unit selling price is $26. Assume that costs have been stable in recent years.
Instructions:

a. Compute the number of units in the ending inventory.

Solution: Computation of the number of units in the ending inventory
Number of units in ending inventory = 24000 + 80000 82000 = 22,000

b. Calculate the cost of a unit assuming use of:

1. Direct costing.
2. Absorption costing.
Solution: Computation of the following
Cost of a unit:
1. Direct costing Unit cost = 3 + 5 + 9 = $17
2. Absorption costing Unit cost = 3 + 5 + 9 + (280000/80000) = 3 +5 +9 +3.50 = $20.50
c. Prepare an income statement for the year ended December 31, 20X6, by using direct costing.

Solution: Computation of the following

Important Note: The Problem No Selling Price Given, hence Sales, Contribution Margin, & Net Income
Cannot Be Computed
Consumer Products
Income Statement - Direct Costing
For the Year Ended December 31, 19X6
Sales
Variable costs:
Cost of goods sold
Selling & administrative

$
1,394,000
164,000

1,558,000

280,000
136,000

416,000

Contribution Margin
Fixed Costs:
Factory overhead
Selling & administrative
Net Income
Working notes:
Sales = 82000 x $
Cost of goods sold = 82000 x 17 = 1394000
Variable selling & admin = 2 x 82000 = 164000
Total variable cost = 1394000 + 164000 = 1558000

Total fixed cost = 280000 + 136000 = 416000

d. Prepare an income statement for the year ended December 31, 20X6, by using absorption

costing.
Solution: Computation of the following
Important Note: The Problem No Selling Price Given, hence Sales, Contribution Margin, & Net Income
Cannot Be Computed
Consumer Products
Income Statement - Absorption Costing
For the Year Ended December 31, 19X6
Sales
Cost of goods sold
Gross Profit
Selling & administrative expenses:
Variable
Fixed

$
1,681,000

164,000
136,000

Net Income

Working notes:
Sales = 82000 x $
Cost of goods sold = 82000 x $20.50 = 1,681,000
Variable selling expense = 82000 x $2 = 164,000
Total selling & admin. expenses = 164000 + 136000 = 300,000

300,000