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Exam 30: Cost-Revenue Analysis for Decision Making

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Question 21

True/False

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The difference in net income reported under direct costing versus the net income reported under absorption costing is calculated based on the increase or decrease in the units available for sale.

A) True
B) False

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Question 22

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Contribution margin is calculated by

A) deducting variable costs and common costs from revenue.
B) deducting variable costs and controllable fixed costs from revenue.
C) deducting variable costs from revenue.
D) deducting fixed costs from revenue.

E) A) and B)
F) None of the above

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Question 23

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If a decision must be made about whether or not to replace a machine, the-------------- of the existing machine is irrelevant.

A segment of a business reported a contribution margin of $33,000 and common costs of $11,000. If the segment is eliminated, the company-wide net income would be

Green Manufacturing makes 30,000 units per year of a part used in the manufacture of its new camcorder. An outside supplier has offered to sell Green all of these parts for $48 a unit. If the parts were purchased from the supplier, all of the direct labor costs would be avoided as well as $5 of manufacturing overhead costs per unit. Product cost information for the part under review is as follows: $\begin{array}{lr}\text { Direct Materials}&\$18\\\text { Direct Labor}&\$24\\\text { Manufacturing overhead}&\$16\\\text { Unit product cost}&\$58\\\end{array}$ If Green has no other use for the space vacated by the decision to purchase the part from the outside supplier, what is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

Under direct costing, all fixed costs are expensed in the period incurred, including fixed selling and administrative costs.

Under----------- costing, a portion of fixed manufacturing overhead is deferred to future periods as part of the inventory value.

Company Zee produces a widget that requires $15 of material per unit along with ½ hour of labor, the average rate being $18/hour. The company's predetermined overhead rate includes $5 of variable cost and $6 of fixed cost per labor hour when the activity level is 10,000 labor hours. Direct costing would cost this widget at $29.50 per unit.

Net income under both the direct costing and absorption costing approaches will always equal.

In its first year of operations, a company has sales of $116,000, ending finished goods inventory of $11,800, variable manufacturing costs of $57,600, and fixed manufacturing costs of $28,000 for the year. Assuming the company uses direct costing, the cost of goods sold for the year is

Common costs are allocated to each segment of a business to determine the segment's contribution margin.

Earnings or potential benefits foregone because a certain course of action is taken are called-------------costs.

In deciding whether to manufacture or to purchase a product,-------------- costs are generally ignored.

Costmore Manufacturing has provided the following operating results for its first year operations: $\begin{array}{lr}\text { Beginning inventory of finished goods } & 0 \\\text { Units produced (no work in process) } & 22,000 \\\text { Units sold } & 18,000 \\\text { Units in ending inventory of finished goods } & 4,000\\\text { Sales price }&\$55\text { per unit }\\\text { Variable manufacturing costs }&\$25\text { per unit }\\\text { manufactured Variable selling and }\text { administrative expenses }&\$ 7 \text { per unit }\\\text { sold Fixed manufacturing }\text { costs for the year } & \$ 110,000 \\\text { Fixed selling and administrative expenses for the year } & \$ 124,000\end{array}$ - Using the absorption costing method, the cost of goods sold is:

If the finished goods inventory increases during the period, the reported net income will be larger under variable costing than under absorption costing.

Under absorption costing, a portion of the fixed manufacturing overhead is deferred to future periods as part of the inventory value.

Analyze the following divisions of Johannes' Clothing Company. Management has to make a decision whether to close one of the divisions or keep both open. Make a recommendation to management based on the information given. Of the fixed costs, parts are controllable within the divisions, but $31,000 of the total are company headquarters fixed costs. Of these, $16,000 are allocated to the Skirt Division and $15,000 to the Shirt Division.

Which is the final step in the decision-making process?

Costmore Manufacturing has provided the following operating results for its first year operations: $\begin{array}{lr}\text { Beginning inventory of finished goods } & 0 \\\text { Units produced (no work in process) } & 22,000 \\\text { Units sold } & 18,000 \\\text { Units in ending inventory of finished goods } & 4,000\\\text { Sales price }&\$55\text { per unit }\\\text { Variable manufacturing costs }&\$25\text { per unit }\\\text { manufactured Variable selling and }\text { administrative expenses }&\$ 7 \text { per unit }\\\text { sold Fixed manufacturing }\text { costs for the year } & \$ 110,000 \\\text { Fixed selling and administrative expenses for the year } & \$ 124,000\end{array}$ - Using the absorption costing method, the gross profit on sales is:

Irrelevant costs are those that will not impact the decision maker's options and thus can be eliminated from analyses.