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Notes On Managerial Accounting1

Home > Study Notes > Notes On Managerial Accounting1
Published in: Accounting | Management
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Breakeven analysis, cost of good manufactured preparation and payback period.

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  1. COST OF GOODS MANUFACTURED Problem 1 Hernandez, Inc. manufactures calculators. The company employs an actual costing system. During May, Hernandez's transactions included the following: Direct labor cost incurred Total manufacturing overhead cost Direct materials purchased Raw materials inventory, beginning Raw materials inventory, ending Selling expenses Work in process inventory, beginning Work in process inventory, ending $5,400 6,650 11,500 160 280 23,000 2,100 220 250 A. Briefly list any additional information you need to calculate cost of goods sold for this company. (Be specific.) B. How much is the cost of direct materials issued to production during May? C. How much is cost of goods manufactured for May? D. Prepare income statement Problem 2 - Saman, Inc. manufactures coasters and uses an actual costing system. During August, Saman's accounts included the following balances and transactions: Work in process, beginning Work in process, ending Finished goods beginning Finished goods, ending Administrative expenses Direct labor cost incurred Materials purchased Raw materials, beginning Direct materials used Manufacturing overhead cost incurred Sales Marketing expenses A. How much is ending raw materials at August 31 B. How much is cost of goods manufactured? C. Prepare income statement Problem 3 Calky, Inc. com leted Job No. G23 durin Direct materials Direct labor Manufacturin overhead Units roduced Units sold $25,200 27,600 7,300 6,800 12,000 20,400 78,000 3,300 76,400 20,100 167,000 1 1 ,ooo 2004. The •ob cost sheet listed the following: $15,000 $5,000 $10,000 1 ,000 units 800 units How much is the cost of the finished goods on hand from this job? Problem 4 - The accounting records of Cinotti Manufacturing Company include the following information:
  2. Work in rocess inventor Finished oods inventor Materials urchased Raw materials inventor Direct materials used Manufacturing overhead incurred Direct labor Selling ex enses Dec. 31, 2004 $ 15,000 45,000 331 ,ooo 325,000 132,000 120,000 70,000 Dec. 31, 2003 $ 12,000 51 ,ooo 24,000 Cinotti uses an actual cost system. Calculate the following: A. Raw materials inventory at 12-31-04 B. Total manufacturing costs added to Work in Process Inventory during 2004 Problem 5 - Peters, Inc. manufactures homework machines. It uses a normal costing system. Any amount of over or underapplied overhead is immaterial. Actual manufacturing overhead for the year is $55,500. Overhead is applied based on direct labor cost. During June, Peter's transactions and accounts included the following: Finished goods inventory, ending Finished goods inventory, beginning Indirect materials issued to production General administrative expenses Raw materials inventory, ending Raw materials inventory, beginning $1 1 ,600 12,300 3,200 9,400 4,500 5,100 Sales Direct labor cost Direct materials purchased Work in process inventory, ending Work in process inventory, beginning Total manufacturing overhead applied $324,000 72,400 178,000 12,800 10,500 56,100 A. How much is cost of goods manufactured? B. Prepare income statement C. How much is total inventory on the June 30th balance sheet? COST VOLUME PROFIT ANALYSIS PNG electric company manufactures a number of electric products. Rechargeable light is one of the 1. PNC's products that sells for $1 80/unit. Total fixed expenses related to rechargeable electric light are $270,000 per month and variable expenses involved in manufacturing this product are $126 per unit. Monthly sales are 8,000 rechargeable lights. Required: a. b. c. Compute break-even point of the company in dollars and units. According to a research conducted by sales department, a 10% reduction in sales price will result in 25% increase in unit sale. Prepare two income statements in contribution marqin format, one using the current price and one using proposed price (10% below the old sales price). Compute the number of rechargeable lights to be sold to earn a net operating income of $189,000 per month (use original data).
  3. 2. PQR company sells two products. The total fixed monthly data of PQR is as follows: Products Product A 600/0 expenses of the company are 1,197,000. The Total Sales Contribution margin ratio Required: Product B $600,000 a. Prepare contribution marqin income statement for the company. b. Calculate break-even point in dollars. TLK Ltd. manufactures small size fans to be used in load shedding areas. Each fan has a 3. rechargeable battery and a built in charging circuit. TLK sells a fan for $120. The annual sale is 30,000 fans. Variable and fixed cost data is given below: Variable expenses Fixed expenses Required: $84 per fan $900,000 per year a. Prepare contribution marqin income statement and compute the degree of operating leverage. b. Next year the sales are expected to increase by 7,500 fans. Compute (a) the expected percentage increase in net operating income (b) expected increase in net operating income and (c) expected total net operating income for the next year Calculate degree of operating leverage in the following cases and predict the increase in operating 4. income subject to 15% increase in sales. Company A: operating income increases by 15% if sales increase by 10%. Company B: sales are $2,000,000, contribution margin ratio is 40% and fixed costs are $400,000 Following is the contribution margin income statement of a single product company: 5. Sales Less variable expenses Contribution margin Less fixed expenses Net operating income Required: Total $840,000 360,000 300,000 $60,000 Per unit $80 $56 $24 a. Calculate break-even point in units and dollars. b. What is the contribution margin at break-even point? c. Compute the number of units to be sold to earn a profit of $36,000.
  4. d. Compute the margin of safety using original data. e. Compute CM ratio. Compute the expected increase in monthly net operating if sales increase by $160,000 and fixed expenses do not change. Berhannan's Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling 6. commission of 10%. Fixed manufacturing costs total $1 ,250 per month, while fixed selling and administrative costs total $2,500. a. What is the contribution margin per phone? b. What is the breakeven point in phones? c. How many phones must be sold to earn a targeted profit of $7,500? Northenscold Company sells several products. Information of average revenue and costs are as 7. follows: Selling price per unit Variable costs per unit: Direct materials Direct manufacturing labor Manufacturing overhead Selling costs Annual fixed costs a. Calculate the contribution margin per unit. $20.00 $4.00 $1.60 $0.40 $2.00 $96,000 b. Calculate the number of units Northenscold's must sell each year to break even. c. Calculate the number of units Northenscold's must sell to yield a profit of $144,000. Payback period — Capital budgeting Problem 1 LASANI Stone Crushing company is considering to purchase a new machine. The cost of the machine is $360,000 and the life of the machine is 10 years. The machine will reduce annual costs by $75,000. Required: Compute the payback period Problem 2 The calculation of the Payback Period is best illustrated with an example. Consider Capital Budgeting project A which yields the following cash flows over its five year life. Year 0 1 Cash Flow -1000 500
  5. 2 3 4 5 400 200 200 100 Problem 3 Due to increased demand, the management of Rani Beverage Company is considering to purchase a new equipment to increase the production and revenues. The useful life of the equipment is 10 years and the company's maximum desired payback period is 4 years. The inflow and outflow of cash associated with the new equipment is given below: The initial cost of equipment Annual cash inflow: Sales Annual cash outflow: Cost of ingredients Salaries expenses Maintenance expenses Non cash expenses: Depreciation $37,500 $75,000 $45,000 $13,500 $1 ,500 $5,000 Required: Should Rani Beverage Company purchase the new equipment? Use payback method for your answer. Problem 4 The management of Health Supplement Inc. wants to reduce its labor cost by installing a new machine. Two types of machines are available in the market — machine X and machine Y. Machine X would cost $18,000 where as machine Y would cost $15,000. Both the machines can reduce annual labor cost by $3,000. Required: Which is the best machine to purchase according to payback method? Problem 5 An investment of $200,000 is expected to generate the following cash flows in six years: Year 1 2 3 4 5 6 Net cash flow $30,000 $40,000 $60,000 $70,000 $55,000 $45,000 Required: Compute payback period of the investment. Should the investment be made if management wants to recover the initial investment in 3 years or less? Problems 1. Which item appears on a variable costing income statement but not on a full costing income statement? A. Fixed manufacturing costs B. Contribution margin
  6. C. Sales D. Gross profit 2. Which one of the following most likely occurs when variable cost per unit increases? A. Fixed costs per unit decrease. B. The breakeven point increases C. Contribution margin per unit increases. D. Some other answer. 3. Which of the following will have no effect on the break-even point in units? A. Sales price increases B. Fixed costs increases C. Variable cost per unit decreases D. Sales volume decreases 4. An example of fixed period cost is the A. cost of assembly labor for bicycles sold by Target. B. Cost to ship products into Target for resale. C. Product advertising cost D. cashier wages at target 6. Which of the following is true about total fixed costs and total variable costs as total volume decreases ? A. Total fixed costs stays the same and total variable costs stays the same. B. Total fixed costs decreases and total variable costs stays the same. C. Total fixed cost stays the same and total variable cost decrease D. Total fixed costs decrease and total variable costs decrease. Problem 1 - The accounting records of Cinotti Manufacturing Company include the following information: Work in rocess inventor Finished goods inventor Materials urchased Raw materials inventor Direct materials used Manufacturing overhead incurred Direct labor Selling ex enses Dec. 31, 2004 $ 15,000 45,000 331 ,ooo 325,000 132,000 120,000 70,000 Dec. 31, 2003 $ 12,000 51 ,ooo 24,000 Cinotti uses an actual cost system. Calculate the following: 1. Raw materials inventory at 12-31-04 2. Total manufacturing costs added to Work in Process Inventory during 2004
  7. 3. 4. 5. Cost of goods manufactured during 2004 Total inventories on Cinotti's December 31 , 2004 balance sheet Assume CGM is $500,000. How much is cost of goods sold for 2004? Problem 2 The operating statement relating to the latest financial year of Hercules Manufacturing Limited is as follows: sales (22,000 units) Direct materials Direct labour Production overheads Gross profit Selling overheads Net profit $'000 $'000 3,300 726 374 798 ,898 1,402 ,042 360 The variable production overheads were $9 per unit while the variable selling overheads were $11 per unit. Required: la) (b) Calculate the contribution margin per unit and the margin of safety in units for the latest financial year. The company has a capacity of 30,000 units per year. Management is not happy with the financial performance for the last year, and two courses of action for the coming year were proposed in the recent management meeting. The sales manager believed that unit volume would increase by 30% with the incurrence of $200,000 on advertising. The general manager considered that full capacity could be reached if the selling price were cut by 10%. In addition, the direct material cost 'Nould be reduced by 5% following a minor modification of the specification of the product. Prepare the budgeted operating statement for the coming year in columnar format, using a contribution margin approach, under each alternative. Problem 3 - Eng Manufacturing Company developed the following data: Beginning work in process inventory Direct materials used Actual manufacturing overhead Cost of goods manufactured Ending work in process $ 10,000 150,000 85,000 295,000 15,000 How much are total manufacturing costs for the period? Problem 4 the investment and expected cash inflows of a project over 8-year period is given below: Year Investment Cash inflow 1 2 3 4 $8,000 $2,000 $4,000 $2,000
  8. 5 6 7 8 $4,000 $1 ,ooo $6,000 $4,000 $4,000 Required: Compute the payback period of the project. Would the project be acceptable if the maximum desired payback period is 7 years? Problem 5 The Black Stone company sells crushed stone to government contractors as well as to small business owners involved in construction business. The company needs to replace an old equipment with a new one. The new equipment can increase production as well as improve the quality of crushed stone. The information about annual incremental revenues and costs associated with the new equipment is given below: Sales Less cost of raw stone Contribution margin Less fixed expenses: Salaries Maintenance Depreciation Net operating income $80,000 $10,000 $30,000 $450,000 $270,000 $180,000 $120,000 $60,000 The new equipment would cost 240,000 and the old equipment can be sold to a small company for $15,000. Required: Would the company invest in new equipment if the desired payback period is 2.5 years or Which of the following will not be a relevant factor when using the payback method of capital investment appraisal? The cost of the asset The timing of the first cash inflow The cash flows generated by the asset up to the payback period The total cash flows generated by the asset
  9. The cash inflows and (outflows) associated with a project are as follows: At start Year 1 Year 2 Year 3 Residual value of project at the end of 3 ears (120,000) 40,000 50,000 60,000 20,000 The payback period for this project would be: a) 2 years and 3 months. b) 2 years and 6 months. c) 3 years. d) 2 years. MCQ: If an initial investment is $765000 and payback period is 4.5 years then increasing in future cash flow will be A. B. c. D.

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