_{Matching Exercise – Costs of Production}

_TERM

1. _{Implicit Cost}

2. _{Normal Profit}

3. _{Factor substitution}

4. _{Explicit Cost}

5. _{Alternative cost}

6. _{Decreasing Returns to Scale}

7. _{Envelope Curve}

8. _{MC=MR rule}

9. _{Marginal Cost}

10. _{Economic profit}

11. _{Profit maximization in the short run}

12. _{Total fixed costs}

13. _{Constant costs industry}

14. _{Stage II}

15. _{Production function}

16. _{Shutdown point}

17. _{Variable input}

18. _{Marginal Revenue}

19. _{Sunk Cost}

20. _{Variable Costs}

_DEFINITION

_{a. The area in which every firm will produce.}

_{b. Another name for the long run average total cost curve.}

_{c. The cost of self-owned, self-utilized resources}

_{d. The profits necessary to ensure that a firm stays in business. Considered by economists to be part of implicit costs.}

_{e. The change in total cost associated with a one unit change in output.}

_{f. Inputs that rise and fall with the quantity of output.}

_{g. The substituting of one input for another to produce a given level of output.}

_{h. The addition to total revenue from selling one more unit of the product}

_{i. The ordinary expenses of the firm that accountants include, such as payroll costs and payments for raw materials. Accounting Costs}

_{j. A cost that has been incurred and cannot be recovered}

_{k. Costs of the fixed inputs such as rent. Does not change with changes in output. Also called overhead costs.}

_{l. The costs resulting from variable inputs.}

_{m. The rule a firm should follow to find the profit maximizing quantity.}

_{n. The production relationship that would lead to increasing costs.}

_{o. The value of what particular resources could have produced had they been used in the best alternative way; opportunity cost.}

_{p. An industry with a horizontal long run supply curve; its expansion does not result in an increase or decrease in input prices.}

_{q. The difference between total cost and total revenue.}

_{r. The relationship between the inputs used in production and the level of output.}

_{s. Considered to be the goal of every firm.}

_{t. The minimum point on the AVC. The lowest price at which the firm will produce.}

Periodic and Perpetual Systems—Calculating Ending Inventory and Cost of Sales using Average Cost (Moving Average), FIFO, and LIFO

Undew Inc.’s inventory records showed the following data for an item it sells regularly.

a. Assuming that Undew maintains a periodic inventory system, compute ending inventory and cost of goods sold for the month-ended January 31 using (1) average cost, (2) FIFO, and (3) LIFO.

Note: Round your final answers only to the nearest dollar.

Note: Do not round the cost per unit amounts in your calculations.

b. Assuming that Undew maintains a perpetual inventory system, compute ending inventory and cost of goods sold for the month-ended January 31 using (1) moving average, (2) FIFO, and (3) LIFO.

Note: Round your final answers only to the nearest dollar.

Note: Do not round the cost per unit amounts in your calculations.

Mastery Problem: Cost-Volume-Profit Analysis

Cost Behavior

Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants your help in determining the cost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

1. Determine whether the costs in the table are variable, fixed, mixed, or none of these.

2. For each cost, determine the fixed portion of the cost, and the per-unit variable cost. If there is no amount or an amount is zero, enter "0". Recall that, for N = Number of Units Produced, Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Complete the following table with your answers. Round variable portion of cost (per unit) answers to two decimal places.

High-Low

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table.

2. With your Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced).

3. Why does the total cost computed for 4,360 units not match the data for January?

a. The high-low method is accurate only for months in which production is at full capacity.

b. The high-low method only gives accurate data when fixed costs are zero.

c. The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

d. The high-low method gives accurate data only for levels of production outside the relevant range.

Contribution Margin

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 82,800 units during the year.

Income Statement - Cover-to-Cover

Income Statement - Biblio Files

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $328,020. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be?
$

2. If Biblio Files Company wants to increase its profit by $40,000 in the coming year, what must their amount of sales be?
$

3. What would explain the difference between your answers for (1) and (2)?

a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.

b. Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.

c. The companies have goals that are not in the relevant range.

d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

What is the target profit Quantity?

What is the Break Even Quantity?

What is the contribution margin ratio (decimal format)?

What is the Break Even Quantity?

What is the Target Profit Sales ($)?

What is the Targe Profit Quantity?

Problem 3-13 Schedules of Cost of Goods Manufactured and Cost of Goods Sold; Income Statement [LO3-3]

Superior Company provided the following data for the year ended December 31 (all raw materials are used in production as direct materials):

Inventory balances at the beginning and end of the year were as follows:

The total manufacturing costs for the year were $675,000; the cost of goods available for sale totaled $725,000; the unadjusted cost of goods sold totaled $662,000; and the net operating income was $37,000. The company’s underapplied or overapplied overhead is closed to Cost of Goods Sold.

Required:

Prepare schedules of cost of goods manufactured and cost of goods sold and an income statement. (Hint: Prepare the income statement and schedule of cost of goods sold first followed by the schedule of cost of goods manufactured.)

Lower-of-Cost-or-Market Inventory

On the basis of the following data:

Determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 9.

Thinnews Co., uses machine hours to allocate manufacturing overhead cost to outputs:

1.What is fixed overhead spending variance?

Group of answer choices

$3,000 favorable

$3,000 unfavorable

$1,000 favorable

$1,000 unfavorable

2.

What is production volume variance?

Group of answer choices

$1,500 unfavorable

$1,000 unfavorable

$1,400 unfavorable

$2,400 favorable

Mastery Problem: Cost-Volume-Profit Analysis

Cost Behavior

Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants your help in determining the cost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

1. Determine whether the costs in the table are variable, fixed, mixed, or none of these.

2. For each cost, determine the fixed portion of the cost, and the per-unit variable cost. If there is no amount or an amount is zero, enter "0". Recall that, for N = Number of Units Produced, Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Complete the following table with your answers. Round variable portion of cost (per unit) answers to two decimal places.

High-Low

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table.

2. With your Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced).

3. Why does the total cost computed for 4,360 units not match the data for January?

a. The high-low method is accurate only for months in which production is at full capacity.

b. The high-low method only gives accurate data when fixed costs are zero.

c. The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

d. The high-low method gives accurate data only for levels of production outside the relevant range.

Contribution Margin

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 81,800 units during the year.

Income Statement - Cover-to-Cover

Income Statement - Biblio Files

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $330,330. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?
$

2. If Biblio Files Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?
$

3. What would explain the difference between your answers for (1) and (2)?

a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.

b. Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.

c. The companies have goals that are not in the relevant range.

d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

(Deriving SR Cost Curves) In this problem, we’ll work through deriving short-run total cost and marginal cost functions from a production function. Such cost functions show how costs vary when quantity changes (you’re typical cost curves from intro to micro!). A firm has a production function ?? = 0.25????^0.5, the rental rate of capital is $100, and the wage rate is $25. In the short-run, capital is fixed at 100 units.

a. What is the firm’s short-run production function, q(L)? In one sentence, explain what this tells you.

b. What is the short-run demand for labor as a function of quantity, q(L) ? In one sentence, explain what this tells you.

c. Write the firm’s cost as a function of labor, ??(L) ? In one sentence, explain what this tells you.

d. Use what you found in (b) and (c) to derive the firm’s short-run cost function, ??(q) . In one sentence, explain what this tells you.

e. What is the firm’s short-run marginal cost function, ????(q) . In one sentence, explain what this tells you.

f. If the firm produces 125 units, what will be its total cost and marginal cost?