This file has now been updated to match the problem numbers on the Fall 1997 Syllabus

AC1


Roberta Company uses standard absorption costing for internal reporting. Standards for the single product it makes are:

                Std Quant       Std price       Standard
Materials       2 lbs.          $30 per lb      $ 60.00
Labor           .5 DLH          $20 per DLH       10.00
Variable OH     .6 MH           $30 per MH        18.00
Fixed OH        .6 MH           $80 per MH        48.00                     
                                                $136.00

During May, 19x9, the following occurred:

Units in beginning inventory    20,000
Units produced                  150,000
Units sold                      160,000
Sales price per unit            $200

Actual inputs:

Materials purchased and used  290,000 lb.  $8,845,000
Direct labor                  73,000 DLH   $1,606,000
Variable overhead             89,000 MH    $2,670,000
Fixed overhead                             $6,600,000
Fixed SG&A expenses                        $1,499,000
Variable SG&A expenses                     $  320,000

Required:

In class, we have prepared an absorption costing income statement for this company. Prepare a variable costing income statement.

AC2


Arno Company makes two models of its only product, a sophisticated trap for rodents. Data relating to each model appear below:

                           Regular   Deluxe   

Standard material cost        $10      $20 

Standard labor cost            $5       $8 

All overhead is fixed and the firm uses budgeted direct labor cost for the coming year, 19X6, as the basis for determining standard cost. During 19X6 the managers expect to make 4,000 units of each model, for total direct labor cost of $52,000. Budgeted overhead is $104,000. There were no beginning inventories.

Operations for the year showed the following results:

                               Regular   Deluxe               
Production                      4,200     3,600            
Sales                           4,000     3,200            
Selling price                     $40       $70            

Costs:                                                     
Materials                                         $108,000 
Direct labor                                       $54,000 
Overhead                                           $98,000 
Selling and general, all fixed                     $35,000

REQUIRED:

a. Prepare an income statement using standard absorption costing. Identify all variances separately to the extent that you have the necessary information.

b. Prepare an income statement using standard variable costing.

AC3


Figure Four operates a company that specializes in the distribution of pharmaceutical products. Figure Four buys from pharmaceutical companies and resells to each of three different markets: General supermarket chains, Drugstore chains, and single store pharmacies. Their controller has become concerned about the profitability of the single store pharmacy market and has undertaken an activity based costing project aimed at measuring the profitability of each customer in that market. They have identified five key activity areas and cost drivers at Figure Four. Information about the activities, the total cost per activity, and the cost drivers is presented below:

                                                                          
     Activity           Cost       Cost driver             Past year results     
Order processing      $80,000   # of orders                2,000 orders             
Line item processing  $63,840   # of line items ordered   21,280 line items        
Store delivery        $71,000   # of deliveries            1,420 deliveries   
Cartons shipped       $76,000   # of cartons/delivery     76,000 cartons shipped   
Shelf stacking at     $10,240   # of hours shelf stacking    640 hours                
    customer store 

Two customers are used to highlight the new insights available with the activity-based costing approach. Data pertaining to these two customers follow:

                                                   Charleston  Chapel Hill  
Total number of orders                                     12           10 
Average number of line items per order                     10           18 
Total number of deliveries                                  6           10 
Average number of cartons shipped per delivery             24           20 
Average number of hours of shelf stacking per delivery      0           .5 
Average revenue per delivery                           $2,400       $1,800 
Average cost of goods sold per delivery                $2,100       $1,650 

REQUIRED:

Use the activity based costing information to compute the profitability of each customer. Comment on the results. What should Figure Four do to improve customer profitability?

Other problems


1. Exco Company makes a single product. Standard cost data follow:

Materials, 3 gal. @ $2                    $6 
Direct labor, .5 hour @ $8/hour           $4 
Variable overhead @ $6 per labor hour     $3 
Fixed overhead @ $10 per labor hour       $5 
Total standard cost                      $18 

Annual budgeted fixed overhead is $500,000. There were no inventories at the beginning of 19X6. The firm's transactions during the year were:

1. Material purchases were 330,000 gallons at $1.90

2. Material use was 304,000 gallons.

3. Direct laborers worked 47,500 hours at $8 per hour.

4. Variable overhead was $285,000.

5. Fixed overhead was $512,000.

6. The firm completed 97,000 units and sold 90,000 at $25 each. Work in process at year end was 3,000 units complete as to materials, 60% complete as to labor and overhead.

7. Selling and administrative expenses were $450,000.

REQUIRED:

a. Determine ending material, work in process and finished goods inventories at standard cost.

b. Prepare an income statement using standard absorption costing identifying all variances separately.

c. Without preparing a new income statement, determine what income would have been if the firm had used standard variable costing.