Question

1.

Allocating common fixed expenses to business segments:

a. may cause managers to erroneously discontinue business segments.

b. may cause managers to erroneously keep business segments that should be dropped.

c. ensures that all costs are covered.

d. helps managers make good decisions.

2.

Keyser Corporation, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price	$	118
Units in beginning inventory		400
Units produced		2,100
Units sold		2,300
Units in ending inventory		200

Variable costs per unit:
Direct materials	$	37
Direct labor	$	23
Variable manufacturing overhead	$	3
Variable selling and administrative expense	$	5
Fixed costs:
Fixed manufacturing overhead	$	73,500
Fixed selling and administrative expense	$	29,900

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.

What is the net operating income for the month under variable costing?

3.

Neef Corporation has provided the following data for its two most recent years of operation:

Selling price per unit	$	84
Manufacturing costs:
Variable manufacturing cost per unit produced:
Direct materials	$	12
Direct labor	$	5
Variable manufacturing overhead	$	4
Fixed manufacturing overhead per year	$	432,000
Selling and administrative expenses:
Variable selling and administrative expense per unit sold	$	5
Fixed selling and administrative expense per year	$	61,000

	Year 1		Year 2
Units in beginning inventory	0		3,000
Units produced	12,000		9,000
Units sold	9,000		10,000
Units in ending inventory	3,000		2,0000

The net operating income (loss) under absorption costing in Year 2 is closest to?

Answer 1

Solution 1:

Allocating common fixed expenses to business segments may cause managers to erroneously discontinue business segments. Common fixed expense will continue to occur even if it is discontinued.

Hence option "a" is coorect.

Solution 2:

Computation of Net operating income under Variable costing
Particulars	Per unit	Amount
Sales	$118.00	$271,400.00
Variable Cost:
Direct Material	$37.00	$85,100.00
Direct Labor	$23.00	$52,900.00
Variable Manufacturing Overhead	$3.00	$6,900.00
Variable Selling and Administrative Expenses	$5.00	$11,500.00
Contribution	$50.00	$115,000.00
Fixed Manufacturing Overhead		$73,500.00
Fixed Selling & Administrative Expenses		$29,900.00
Net Operating Income		$11,600.00

Solution 3:

Computation of Unit Product Cost - Absorption Costing
Particulars	Year 1	Year 2
Unit Product Cost:
Direct material	$12.00	$12.00
Direct Labor	$5.00	$5.00
Variable manufacturing overhead	$4.00	$4.00
Fixed manufacturing overhead Year 1 - $432000/12000 Year 2 - $432,000/9000	$36.00	$48.00
Unit Product Cost	$57.00	$69.00

Income Statement - Absorption Cosing
Particulars	Per unit	Year 2
		Details	Amount
Sales	$84.00		$840,000.00
Cost of Goods Sold:
Cost of goods produced (9000 units)	$69.00	$621,000.00
Add: Opening Inventory (3000 units)	$57.00	$171,000.00
Less: Ending Inventory (2000 units)	$69.00	$138,000.00	$654,000.00
Gross Profit			$186,000.00
Variable Selling & Administrative Expenses			$50,000.00
Fixed Selling & Administrative Expenses			$61,000.00
Net Operating Income			$75,000.00