MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES

By Dennis Caplan, University at Albany (State University of New York)

 

 

CHAPTER 4:  Exercises and Problems:

 

Discussion Question 4-1: A leading management accounting textbook (Cost Accounting: A Managerial Emphasis, by Horngren, Datar and Foster, 12th edition) provides the following table (Exhibit 2-5 in that textbook) providing examples of cost classifications:

 

 

Direct Costs

Indirect Costs

 

 

Variable Costs:

Cost object: BMW X5s produced

 

Example: Tires used in assembly of automobile

Cost object: BMW X5’s produced

 

Example: Power costs at Spartanburg plant. Power usage is metered only to the plant, where multiple products are assembled.

 

 

 

Fixed Costs:

Cost object: BMW X5s produced

 

Example: Salary of supervisor on BMW X5 assembly line

Cost object: BMW X5s produced

 

Example: Annual lease costs at Spartanburg plant. Lease is for whole plant, where multiple products are produced.

 

 

Required: Evaluate whether the cost object is identical in each of the four boxes.

 

4-2:

A)        If a company makes 100 units of product, the allocated fixed cost per unit is $5 and the variable cost per unit is $6.  What will be the per-unit total cost (fixed plus variable cost) if the company makes 200 units?

B)        At a production and sales level of 1,000 units, the company’s costs are as follows:

 

Variable manufacturing costs per unit            $20

Allocated fixed manufacturing cost per unit  $10                 

Variable selling costs per unit                         $  5

Allocated fixed selling costs per unit             $  3

 

How much would the company have to spend in total (total cash outlay for both fixed and variable costs), if it makes 1,200 units and sells 200 units (so that 1,000 units are in ending inventory at the end of the period)?

 

4-3: Describe each of the following costs as either fixed, variable, or semi-variable (i.e., mixed)

 

A)        The cost is $500 per unit at a production level of 50 units, and $500 per unit at a production level of 100 units.

 

B)        The cost is $500 in total at a production level of 50 units, and $1,000 in total at a production level of 100 units.

 

C)        The cost is $500 in total at a production level of 5 units, and $100 per unit at a production level of 10 units.

 

4-4: If a company makes 100 units of product, the fixed cost per unit is $5 and the variable cost per unit is $6. How much will the company have to spend in total to make 200 units?

 

4-5: Identify the following cost as either fixed, variable or mixed (semi-variable). The horizontal axis refers to the number of units produced. The vertical axis refers to the cost per unit at that level of production.

 

4-6: Identify the following cost as either fixed, variable or mixed (semi-variable). The horizontal axis refers to the number of units produced. The vertical axis refers to the total cost incurred for all of the units produced.

 

4-7: Identify the following cost as either fixed, variable or mixed (semi-variable). The horizontal axis refers to the number of units produced. The vertical axis refers to the total cost incurred for all of the units produced.

 

 

4-8: Turquoise Company manufactures widgets and other good stuff. When 12,000 widgets are produced, the total cost per widget is $40, calculated as follows:

 

            Materials (a variable cost)                                           $10

            Labor (another variable cost)                                        15

            Variable overhead (yet another variable cost)              10

            Fixed overhead (not a variable cost)                               5

 

The company is considering buying its widgets, instead of making them (hence, the company would become a widget wholesaler, but will still manufacture other good stuff). The company can buy widgets from another company for $42 per widget. If the company stops making widgets, total fixed costs will not change, although some of the facilities currently being used to make widgets can be rented out, resulting in $50,000 in rental income to the Turquoise Company. What would be the incremental cost or benefit to the Turquoise Company from becoming a widget wholesaler instead of a widget manufacturer?

 

4-9: A particular cost is $10,000 in total when 50 units are made.

 

A)        Complete the following table, indicating what the cost would be if production is increased to 200 units:

 

 

Cost per Unit

Cost in total

If this cost is a variable cost

 

 

If this cost is a fixed cost

 

 

 

B)        Complete the following table, indicating what the cost would be if production is reduced to 20 units:

 

 

Cost per Unit

Cost in total

If this cost is a variable cost

 

 

If this cost is a fixed cost

 

 

 

4-10: Describe in two or three (no more than four) complete, well-written sentences the difference between fixed costs and variable costs.

 

4-11: In general, and within the relevant range, as production increases:

 

            (A)       Per unit fixed costs and per unit variable costs both stay the same.

 

            (B)       Per unit variable costs go down, and per unit fixed costs stay the same.

 

            (C)       Per unit fixed costs go down, and per unit variable costs stay the same.

 

            (D)       Per unit fixed costs and total variable costs both stay the same.

 

4-12: A particular cost is a semi-variable (or mixed) cost, within a relevant range of 100 to 200 units of production. This cost is $1,000 in total when 100 units are manufactured (i.e., $10 per unit, when 100 units are manufactured). If production is doubled to 200 units, which of the following is the most likely amount incurred for this particular cost?

 

            (A)       $   990            

 

            (B)       $1,000            

 

            (C)       $1,100            

 

            (D)       $2,000            

 

4-13: If production doubles, what will happen to variable costs?

 

(A)       Total variable costs and the variable cost per unit will both double.

 

(B)       Total variable costs will stay the same, and the variable cost per unit will decrease

 

(C)       Total variable costs will stay the same, and the variable cost per unit will double.

 

(D)       Total variable costs will double, and the variable cost per unit will stay the same.

 

4-14: At a production level of 200 units, total costs for the factory are $9,000, consisting of $8,000 in variable costs and $1,000 in fixed costs. Calculate total factory costs if production increases 25%.

 

4-15 (The Matching Principle and cost behavior): Assume that the Little Rock Company calculates income in the following manner: All manufacturing costs (variable and fixed) are treated as a cost of inventory, and the “matching principle” is honored for these costs, such that the cost to make inventory appears on the Income Statement as Cost of Goods Sold when the inventory is sold. All non-manufacturing costs are expensed (appear on the Income Statement) when incurred (i.e., the matching principle is not honored for these costs).

 

In 2003, the Little Rock Company incurred fixed manufacturing costs of $500,000 and fixed non-manufacturing costs of $300,000. The Company made 10,000 units and sold 5,000. Variable manufacturing cost was $150 per unit. Variable non-manufacturing cost was $30 for every unit sold (this was a sales commission). Revenue was $3,000,000.

 

Required: Calculate income for 2003.

 

 

 

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Management Accounting Concepts and Techniques; copyright 2006; most recent update: November 2009

 

For a printer-friendly version, contact Dennis Caplan at dcaplan@uamail.albany.edu