# Cost Accounting

Cost Accounting

One is 15 questions, and the second is 15 answers for all questions.

solve all 15 questions in details and show me the formula,

MAF 700_ Advanced Cost and Managerial Accounting

Practice Questions

1.    Soft Cushion Company is highly decentralized. Each division is empowered to make its own sales decisions. The Assembly Division can purchase stuffing, a key

component, from the Production Division or from external suppliers. The Production Division has been the major supplier of stuffing in recent years. The Assembly

Division has announced that two external suppliers will be used to purchase the stuffing at \$20 per pound for the next year. The Production Division recently increased

its unit price to \$40. The manager of the Production Division presented the following information — variable cost \$32 and fixed cost \$8 —to top management in order to

attempt to force the Assembly Division to purchase the stuffing internally. The Assembly Division purchases 20,000 pounds of stuffing per month.

What would be the monthly operating advantage (disadvantage) of purchasing the goods internally, assuming the external supplier increased its price to \$50 per pound

and the Production Division is able to utilize the facilities for other operations, resulting in a monthly cash-operating savings of \$30 per pound?

2.    The Fabrication Division of American Car Company has offered to purchase 90,000 batteries from the Electrical Division for \$104 per unit. At a normal volume of

250,000 batteries per year, production costs per battery are as follows:
Direct materials            \$ 40
Direct manufacturing labor    30
Total                \$112
The Electrical Division has been selling 250,000 batteries per year to outside buyers at \$136 each; capacity is 350,000 batteries per year. The Fabrication Division

has been buying batteries from outside sources for \$130 each.
Required:
a.    Should the Electrical Division manager accept the offer? Explain.
b.    From the company’s perspective, will the internal sales be of any benefit? Explain. .

3.    The Microchip Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the

Microchip Division for 2013 are as follows:

Internal Sales    External Sales
Sales:
300,000 chips at \$10    \$3,000,000
200,000 chips at \$12        \$2,400,000
Variable expenses at \$4    1,200,000    800,000
Contribution margin    \$1,800,000    \$1,600,000
Fixed cost (allocated in units)    1,500,000    1,000,000
Operating income    \$ 300,000    \$ 600,000

The Personal Computer Division has just received an offer from an outside supplier to furnish chips at \$8.90 each. The manager of Microchip Division is not willing to

meet the \$8.90 price. She argues that it costs her \$9.00 to produce and sell each chip. Sales to outside customers are at a maximum of 200,000 chips.

Required:
a.    Verify the Microchip Division’s \$9.00 unit cost figure.
b.    Should the Microchip Division meet the outside price of \$8.90? Explain.
c.    Could the \$8.60 price be met and still show a profit for the Microchip Division sales to the Personal Computer Division

4.    LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions. The division managers are evaluated, in part, on the

basis of the change in their return on invested assets. Operating results for the Packer Division for 2015 are budgeted as follows:

Sales (300,000 × \$8.90)    \$2,670,000
Variable costs (300,000 × \$4)    1,200,000
Contribution margin    \$1,470,000
Fixed costs (300,000 × \$5.00)    1,500,000
Operating income    \$ (30,000)

Operating assets for the division are currently \$3,600,000. For 2015, the division can add a new product line for an investment of \$600,000. The new product line will

generate sales of \$1,600,000 and will incur fixed expenses of \$600,000 annually. Variable costs of the new product will average 60% of the selling price.

Required:
a.    What is the effect on ROI of accepting the new product line?
b.    If the company’s required rate of return is 6% and residual income is used to evaluate managers, would this encourage the division to accept the new product

line? Explain and show computations

5.    Craylon Corp. is planning the 2015 operating budget. Average operating assets of \$1,800,000 will be used during the year and unit selling prices are expected

to average \$100 each. Variable costs of the division are budgeted at \$500,000, while fixed costs are set at \$300,000. The company’s required rate of return is 18%.

Required:
a.    Compute the sales volume necessary to achieve a 20% ROI.
b.    The division manager receives a bonus of 50% of residual income. What is his anticipated bonus for 2015, assuming he achieves the 20% ROI from part (a)?

6.     Colise Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in

the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers:

Customer Revenues        Customer Costs
Marveline Burnett            \$360                \$270
J Jackson                240                366
Roger Jones            96                90
Paul Saas                90                132
Becky Stephan            420                264

Required:
a.    Compute the operating income for each of the five customers.
b.    What options should Colise Services consider in light of the customer-profitability results?
c.    What problems might Colise Services encounter in accurately estimating the operating costs of each customer?

7.    Hitz Video Rental is evaluating rental prices. Historical data show that Friday and Saturday have twice the rentals of other days of the week. The following

information pertains to the store’s normal operations per week:

Average rentals per day on Friday and Saturday            1,150
Average rentals per day on Sunday through Thursday        500
Store hours per day                        12
Total units available for rent                    10,000
Variable operating costs per hour                \$ 40
Marketing costs per week                    \$1,500
Customer service costs per week                \$ 250

The store manager wants to charge more for rentals on Friday and Saturday. What is the minimum price that should be charged during peak rental days?

8.    Velim Electronics manufactures electric shavers and is considering decreasing the price by \$2 a unit for the coming year. With a \$2 price decrease, the unit

demand is expected to increase by 25%, and a high volume materials discount is expected to decrease the variable costs per unit by \$1 per unit.

Currently        Projected
Demand            10,000 units        12,500 units
Selling price            \$51            \$49
Variable costs per unit    \$45            \$44

Would you recommend the \$2 price decrease?

9.    Timothy Company has budgeted sales of \$780,000 with the following budgeted costs:

Direct materials                \$168,000
Direct manufacturing labor        132,000
Variable            96,000
Fixed                108,000
Variable                72,000
Fixed                    100,000

Compute the average markup percentage for setting prices as a percentage of:

a.    Total manufacturing costs
b.    The variable cost of the product
c.    The full cost of the product
d.    Variable manufacturing costs

10.    Premium Company provides the following ABC costing information:

Activities    Total Costs    Activity-cost drivers
Account inquiry    \$200,000    10,000    hours
Account billing    \$140,000    4,000,000    lines
Account verification accounts    \$75,000    40,000    accounts
Correspondence letters    \$ 25,000    4,000    letters
Total costs    \$440,000

The above activities are used by Departments A and B as follows:

Department A    Department B
Account inquiry hours    2,500    hours    4,000    hours
Account billing lines    400,000    lines        250,000    lines
Account verification accounts    10,000    accounts    8,000    accounts
Correspondence letters    1,200    letters    1,600    letters

a)    How much of the account inquiry cost will be assigned to Department A?
b)    How much of the account billing cost will be assigned to Department B?
c)    How much of account verification costs will be assigned to Department A?
d)    How much of correspondence costs will be assigned to Department A?
e)    How much of the total costs will be assigned to Department A?

11.    Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2015, manufacturing overhead cost estimates total

\$840,000 for an annual production capacity of 12 million pages.

For 2015 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of

design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool    Manufacturing overhead costs    Activity level
Design changes    \$ 120,000    300 design changes
Setups    640,000    5,000 setups
Inspections    80,000    8,000 inspections

During 2015, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity    Money Managers    Hospital Systems
Pages    60,000    76,000
Design changes    10    0
Setups    20    10
Inspections    30    38

a)    What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 12 million pages of production

capacity?
b)    Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Money Managers during 2015?

12.    Comfort Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of    Number of    Number of
Product    Setups    Components    Direct Labor Hours
Standard    12    8    255
Deluxe    28    12    245

a)    Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard

model?
b)    Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the deluxe

model?
c)    Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the

total amount of overhead costs assigned to the standard model?
d)    Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the

total amount of overhead costs assigned to the deluxe model?

13.    Degen Company used least squares regression analysis to obtain the following output:

Payroll Department Cost
Explained by Number of Employees
Constant    \$7,540
Standard error of Y estimate    819
r2    0.8924
Number of observations    20

X coefficient(s)    \$2.473
Standard error of coefficient(s)    0.0966

Required:
a.    What is the total fixed cost?
b.    What is the variable cost per employee?
c.    Prepare the linear cost function.
d.    What is the coefficient of determination? Comment on the goodness of fit.

14.    Patrick Ross, the president of Corise’s Wild Game Company, has asked for information about the cost behavior 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 only records available:

February    1,870    \$22,500
March    3,080    24,475
April    1,100    24,321
May    2,750    23,650
June    3,850    31,196

Required:
Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver.

15.    Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe, Kansas. The automated system is in its first year of operation

and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the

following data were collected:

January    4,560    5,424,000    \$405,600
February    4,380    5,208,000    404,160
March    4,680    5,400,000    407,040
April    3,960    5,148,000    404,160
May    3,900    5,040,000    391,200
June    3,720    4,944,000    384,000

Required:
a.    Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b.    Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.
c.    For July, the company ran the machines for 4,000 hours and used 4,550,000 kilowatt-hours of power. The overhead costs totaled \$365,000. Which cost driver was

the best predictor for July?

MAF 700_ Advanced Cost and Managerial Accounting

Practice Questions_Solutions

1.    Purchase cost: (20,000 lbs. × \$50)    :    \$1,000,000
Outlay cost: (20,000 lbs. × \$32)        :    (640,000)
Opportunity cost: (20,000 lbs. × \$30)    :    (600,000)

2.    a. Variable cost per battery         = \$40 + \$30 + \$12 = \$82
Sales to Assembly                \$104
Variable costs                82
Contribution margin            \$22
Sales to Assembly    \$104
Variable costs    82
Contribution margin    \$22

Because the Electrical Division is not at capacity, it should sell to the Fabrication Division up to 100,000 units at \$104. This will add \$1,980,000 (90,000 × \$22) at

the current level to its operating income without reducing its outside sales.
b.    The internal sales would be beneficial to the company because the internal variable manufacturing costs of \$82 per battery are less than the external price of

\$130 currently being paid by the Fabrication Division. The company would be saving \$4,320,000 [90,000 × (\$130 – \$82)] per year.

3.    a.
Variable costs    \$4.00
Fixed costs
[(\$1,500,000 + \$1,000,000)/500,000 units]    5.00
Total unit costs    \$9.00

b.    Yes, because the contribution margin is positive (\$8.90 – \$4.00 = \$4.90). If it loses the internal business, the other sales would have to absorb the fixed

costs, which would force even higher external prices. The Microchip Division manager does not have much bargaining power since the external sales are already at a

maximum.
c.
Sales (300,000 × \$8.90)    \$2,670,000
Variable costs (300,000 × \$4)    1,200,000
Contribution margin    \$1,470,000
Fixed costs (300,000 × \$5.00)    1,500,000
Operating income    \$ (30,000)

Internal sales will not show a profit. This assumes the fixed costs are still allocated at \$5.00 per unit.

4.

New investment:
Sales        \$1,600,000
Variable costs    \$960,000
Fixed costs    600,000    1,560,000
Operating income        \$ 40,000

Current ROI = \$700,000/\$3,600,000 = 0.194
New investment ROI = \$40,000/\$600,000 = 0.067
Combined ROI = \$740,000/\$4,200,000 = 0.176

Accepting the new product line will reduce the division’s ROI. This would make the manager reluctant to make the investment.

Investment    \$600,000
Minimum return    × 0.06
Required amount    \$ 36,000

Income    \$ 40,000
Required amount    36,000
Residual income    \$ 4,000

The manager would accept the investment because income is increased by \$4,000.

5.    a. Target operating income = 0.20 × \$1,800,000 = \$360,000

Operating income    \$360,000
Variable costs    500,000
Fixed costs    300,000
Target revenues    \$1,160,000

Sales volume = \$1,160,000 / \$100 = 11,600 units

b.
Asset base    \$1,800,000
Minimum rate    × 0.18
Required return    \$ 324,000

Target operating income    \$ 360,000
Required return    324,000
Residual income    \$ 36,000

Bonus = \$36,000 × 0.50 = \$18,000

6.    a.
Customer Revenues    Customer Costs    Operating income
Marveline Burnett        \$360            \$270            \$ 90
J Jackson            240            366            (126)
Roger Jones            96            90            6
Paul Saas            90            132            (42)
Becky Stephan        420            264            156

b.    1. Pay increased attention to the profitable customers Stephan and Burnett.

2. Seek ways of reducing costs and increasing revenues for the loss accounts of J Jackson and Paul Saas. Work with the customers so their behavior reduces overall

costs. Reduce costs with better scheduling. Maybe a different fee schedule needs to be implemented depending on the age of the house, the distance to the home, if the

repair is preventive or an emergency, etc. Determine whether the operating income pattern will probably continue or not and why.

3. As a last resort, the company may want to discontinue the Jackson account if the customer does not agree to a fee increase and the operating loss pattern is

expected to continue.

7.
Variable costs (\$40 × 12 × 7)        \$3,360
Marketing                1,500
Customer service            250
Total costs per week            \$5,110

Average rental cost per customer     \$5,110 / [(2 × 1,150) + (5 × 500)]
= \$1.0645

8.    Yes, because operating income increases

9.    a.    \$168,000 + \$132,000 + \$96,000 + \$108,000 = \$504,000
(\$780,000 – \$504,000)/\$504,000 = 54.8%

b.    \$168,000 + \$132,000 + \$96,000 + \$72,000 = \$468,000
(\$780,000 – \$468,000)/\$468,000 = 66.7%

c.    \$168,000 + \$132,000 + \$96,000 + \$108,000 + \$72,000 + \$100,000 = \$676,000
(\$780,000 – \$676,000)/\$676,000 = 15.4%

d.    \$168,000 + \$132,000 + \$96,000 = \$396,000
(\$780,000 – \$396,000)/\$396,000 = 97%

10.    a. \$50,000
b.    \$8,750
c.    \$18,750
d.    \$7,500
e.    \$90,250

11.    a. \$ 0.07 per page
b. \$ 4,200

12.    a. \$66,300
b. \$63,700
c. \$46,800
d. \$83,200

13.    a.     The constant or intercept is the total fixed cost of \$7,540.
b.    The variable cost per employee is the X coefficient of \$2.473.
c.    y = \$7,540 + \$2.473X
d.    The coefficient of determination is the r2 of 0.8924. This represents a very high goodness of fit. The closer to 1.0, the better the cost driver explains the

cost. Therefore, the conclusion can be drawn that there is a significant relationship between the cost of the payroll department and the number of employees.

14.    :      High: June    3,850    \$31,196
Low: April    1,100    24,321
Difference    2,750    \$ 6,875

Variable cost per MH: \$6,875/2,750 = \$2.50 per MH

Fixed cost:    \$24,321 = a + \$2.50 × 1,100
a = \$21,571

Cost function is Y = \$21,571 + \$2.50X

15.
a.    Machine-hours:
Slope coefficient    = (\$407,040 – \$384,000) / (4,680 – 3,720)
= \$24.00 per machine-hour
Constant = \$384,000 – (\$24 × 3,720) = \$294,720
Machine-hour estimating equation = \$294,720 + \$24X

b.    Kilowatt-hours:
Slope coefficient = (\$407,040 – \$384,000) / (5,400,000 – 4,944,000) = \$0.0505 per kilowatt-hour

Constant = \$407,040 – (\$0.0505 × 5,400,000) = \$134,198

Kilowatt-hour estimating equation =\$134,198 + (\$0.0505 per KWH × number of KWH)

c.     July’s estimated costs:with machine-hours = \$294,720 + (\$24 × 4,000) = \$390,720

with kilowatt-hours = \$134,198 + (\$0.0505 × 4,550,000) = \$363,973

The best estimator for July was the kilowatt-hour cost driver.