Quiz 8: Absorption and Variable Costing, and Inventory Management

is the difference between the unit cost of a product under absorption costing and variable costing?

Yates Company shows the following unit costs for its product: Yates started the year with 8,000 units in inventory, produced 50,000 units during the year, and sold 55,000 units. The value of ending inventory is A) greater under variable costing than absorption costing. B) greater under absorption costing than variable costing. C) the same under both variable and absorption costing. D) There is no ending inventory. E) This situation cannot happen.

a company produces 10,000 units and sells 8,000 units during a period, which method of computing operating income (absorption costing or variable costing) will result in the higher operating income? Why?

a segmented income statement, which of the following statements is true? A) Segment margin is greater than contribution margin. B) Common fixed expenses must be allocated to each segment. C) Contribution margin is equal to sales less all variable and direct fixed expenses of a segment. D) Segment margin is equal to contribution margin less direct and common fixed expenses. E) Segment margin is equal to contribution margin less direct fixed expenses.

is a segment?

EOQ for Part B-22 is 2,500 units, and four orders are placed each year. The total annual ordering cost is $1,200. Which of the following is true? A) The cost of placing one order is $4,800. B) The annual demand for the part is 2,500 units. C) The cost of placing one order is $1,200. D) The total carrying cost is $1,200. E) It is impossible to calculate the annual carrying cost given the above information.

is the difference between contribution margin and segment margin?

Which of the following is a reason for carrying inventory? A) To balance setup and carrying costs B) To satisfy customer demand C) To avoid shutting down manufacturing facilities D) To take advantage of discounts E) All of these.

are ordering costs? Carrying costs? Give examples of each.

Suppose that a material has a lead time of four days and that the average usage of the material is 12 units per day. What is the reorder point? A) 3 B) 12 C) 15 D) 36 E) 48

are stockout costs?

Suppose that a material has a lead time of four days and that the average usage of the material is 12 units per day. The maximum usage is 15 units per day. What is the safety stock? A) 3 B) 12 C) 9 D) 15 E) 5

the purchase price of the part being ordered enter into the EOQ equation? Why or why not?

segment could be which of the following? A) Product B) Customer type C) Geographic region D) All of these. E) None of these.

are the reasons for carrying inventory?

Garrett Company provided the following information: Common fixed cost totaled $46,000. Garrett allocates common fixed cost to Product 1 and Product 2 on the basis of sales. If Product 2 is dropped, which of the following is true? A) Sales will increase by $300,000. B) Overall operating income will increase by $2,600. C) Overall operating income will decrease by $25,000. D) Overall operating income will not change. E) Common fixed cost will decrease by $27,600.

Explain why, in the traditional view of inventory, carrying costs increase as ordering costs decrease.

Companies may choose to use variable costing because it A) accords with GAAP. B) is most useful for management decision making. C) provides the gross margin. D) is useful for external reporting. E) None of these.

is the economic order quantity?

McCartney Company produces a number of products and provides the following information: Currently, McCartney produces 1,000 units of Product C per production run. Refer to the information for McCartney Company above. Inventory-related cost for Product C under the current inventory policy is A) $900. B) $2,500. C) $3,400. D) $45,000. E) $100,000.

Explain how safety stock is used to deal with demand uncertainty.

McCartney Company produces a number of products and provides the following information: Currently, McCartney produces 1,000 units of Product C per production run. Refer to the information for McCartney Company above. The economic order quantity (EOQ) for Product C is A) 500. B) 600. C) 700. D) 800. E) 1,000.

approach does JIT take to minimize total inventory costs?

McCartney Company produces a number of products and provides the following information: Currently, McCartney produces 1,000 units of Product C per production run. Refer to the information for McCartney Company above. What is the total inventory-related cost at the EOQ? ( Note : Round the number of setups to the nearest whole number.) A) $1,500 B) $3,330 C) $2,985 D) $3,400 E) $5,000

Inventory Valuation under Absorption Costing During the most recent year, Judson Company had the following data associated with the product it makes: Refer to the data for Judson Company above.

Inventory Valuation under Variable Costing During the most recent year, Judson Company had the following data associated with the product it makes: Refer to the data for Judson Company above.

Absorption-Costing Income Statement During the most recent year, Osterman Company had the following data: Refer to the data for Osterman Company above.

Variable-Costing Income Statement During the most recent year, Osterman Company had the following data: Refer to the data for Osterman Company on the previous page.

Segmented Income Statement Gorman Nurseries Inc. grows poinsettias and fruit trees in a green house/nursery operation. The following information was provided for the coming year. A sales commission of 4% of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be $146,000 for the poinsettia line and $87,000 for the fruit tree line. Common fixed overhead for the nursery operation was estimated to be $800,000; common selling and administrative expense was estimated to be $450,000.

Ordering Cost, Carrying Cost, and Total Inventory-Related Cost La Cucina Company sells kitchen supplies and housewares. Lava stone is used in production of molcajetes (mortars and pestles used in the making of guacamole) and is purchased from external suppliers. Each year, 8,000 pounds of lava stone is used; it is currently purchased in lots of 500 pounds. It costs La Cucina $5 to place the order, and carrying cost is $2 per pound per year Refer to the data for La Cucina Company above.

Economic Order Quantity La Cucina Company sells kitchen supplies and housewares. Lava stone is used in production of molcajetes (mortars and pestles used in the making of guacamole) and is purchased from external suppliers. Each year, 8,000 pounds of lava stone is used; it is currently purchased in lots of 500 pounds. It costs La Cucina $5 to place the order, and carrying cost is $2 per pound per year Refer to the data for La Cucina Company above.

Reorder Point La Cucina Company sells kitchen supplies and housewares. Lava stone is used in production of molcajetes (mortars and pestles used in the making of guacamole) and is purchased from external suppliers. Each year, 8,000 pounds of lava stone is used; it is used evenly at the rate of 30 pounds per day. It takes La Cucina 5 days from the time of order to the time of arrival of the order.

Safety Stock and the Reorder Point with Safety Stock La Cucina Company sells kitchen supplies and housewares. Lava stone is used in production of molcajetes (mortars and pestles used in the making of guacamole) and is purchased from external suppliers. Each year, 8,000 pounds of lava stone is used; it is used evenly at the rate of 30 pounds per day. However, some days as many as 35 pounds are used. It takes La Cucina 5 days from the time of order to the time of arrival of the order.

Inventory Valuation under Absorption Costing Amiens Company produced 20,000 units during its first year of operations and sold 18,900 at $17 per unit. The company chose practical activity-at 20,000 units-to compute its predetermined overhead rate. Manufacturing costs are as follows:

Inventory Valuation under Variable Costing Lane Company produced 50,000 units during its first year of operations and sold 47,300 at $12 per unit. The company chose practical activity-at 50,000 units-to compute its predetermined overhead rate. Manufacturing costs are as follows:

Inventory Valuation under Absorption and Variable Costing Overton Company produced 80,000 units last year. The company sold 79,000 units and there was no beginning inventory. The company chose practical activity-at 80,000 units-to compute its predetermined overhead rate. Manufacturing costs are as follows:

Income Statements under Absorption and Variable Costing In the coming year, Kalling Company expects to sell 28,700 units at $32 each. Kalling's controller provided the following information for the coming year.

Inventory Valuation under Absorption and Variable Costing with Decrease in Ending Inventory The following information pertains to Chacon Inc. for last year:

Income Statements under Absorption and Variable Costing with Decrease in Ending Inventory The following information pertains to Chacon Inc. for last year: Assume that the selling price is $27 per unit.

Solving for Missing Values Using Absorption and Variable Costing Relationships Each of the following situations is independent.

Segmented Income Statement Knitline Inc. produces high-end sweaters and jackets in a single factory. The following information was provided for the coming year. A sales commission of 5% of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be $20,000 for the sweater line and $50,000 for the jacket line. Common fixed overhead for the factory was estimated to be $45,000. Common selling and administrative expense was estimated to be $15,000.

Segmented Income Statements, Inventory Valuation For the coming year, Paulson Computers Inc. expects to produce 144,000 computers. Of these, 64,000 will be consumer (personal) computers and 80,000 will be small business computers. Common fixed overhead is $1,700,000. Additional information for the coming year is as follows: Fixed selling and administrative expense for Paulson Computers is $2,960,000 per year.

Ordering Cost, Carrying Cost, and Total Inventory-Related Cost Ranger Company purchases 17,280 units of Product Beta each year in lots of 864 units per order. The cost of placing one order is $10, and the cost of carrying one unit of product in inventory for a year is $6. Refer to the data for Ranger Company above.

Ordering Cost, Carrying Cost, and Total Inventory-Related Cost Ranger Company purchases 17,280 units of Product Beta each year in lots of 864 units per order. The cost of placing one order is $10, and the cost of carrying one unit of product in inventory for a year is $6. Refer to the data for Ranger Company above.

Safety Stock; Reorder Point Pohling Companymakes a variety of household appliances, including automatic can openers. Small motors used in making can openers are purchased from an outside supplier. Each year, 20,000 small motors are used, at the rate of 80 small motors per day. However, some days as many as 88 small motors are used. It takes Pohling 5 days from the time of order to the time of arrival of the order.

Safety Stock; Reorder Point Party-Hearty Company makes a variety of holiday party packs. One party pack is for a bachelorette party. It includes a tiara, a pink feathered boa, and a t-shirt emblazoned with ''I'm the Bride.'' Pink feathered boas are purchased from an outside supplier. Each year, 6,500 boas are used, at the rate of 16 boas per day. However, some days as many as 50 boas are used. It takes 6 days from the time that Party-Hearty places an order of boas to the arrival of the order.

Variable-Costing and Absorption-Costing Income Borques Company produces and sells wooden pallets that are used for moving and stacking materials. The operating costs for the past year were as follows: During the year, Borques produced 200,000 wooden pallets and sold 204,300 at $9 each. Borques had 8,200 pallets in beginning finished goods inventory; costs have not changed from last year to this year. An actual costing system is used for product costing.

Variable Costing, Absorption Costing, Segmented Income Statements, Inventory Valuation During its first year of operations, Sugarsmooth Inc. produced 55,000 jars of hand cream based on a formula containing 10% glycolic acid. Unit sales were 52,300 jars. Fixed overhead totaled $27,500 and was applied at the rate of $0.50 per unit produced. The results of the year's operations are as follows (on an absorption-costing basis): At the end of the first year of operations, Sugarsmooth is considering expanding its customer base. In its first year, it sold to small drugstores and supermarkets. Now, Sugarsmooth wants to add large discount stores and small beauty shops. Working together, the company controller and marketing manager have accumulated the following information: a. Anticipated sales to discount stores would be 20,000 units at a discounted price of $5.80. Higher costs of shipping and return penalties would be incurred. Shipping would amount to $8,500 per year, and return penalties would average 4% of sales. In addition, a clerk would need to be hired solely to handle the discount stores' accounts. The clerk's salary and benefits would be $28,000 per year. b. Anticipated sales to beauty shops would be 10,000 units at a price of $9. A commission of 10% of sales would be paid to independent jobbers who sell to the shops. In addition, an extra packing expense of $0.50 per unit would be incurred because the shops require fewer bottles per carton. c. The sales to small drugstores and supermarkets will remain the same. d. The fixed overhead and selling and administrative expenses would remain unchanged and are treated as common costs.

Segmented Income Statements, Product-Line Analysis Alard Company produces blenders and coffee makers. During the past year, the company produced and sold 65,000 blenders and 75,000 coffee makers. Fixed costs for Alard totaled $340,000, of which $184,000 can be avoided if the blenders are not produced and $142,500 can be avoided if the coffee makers are not produced. Revenue and variable cost information follow:

Variable Costing, Absorption Costing, Inventory Valuation Zeitgeist Company manufactures silicon sleeves for MP3 players. In August 2013, Zeitgeist began producing the colorful sleeves. During the month of August, 16,000 were produced, and 14,750 were sold at $6.95 each. The following costs were incurred: A selling commission of 8% of sales price was paid. Administrative expenses, all fixed, amounted to $37,890.

Segmented Income Statement, Management Decision Making FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows: Kathy Bunker, president of FunTime, is concerned about the financial performance of her firm and is seriously considering dropping both the scented and musical product lines. However, before making a final decision, she consults Jim Dorn, FunTime's vice president of marketing.

Ordering and Carrying Costs, EOQ A-Tech Company uses 36,000 circuit boards each year in its production of stereo units. The cost of placing an order is $15. The cost of holding one unit of inventory for one year is $3. Currently, A-Tech orders 3,000 circuit boards in each order.

Economic Order Quantity Italia Pizzeria is a popular pizza restaurant near a college campus. Brandon Thayn, an accounting student, works for Italia Pizzeria. After several months at the restaurant, Brandon began to analyze the efficiency of the business, particularly inventory practices. He noticed that the owner had more than 50 items regularly carried in inventory. Of these items, the most expensive to buy and carry was cheese. Cheese was ordered in blocks at $17.50 per block. Annual usage totals 14,000 blocks. Upon questioning the owner, Brandon discovered that the owner did not use any formal model for ordering cheese. It took five days to receive a new order when placed, which was done whenever the inventory of cheese dropped to 200 blocks. The size of the order was usually 400 blocks. The cost of carrying one block of cheese is 10% of its purchase price. It costs $40 to place and receive an order. Italia Pizzeria stays open seven days a week and operates 50 weeks a year. The restaurant closes for the last two weeks of December.

Ethical Issues, Absorption Costing, Performance Measurement Ruth Swazey, divisional controller and certified management accountant, was upset by a recent memo she received from the divisional manager, Paul Chesser. Ruth was scheduled to present the division's financial performance at headquarters in one week. In the memo, Paul had given Ruth some instructions for this upcoming report. In particular, she had been told to emphasize the significant improvement in the division's profits over last year. Ruth, however, didn't believe that there was any real underlying improvement in the division's performance and was reluctant to say otherwise. She knew that the increase in profits was because of Paul's conscious decision to produce for inventory. In an earlier meeting, Paul had convinced his plant managers to produce more than they knew they could sell. By doing so, more of the fixed factory overhead could be moved into inventory with the extra units produced. He argued that by deferring some of this period's fixed costs, reported profits would jump. He pointed out two significant benefits. First, by increasing profits, the division could exceed the minimum level needed so that all the managers would qualify for the annual bonus. Second, by meeting the budgeted profit level, the division would be better able to compete for much needed capital. Ruth had objected but had been overruled. The most persuasive counterargument was that the increase in inventory could be liquidated in the coming year as the economy improved. However, Ruth considered this event unlikely. Based on past experience, she believed that it would take at least two years of improved market demand before the productive capacity of the division was exceeded.