Question

1.Assume the following information:

	Amount				Per Unit
Sales	$	300,000				$	40
Variable expenses		112,500					15
Contribution margin		187,500				$	25
Fixed expenses		52,000
Net operating income	$	135,500

The unit sales to attain a target profit of $183,000 is:

• 9,400 units.

• 11,092 units.

• 9,582 units.

• 15,667 units.

2.Assume a company’s direct labor budget for July estimates 10,000 labor-hours to meet the month’s production requirements. The variable manufacturing overhead rate used for budgeting purposes is $2.50 per direct labor-hour. The budgeted fixed manufacturing overhead for July is $60,000 including $7,000 of depreciation. What is the amount of budgeted cash disbursements for manufacturing overhead for July?

• $86,000

• $92,000

• $78,000

• $84,000

3.Assume a company is considering buying 10,000 units of a component part rather than making them. A supplier has agreed to sell the company 10,000 units for a price of $40.75 per unit. The company’s accounting system reports the following costs of making the part:

	Per Unit					10,000 Units per Year
Direct materials		$	16				$	160,000
Direct labor			12					120,000
Variable manufacturing overhead			2					20,000
Fixed manufacturing overhead, traceable			8					80,000
Fixed manufacturing overhead, allocated			4					40,000
Total cost		$	42				$	420,000

One-half of the traceable fixed manufacturing overhead relates to supervisory salaries and the remainder relates to depreciation of equipment with no salvage value. If the company chooses to buy this component part from a supplier, then the supervisor who oversees its production would be discharged. What is the financial advantage (disadvantage) of buying 10,000 units from the supplier?

• $(67,500)

• $(40,000)

• $135,000

• $67,500

4.Assume the following:

• The standard price per pound is $2.90.
• The actual quantity of materials purchased is 62,000 pounds.
• The actual quantity of materials used in production is 60,000 pounds.
• The standard quantity allowed for the actual level of output is 59,200 pounds.

What is the materials quantity variance?

• $2,320 U

• $8,120 U

• $8,120 F

• $2,320 F

5. Assume that a company manufactures numerous component parts, one of which is called Part A. The company’s absorption costing system indicates that it costs $23.00 to make one unit of Part A as shown below:

Direct materials	$	10.00
Direct labor		6.00
Variable overhead		2.00
Fixed overhead		5.00
Total absorption cost per unit	$	23.00

The company is trying to decide between two alternatives:

Alternative 1: Continue making 80,000 units of Part A per year using its existing equipment at the unit cost shown above. The equipment used to make this part does not wear out through use and it has no resale value.

Alternative 2: Replace the existing equipment with a new piece of equipment that the company would rent for $151,000 per year. The new piece of equipment would be used to make 80,000 units per year and it would reduce Part A’s direct labor cost per unit by 20% and its variable overhead per unit by 30%. The direct materials cost per unit will remain constant.

What is the financial advantage or (disadvantage) of renting the new piece of equipment?

• $(8,080)

• $(4,040)

• $(7,000)

• $(2,040)

6. Assume that the cost formula for one of a company’s variable expenses is $5.00 per unit. The company’s planned level of activity was 2,000 units and its actual level of activity was 2,200 units. The spending variance was $250 unfavorable. What is the actual amount of this expense?

• $9,250

• $11,000

• $8,250

• $11,250

7.Assume that the amount of one of a company’s variable expenses in its flexible budget is $40,000. The actual amount of the expense is $42,000 and the amount in the company’s planning budget is $41,400. The activity variance for this expense is:

• $1,400 U.

• $700 F.

• $700 U.

• $1,400 F.

Answer 1

Question 1

Units to be Sold to attain Target Profit = (Target Profit + Fixed Costs )/ Contribution Margin per Unit

Target Profit = $ 183,000

Fixed Costs = $ 52,000

Contribution Margin per Unit = $ 25

Units Sales to Earn Target Profit of $ 183,000 = (183,000 + 52,000)/25

= 9,400 Units

Option A is the Correct Answer

Question 2

Particulars	Amount
Variable Overhead Rate per Hour	2.5
* Direct Labour Hours	10,000
Total Variable Overhead	25,000
Add : Total Fixed Overhead	60,000
Total Manufacturing Overheads	85,000
Less: Depreciation	7,000
Cash Disbursement for Overhead in July	78,000

Option C is the Correct Answer

Question 3

Cost of Making one Unit = Direct Materials Cost per Unit + Direct Labour Cost per Unit + Variable Overhead per Unit + Fixed Manufacturing Traceable

Cost of Making 1 Unit = 16 + 12 + 2 + 4

Cost of Making 1 Unit = $ 34 per Unit

Total Manufacturing Overhead Traceable = $ 8

Avoidable Manufacturing Overhead = 1/ * $ 8 = $ 4 per Unit

As the cost is avoidable on buying from outside so it is a relevant cost for finding advantage or disadvantage.

Cost of Buying 1 Unit = $ 40.75

Cost of Making 1 Unit = $ 34

Financial Advantage / (Disadvantage) of Buying = Cost of Making 1 Unit - Cost of Buying 1 Unit

= 34 - 40.75

= ($ 6.75)

Financial Disadvantage of Buying 10,000 Units = 10,000 * $ 6.75 per Unit

= $ 67,500

Option A ($ 67,500) is the Correct Answer

Question 4

Material Quantity Variance =(Standard Material for Actual Output - Actual Quantity of Material Used )* Standard Rate per Pound

Standard Rate per Pound = $ 2.90

Standard Quantity of Material for Actual Output = 59,200 Pounds

Actual Quantity of Material Used = 60,000 Pounds

Material Quantity Variance = (59,200 - 60,000) * 2.90

Material Quantity Variance =( $ 2,320) Unfavorable Variance

Option A is the Correct Answer.

Question 6

Variable Flexible Budget Expenses for 2,200 Units of Output = 2,200 Units * Variable Expenses per Unit

= 2,200 * 5

= $ 11,000

Actual Expense for 2,200 Units = Variable Flexible Budget Expenses + Unfavorable Spending Variance

Actual Expenses for 2,200 Units = 11,000 + 250

Actual Expense for 2,200 Units = $ 11,250

Option D is the Correct Answer.

Question 7

Activity Variance = Planning Budget Variable Expenses - Flexible Budget Variable Costs

Activity Variances = 41,400 - 40,000

Activity Variance = $ 1,400 Favourable Variance

Option D is the Correct Answer.

Question 5

Relevant Cost of Producing per Unit as per Alternative 1 = Direct Materials Cost per Unit + Direct Labour Cost per Unit + Variable Overhead Cost per Unit

= 10 + 6 + 2

= $ 18 per Unit

Relevant Cost of Producing Per Unit as per Alternative 2 = Direct Materials Cost per Unit + Direct Labour Cost per Unit + Variable Manufacturing Overhead Cost per Unit + Additional Rent Cost per Unit

= 10 + 4.8 + 1.4 + 1.8875

= $ 18.0875 per Unit

Direct Labour Cost = $ 6 - 20% Reduction = $ 4.8

Variable Manufacturing Overhead = $ 2 - 30% Reduction = $ 1.40

Rent Cost per Unit = 151,000 / 80,000 Units = $ 1.8875

Financial Advantage / (Disadvantage) of Renting the New Piece of Equipment = Relevant Cost as per Alternative 1 - Relevant Cost as per Alternative 2

= 18 - 18.0875

Financial Disadvantage = $ 0.0875 per Unit

Disadvantage on 80,000 Units = 80,000 * $ 0.0875 per Unit = $ 7,000

Option C ($ 7,000) is the Correct Answer