Management Accounting by Horngren 11th edition Exam 3 Review

8/2/2019 Management Accounting by Horngren 11th edition Exam 3 Review

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Chapter 9

• You need to know: – The only difference between variable and absorption

costing.

– Fixed overhead is treated a period cost under -----costing, while it is treated as product cost under -------- costing.

– When we produce more than we sell, the operatingincome will be higher under ------- costing.

– The inventory buildup (producing for inventory). – The effect of inventory buildup on the operating

income.



Chapter 9

• You need to know:

– That under the throughput costing only direct

material costs are included as inventoriablecosts.

– How to calculate the production volumevariance.



Chapter 9•

For 20x4, Nichols, Inc. had sales of 75,000 units and production of 100,000 units. Other information for the year included:• Direct manufacturing labor $187,500• Variable manufacturing overhead 100,000• Direct materials 150,000• Variable selling expenses 100,000

• Fixed administrative expenses 100,000• Fixed manufacturing overhead 200,000• There was no beginning inventory. • Required: • a. Compute the ending finished goods inventory under

both absorption and variable costing.



Chapter 9

• Absorption Variable

Direct materials $150,000 $150,000

Direct manufacturing labor 187,500 187,500 Variable MOH 100,000 100,000

Fixed MOH overhead 200,000 0

Total $637,500 $437,500



Chapter 9

• Under absorption costing, fixed manufacturingcosts expensed on the income statement(excluding adjustments for variances) total

• a. $8,550.

• b. $9,000.

• c. $7,200.

• d. zero. • Answer : a

• $7,200 / 800 units = $9 x 950 = $8,550



Chapter 9

• Under absorption costing, the production-volume variance is

• a. $450.• b. $1,350.

• c. $1,800.

• d. zero. • Answer : c

• $7,200 / 800 units = $9 x 200 = $1,800



Chapter 9

• Under variable costing, the fixedmanufacturing costs expensed on the incomestatement (excluding adjustments for variances)

total• a. $8,550.• b. $7,200.• c. $9,000.

• d. zero. • Answer : b $7,200 of fixed manufacturing costs is expensed

as a lump sum.



Chapter 9

• Operating income using absorption costing willbe __________ operating income if usingvariable costing.

• a. $450 higher than

• b. $900 higher than

• c. $1,350 lower than

• d. the same as • Answer : a

•



Chapter 9

• At the end of the accounting period BumstedCorporation reports operating income of $30,000 andthe fixed overhead cost rate is $20 per unit. Undervariable costing, if this company produces 100 more

units of inventory, then operating income• a. will increase by $2,000.• b. will increase by $2,000 only if the 100

additional units of inventory are sold.• c. will not be affected.• d. cannot be determined using only the above

information. • Answer : c



Chapter 9

• Jarvis Golf Company sells a special putter for $20 each. In March, it sold28,000 putters while manufacturing 30,000. There was no beginninginventory on March 1. Production information for March was:

• Direct manufacturing labor per unit 15minutes

• Fixed selling and administrative costs$ 40,000

• Fixed manufacturing overhead132,000

• Direct materials cost per unit 2• Direct manufacturing labor per hour 24

• Variable manufacturing overhead per unit 4• Variable selling expenses per unit 2



Chapter 9

• Required:

• a. Compute the cost per unit under

both absorption and variable costing.• b. Compute the ending inventories

under both absorption and variable

costing.



Chapter 9

• a. Absorption Variable • Total cost per unit $16.40 $12.00

• b. Absorption Variable• Ending inventory $ 32,800 $ 24,000



Chapter 9

• - Veach Corporation incurred fixed manufacturing costs of $6,000 during20x4. Other information for 20x4 includes:

• The budgeted denominator level is 1,000 units.• Units produced total 750 units.• Units sold total 600 units.

• Beginning inventory was zero.• The company uses VARIABLE COSTING and the fixed manufacturing cost

rate is based on the budgeted denominator level. Manufacturing variancesare closed to cost of goods sold.

• Fixed manufacturing costs included in ending inventory total• a. $1,200.

• b. $1,500.• c. $900.• d. zero.



Chapter 10


– What is a cost function?

– The relevant range of activities. – Cost estimation

– Industrial engineering method

– Conference method – Account analysis method



Chapter 10

• You need to know: – Under high low method; unit variable cost = ?/?

– FC = F + V (x)

– Advantages and disadvantages of each estimationmethod.

– Criteria to evaluate and choose cost driver

– How do we interpret the “r2” (coefficient of

determination) and the “r” (correlation coefficient). – How to interpret the regression equation into a cost

function.



Chapter 10


– A nonlinear cost function.

– A step function. – The learning curve.



Chapter 10

• The cost function y = 1,000 + 5X

• a. has a slope coefficient of 1,000.

• b. has an intercept of 5.

• c. is a straight line.

• d. represents a fixed cost.

• Answer : c



Chapter 10

• At the Jordan Company, the cost of the personneldepartment has always been charged to productiondepartments based upon number of employees.

Recently, opinions gathered from the departmentmanagers indicate that the number of new hires mightbe a better predictor of personnel costs.

• Total personnel department costs are$160,000.

• Department A B C • Number of employees 30 270 100

• The number of new hires 8 12 5



Chapter 10

• If number of new hires is considered the costdriver, what amount of personnel costs will beallocated to Department A?

• a. $12,000

• b. $5,333

• c. $51,200

• d. $20,000 • Answer : c [8 / (8 + 12 + 5)]

x $160,000 = $51,200



Chapter 10

• Which cost estimation method is beingused by Jordan Company?

• a. The industrial engineering method• b. The conference method

• c. The account analysis method

• d. The quantitative analysis method

• Answer : b



Chapter 10

• For Carroll Company, labor-hours are 12,500 and wages$47,000 at the high point of the relevant range, andlabor-hours are 7,500 and wages $35,000 at the lowpoint of the relevant range.

• 88. What is the slope coefficient per labor-hour?• a. $4.67• b. $3.76• c. $2.40

• d. $0.42 • Answer : c• Slope = ($47,000 - 35,000)/(12,500 – 7,500) =

$2.40 per labor-hour



Chapter 10

• Arfaei Company manufactures chairs. Because theefforts of manufacturing are approximately equalbetween labor and machinery, management is

considering other possible cost drivers. By consideringdifferent cost drivers, it is anticipated that the estimatingprocess can be improved. The following cost estimatingequations with their r2 values have been determined for20x3:

1. X = cutting time y = $19,500 + $20X r2 = 0.652. X = labor y = $5,000 + $25X r2 = 0.49

3. X = machinery y = $44,500 + $5X r2 = 0.55



Chapter 10

• Required:

• a. Which equation should be

selected for the analysis?• b. What other factors should be

included in the selection of the estimating

equation?



Chapter 10

A-Equation 1 for cutting time is slightly better thanthe other two equations based on r2 values.

B- Other factors to be considered are economicplausibility, the significance of independentvariables, and specification analysis. The bestcost drivers of the dependent variables are those

that meet all these criteria plus that of bestcoefficient of determination



Chapter 10

• Patrick Ross, the president of Ross’s Wild GameCompany, has asked for information about the costbehavior of manufacturing overhead costs. Specifically,he wants to know how much overhead cost is fixed and

how much is variable. The following data are the onlyrecords available.• Month Machine-hours Overhead Costs • February 1,700 $20,500• March 2,800 22,250

• April 1,000 19,950• May 2,500 21,500• June 3,500 23,950



Chapter 10

• Using the high-low method, determine theoverhead cost equation. Use machine-

hours as your cost driver.

• Estimated cost equation: y = $18,350 + $1.60 (1,000)



Chapter 3

• You need to know: – The purpose of cost-volume-profit analysis.

– Breakeven point in units = ? – Breakeven point in $ = ?

– Contribution margin = ?-?

– Target operating income.

– After taxes target net income.

– Sensitivity analysis.



Chapter 3

• You need to know: – Operating leverage describes--------

– The higher the proportion of fixed cost the ? the

operating leverage. – The degree of operating leverage = ?/?

– In what way you can use the degree of operatingleverage?

– If sales volume increased by %10 and the degree of operating leverage is 2, how much the increase in netincome?



Chapter 3

• Cost-volume-profit analysis is usedPRIMARILY by management

• a. as a planning tool.• b. for control purposes.

• c. to prepare external financialstatements.

• d. to attain accurate financial results.

• Answer : a



Chapter 3

• The contribution income statement

• a. reports gross margin.

•b. is allowed for external reporting to

shareholders.

• c. categorizes costs as either direct orindirect.

• d. can be used to predict future profits atdifferent levels of activity.

• Answer : d



Chapter 3

• What is the contribution margin per ticketpackage?

• a. $50• b. $100

• c. $150

• d. $200

• Answer : a $200 - $150 = $50



Chapter 3

• How many ticket packages will Rubenneed to sell in order to break even?

• a. 34 packages• b. 50 packages

• c. 100 packages

• d. 150 packages • Answer : c 200X – 150X – 5,000 = 0; X = 100



Chapter 3

• For every $25,000 of ticket packages sold,operating income will increase by

• a. $6,250.

• b. $12,500.• c. $18,750.• d. impossible to compute. • Answer : a $25,000 x ($50 /

$200) = $6,250•



Chapter 3

• The strategy MOST likely to reduce the breakeven pointwould be to

• a. increase both the fixed costs and the

contribution margin.• b. decrease both the fixed costs and thecontribution margin.

• c. decrease the fixed costs and increase thecontribution margin.

• d. increase the fixed costs and decrease thecontribution margin.

• Answer : c



Chapter 3

• Cheaney Manufacturing produces a singleproduct that sells for $200. Variable costsper unit equal $50. The company expectstotal fixed costs to be $120,000 for thenext month at the projected sales level of 2,000 units. In an attempt to improve

performance, management is consideringa number of alternative actions. Eachsituation is to be evaluated separately.



Chapter 3

• Suppose that management believes that a $24,000increase in the monthly advertising expense will result ina considerable increase in sales. Sales must increase byhow much to justify this additional expenditure?

• a. 320 units

• b. 480 units

• c. 160 units

• d. none of the above

• Answer : c 200X – 50X – 24,000 =0; X = 160 units to cover the expenditures



Chapter 3

• Suppose that management believes that a 20% reduction in theselling price will result in a 20% increase in sales. If this proposedreduction in selling price is implemented,

• a. operating income will decrease by $36,000.

•b. operating income will increase by $36,000.

• c. operating income will decrease by $80,000.• d. operating income will increase by $44,000.

• Answer : a• $200 x 20% = $40 x 2,000 units = ($80,000)

• 2000 units x 20% = 400 units x ($160 - $50) = 44,000• Change in operating income ($36,000)



Chapter 3

• Karen Hefner, a florist, operates retail stores in severalshopping malls. The average selling price of anarrangement is $30 and the average cost of each sale is$18. A new mall is opening where Karen wants to locate

a store, but the location manager is not sure about therent method to accept. The mall operator offers thefollowing three options for its retail store rentals:

• 1. paying a fixed rent of $15,000 a month,• 2. paying a base rent of $9,000 plus 10% of revenue

received, or• 3. paying a base rent of $4,800 plus 20% of revenue

received up to a maximum rent of $25,000.



Chapter 3

• a. For each option, compute thebreakeven sales and the monthly rent paid

at break-even.• b. Beginning at zero sales, show the

sales levels at which each option is

preferable up to 5,000 units.



Chapter 3

• a. Option 1 N = Breakeven units• $30N - $18N - $15,000 = 0• $12N - $15,000 = 0• N = $15,000/$12 = 1,250 units

• Rent at breakeven = $15,000• Option 2 N = Breakeven units• $30N - $18N - 0.10($30N) - $9,000 = 0• $9N - $9,000 = 0• N = $9,000/$9 = 1,000 units

• Rent at breakeven = $9,000 + (0.10 x $30 x 1,000) =$12,000



Chapter 3

• b. Option 3 from 0 to 1,400 units for $4,800 plus $6 per unit.• Option 2 from 1,401 to 2,000 for $9,000 plus $3 per unit.• Option 1 above 2,000 for $15,000.• Option 1 equals Option 2 when sales are 2,000 and favors

Option 1 above 2,000 units.• $15,000 = $9,000 + 0.10($30N); $6,000 = $3N; N =2,000

• Option 1 equals Option 3 when sales are 1,700 and favorsOption 1 above 1,700 units.

• $15,000 = $4,800 + 0.20($30N); $10,200 = $6N; N =

1,700 units



Chapter 3

• If the contribution-margin ratio is 0.30,targeted net income is $76,800, and targetedsales volume in dollars is $480,000, then total

fixed costs are• a. $23,000.

• b. $44,160.

• c. $67,200.

• d. $144,000.

• Answer : c



Chapter 3

• Good luck.

Management Accounting by Horngren 11th edition Exam 3 Review

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