Question

. Green Company makes calculators. During the most recent accounting period, Green paid $3,000 for raw materials, $5,000 for labor, and $2,000 for overhead costs that were incurred to make calculators. Green started and completed 10,000 calculators, of which 8,000 were sold. Based on this information, how much expense would Green recognize on the income statement?

(A) Which of the following transactions would cause net income for the period to be understated and explain why your answer is correct – feel free to make-up numbers to help your explanation?

a. Misclassifying period cost and considering it product cost

b. Misclassifying product cost and considering it period cost

c. All of the above

d. None of the above

EXPLAINATION:_____________________________________________________________________________________________________________________________________________________

(B) What is an upstream and downstream cost? Give an example of each that a bakery would have:

(Upstream):____________________________________________________________________

______________________________________________________________________________

(Downstream)_________________________________________________________________________________________________________________________________________________________

5. (A)

Number of Units:	2,000	4,000
Total Cost:
Variable	$8,000	$16,000
Fixed	$8,000	$8,000
Cost per unit:
Variable	$4.00	(a)
Fixed	$4.00	(b)

Looking at the table above, what is (a):________________       and     (b):______________________

(B)

	UNITS SOLD
	100	200	300	400
Cost #1	$12 per unit	$6 per unit	$4 per unit	$3 per unit
Cost #2	$5 per unit	$5 per unit	$5 per unit	$5 per unit

Determine whether Cost #1 and Cost #2 is variable, fixed, or mixed and why

Cost #1:_________________. Why: ___________________________________________________

Cost #2:_________________. Why: ___________________________________________________

6. Sales revenue (2,000 units * $50 per unit)	$100,000
Cost of goods sold:
Variable (2,000 units * $20 per unit)	(40,000)
Fixed	(9,000)
Gross Margin	51,000
Administrative Salaries	(13,000)
Sales office Depreciation	(4,000)
Sales supplies (2,000 units *$3 per unit)	(6,000)

Net Income                                                                 $28,000

Using the income statement above, if sales increased by 20%,

(1) What percent will net income increase? (2) How much will the new net income be?

Answer 1

1)

Raw Materials	$ 2,400.00
labor	$ 4,000.00
Overhead	$ 1,600.00
Total	$ 8,000.00

A)

b. Misclassifying product cost and considering it period cost

It is because if the period cost is considered all the amount will be expensed however if its product cost only relevant qty sold cost will be considered and balance we will be in inventory value.

B) The Cost incurred prior to start the production will be called as upstream cost and downstream cost are those which is incurred when the finished product is ready for the delivery.

Example- Upstream Cost

In a Bakery, the cost incurred to purchase of ingredients, tools

Exampe- Downstream cost

Amount paid for the delivery of the product at customer place.

5(A)

a = 16,000/4000 =4

b= 8,000/4000 =2

5(B)

Cost 1 - It is a Fixed cost as the total amount at all level is same which is 1200

Cost 2 - It is a Variable cost as the cost per unit is always same

6) Increase in net income = 38,800-28,000/28,000

=38.57%

New income statement

Sales revenue	$120,000
Cost of goods sold:
Variable	48,000
Fixed	9,000
Gross Margin	63,000
Administrative Salaries	13,000
Sales office Depreciation	4,000
Sales supplies	7200
Net Income	38,800