Seminar 3

Additional discussion question

Marios Pizza
Profit & Loss Statement for year ended 31st May 1998
000
$

000
$

Sales

160

Less: Variable costs

Cost of goods sold
Selling & Admin

32
28

(60)

Contribution

100

Less: Fixed costs

Selling & Admin

(36)

Net Profit

64

Marios sells 3 small pizzas for every large pizza. The sales price for a small
pizza is $10; a large pizza sells for $20.
Required:
Calculate BEP in the numbers of small pizzas and large pizzas.
Seminar 4
Activity 4.5 solution
Cost items
Indirect labour
Consumables
Rent & rates
Depreciation
Power

Basis

Assembly

Machining

140,000
34,000
16,000
45,000
27,000

Floor space
Book value
KW hours

160,000
42,000
19,200
36,000
24,000

Stage 1:Allocated &

apportioned overheads

262,000

281,200

Stage 2: Reapportionment
Canteen
No. of employees
Maintenance
Maintenance hrs

45,400
63,166

40,860
47,374

Departmental overhead

370,566

369,434

POHR
Labour hours
Labour hour activity base
Machine hours
Machine hour activity base

12,640
29.32
$

15,700
23.53

Canteen

Maintenance

50,000
30,000
4,800
3,000
3,000

70,000
16,000
8,000
6,000
6,000

90,800

106,000

(90,800)
-

4,540
(110,540)

Week 3 & 4 quizzes

Question 1
Edmonco Company produced and sold 45,000 units of a single product last year, with the following
results:

If Edmonco's sales revenues increase 15%, what will be the percentage increase in income before
income taxes?

A. 15%.
B. 45%.
C. 60%.
D. 75%.
E. None of the other answers is correct.

Question 2
Jamal & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these
products are as follows:

Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.
Assuming that the sales mix remains constant, the number of units of Fancy that Jamal must
sell to break even is:

A. 2,000.
B. 3,000.
C. 3,375.
D. 5,000.
E. 5,625.

Question 3
You are analyzing Becker Corporation and Newton Corporation and have concluded that
Becker has a higher operating leverage factor than Newton. Which one of the following
choices correctly depicts (1) the relative use of fixed costs (as opposed to variable costs) for
the two companies and (2) the percentage change in income caused by a change in sales?

A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

Question 4
Media, Inc., an advertising agency, applies overhead to jobs on the basis of direct professional
labor hours. Overhead was estimated to be $150,000, direct professional labor hours were
estimated to be 15,000, and direct professional labor cost was projected to be $225,000.
During the year, Media incurred actual overhead costs of $146,000, actual direct professional
labor hours of 14,500, and actual direct labor cost of $222,000. By year-end, the firm's
overhead was:

A. $1,000 underapplied.
B. $1,000 overapplied.
C. $4,000 underapplied.
D. $4,000 overapplied.
E. $5,000 underapplied.

Question 5
Elmton recently sold 70,000 units, generating sales revenue of $4,900,000. The company's variable
cost per unit and total fixed cost amounted to $20 and $2,800,000, respectively. Management is in the
process of studying the dollar impact of various transactions and events, and desires answers to the
following independent cases:

Case no. 1: Management wants to lower the firm's break-even point to 52,000 units. If all other costs
remain constant, what must happen to fixed costs to achieve this objective?

Case no. 2: The company anticipates a $2 hike in the variable cost per unit. If all other costs remain
constant and management desires to maintain the firm's current break-even point, what must happen
to Elmton's selling price? If selling price remains constant, what must happen to the firm's total fixed
costs?
Required:
A. Answer the two cases raised by management.
B. Determine the impact (increase, decrease, or no effect) of the following operating changes on the
items cited:
1. An increase in variable selling costs on income.
2. A decrease in direct material cost on the unit contribution margin.
3. A decrease in the number of units sold on the break-even point.

Question 6
The estimates used to calculate the predetermined overhead rate will virtually always:

A. prove to be correct.
B. result in a year-end balance of zero in the Manufacturing Overhead account.
C. result in overapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
D. result in underapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
E. result in either underapplied or overapplied overhead that is closed to Cost of Goods Sold if it is
immaterial in amount.

Question 7
Which of the following statements about the use of direct labor as a cost driver is false?
A. Direct labor is the most commonly used cost driver when calculating a predetermined overhead
rate.
B. Direct labor is gaining importance in many manufacturing applications with respect to being a
significant cost driver.
C. Direct labor is an inappropriate cost driver to use if a company is highly automated.
D. If direct labor is a good cost driver, increases in direct labor are matched with increases in
manufacturing overhead.
E. Companies can use either direct labor cost or direct labor hours as a cost driver.

Question 8
In the two-stage cost allocation process, costs are assigned:
A. from jobs, to service departments, to production departments.
B. from service departments, to jobs, to production departments.
C. from service departments, to production departments, to jobs.
D. from production departments, to jobs, to service departments.
E. from the balance sheet (when goods are produced), to the income statement (when goods are
sold).

Question 9
Fogg Company, which uses labor hours to apply overhead to manufacturing, may have increased
amounts of underapplied overhead at month-end if:

A. suppliers of direct materials have an across-the-board price increase.

B. an accountant failed to record the period's charges for plant maintenance and security.
C. employees are hit hard with a widespread outbreak of the flu.
D. direct laborers are granted a wage increase.
E. outlays for advertising expenditures are increased.

Question 10
Margery, Inc., which uses a job-costing system, is a labor-intensive firm, with many skilled
craftspeople on the payroll. Job no. 789 was the only job in process on January 1, having costs of
$22,500 as of that date. Direct materials used and direct labor incurred during January were:

Job no. 791 was the only job in production as of January 31.
Required:
A. Should Margery use direct labor or machine hours as a cost driver. Why?
B. Assume that the company decided to use direct labor as its cost driver. If the budgeted amounts of
direct labor and manufacturing overhead are anticipated to be $200,000 and $300,000, respectively,
what is the firm's predetermined overhead rate?
C. Compute the cost of work-in-process inventory as of January 31.
D. Compute the cost of jobs completed during January.
E. Suppose that the company sold all of its completed jobs, adding a 40% markup to cost. How much
would the firm report as sales revenue?