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Exam 30: Cost-Revenue Analysis for Decision Making

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Question 1

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Fixed manufacturing costs are written off as current expenses of the period in which they occurred when using

A) absorption costing.
B) standard costing.
C) direct costing.
D) differential costing.

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

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Question 2

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Income statements prepared on a(n)--------------costing basis usually provide data in a form more useful for internal decision making.

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Question 3

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The inventory costing system not acceptable for financial reporting is------------- costing.

The first step in the decision-making process is to determine relevant cost and revenue data.

The direct costing procedure is used for financial reporting.

Nabob Corporation is considering expanding into the Midwest. It is estimated that this new division would generate an average of $378,000 in sales per year. The variable manufacturing costs would be $187,000, variable selling costs would be $72,000, and controllable fixed costs would be $90,000. In addition, the company planned to allocate $85,000 of company common fixed costs to the new division. Is this a wise decision for Nabob Corporation? Why?

If a decision must be made to replace a machine, the book value of the existing machine is a sunk cost and is, therefore, ignored in the decision process.

Tyro Manufacturing has a machine that requires frequent repairs. Production is stopped and as a result some shipment dates have not been met. The manager read in their industry's trade magazine about a new machine that has just been developed. Using the given headings, list the six steps of the decision -making process. Relate each of the first five to this specific situation using the format provided. $\begin{array} { | l | l |} \hline \text { Step } & \text { Relationship to Situation } \\\hline & \\\hline & \\\hline & \\\hline & \\\hline & \\\hline\end{array}$

Timkon Manufacturing has provided the following operating results for its recent operations: $\begin{array}{lr}\text { Beginning inventory of finished goods } & 4,500 \\\text { Units produced (no work in process) } & 10,000 \\\text { Units sold } & 12,500 \\\text { Units in ending inventory of finished goods } & 2,000\\\text { Sales price }&\$ 50 \text { per unit }\\\text { Variable manufacturing costs }&\$ 20 \text { per unit }\\\text { manufactured Variable selling expenses }&\$ 2 \text { per unit sold }\\\text { Variable administrative expenses } & \$ 1 \text { per unit sold Fixed manufacturing } \\\text { costs for the year } & \$ 100,000 \\\text { Fixed selling expenses for the year } & \$ 52,000 \\\text { Fixed administrative expenses for the year } & \$ 84,000\end{array}$ - Using the direct method, cost of goods manufactured for the year is:

Which of the following should NOT be considered when deciding whether to make or buy a part?

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 the part for $48 a unit. If the part was purchased from the supplier, all of the direct labor costs would be avoided as well as $5 of the manufacturing overhead cost per unit. Product cost information for the part under review is as follows: $\begin{array}{lr}\text { Direct Materials}&\$18\\\text { Direct Labor}&\$24\\\text { Manufacturing overhead}&\$16\\\text { Unit product cost}&\$58\\\end{array}$ How much of the unit product cost is relevant in the decision of whether to make or buy the part?

Segment managers can never control fixed costs.

Which of the following should NOT be considered when making decision on future manufacturing processes?

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

Evaluation of available capacity is irrelevant when making decisions on whether to accept or reject a special order.

Which of the following is NOT considered when determining whether to continue making a part or to buy that part?

The following information relates to a one-time special order from a flood relief organization for 200 of its book bags at $8.50. Current manufacturing costs are as follows. $\begin{array}{lr}\text { Direct Material per bag } & \$ 3.24 \\\text { Direct Labor } & 4.21 \\\text { Variable Manufacturing Overhead } & .55 \\\text { Variable Selling costs } & .76 \\\text { Fixed Manufacturing Overhead } & 1.25\end{array}$ Fixed manufacturing overhead is based on capacity of 4,500 units per year. Normal sales is 4,000 book bags per year. Only $0.46 of the selling costs will be incurred for this special order. What are the relevant costs regarding this special order? Pose one nonfinancial consideration regarding the acceptance or rejection of this special offer.

The Sloan Corporation is considering the purchase of a new factory machine at a cost of $36,000. The machine would perform a function that is now being performed by hand. The new machine would have a life of six years and would produce 6,000 units a year (the current output). Direct labor costs would be reduced by $1.10 a unit. Variable overhead costs would be reduced by $0.35 a unit. Fixed costs, other than depreciation, would increase by $2,800 a year. 1. Should the machine be purchased? 2. What impact would the decision have on annual net income?

The data given below pertains to the operations of the Newton Products Corporation for the year ended December 31, 2019 Based on the information given prepare an income statement for the year using the absorption costing approach. Assume that the beginning finished goods inventory had a cost of $32.50 per unit.

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 direct costing, the marginal income on sales is: