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# Managerial accounting: classify costs, compute breakeven, CV

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I. Classifications

Part A: Classifications

Determine the classification for each cost item based on 2 different schemes. First, determine cost behavior: whether the cost is variable or fixed (relative to the number of units produced); check the appropriate space. Then, determine whether the cost is a product or a period cost; check the appropriate space. Be sure your final answers are lined up under the right column before submitting your quiz.

Behavior Functional Area
Cost Item Variable Fixed Product Period

Sales supervisors' salaries _____ _____ _____ _____

Cost of newspaper advertising _____ _____ _____ _____

Property taxes paid on the headquarters building _____ _____ _____ _____

Hourly wages of workers filling sales order (pickers) _____ _____ _____ _____

Paper towels used in the factory building restrooms _____ _____ _____ _____

Cost of electricity for the administrative offices _____ _____ _____ _____

Salaries of the production department managers _____ _____ _____ _____

Insurance paid on the factory building _____ _____ _____ _____

Cost of fabric to make polo shirts _____ _____ _____ _____

Commissions paid to salespeople at \$4 per unit _____ _____ _____ _____

Cost of forms for billing customers for their orders _____ _____ _____ _____
(invoices)

Part B: Identification of cost types

Select from the list above (in Part A) and list below two items that would be classified as:

2. Selling (or marketing) costs

II. Solving for Unknowns

For each case solve for the unknown amounts. Use the space below each set of information to show your calculations.

Units Selling Variable Total Contrib. Fixed Operating
Sold Price Costs / Unit Margin Costs Income (Loss)

3,000 \$ 25.00 (a)_________ \$ 45,000 \$ 57,000 (b)__________

Units Selling Variable Total Contrib. Fixed Operating
Sold Price Costs / Unit Margin Costs Income (Loss)

2,400 \$ 18.00 (c)_________ (d)___________ \$ 12,300 \$ 5,700

Unit Selling Variable Total Contrib. Fixed Operating
Sold Price Costs / Unit Margin Costs Income (Loss)

(e)_________ \$ 8.00 \$ 5.50 \$ 17,500 (f)__________ (\$ 9,250)

Units Selling Variable Total Contrib. Fixed Operating
Sold Price Costs / Unit Margin Costs Income (Loss)

4,250 (g)___________ \$ 9.20 \$27,200 \$ 22,100 (h)___________

III. Cost-Volume-Profit Analysis Problems

The following cost information is available for a single product manufactured and sold by Dreamer Corp.:

Variable costs: (Per unit) Fixed costs (in total):
Manufacturing: Direct materials \$ 10 Fixed overhead \$ 540,000
Direct labor 12

Units sell for \$36 each, and the firm is currently manufacturing and selling 120,000 units.

1. Determine the contribution margin per unit and the contribution margin ratio (percentage).

2. Calculate the firm's breakeven point in units.

3. Calculate the firm's breakeven point in sales dollars (revenues).

4. Calculate income at their current operating level of 120,000 units.

5. Suppose a change in manufacturing technology would allow the firm to reduce direct labor costs to \$6 per unit, but would increase fixed overhead costs by \$150,000. Compute the breakeven point considering these changes to the cost structure.

6. Return to the original information (ignore changes in part 5). Suppose the firm can add a second product that would sell for \$20 per unit, have unit variable costs of \$13, and would increase total fixed costs by \$320,000. Determine the firm's total income if they continue making and selling 120,000 units of the original product and make and sell 80,000 units of the second product.

7. Continuing with the 2 products, suppose the sales mix changes so they make and sell 100,000 units of each product (making the same total of 200,000 units). Determine the firm's total income with this mix of the two products.

Dane Co. applies manufacturing overhead to jobs based on direct labor hours worked. At the beginning of the year, the company estimated that overhead costs would total \$33,300 for the year, and that there would be 1,800 direct labor hours worked during the year.

1. Determine the pre-determined overhead rate for the year. (This will be used to assign overhead to the jobs in parts 2 and 3.)

2. One job that ran during the month of March used 60 direct labor hours. The job also incurred materials costs of \$1,750; the direct labor cost was \$900 (60 labor hours at \$15 per hour). The job consisted of 120 units. Determine the total manufacturing cost for the job, and the total cost per unit for items produced in this job.

3. A second job that ran during the month used 80 direct labor hours, incurred \$2,280 of direct materials cost, and \$1,200 of direct labor cost (80 hours at \$15 per hour). The job consisted of 150 units. Determine the total manufacturing cost for the job, and the total cost per unit for items produced in this job.

4. Assume the jobs described in parts 2 and 3 were the only jobs worked on during the entire month of March. (The overhead was applied to these 2 jobs is the only applied overhead for the month.) Actual overhead costs for the month totaled \$3,000. Determine the amount of under- or over-applied overhead for the month AND label it as over- or under-applied.

V. Activity-Based Costing

The purchasing department of a manufacturing firm has decided to apply its costs to jobs using an activity based costing system. Its costs of \$410,000 are split among the three major activities:

Activity Cost Allocation Measure Total Activity
Finding suppliers \$ 200,000 Number of telephone calls 100,000 calls
Issuing purchase orders \$ 90,000 Number of purchase orders 30,000 orders
Reviewing receiving reports \$ 120,000 Number of receiving reports 15,000 reports

1. From the information provided, determine the three allocation rates (one for each cost pool) to be used by an activity based costing system.

2. For one job that was produced by the firm, the following purchasing department activities were completed: 180 phone calls were made, 45 purchase orders were issued, and 36 separate incoming orders (receiving reports) were received. What amount of purchasing department cost would be assigned to this job?

#### Solution Preview

I. Classifications

Part A: Classifications

Determine the classification for each cost item based on 2 different schemes. First, determine cost behavior: whether the cost is variable or fixed (relative to the number of units produced); check the appropriate space. Then, determine whether the cost is a product or a period cost; check the appropriate space. Be sure your final answers are lined up under the right column before submitting your quiz.

Behavior Functional Area
Cost Item Variable Fixed Product Period

Sales supervisors' salaries _____ __X___ _____ __X___

Cost of newspaper advertising _____ __X___ _____ __X___

Property taxes paid on the headquarters building _____ __X___ _____ __X___

Hourly wages of workers filling sales order (pickers) __X__ _____ _____ __X___

Paper towels used in the factory building restrooms _____ __X__ __X___ _____

Cost of electricity for the administrative offices _____ __X___ _____ __X__

Salaries of the production department managers _____ __X___ __X___ _____

Insurance paid on the factory building _____ __X___ __X___ _____

Cost of fabric to make polo shirts __X___ _____ __X___ _____

Commissions paid to salespeople at \$4 per unit __X___ _____ _____ __X__

Cost of forms for billing customers for their orders __X__ _____ _____ __X___
(invoices)

Part B: Identification of cost types

Select from the list above (in Part A) and list below two items that would be classified as:

Salaries of the production department managers and Insurance paid on the factory building

2. Selling (or marketing) costs

Commissions paid to salespeople at \$4 per unit and Cost of newspaper advertising

II. Solving for Unknowns

For each case solve for the unknown amounts. Use the space below each set of information to show your calculations.

Units Selling Variable Total Contrib. Fixed Operating
Sold Price Costs / Unit Margin Costs Income (Loss)

3,000 \$ 25.00 (a)__10_____ \$ 45,000 \$ 57,000 (b)_(12,000)_

Total Contribution Margin = Total Sales - Total Variable Costs
45,000 = (25 x 3,000) - (X x 3,000)
45,000 = 75,000 - 3,000X
X = \$10

Operating Income = Total Sales - Total Variable Costs - Fixed Costs
(Loss) = ...

#### Solution Summary

This solution is comprised of a detailed explanation to determine the classification for each cost item based on 2 different schemes, identify cost types, solve for the unknown amounts, compute net income and break even point, determine the pre-determined overhead rate, the three allocation rates, and the amount of under- or over-applied overhead for the month.

\$2.19