CMA ESSAY QUESTIONS VARIABLE ABSORPTION AND THOROUGH COSTING

CMA PRACTICE ESSAY TYPE QUESTIONS VARIABLE ABSORPTION AND THOROUGH COSTING

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Q7 The following data are available for Ruggles Company for the year ended September 30, 20x4.

                  Sales:                                                            24,000 units at $50 each

                  Expected and actual production:                                    30,000 units

                  Manufacturing costs incurred:

                           Variable:                                                                      $525,000

                           Fixed:                                                                          $372,000

                  Nonmanufacturing costs incurred:

                           Variable:                                                                      $144,800

                           Fixed:                                                                            $77,400

                  Beginning inventories:                                                                none

         Required:

         a.      Determine operating income using the variable-costing approach.

         b.      Determine operating income using the absorption-costing approach.

         c.      Explain why operating income is not the same under the two approaches.

Q8  .  Bobby Smith and Sons Company was concerned that increased sales did not result in increased profits for 20x3.  Both variable unit and total fixed manufacturing costs for 20x2 and 20x3 remained constant at $20 and $2,000,000, respectively.

         In 20x2, the company produced 100,000 units and sold 80,000 units at a price of $50 per unit.  There was no beginning inventory in 20x2.  In 20x3, the company made 70,000 units and sold 90,000 units at a price of $50.  Selling and administrative expenses were all fixed at $100,000 each year.

         Required:

         a.      Prepare income statements for each year using absorption costing.

         b.      Prepare income statements for each year using variable costing.

         c.      Explain why the income was different each year using the two methods.  Show computations.

Q9  Ernsting Bottling Works manufactures glass bottles.  January and February operations were identical in every way except for the planned production. 

         January had a production denominator of 35,000 units.

         February had a production denominator of 36,000 units.

         Fixed manufacturing costs totaled $126,000.

         Sales for both months totaled 45,000 units with variable manufacturing costs of $4 per unit.  Selling and administrative costs were $0.40 per unit variable and $60,000 fixed.  The selling price was $10 per unit.

         Required:

         Compute the operating income for both months using absorption costing.

Q10  .  Calvin Enterprises produces a specialty statue item.  The following information has been provided by management:

         Actual sales                                                          150,000 units

         Budgeted production                                           160,000 units

         Selling price                                                            $34 per unit

         Direct manufacturing costs                                       $9 per unit

         Fixed manufacturing costs                                       $5 per unit

         Variable manufacturing costs                                   $4 per unit

         Variable administrative costs                                    $2 per unit

         Required:

         a.      What is the cost per statue if absorption costing is used?

         b.      What is the cost per statue if "super-variable costing" is used?

         c.      What is the total throughput contribution?

Q11  Wallace’s Wrench Company manufactures socket wrenches.

·               For next month, the vice president of production plans on producing 4,400 wrenches per day.

·               The company can produce as many as 5,000 wrenches per day, but are more likely to produce 4,500 per day.

·               The demand for wrenches for the next three years is expected to average 4,250 wrenches per day.

·               Fixed manufacturing costs per month total $336,600.

·               The company works 20 days a month.

·               Fixed manufacturing overhead is charged on a per wrench basis.

         Required:

         a.      What is the theoretical fixed manufacturing overhead rate per wrench?

         b.      What is the practical fixed manufacturing overhead rate per wrench?

         c.      What is the normal fixed manufacturing overhead rate per wrench?

         d.      What is the master-budget fixed manufacturing overhead rate per wrench?

Q12  Sutton Hot Dog Stand sells hot dogs for $1.35.  Variable costs are $1.05 per unit with fixed production costs of $90,000 per month at a level of 400,000 units.  Fixed administrative costs total $30,000.  Sales average 400,000 units per month, with production of 400,000 hot dogs.

         Required:

         a.      What are breakeven unit sales under variable costing?

         b.      What are breakeven unit sales under absorption costing if she sells everything she prepares?

         c.      What are breakeven unit sales under absorption costing if average sales are 498,000 and planned production is changed to 500,000?

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