Estimated Income Statements, using Absorption and Variable Costing Prior to the first month of operations ending October 31, Marshall Inc. estimated the following operating results: Sales (27,200 x $96) $2,611,200 Manufacturing costs (27,200 units): Direct materials 1,572,160 Direct labor 372,640 Variable factory overhead 174,080 Fixed factory overhead 206,720 Fixed selling and administrative expenses 56,200 Variable selling and administrative expenses 68,000 The company is evaluating a proposal to manufacture 30,400 units instead of 27,200 units, thus creating an ending inventory of 3,200 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses. a. 1. Prepare an estimated income statement, comparing operating results if 27,200 and 30,400 units are manufactured in the absorption costing format. If an amount box does not require an entry leave it blank. Marshall Inc. Absorption Costing Income Statement For the Month Ending October 31 27,200 Units Manufactured 30,400 Units Manufactured Sales $ 2,611,200 $ 2,611,200 Cost of goods sold: Cost of goods manufactured $ 2,325,600 $ 2,449,800 Inventory, October 31 0 Total cost of goods sold $ 2,325,600 $ Gross profit $ 285,600 $ Selling and administrative expenses 124,200 124,200 Operating income $ 161,400 $ Feedback a. 1. Recall that under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead. Calculate unit cost for direct materials, direct labor, variable factory overhead, fixed factory overhead. Add together to get total unit cost. For 30,400 units, use the same unit costs for direct materials, direct labor, and variable overhead, but instead recalculate the fixed factory overhead and add this to obtain the unit cost at the 30,400 unit level. Sales - (cost of goods manufactured - Inventory, October 31) = Gross profit; gross profit - selling and administrative expenses = income from operations. Remember that the Inventory, October 31 adjustment will only be necessary at the 30,400 level. a. 2. Prepare an estimated income statement, comparing operating results if 27,200 and 30,400 units are manufactured in the variable costing format. If an amount box does not require an entry leave it blank. Marshall Inc. Variable Costing Income Statement For the Month Ending October 31 27,200 Units Manufactured 30,400 Units Manufactured Sales $ 2,611,200 $ 2,611,200 Variable cost of goods sold: Variable cost of goods manufactured $ 2,118,880 $ Inventory, October 31 0 Total variable cost of goods sold $ 2,118,880 $ Manufacturing margin $ 1,572,600 $ Variable selling and administrative expenses Contribution margin $ $ Fixed costs: Fixed factory overhead $ $ Fixed selling and administrative expenses Total fixed costs $ $ Operating income $ $ Feedback a. 2. Recall that under variable costing, fixed factory overhead costs are not a part of the cost of goods manufactured. Instead, fixed factory overhead costs are treated as a period expense. Therefore, recast the income statement such that Net sales - variable cost of products sold = Manufacturing margin; Manufacturing margin - variable selling and administrative expenses = Contribution margin; Contribution margin - (fixed manufacturing costs + fixed selling and administrative expenses) = income from operations. Remember that the variable cost of manufacturing will be the same at both levels after adjusting for Inventory, October 31. Thus manufacturing margin should also be the same for both levels. b. What is the reason for the difference in operating income reported for the two levels of production by the absorption costing income statement? The increase in income from operations under absorption costing is caused by the allocation of fixed factory overhead cost over a larger number of units. Thus, the cost of goods sold is less . The difference can also be explained by the amount of fixed factory overhead cost included in the ending inventory.

When the monopoly firm sells two units of its product, it earns total revenue of $260 and it incurs a total cost of $210. If its marginal revenue for the second unit was $110, what was the marginal revenue of the first unit?

Group Choice Answers:

$100

$150

$133

$220

There is not enough information to answer the question.

According to the EPA’s prospective analysis of the 1990 to 2010 period, total social benefits (TSB) associated with the CAAA of 1990 are estimated at $690 billion ($1990) and the comparable total social cost (TSC) estimates are $180 billion ($1990). Explain why these data do not communicate whether the regulations outlined by the CAAA of 1990 are efficient.

Pillar Company manufactures a product in three different qualities, called ‘Basic’, ‘Average’ and ‘Super’. The ‘Basic’ and ‘Average’ both requires 2.0 direct labor hours while ‘Super’ requires 2.5 direct labor hours. The company is able to sell these products at a price that gives a standard profit mark-up of 25 % of full manufacturing cost. The company manufactures and sold 90,000 units, 60,000 units and 40,000 units of ‘Basic’, ‘Average’ and ‘Super’ respectively. Management is concerned by the deterioration of profit.

Material and labor costs per unit are as follows:

The total overheads are $10,000,000. Currently, the company is using direct labor-hour as an allocation base to apply overheads.

Recently, the business management accountant has undertaken an exercise to try to identify activities and cost drivers in an attempt to be able to deal with the overheads on a more precise basis using the activity based costing approach. An analysis has provided the following information:

Required:

1. Calculate the predetermined overhead rate using the current basis of allocation and determine the overhead per unit, total cost per unit and the selling price for the three models.

2. Calculate the activity rate, the overhead per unit, the total cost per unit for the three models using the activity based costing approach.

3. What conclusions do you draw based on the above results? What advice would you offer the management of the company?

Pillar Company manufactures a product in three different qualities, called ‘Basic’, ‘Average’ and ‘Super’. The ‘Basic’ and ‘Average’ both requires 2.0 direct labor hours while ‘Super’ requires 2.5 direct labor hours. The company is able to sell these products at a price that gives a standard profit mark-up of 25 % of full manufacturing cost. The company manufactures and sold 90,000 units, 60,000 units and 40,000 units of ‘Basic’, ‘Average’ and ‘Super’ respectively. Management is concerned by the deterioration of profit.

Material and labor costs per unit are as follows:

The total overheads are $10,000,000. Currently, the company is using direct labor-hour as an allocation base to apply overheads.

Recently, the business management accountant has undertaken an exercise to try to identify activities and cost drivers in an attempt to be able to deal with the overheads on a more precise basis using the activity based costing approach. An analysis has provided the following information:

Required:

1. Calculate the predetermined overhead rate using the current basis of allocation and determine the overhead per unit, total cost per unit and the selling price for the three models.

2. Calculate the activity rate, the overhead per unit, the total cost per unit for the three models using the activity based costing approach.

3. What conclusions do you draw based on the above results? What advice would you offer the management of the company?

The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers it uses in its budgeting and performance reports—the number of courses and the total number of students. For example, the school might run two courses in a month and have a total of 61 students enrolled in those two courses. Data concerning the company’s cost formulas appear below:

For example, administrative expenses should be $3,600 per month plus $44 per course plus $7 per student. The company’s sales should average $900 per student.

The company planned to run four courses with a total of 61 students; however, it actually ran four courses with a total of only 55 students. The actual operating results for September appear below:

Required:

Prepare a flexible budget performance report that shows both revenue and spending variances and activity variances for September. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

1) Bustillo Company operates sight-seeing buses. Management has identified two cost drivers—the number of buses in operation and the number of passengers served —that it uses in its budgeting and performance reports. Data concerning the company’s cost formulas appear below:

For example, vehicle operating costs should be $6,800 per month plus $476 per bus plus $4.5 per passenger. The company’s sales revenue should average $31 per passenger. In July, the company operated 54 buses and served a total of 3,300 passengers. How much is the company’s flexible budget operating income for July?

2)

A cash budget for the first three quarters of Brister Incorporated is given below (000 omitted). The company requires a minimum cash balance of at least $5,000 to start each quarter. If necessary, the company will borrow money from its bank to maintain this balance. The company will pay no interest in Quarters 1, 2, and 3. It will repay as much of its borrowings as possible as soon as it has more than $5,000 in cash in a given quarter. Suppose the company starts the first quarter with no bank debt. How much total bank debt does the company expect to have at the end of the third quarter?

The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers it uses in its budgeting and performance reports—the number of courses and the total number of students. For example, the school might run two courses in a month and have a total of 65 students enrolled in those two courses. Data concerning the company’s cost formulas appear below:

For example, administrative expenses should be $3,800 per month plus $41 per course plus $6 per student. The company’s sales should average $870 per student.

The company planned to run four courses with a total of 65 students; however, it actually ran four courses with a total of only 59 students. The actual operating results for September appear below:

Required:

Prepare a flexible budget performance report that shows both revenue and spending variances and activity variances for September. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Weller Industrial Gas Corporation supplies acetylene and other compressed gases to industry. Data regarding the store's operations follow:

• Sales are budgeted at $350,000 for November, $370,000 for December, and $360,000 for January.
• Collections are expected to be 80% in the month of sale and 20% in the month following the sale.
• The cost of goods sold is 69% of sales.
• The company desires an ending merchandise inventory equal to 80% of the cost of goods sold in the following month.
• Payment for merchandise is made in the month following the purchase.
• Other monthly expenses to be paid in cash are $20,100.
• Monthly depreciation is $19,900.
• Ignore taxes.

Required:
a. Prepare a Schedule of Expected Cash Collections for November and December.

b. Prepare a Merchandise Purchases Budget for November and December.

c. Prepare Cash Budgets for November and December.

d. Prepare Budgeted Income Statements for November and December.

e. Prepare a Budgeted Balance Sheet for the end of December