Question

QUESTION 1 -

Classic Sound is a start-up company that produces vinyl records for numerous record labels worldwide. The company has two full-time employees working in the production department while the CEO splits her time 80/20% between developing new business and overseeing the production process. Information taken from the accounting records for the first three months of operations is shown below.

Beginning raw materials inventory	$	0
Purchases of raw materials		57,500
Ending raw materials inventory		28,750
Direct labour		46,750
Manufacturing overhead		35,250
Beginning work in process inventory		0
Ending work in process inventory		6,500
Purchase of production equipment		175,000
Rent for production facility		11,250

Required:

1. Prepare a schedule of cost of goods manufactured for the company for the month. (Do not leave any empty spaces; input a 0 wherever it is required.)

2. What types of expenses are likely included in the total manufacturing overhead cost of $35,250 incurred for the first three months of operation? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

a) Selling expense

b) Administrative expense

c) Ending work in process inventory

d) Rent for the production facility

e) Depreciation on the production equipment

f) Insurance on the production equipment

g) Indirect materials used in producing records

h) Indirect labour related to the CEO's supervision of the production process (20% of her time).

QUESTION 2 –

Urban Auto Glass specializes in the repair and replacement of windshields for passenger vehicles. Variable and fixed costs related to installation activities for the most recent month (July) are listed below.

Item
Number of windshields installed		1,650
Variable expenses:
Direct materials	$	331,650
Direct labour (1 hour per installation)		54,450
Indirect materials		14,850
Fixed expenses:
Installation supervisor’s wages	$	4,950
Installation scheduler’s wages		1,650
Warehouse expenses		6,600

Required:

1. Calculate the per unit amounts for each of the variable expense and fixed expense items in July.

2. Management expects that 1,850 windshields will be installed in August and that this level of activity is within the relevant range for all variable and fixed expenses.

a&b-1. Calculate the total expense and per unit amounts for each of the variable and fixed cost items above. (Round "per unit" answers to 2 decimal places.)

3. Identify some factors that might cause variable costs per unit to change if the actual level of activity in a given month falls above or below the relevant range. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

a) Direct material costs per unit could decrease if quantity discounts are received from the manufacturer for larger order quantities.

b) Direct material costs could increase if quantity discounts currently being received are lost if order quantities decrease significantly.

c) Direct labour costs per unit could increase if activity levels increase and installations have to be completed using more expensive overtime hours.

d) Direct labour costs per unit could increase if activity levels decrease and less experienced, and lower paid, installers are laid off.

e) Direct labour costs per unit could decrease as the number of installations increases due to the effects of learning (i.e., the time required for each installation may decrease with experience).

f) Direct material costs per unit could increase if quantity discounts are received from the manufacturer for larger order quantities.

g) Direct material costs could decrease if quantity discounts currently being received are lost if order quantities decrease significantly.

Answer 1

Solution

Part 1 –

Classic Sound

1. Schedule of cost of goods manufactured for the company for the month:

1. The expenses likely to be included in the total manufacturing overhead cost of $35,250 incurred for the first three months of operation are –

Rent for the production facility

Depreciation on the production equipment

Insurance on the production equipment

Indirect materials used in producing records

Indirect labor related to the CEO’s supervision of the production process (20% of her time).

Part 2 –

Urban Auto Glass

1. Calculation of the per unit amounts for each of the variable expense and fixed expense items in July –

1. Calculation of the total expenses and per unit amounts for each of the variable and fixed cost items above:

Activity level – 1,850 windshields

The activity is in the relevant range.

So, the fixed costs in total remain the same. The variable cost per unit remains the same.

Hence, the variable cost in total changes and the fixed cost per unit remains constant for level of activity within the relevant range.

1. Some factors that might cause variable costs per unit to change if the actual level of activity in a given month falls above or below the relevant range –

Direct materials cost per unit could decrease if quantity discounts are received from the manufacturer for large order quantities.

Direct materials cost per unit could increase if quantity discounts currently being received are lost if order quantities decrease significantly.

Direct labor costs per unit could increase if activity level increases and installations have to be completed using more expensive overtime hours.

Direct labor cost per unit could decrease as the number of installations increase due to the effects of learning (ie., the time required for each installation may decrease with experience).