Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises Solutions

1. Rainier Manufacturing uses absorption costing in its job-order costing system. Selected ledger
accounts for the year just ended are presented below. Each question mark (?) represents a debit or credit
that is missing from the account(s). BB = Beginning Balance, EB = Ending Balance.

BB
RM
Purchases
EB

BB

Raw Materials
12,000
? 62,000
58,000
8,000

Finished Goods
15,200
? 167,030

EB

BB
DM
DL
MOH
EB

WIP
7,000
? 55,800
? 167,030
? 40,000
? 74,000
9,770

COGS

? 169,730

Unadjusted
COGS

? 169,730

12,500

Factory Wages Payable

- BB
50,000

46,000

IM
IL
Other
MOH
Total

MOH
? 6,200
? 10,000
? 74,000
55,200
? 71,400

4,000 EB

Additional Information: (I suggest you look over the above accounts carefully and read all the
information below before you start to respond to. any of the items on the next page)
The cost of both direct (DM) and indirect materials (IM) are debited to the Raw Materials
Inventory account when materials are purchased.
Of the raw materials issued to production during the year, 90% were direct materials and 10%
were indirect materials.
Of the factory wages incurred during the year, 80% was for direct labor and 20% was for indirect
labor.
The other MOH of $55,200 indicated in the MOH account includes depreciation, insurance,
utilities, and maintenance costs incurred during the year related to production.
During the year, Rainier applied manufacturing overhead to production using a single, plant-wide
predetermined application rate based on direct labor (DL) cost. Any over- or under-applied
overhead is adjusted directly to cost of goods sold at the end of the year.
The balance of Work in Process (WIP) at the end of the year related to the only job still in
production at that time. Its job cost sheet shows DM of $3,500, DL of $2,200, and MOH applied
(MOHA) of $4,070 as of the end of the year.

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises Solutions

(a)
The cost of direct materials issued to production was $55,800; indirect materials cost incurred was
$6,200. (See T-accounts)
(b)
The cost of direct labor used in production was $40,000; indirect labor cost incurred was $10,000.
(See T-accounts.)
(c)
The predetermined overhead application rate being used during the year is 185% based on direct
labor cost. (See data re. ending WIP costs)
(d)
Total manufacturing overhead applied during the year was $74,000 (Direct labor $40,000 x
185%)
(e)

Cost of goods manufactured during the year was $167,030 (See account analysis.)

(f)

Was manufacturing overhead over- or under-applied by the end of the year? Over-applied.
Provide the journal entry that would have been necessary to clear the manufacturing overhead
account at the end of the year.
Dr.
MOH
$2,600
Cr.
COGS
$2,600
See MOH T-account on
previous page.
(g)

As a result of the entry you have made in (f) above, operating income will increase/decrease/be
unaffected (circle one) by $2,600 and inventory balances will increase/decrease/be unaffected
(circle one) by $NA

(h)

Specific to Rainiers data for the year, speculate as to whether its production output was equal to,
less than, or greater than (circle one) expected output. What evidence do you have to support
your answer? Explain.
The evidence to support the answer is that MOH was over-applied. Although this could
have been caused by a number of factors, a likely situation is that the amount of direct labor
cost incurred was greater than was anticipated when the predetermined overhead
application rate was computed. This would have happened if actual production exceeded
expected production. Thus, more of the cost driver was used than was expected, and, as a
consequence, 185% of DL cost incurred produced a larger amount of overhead applied than
was anticipated. Also, recall that most of the overhead would be fixed, so the overhead
incurred would not be much higher than overhead estimated, even if production was greater
than planned.

If sales revenue for the year was $250,000, the gross margin reported on Rainiers income
statement for the year was $82,870
$250,000 ($169,730 - $2,600)
(i)

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises Solutions

2. Parkland Manufacturing applies manufacturing overhead to production on the basis of direct labor
hours. It uses two (2) direct labor hours per unit produced. Direct labor hours and costs at two
different production and sales levels are presented in the table below.
9,000 Units 15,000 Units
Direct labor hours used
18,000 DLH 30,000 DLH
Total prime manufacturing costs
$135,000
$225,000
Total manufacturing overhead
$72,700
$86,500
Total selling and administrative expenses
$43,700
$51,500
Parkland estimates that $32,000 of its selling and administrative expenses are fixed costs.
(a) Using high-low analysis, determine the cost formula (equation) for estimating manufacturing
overhead. (i.e. Determine estimated variable MOH per direct labor hour and the total estimated
fixed MOH.) Clearly show your work and present a complete answer.
($86,500 - $72,700)/(30,000 18,000 DLH) = $1.15 VC per direct labor hour.

(OR

$72,700
=
$72,700
=
TFC = $52,000

TFC
TFC

+
+

($1.15 x 18,000 DLH)

$20,700

TMOH
=
$86,500
=
$86,500
=
TFC = $52,000)

$52,000 + $1.15X where X is number of direct labor hours

TFC +
($1.15 x 30,000 DLJH)
TFC +
$34,500

(b) Assume Parkland plans to manufacture and sell 13,000 units next year.
(i) What would be the total estimated manufacturing (product) cost at that level of production?
Unit product cost is Prime cost per unit + MOH per unit
Prime cost is $15 per unit. (See data in table. Either $135,000/9,000 units or $225,000/15,000
units)
VMOH per unit is $2.30 ($1.15 per DLH x 2 DLH per unit of output)
Total variable cost per unit is $17.30
$17.30 x 13,000 units of output
Plus fixed MOH
Total manufacturing cost

$224,900
52,000
$276,900

(ii) What would be the estimated manufacturing (product) cost per unit produced next year?
$276,900 -:- 13,000 units = $21.30 per unit. (OR $17.30 VC per unit + $4 FC per unit)
3

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises Solutions

(c) Suppose, rather than 13,000 units, Parkland plans to manufacture and sell 11,000 units next year.
Would the estimated manufacturing cost per unit be higher/lower/the same (circle one) as your answer to
Part (b.ii)? Explain.
Since fewer units would be produced, unit fixed cost would be higher.
(d) How comfortable would you be using the cost formula you have presented in Part (a) to estimate total
manufacturing overhead if Parkland wanted to product 16,000 units next year? Explain.
Not comfortable.
Production at 16,000 units is outside the relevant range of the data we used in our analysis of cost
structure in (a). Both total fixed costs and variable costs per unit might be different.
(e) What is the variable selling and administrative cost per unit?
Total S&A $43,700 - $32,000 fixed = $11,700 total variable at 9,000 unit level
$11,700/9,000 units = $1.30 per unit
(The same answer could be derived using the S&A data at 15,000 units.)
(f) If Parklands selling price is $30 per unit, what is the contribution margin per unit?
CM = SP - VC
$30 SP ($17.30 variable production cost per unit + $1.30 variable S&A) = $11.40
(g) How many units should Parkland plan to sell if it wants to earn a target profit of $75,000 next year?
(Give your answer rounded up to the next whole unit.)
{($52,000 + $32,000) + $75,000 profits}/$11.40 CM per unit} = 13,948 units

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises Solutions

3. A company has provided the following data:

If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by
20%, and all other factors remain the same, net operating income will:
A. Increase By $61,000.
B. Increase By $20,000.
C. Increase By $3,500.
D. Increase by $11,000.

4. At a break-even point of 400 units sold, variable expenses were $4,000 and fixed expenses
were $2,000. What will the 401st unit sold contribute to profit?
A. $0
B. $5
C. $10
D. $15
Break-even point (units) = Fixed expenses Contribution margin per unit
Substituting:
400 = $2,000 Contribution margin per unit
Contribution margin per unit = $5

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises Solutions

5. Vaccaro Corporation produces and sells a single product. Data concerning that product appear
below:

Fixed expenses are $293,000 per month. The company is currently selling 3,000 units per month.
Management is considering using a new component that would increase the unit variable cost by
$13. Since the new component would increase the features of the company's product, the
marketing manager predicts that monthly sales would increase by 400 units. What should be the
overall effect on the company's monthly net operating income of this change?
A. Increase of $600
B. Increase of $39,600
C. Decrease of $600
D. Decrease of $39,600

Increase in net operating income: $43,600 - $43,000 = $600

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises Solutions

6. Similien Corporation produces and sells a single product. Data concerning that product appear
below:

Fixed expenses are $300,000 per month. The company is currently selling 5,000 units per month.
The marketing manager would like to cut the selling price by $14 and increase the advertising
budget by $17,000 per month. The marketing manager predicts that these two changes would
increase monthly sales by 1,400 units. What should be the overall effect on the company's
monthly net operating income of this change?
A. Increase Of $64,200
B. Increase Of $215,400
C. Decrease Of $64,200
D. Decrease of $5,800

Decrease in net operating income: $60,000 - $54,200 = $5,800

Accounting 225 Quiz Section #7

Midterm1 Review Class Exercises Solutions

7. Moloney Corporation produces and sells a single product. Data concerning that product appear
below:

Fixed expenses are $898,000 per month. The company is currently selling 9,000 units per month.
The marketing manager would like to introduce sales commissions as an incentive for the sales
staff. The marketing manager has proposed a commission of $16 per unit. In exchange, the sales
staff would accept a decrease in their salaries of $117,000 per month. (This is the company's
savings for the entire sales staff.) The marketing manager predicts that introducing this sales
incentive would increase monthly sales by 100 units. What should be the overall effect on the
company's monthly net operating income of this change?
A. Increase Of $115,400
B. Decrease Of $16,600
C. Decrease Of $250,600
D. Increase Of $1,063,400

Decrease in net operating income: $182,000 - $165,400 = $16,600