1.

Mullee Corporation produces a single product and has the following cost structure:

     
Number of units produced each year   7,000
Variable costs per unit:    
Direct materials RM 51
Direct labor RM 12
Variable manufacturing overhead RM 2
Variable selling and administrative expense RM 5
Fixed costs per year:    
Fixed manufacturing overhead RM441,000
Fixed selling and administrative expense RM112,000

The absorption costing unit product cost is:

A) RM149 per unit
B) RM65 per unit
C) RM63 per unit
D) RM128 per unit

Answer: D
Explanation:
     
Direct materials RM 51
Direct labor   12
Variable manufacturing overhead   2
Fixed manufacturing overhead cost (RM441,000 ÷ 7,000 units)   63
Absorption costing unit product cost RM128
2. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

     
Selling price RM 121
Units in beginning inventory   0
Units produced   6,000
Units sold   5,600
Units in ending inventory   400
Variable costs per unit:    
Direct materials RM 38
Direct labor RM 53
Variable manufacturing overhead RM 3
Variable selling and administrative expense RM 11
Fixed costs:    
Fixed manufacturing overhead RM 60,000
Fixed selling and administrative expense RM 28,000

What is the total period cost for the month under variable costing?
A) RM149,600
B) RM60,000
C) RM88,000
D) RM89,600

Answer: A
Explanation:
     
Variable selling and administrative expense
(RM11 per unit × 5,600 units sold) RM 61,600
Fixed manufacturing overhead   60,000
Fixed selling and administrative expense   28,000
Variable costing total period cost RM 149,600
47) Rhea Corporation has provided the following data for its two most recent years of
operation:

     
Selling price per unit RM 67
Manufacturing costs:    
Variable manufacturing cost per unit produced:    
Direct materials RM 10
Direct labor RM 5
Variable manufacturing overhead RM 3
Fixed manufacturing overhead per year RM252,000
Selling and administrative expenses:    
Variable selling and administrative expense per unit sold RM 4
Fixed selling and administrative expense per year RM 65,000

  Year 1 Year 2
Units in beginning inventory 0 1,000
Units produced during the year 9,000 7,000
Units sold during the year 8,000 7,000
Units in ending inventory 1,000 1,000

The net operating income (loss) under absorption costing in Year 2 is closest to:
A) RM6,000
B) RM99,000
C) (RM2,000)
D) RM71,000

Answer: A

Explanation: Absorption costing unit product costs:

  Year 1 Year 2
Direct materials RM 10 RM 10
Direct labor   5   5
Variable manufacturing overhead   3   3
Fixed manufacturing overhead
(RM252,000 ÷ 9,000 units produced; RM252,000 ÷
7,000 units produced)   28   36
Absorption costing unit product cost RM 46 RM 54

Absorption costing income statement:

  Year 2
Sales [(8,000 units sold × RM67 per unit); (7,000 units
RM 469,000
sold × RM67 per unit)]
Cost of goods sold [(8,000 units sold × RM46 per unit);   370,000
((1,000 units sold × RM46 per unit) + (6,000 units sold ×
RM54 per unit))
= RM46,000 + RM324,000)]
Gross margin   99,000
Selling and administrative expenses
[((8,000 units sold × RM4 per unit) + RM65,000);
((7,000 units sold × RM4 per unit) + RM65,000)]   93,000
Net operating income (loss) RM 6,000
3. Homeyer Corporation has provided the following data for its two most recent years of
operation:

     
Selling price per unit RM 71
Manufacturing costs:    
Variable manufacturing cost per unit produced:    
Direct materials RM 12
Direct labor RM 6
Variable manufacturing overhead RM 3
Fixed manufacturing overhead per year RM 264,000
Selling and administrative expenses:    
Variable selling and administrative expense per unit sold RM 4
Fixed selling and administrative expense per year RM 74,000

  Year 1 Year 2
Units in beginning inventory 0 3,000
Units produced during the year 11,000 12,000
Units sold during the year 8,000 14,000
Units in ending inventory 3,000 1,000

The net operating income (loss) under absorption costing in Year 1 is closest to:
A) RM102,000
B) RM30,000
C) RM176,000
D) RM208,000

Answer: A

Explanation: Absorption costing unit product cost:

  Year 1
Direct materials RM 12
Direct labor   6
Variable manufacturing overhead   3
Fixed manufacturing overhead
 
(RM264,000 ÷ 11,000 units produced) 24
Absorption costing unit product cost RM 45

Absorption costing income statement:

  Year 1
Sales [(8,000 units sold × RM71 per unit)] RM 568,000
Cost of goods sold [(8,000 units sold × RM45 per unit)]   360,000
Gross margin   208,000
Selling and administrative expenses
 
[((8,000 units sold × RM4 per unit) + RM74,000)] 106,000
Net operating income (loss) RM 102,000
4. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:

     
Units in beginning inventory   0
Units produced   8,900
Units sold   8,500
Units in ending inventory   400
Variable costs per unit:    
Direct materials RM 26
Direct labor RM 25
Variable manufacturing overhead RM 4
Variable selling and administrative expense RM 4
Fixed costs:    
Fixed manufacturing overhead RM 249,200
Fixed selling and administrative expense RM 17,000

What is the variable costing unit product cost for the month?
A) RM59 per unit
B) RM83 per unit
C) RM87 per unit
D) RM55 per unit

Answer: D

Explanation:
     
Direct materials RM 26
Direct labor   25
Variable manufacturing overhead   4
Variable costing unit product cost RM 55
5. Mccrone Corporation has provided the following data for its 2 years of operation:
     
Selling price per unit RM 59
Manufacturing costs:    
Variable manufacturing cost per unit produced:    
Direct materials RM 11
Direct labor RM 6
Variable manufacturing overhead RM 4
Fixed manufacturing overhead per year RM 88,000
Selling and administrative expenses:    
Variable selling and administrative expense per unit sold RM 4
Fixed selling and administrative expense per year RM 80,000

  Year 1 Year 2
Units in beginning inventory 0 1,000
Units produced during the year 11,000 8,000
Units sold during the year 10,000 5,000
Units in ending inventory 1,000 4,000

The net operating income (loss) under variable costing in Year 1 is closest to:
A) RM380,000
B) RM340,000
C) RM180,000
D) RM172,000

Answer: D
Explanation: Variable costing unit product cost:
  Year 1
Direct materials RM 11
Direct labor   6
Variable manufacturing overhead   4
Variable costing unit product cost RM 21

Variable costing income statement:

  Year 1
Sales [(10,000 units sold × RM59 per unit)]  RM 590,000
Variable expenses:      
Variable cost of goods sold
[(10,000 units sold × RM21 per unit)] 210,000    
Variable selling and administrative expense
[(10,000 units sold × RM4 per unit)] 40,000   250,000
Contribution margin     340,000
     
Fixed expenses:
Fixed manufacturing overhead 88,000    
Fixed selling and administrative expenses 80,000   168,000
Net operating income  RM 172,000
6. Kray Inc., which produces a single product, has provided the following data for its most
recent month of operations:

     
Number of units produced   6,000
Variable costs per unit:    
Direct materials RM 40
Direct labor RM 19
Variable manufacturing overhead RM 8
Variable selling and administrative expense RM 2
Fixed costs:    
Fixed manufacturing overhead RM 144,000
Fixed selling and administrative expense RM 198,000

There were no beginning or ending inventories. The variable costing unit product cost was:
A) RM91 per unit
B) RM67 per unit
C) RM69 per unit
D) RM61 per unit

Answer: B
Explanation:
     
Direct materials RM 40
Direct labor   19
Variable manufacturing overhead   8
Variable costing unit product cost RM 67
7. A manufacturing company that produces a single product has provided the following
data concerning its most recent month of operations:

     
Selling price RM 133
Units in beginning inventory   0
Units produced   7,000
Units sold   6,800
Units in ending inventory   200
Variable costs per unit:    
Direct materials RM 41
Direct labor RM 57
Variable manufacturing overhead RM 5
Variable selling and administrative expense RM 4
Fixed costs:    
Fixed manufacturing overhead RM 133,000
Fixed selling and administrative expense RM 34,000

What is the total period cost for the month under absorption costing?
A) RM61,200
B) RM133,000
C) RM34,000
D) RM194,200

Answer: A
Explanation:
     
Variable selling and administrative expense
RM4.00 per unit × 6,800 units sold RM 27,200
Fixed selling and administrative expense   34,000
Absorption costing total period cost RM 61,200
8. Beamish Inc., which produces a single product, has provided the following data for its
most recent month of operations:

     
Number of units produced   8,000
Variable costs per unit:    
Direct materials RM 37
Direct labor RM 56
Variable manufacturing overhead RM 4
Variable selling and administrative expense RM 2
Fixed costs:    
Fixed manufacturing overhead RM 312,000
Fixed selling and administrative expense RM 448,000

There were no beginning or ending inventories. The absorption costing unit product cost was:
A) RM93 per unit
B) RM97 per unit
C) RM136 per unit
D) RM194 per unit

Answer: C

Explanation:
     
Direct materials RM 37
Direct labor   56
Variable manufacturing overhead   4
Fixed manufacturing overhead cost (RM312,000 ÷ 8,000 units)   39
Absorption costing unit product cost RM 136

9. A company produces a single product. Variable production costs are RM21 per unit and
variable selling and administrative expenses are RM4 per unit. Fixed manufacturing overhead
totals RM30,000 and fixed selling and administration expenses total RM36,000. Assuming a
beginning inventory of zero, production of 6,000 units and sales of 5,600 units, the dollar
value of the ending inventory under variable costing would be:
A) RM10,000
B) RM8,400
C) RM12,000
D) RM14,400

Answer: B

Explanation: Units in ending inventory = Units in beginning inventory + Units produced –

Units sold
= 0 units + 6,000 units – 5,600 units = 400 units

Value of ending inventory under variable costing = Units in ending inventory × Variable
production cost
= 400 units × RM21 per unit = RM8,400
 10. Carriveau Corporation has two divisions: Consumer Division and Business Division.
The following data are for the most recent operating period:

Consumer Business
  Division Division  
Sales RM 331,000 RM 245,000  
Variable expenses RM 102,610 RM 58,800  
Traceable fixed expenses RM 149,000 RM 139,000  

The company's common fixed expenses total RM63,360.

The Consumer Division's break-even sales is closest to: (Round your intermediate
calculations to 2 decimal places.)

A) RM215,942
B) RM268,710
C) RM488,153
D) RM307,768

Answer: A

Explanation: Segment contribution margin = Segment sales – Segment variable expenses

= RM331,000 – RM102,610 = RM228,390

Segment CM ratio = Segment contribution margin ÷ Segment sales

= RM228,390 ÷ RM331,000 = 0.690

Dollar sales for a segment to break even = Traceable fixed expenses ÷ Segment CM ratio
= RM149,000 ÷ 0.690 = RM215,942
 11. Carriveau Corporation has two divisions: Consumer Division and Business Division.
The following data are for the most recent operating period:

Consumer Business
  Division Division  
R
Sales 331,000 RM 245,000  
M
R
Variable expenses 102,610 RM 58,800  
M
R
Traceable fixed expenses 149,000 RM 139,000  
M

The company's common fixed expenses total RM63,360.

The Business Division's break-even sales is closest to: (Round your intermediate
calculations to 2 decimal places.)

A) RM488,153
B) RM218,355
C) RM266,263
D) RM182,895

Answer: D

Explanation: Segment contribution margin = Segment sales – Segment variable expenses

= RM245,000 – RM58,800 = RM186,200

Segment CM ratio = Segment contribution margin ÷ Segment sales

= RM186,200 ÷ RM245,000 = 0.760

Dollar sales for a segment to break even = Traceable fixed expenses ÷ Segment CM ratio
= RM139,000 ÷ 0.760 = RM182,895
 12. Carriveau Corporation has two divisions: Consumer Division and Business Division.
The following data are for the most recent operating period:

Consumer Business
  Division Division  
Sales RM 331,000 RM 245,000  
Variable expenses RM 102,610 RM 58,800  
Traceable fixed expenses RM 149,000 RM 139,000  

The company's common fixed expenses total RM63,360.

The company's overall break-even sales is closest to:

A) RM398,837
B) RM288,296
C) RM488,153
D) RM89,316

Answer: C
Explanation:
Total Consumer Business
  Company Division   Division
Sales RM 576,000 RM 331,000   RM 245,000  
Variable expenses RM 161,410 RM 102,610   RM 58,800  
Traceable fixed
RM 288,000 RM 149,000   RM 139,000  
expenses

Contribution margin = Sales – Variable expenses

= RM576,000 – RM161,410 = RM576,000

CM ratio = Contribution margin ÷ Sales

= RM414,590 ÷ RM576,000 = 0.720 (rounded)

Total fixed expenses = Total traceable fixed expenses + Common fixed expenses
= RM288,000 + RM63,360 = RM351,360

Dollar sales to break even = Total fixed expenses ÷ CM ratio

= RM351,360 ÷ 0.720 = RM488,153 (using the unrounded CM ratio) 
 13. Jemmott Corporation has two divisions: Western Division and Eastern Division. The
following report is for the most recent operating period:

Total Western Eastern

  Company Division   Division
Sales RM 406,000 RM 188,000   RM 218,000  
Variable expenses   111,880   63,920     47,960  
Contribution margin   294,120   124,080     170,040  
Traceable fixed expenses   191,000   85,000     106,000  
Segment margin   103,120   39,080     64,040  
Common fixed expenses   69,020   31,960     37,060  
Net operating income RM 34,100 RM 7,120   RM 26,980  

The common fixed expenses have been allocated to the divisions on the basis of sales.

The Western Division's break-even sales is closest to: (Round your intermediate
calculations to 2 decimal places.)
A) RM128,788
B) RM233,364
C) RM177,212
D) RM358,929

Answer: A
Explanation: Segment CM ratio = Segment contribution margin ÷ Segment sales
= RM124,080 ÷ RM188,000 = 0.660

Dollar sales for a segment to break even = Traceable fixed expenses ÷ Segment CM ratio
= RM85,000 ÷ 0.660 = RM128,788
 14. Jemmott Corporation has two divisions: Western Division and Eastern Division. The
following report is for the most recent operating period:

Total Western Eastern

  Company Division   Division
R
Sales 406,000 RM 188,000   RM 218,000  
M
Variable expenses   111,880   63,920     47,960  
Contribution margin   294,120   124,080     170,040  
Traceable fixed expenses   191,000   85,000     106,000  
Segment margin   103,120   39,080     64,040  
Common fixed expenses   69,020   31,960     37,060  
R
Net operating income 34,100 RM 7,120   RM 26,980  
M

The common fixed expenses have been allocated to the divisions on the basis of sales.

The Eastern Division's break-even sales is closest to: (Round your intermediate
calculations to 2 decimal places.)
A) RM135,897
B) RM224,385
C) RM358,929
D) RM183,410

Answer: A
Explanation: Segment CM ratio = Segment contribution margin ÷ Segment sales
= RM170,040 ÷ RM218,000 = 0.780

Dollar sales for a segment to break even = Traceable fixed expenses ÷ Segment CM ratio
= RM106,000 ÷ 0.780 = RM135,897
 15. Jemmott Corporation has two divisions: Western Division and Eastern Division. The
following report is for the most recent operating period:

Total Western Eastern

  Company Division   Division
R
Sales 406,000 RM 188,000   RM 218,000  
M
Variable expenses   111,880   63,920     47,960  
Contribution margin   294,120   124,080     170,040  
Traceable fixed expenses   191,000   85,000     106,000  
Segment margin   103,120   39,080     64,040  
Common fixed expenses   69,020   31,960     37,060  
R
Net operating income 34,100 RM 7,120   RM 26,980  
M

The common fixed expenses have been allocated to the divisions on the basis of sales.

The company's overall break-even sales is closest to:

A) RM94,243
B) RM271,743
C) RM264,685
D) RM358,929

Answer: D

Explanation: CM ratio = Contribution margin ÷ Sales

= RM294,120 ÷ RM406,000 = 0.724 (rounded)

Total fixed expenses = Total traceable fixed expenses + Common fixed expenses
= RM191,000 + RM69,020 = RM260,020

Dollar sales to break even = Total fixed expenses ÷ CM ratio

= RM260,020 ÷ 0.724 = RM358,929 (using the unrounded CM ratio)
 16. Jemmott Corporation has two divisions: Western Division and Eastern Division. The
following report is for the most recent operating period:

Total Western Eastern

  Company Division   Division
Sales RM 406,000 RM 188,000   RM 218,000  
Variable expenses   111,880   63,920     47,960  
Contribution margin   294,120   124,080     170,040  
Traceable fixed expenses   191,000   85,000     106,000  
Segment margin   103,120   39,080     64,040  
Common fixed expenses   69,020   31,960     37,060  
Net operating income RM 34,100 RM 7,120   RM 26,980  

The common fixed expenses have been allocated to the divisions on the basis of sales.

What is the company's overall net operating income if it operates at the break-even points for
its two divisions?
A) RM34,100
B) RM0
C) RM(69,020)
D) RM(260,020)

Answer: C
Explanation: If the company operates at the break-even points for its two divisions, it will
not cover its common fixed expense of RM69,020.
 17. Neelon Corporation has two divisions: Southern Division and Northern Division. The
following data are for the most recent operating period:

Total Southern Northern

  Company Division   Division
Sales RM 418,000 RM 193,000   RM 225,000  
Variable expenses RM 130,880 RM 79,130   RM 51,750  
Traceable fixed expenses RM 186,000 RM 77,000   RM 109,000  
Common fixed expense RM 79,420 RM 36,670   RM 42,750  

The common fixed expenses have been allocated to the divisions on the basis of sales.

The Southern Division's break-even sales is closest to: (Round your intermediate
calculations to 2 decimal places.)
A) RM192,661
B) RM265,119
C) RM386,408
D) RM130,508

Answer: D

Explanation: Segment contribution margin = Segment sales – Segment variable expenses

= RM193,000 – RM79,130 = RM113,870

Segment CM ratio = Segment contribution margin ÷ Segment sales

= RM113,870 ÷ RM193,000 = 0.590

Dollar sales for a segment to break even = Traceable fixed expenses ÷ Segment CM ratio
= RM77,000 ÷ 0.590 = RM130,508
 18. Neelon Corporation has two divisions: Southern Division and Northern Division. The
following data are for the most recent operating period:

Total Southern Northern

  Company Division   Division
Sales RM 418,000 RM 193,000   RM 225,000  
Variable expenses RM 130,880 RM 79,130   RM 51,750  
Traceable fixed expenses RM 186,000 RM 77,000   RM 109,000  
Common fixed expense RM 79,420 RM 36,670   RM 42,750  

The common fixed expenses have been allocated to the divisions on the basis of sales.

The Northern Division's break-even sales is closest to: (Round your intermediate
calculations to 2 decimal places.)
A) RM141,558
B) RM197,078
C) RM244,701
D) RM386,408

Answer: A
Explanation: Segment contribution margin = Segment sales – Segment variable expenses
= RM225,000 – RM51,750 = RM173,250

Segment CM ratio = Segment contribution margin ÷ Segment sales

= RM173,250 ÷ RM225,000 = 0.770

Dollar sales for a segment to break even = Traceable fixed expenses ÷ Segment CM ratio
= RM109,000 ÷ 0.770 = RM141,558
 19. Nelter Corporation, which has only one product, has provided the following data
concerning its most recent month of operations:

     
Selling price RM 121
Units in beginning inventory   400
Units produced   5,600
Units sold   5,800
Units in ending inventory   200
Variable costs per unit:    
Direct materials RM 33
Direct labor RM 49
Variable manufacturing overhead RM 1
Variable selling and administrative expense RM 4
Fixed costs:    
Fixed manufacturing overhead RM 140,000
Fixed selling and administrative expense RM 52,200

The company produces the same number of units every month, although the sales in units
vary from month to month. The company's variable costs per unit and total fixed costs have
been constant from month to month.

Required:

a. Prepare a contribution format income statement for the month using variable costing.
b. Prepare an income statement for the month using absorption costing.
Answer:
a.
Unit product cost under variable costing:

     
Direct materials RM 33
Direct labor   49
Variable manufacturing overhead   1
Variable costing unit product cost RM 83

Variable costing income statement

     
Sales (RM121 per unit × 5,800 units)     RM 701,800
Variable expenses:        
Variable cost of goods sold 481,40
(RM83 per unit × 5,800 units) RM 0    
Variable selling and administrative
(RM4 per unit × 5,800 units)   23,200   504,600
Contribution margin       197,200
Fixed expenses:        
140,00
Fixed manufacturing overhead      
0
Fixed selling and administrative expense   52,200   192,200
Net operating income     RM 5,000
b.
Unit product cost under absorption costing:

     
R
Direct materials 33
M
Direct labor   49
Variable manufacturing overhead   1
Fixed manufacturing overhead cost (RM140,000 ÷ 5,600 units)   25
R
Absorption costing unit product cost 108
M

Absorption costing income statement

     
R
Sales (RM121 per unit × 5,800 units) 701,800
M
Cost of goods sold (RM108 per unit × 5,800 units)   626,400
Gross margin   75,400
Selling and administrative expenses
[(RM4 per unit × 5,800 units) + RM52,200]   75,400
R
Net operating income 0
M
 20. Miller Corporation produces a single product. The company had the following results
for its first two years of operation:

Year 1 Year 2
Sales RM1,200,000 RM1,200,000
Cost of goods sold 800,000 680,000
Gross margin 400,000 520,000
Selling and administrative expenses 300,000 300,000
Net operating income RM100,000 RM220,000

In Year 1, the company produced and sold 40,000 units of its only product; in Year 2, the
company again sold 40,000 units, but increased production to 50,000 units. The company's
variable production cost is RM5 per unit and its fixed manufacturing overhead cost is
RM600,000 a year. Fixed manufacturing overhead costs are applied to the product on the
basis of each year's unit production (i.e., a new fixed manufacturing overhead rate is
computed each year). Variable selling and administrative expenses are RM2 per unit sold.

Required:
a. Compute the unit product cost for each year under absorption costing and under variable
costing.
b. Prepare a contribution format income statement for each year using variable costing.
c. Reconcile the variable costing and absorption costing income figures for each year.
d. Explain why the net operating income for Year 2 under absorption costing was higher than
the net operating income for Year 1, although the same number of units were sold in each
year.

Answer:
a. Cost per unit under absorption costing:
Year 1 Year 2
Variable production cost RM5 RM5
Fixed manufacturing overhead cost:
(RM600,000 ÷ 40,000 units) 15
(RM600,00 ÷ 50,000 units 12
Unit product cost RM20 RM17

Cost per unit under variable costing:

Year 1 Year 2
Variable costing unit product cost RM5 RM5

b. Income statements for each year under variable costing:

Year 1 Year 2
RM1,200,00
Sales RM1,200,000 0
Cost of goods sold (RM5 per unit × 40,000 units) 200,000 200,000
Variable selling and administrative expense
(RM2 per unit × 40,000 units) 80,000 80,000
Contribution margin 920,000 920,000
Fixed expenses:
Fixed manufacturing overhead 600,000 600,000
Fixed selling and administrative expense 220,000 220,000
 Net operating income RM100,000 RM100,000

c. Reconciliation
Year 1:
Units in ending inventory = Units in beginning inventory + Units produced — Units sold
= 0 units + 40,000 units - 40,000 units = 0 units

Year 2:
Units in ending inventory = Units in beginning inventory + Units produced - Units sold
= 0 units + 50,000 units - 40,000 units = 10,000 units

Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing

overhead in ending inventory - Fixed manufacturing overhead in beginning inventory =
(RM12 per unit × 10,000 units) - (RM15 per unit × 0 units) = RM120,000

c.
Year 1 Year 2
RM100,00 RM100,00
Net operating income under variable costing 0 0
Fixed manufacturing overhead deferred in inventory in
Year 2 120,000
RM100,00 RM220,00
Net operating income under absorption costing 0 0

d. The increase in production in Year 2, in the face of level sales, caused a buildup of
inventory and a deferral of a portion of the overhead costs of Year 2 to the next year. This
deferral of cost relieved Year 2 of RM120,000 of fixed manufacturing overhead. Income for
Year 2 was RM120,000 higher than income of Year 1, even though the same number of units
was sold each year. By increasing production and building up inventory, the company was
able to increase profits without increasing sales. This is a major criticism of the absorption
costing approach.