Question: It is the end of 2017. Z-
It is the end of 2017. Z-Var Corporation began operations in January 2016. The company is so named because it has no variable costs (Zero VARiable). All its costs are fixed; they do not vary with output. Z-Var Corp. is located on the bank of a river and has its own hydroelectric plant to supply power, light, and heat. The company manufactures a synthetic fertilizer from air and river water and sells its product at a price that is not expected to change. It has a small staff of employees, all paid fixed annual salaries. The output of the plant can be increased or decreased by pressing a few buttons on a keyboard.
The following budgeted and actual data are for the operations of Z-Var. The company uses budgeted production as the denominator level and writes off any production-volume variance to cost of goods sold.
Required:
1. Prepare income statements with one column for 2016, one column for 2017, and one column for the two years together using
(a) variable costing and
(b) absorption costing.
2. What is the breakeven point under
(a) variable costing and
(b) absorption costing?
3. What inventory costs would be carried in the balance sheet on December 31, 2016 and 2017 under each method?
4. Assume that the performance of the top manager of Z-Var is evaluated and rewarded largely on the basis of reported operating income. Which costing method would the manager prefer? Why?
Transcribed Image Text:
2016 2017° Sales 30,000 tons 60,000 tons $ 30,000 tons O tons $ 90 per ton Production Selling price 90 per ton Costs (all fixed): $2,580,000 $2,580,000 Manufacturing Operating (nonmanufacturing) $ 102,000 $ 102,000 " Management adopted the policy, effective January 1, 2017, of producing only as much product as needed to fill sales orders. During 2017, sales were the same as for 2016 and were filled entirely from inventory at the start of 2017.
> “Companies that make no variable-cost/fixed-cost distinctions must use absorption costing, and those that do make variable-cost/fixed-cost distinctions must use variable costing.” Do you agree? Explain.
> What is the IRS’s requirement for tax reporting regarding the choice of a denominator-level capacity concept?
> Describe how flexible-budget variance analysis can be used in the control of costs of activity areas.
> “Overhead variances should be viewed as interdependent rather than independent.” Give an example.
> Describe the downward demand spiral and its implications for pricing decisions.
> “The production-volume variance should always be written off to Cost of Goods Sold.” Do you agree? Explain.
> Provide one caveat that will affect whether a production-volume variance is a good measure of the economic cost of unused capacity.
> What are two ways of reducing the negative aspects associated with using absorption costing to evaluate the performance of a plant manager?
> Roadster Company (RC) designs and produces automotive parts. In 2017, actual variable manufacturing overhead is $280,000. RC’s simple costing system allocates variable manufacturing overhead to its three customers based on machine-hours
> Why is the flexible-budget variance the same amount as the spending variance for fixed manufacturing overhead?
> What are the steps in developing a budgeted fixed overhead rate?
> Explain the main conceptual issue under variable costing and absorption costing regarding the timing for the release of fixed manufacturing overhead as expense.
> Why is the term direct costing a misnomer?
> What are the factors that affect the spending variance for variable manufacturing overhead?
> What are the steps in developing a budgeted variable overhead cost-allocation rate?
> How does standard costing differ from actual costing?
> How does the planning of fixed overhead costs differ from the planning of variable overhead costs?
> Differences in operating income between variable costing and absorption costing are due solely to accounting for fixed costs. Do you agree? Explain.
> Rob Kapito, the controller of Blackstar Paint Supply Company, has been exploring a variety of internal accounting systems. Rob hopes to get the input of Blackstar’s board of directors in choosing one. To prepare for his presentation to
> The Ride-On-Wave Company (ROW) produces a line of non-motorized boats. ROW uses a normal-costing system and allocates manufacturing overhead using direct manufacturing labor cost. The following data are for 2017: Budgeted manufacturing overhead cost&acir
> Tesla Motors assembles the fully electric Model S-85 automobile at its Fremont, California, plant. The standard variable manufacturing cost per vehicle in 2017 is $58,800, which consists of: Direct materials……&acir
> In 2018, only 876,000 Mealman meals were produced and sold to the hospitals. Wright suspects that hospital controllers had systematically inflated their 2018 meal estimates. Required: 1. Recall that Mealman uses the master-budget capacity utilization t
> Meals To Go operates a chain of 10 hospitals in the Los Angeles area. Its central food-catering facility, Mealman, prepares and delivers meals to the hospitals. It has the capacity to deliver up to 1,460,000 meals a year. In 2017, based on estimates from
> The Iron City Company started business on January 1, 2017. Iron City manufactures a specialty honey beer, which it sells directly to state-owned distributors in Pennsylvania. Honey beer is produced and sold in six-packs, and in 2017, Iron City produced m
> Planet Light First (PLF), a producer of energy-efficient light bulbs, expects that demand will increase markedly over the next decade. Due to the high fixed costs involved in the business, PLF has decided to evaluate its financial performance using absor
> Planet Light First (PLF), a producer of energy-efficient light bulbs, expects that demand will increase markedly over the next decade. Due to the high fixed costs involved in the business, PLF has decided to evaluate its financial performance using absor
> Market.com is about to enter the highly competitive personal electronics market with a new type of tablet. In anticipation of future growth, the company has leased a large manufacturing facility and has purchased several expensive pieces of equipment. In
> LLAP Company manufactures a specialized hoverboard. LLAP began 2017 with an inventory of 240 hoverboards. During the year, it produced 1,200 boards and sold 1,300 for $800 each. Fixed production costs were $319,000, and variable production costs were $37
> Magic Me is a manufacturer of magic kits. It uses absorption costing based on standard costs and reports the following data for 2017: There is no price, spending, or efficiency variances. Actual operating costs equal budgeted operating costs. The produc
> Castle Lager has just purchased the Jacksonville Brewery. The brewery is two years old and uses absorption costing. It will “sell” its product to Castle Lager at $47 per barrel. Peter Bryant, Castle Lagerâ€&
> Creative Solutions designs Web pages for clients in the education sector. The company’s job-costing system has a single direct cost category (Web-designing labor) and a single indirect cost pool composed of all overhead costs. Overhead costs are allocate
> Castle Lager has just purchased the Jacksonville Brewery. The brewery is two years old and uses absorption costing. It will “sell” its product to Castle Lager at $47 per barrel. Peter Bryant, Castle Lagerâ€&
> Mountain Press produces textbooks for high school accounting courses. The company recently hired a new editor, Jan Green, to handle production and sales of books for an introductory accounting course. Jan’s compensation depends on the gross margin associ
> Gammaro Company uses standard costing. Tim Sweeney, the new president of Gammaro Company, is presented with the following data for 2017: Required: 1. At what percentage of denominator level was the plant operating during 2017? 2. How much fixed manufac
> Carpenter Company uses standard costing. The company has a manufacturing plant in Georgia. Standard labor-hours per unit are 0.50, and the variable overhead rate for the Georgia plant is $3.50 per direct labor-hour. Fixed overhead for the Georgia plant i
> The Greenspace Company started business on January 1, 2017. The company adopted a standard costing system for the production of ergonomic backpacks. Greenspace chose direct labor as the application base for overhead and decided to use the proration metho
> Cavio is a cloud service provider that offers computing resources to handle enterprise-wide applications. For March 2017, Cavio estimates that it will provide 18,000 RAM hours of services to clients. The budgeted variable overhead rate is $6 per RAM hour
> Kathy’s Kettle Potato Chips produces gourmet chips distributed to chain sub shops throughout California. To ensure that their chips are of the highest quality and have taste appeal, Kathy has a rigorous inspection process. For quality control purposes, K
> The Beal Manufacturing Company’s costing system has two direct-cost categories: direct materials and direct manufacturing labor. Manufacturing overhead (both variable and fixed) is allocated to products on the basis of standard direct m
> The Gallo Company uses a flexible budget and standard costs to aid planning and control of its machining manufacturing operations. It’s costing system for manufacturing has two direct-cost categories (direct materials and direct manufacturing labor—both
> The Saluki Company specializes in making fraternity and sorority T-shirts for the college market. Due to the high setup costs for each batch printed, Saluki holds the T-shirt requests until demand is approximately 100 shirts. At that point Saluki will sc
> Cheney & Partners, a Quebec based public accounting partnership, specializes in audit services. Its job-costing system has a single direct-cost category (professional labor) and a single indirect-cost pool (audit support, which contains all costs of
> The Roller Bag Company manufactures extremely light and rolling suitcases. It was one of the first companies to produce rolling suitcases and sales have increased for the past several years. In 2017, Roller Bag budgeted to sell 150,000 suitcases for $80
> Audrina’s Fleet Feet, Inc., produces dance shoes for stores all over the world. While the pairs of shoes are boxed individually, they are crated and shipped in batches. The shipping department records both variable direct batch-level co
> Wilson Products uses standard costing. It allocates manufacturing overhead (both variable and fixed) to products on the basis of standard direct manufacturing labor-hours (DLH). Wilson Products develops its manufacturing overhead rate from the current an
> Consider the following two situations—cases A and B— independently. Data refer to operations for April 2017. For each situation, assume standard costing. Also assume the use of a flexible budget for control of variable
> Best Around, Inc., is a manufacturer of vacuums and uses standard costing. Manufacturing overhead (both variable and fixed) is allocated to products on the basis of budgeted machine-hours. In 2017, budgeted fixed manufacturing overhead cost was $17,000,0
> Cooking Whiz manufactures premium food processors. The following are some manufacturing overhead data for Cooking Whiz for the year ended December 31, 2017: Budgeted number of output units: 915 Planned allocation rate: 2 machine-hours per unit Actual
> Cooking Whiz manufactures premium food processors. The following are some manufacturing overhead data for Cooking Whiz for the year ended December 31, 2017: Budgeted number of output units: 915 Planned allocation rate: 2 machine-hours per unit Actual
> ABC Inc. desires to maintain a capital structure of 80% equity and 20% debt. They currently have an effective tax rate of 30%. The company’s cost of equity capital is 12%. To obtain their debt financing, they issue bonds with an interest rate of 10%. Wha
> The Long Haul Trucking Company is developing metrics for its drivers. The company computes variable costs of each load based upon miles driven and allocates fixed costs based upon time consumed. Load costing standards consider safe driving speeds and Dep
> Rowan Company produces pipes for concert quality organs. Each job is unique. In April 2016, it completed all outstanding orders, and then, in May 2016, it worked on only two jobs, M1 and M2: Direct manufacturing labor is paid at the rate of $25 per hour
> If ROI is used to evaluate a manager’s performance for a relatively new division, which of the following measures for assets (or investment) will increase ROI? a. Gross book value used instead of net book value. b. Net book value using accelerated rather
> Assuming an increase in price levels over time, which of the following asset valuations will produce the highest return on assets? a. Net book value b. Gross book value c. Replacement cost d. Depreciated replacement cost
> During the current year, a strategic business unit (SBU) within Roke Inc. saw costs increase by $2 million, revenues increase by $4 million, and assets decrease by $1 million. SBUs are set up by Roke as follows I. Cost SBU II. Revenue SBU III. Profit S
> Nick’s Enterprises has purchased a new machine tool that will allow the company to improve the efficiency of its operations. On an annual basis, the machine will produce 20,000 units with an expected selling price of $10, prime costs of $6 per unit, and
> The following information pertains to the January 2, year 2 transaction replacing a print machine for Hidden Creek Enterprises, Inc. Net book value – old print machine…………. $20,000 Total cost of new machine……………………..$180,000 Down payment on new machine…
> Which of the following statements is true if the NPV of a project is –$4,000 (negative $4,000) and the required rate of return is 5 percent? a. The project’s IRR is less than 5 percent. b. The required rate of return is lower than the IRR. c. The NPV ass
> Which of the following items describes a weakness of the internal rate-of-return method? a. The internal rate of return is difficult to calculate and requires a financial calculator or spreadsheet tool such as Excel to calculate efficiently. b. Cash flow
> A company should accept for investment all positive NPV investment alternatives when which of the following conditions is true? a. The company has extremely limited resources for capital investment. b. The company has excess cash on its balance sheet. c.
> Just-in-time inventory assumes all of the following, except: 1. Zero defects. 2. Resources will only be introduced as they are needed. 3. Just-in-time inventory presumes first-in, first-out costing. 4. Production of components only occurs only when reque
> Lyle Co. has only one product line. For that line, the reorder point is 500 units, the lead time for production is three weeks, and the sales volume is estimated at 50 units per week. Lyle has established which of the following amounts as its safety stoc
> Donald Transport assembles prestige manufactured homes. Its job costing system has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead allocated at a budgeted $31 per machine-hou
> Jill’s Custom Bags manufacturers and sells 12,000 customer designer bags per year, each requiring three yards of a specially manufactured fabric. These bags are sold evenly throughout the year. The materials for these bags require two months’ lead time.
> Jack’s Tracks sells 24,000 custom-designed GoKarts per year. These GoKarts are sold evenly throughout the year. The manufacturer charges Jack a $50 processing cost per order, and Jack incurs a carrying cost of $240 per year including storing each GoKart
> The order size associated with the economic-order-quantity (EOQ) model will necessarily decline if: a. Ordering costs rise b. Storage costs rise c. Insurance costs for materials in storage fall d. Stockout costs rise
> Six Sigma is a continuous quality improvement methodology that is designed to promote: 1. Improvements for existing products and business processes. 2. Development of new products or business processes. 3. Both existing product/process improvement and ne
> Rector Corporation is examining its quality control program. Which of the following statements is/are correct? I. Rework costs should be regarded as a cost of quality when the rework is caused by internal failure. II. Prevention costs are costs that are
> Fresh Products, Inc. incurred the following costs during December related to the production of its 162,500 frozen ice cream cone specialty items: Food product labor………………$175,000 Ice cream cone ingredients……325,000 Sales and marketing costs………10,000 Fact
> 18-18 Healthy Dinners Co. produces frozen dinners for the health conscious consumer. During the quarter ended September 30, the company had the following cost data: Dinner ingredients…………………………..$3,550,000 Preparation labor…………………………………900,000 Sales an
> Which of the following is a TRUE statement regarding the treatment of scrap by a firm? a. Scrap is always allocated to a specific job. b. Scrap is separated between normal and abnormal scrap. c. Revenue received from the sale of scrap on a job lowers the
> All of the following are accurate regarding the treatment of normal or abnormal spoilage by a firm with the exception of: a. Abnormal spoilage is excluded in the standard cost of a manufactured product. b. Normal spoilage is capitalized as part of invent
> Kimberly Manufacturing uses a process-costing system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May, Year 5.
> Visual Company produces gadgets for the coveted small appliance market. The following data reflect activity for the year 2017: Costs Incurred Purchases of direct materials (net) on credit………. $1
> Describe two generic strategies.
> Penn Manufacturing Corporation uses a process-costing system to manufacture printers for PCs. The following information summarizes operations for its NoToner model during the quarter ending September 30, Year 1: Beginning work-in-process inventory was 5
> Sepulveda Corporation uses a process costing system to manufacture laptop PCs. The following information summarizes operations for its VeryLite model during the quarter ending March 31, Year 1: Beginning work-in-process inventory was 50% complete for di
> The following information concerns Westheimer Corporation’s equivalent units in May 20X1: Units Beginning work-in-process (50% complete)………
> Assuming beginning work in process is zero, the equivalent units of production computed using FIFO versus weighted average will have the following relationship: 1. FIFO equivalent units will be greater than weighted-average equivalent units. 2. FIFO equi
> Earl’s Hurricane Lamp Oil Company produces both A-1 Fancy and B Grade Oil. There are approximately $9,000 in joint costs that Earl may allocate using the relative sales value at splitoff or the net realizable value approach. Before splitoff, A-1 sells fo
> Dallas Company produces joint products, TomL and JimmyJ, each of which incurs separable production costs after the splitoff point. Information concerning a batch produced at a $200,000 joint cost before splitoff follows: What is the joint cost assigned
> Houston Corporation has two products, Astros and Texans, with the following volume information: Volume Product Astros……. 20,000 gal Product Texans………………..10,000 gal Total………………………………. 30,000 gal The joint cost to produce the two products is $120,000. Wha
> Joint costs of $8,000 are incurred to process X and Y. Upon splitoff, $4,000 and $6,000 in costs are incurred to produce 200 units of X and 150 units of Y, respectively. In order to justify processing further at the splitoff point, revenues for product:
> Select Manufacturing Co. produces three joint products and one organic waste byproduct. Assuming the byproduct can be sold to an outside party, what is the correct accounting treatment of the byproduct proceeds received by the firm? a. Apply sale proceed
> Lexota, Inc., an auto manufacturer, reported the following budgeted and actual sales of its vehicles during September, Year 2: The budgeted contribution margin is 20% for both vehicle types. Which of the following statements is true concerning the sales
> The University of Chicago Press is wholly owned by the university. It performs the bulk of its work for other university departments, which pay as though the press were an outside business enterprise. The press also publishes and maintains a stock of boo
> The actual contribution margin per unit will impact the following sales variance: a. Flexible-budget variance b. Market-size variance c. Market-share variance. d. Sales-quantity variance
> Which of the following statements regarding price elasticity is incorrect? a. A product with a perfectly inelastic demand would have the same demand even as prices change. b. A product with a perfectly inelastic demand would see demand change as prices c
> Canarsie Corporation uses a balanced scorecard to evaluate its digital camera manufacturing operation. Which of the following statements with respect to balanced scorecards is/are correct? I. A balanced scorecard reports management information regarding
> The balanced scorecard describes all of the following except which one? a. The descriptions of critical initiatives for the organization’s performance. b. The strategic goals. c. The related measures associated with strategic and tactical goals. d. The d
> Jacobs Inc. is a relatively new company that has established a position in the highly competitive biotechnology industry. Which of the following statements is correct regarding Jacobs’ profitability? a. Profits will increase when buyers have lower switch
> Ace Cleaning Service is considering expanding into one or more new market areas. Which costs are relevant to Ace’s decision on whether to expand? Sunk Costs Variable Costs Opportunity Costs а. No Yes Yes b. Yes Yes Yes с. No Yes No
> Lees Corp. is deciding whether to keep or drop a small segment of its business. Key information regarding the segment includes: Contribution margin……………. 35,000 Avoidable fixed costs…………..30,000 Unavoidable fixed costs………. 25,000 Given the information ab
> In order to determine whether a special order should be accepted at full capacity, the sales price of the special order must be compared to the per unit: a. Contribution margin of the special order. b. Variable cost and contribution margin of the special
> Chade Corp. is considering a special order brought to it by a new client. If Chade determines the variable cost to be $9 per unit, and the contribution margin of the next best alternative of the facility to be $5 per unit, then if Chade has: a. Full capa
> Which of the following is not a qualitative factor that Atlas Manufacturing should consider when deciding whether to buy or make a part used in manufacturing their product? a. Quality of the outside producer’s product. b. Potential loss of trade secrets.
> Creative Woodworking uses normal costing and allocates manufacturing overhead to jobs based on a budgeted labor-hour rate and actual direct labor-hours. Under- or overallocated overhead, if immaterial, is written off to Cost of Goods Sold. During 2017, C
> What would be the approximate value of the coefficient of correlation between advertising and sales where a company advertises aggressively as an alternative to temporary worker layoffs and cuts off advertising when incoming jobs are on backorder? a. 1.0
> A regression equation is set up, where the dependent variable is total costs and the independent variable is production. A correlation coefficient of 0.70 implies that: a. The coefficient of determination is negative. b. The level of production explains
> In regression analysis, the coefficient of determination: a. Is used to determine the proportion of the total variation in the dependent variable (y) explained by the independent variable (X). b. Ranges between negative one and positive one. c. Is used t
