# Gross Profit Calculating

Document Sample

Confidential                                                                  AAD 2104 / January – May 2006

SECTION A: TRUE FALSE STATEMENTS (20 MARKS)
1.        Both direct labor cost and indirect labor cost are product costs
2.        Direct material costs and indirect material costs are prime costs
3.        In calculating gross profit for a manufacturing company, the cost of goods
manufactured is deducted from net sales
4.        A process cost accounting system is appropriate for homogeneous products that are
continuously mass produced
than the manufacturing overhead costs applied to jobs
6.        Equivalent units of production measure the work done during a period, expressed in
fully completed units.
7.        The first step performed in preparing a production cost report is computing the
equivalent units of production
8.        A variable cost remains constant per unit at various levels of activity
9.        If volume increases, all costs will increase
10.       A mixed cost has both selling and administrative cost elements
11.       If more units are sold than are produced in a period, variable costing income will be
greater than absorption costing income
12.       The margin of safety is the difference between contribution margin and fixed costs
13.       The first step in activity-based costing is to assign overhead costs to products, using
cost drivers
14.       Budgets are statements of management's plans stated in financial terms
15.       The direct materials budget must be completed before the production budget because
the quantity of materials available for production must be known.
16.       Process cost accounting focuses on the process involved in mass-producing products
that are very similar in nature
17.       A standard is a unit amount, whereas a budget is a total amount
18.       In developing a standard cost for direct materials, a price factor and a quantity factor
must be considered
19.       A variance is the difference between actual costs and standard costs
20.       If actual costs are less than standard costs, the variance is favorable

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Confidential                                                             AAD 2104 / January – May 2006

SECTION B (80 MARKS)

Question 1 (20 marks)
Orchid Company manufactures and distributes industrial air compressors. The following
costs are available for the year ended December 31, 2005. The company has no beginning
inventory. In 2005, 1,500 units were produced, but only 1,200 units were sold. The unit
selling price was \$4,500. Costs and expenses were:
Variable costs per unit:
Direct materials                        \$800
Direct labor                            \$1,500

Annual fixed costs and expenses:

a. Compute the manufacturing cost of one unit of product using variable and absorption
costing
(6 marks)
b. Prepare a 2005 income statement for Orchid Company using variable costing
(8 marks)
c. Calculate the value of ending inventory under variable costing
(3 marks)
d. Calculate the cost of goods sold under absorption costing
(3 marks)

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Confidential                                                              AAD 2104 / January – May 2006

Question 2 (20 marks)
Raya Company developed the following information for its product:
Per Unit
Sales price                                            \$90
Variable cost                                           63
Contribution margin                                    \$27

Total fixed costs                                \$1,350,000

Instructions
Answer the following independent questions and show computations using the contribution

1. How many units must be sold to break even?
(4 marks)
2. What is the total profit that the company will earn if it manages to sell 52,000 units?
Prepare a variable income statement.
(5 marks)
3. If the company is presently selling 75,000 units, but plans to spend an additional
\$135,000 on an advertising program, how many units must the company sell to earn
the same net income it is now making?
(6 marks)
4. Using the original data in the problem, compute a new break-even point in units if
the unit sales price is increased 20%, unit variable cost is increased by 10%, and
total fixed costs are increased by \$198,000.
(5 marks)

Question 3 (20 marks)
The Kenanga Company, a merchandising firm, has planned the following sales for the next
four months:
March   April   May     June
Total budgeted sales ..........   \$50,000 \$70,000 \$90,000 \$60,000

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Confidential                                                                                      AAD 2104 / January – May 2006

Sales are made 40% for cash and 60% on account. From experience, the company has
learned that a month’s sales on account are collected according to the following pattern:
Month of sale.........................................................     70%
First month following month of sale .....................                  20%
Second month following month of sale ................                       8%
Uncollectible .........................................................     2%

The company requires a minimum cash balance of \$4,000 to start a month.
Required:
a. Compute the budgeted cash receipts for June by preparing the schedule of cash collected.
(8 marks)
b. Assume the following budgeted data for June:

Purchases ......................................................     \$52,000
Selling and administrative expenses ............                     \$10,000
Depreciation .................................................           \$8,000
Equipment purchases ...................................              \$15,000
Cash balance, beginning of June ..................                       \$6,000

Using this data, along with your answer to part (1) above, prepare a cash budget in good form
for June. Clearly show any borrowing needed during the month. The company can borrow in
any dollar amount, but will not pay any interest until the following month.
(12 marks)

Question 4 (20 marks)
Ihsan Sporting Goods Company manufactures aluminum baseball bats that it sells to
university athletic departments. It has developed the following per unit standard costs for
2005 for each baseball bat:

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Confidential                                                             AAD 2104 / January – May 2006

Standard Quantity        2 Pounds (Aluminum)            1/2 hour                 1/2 hour
Standard Price                   \$4.00                 \$10.00                    \$6.00
Unit Standard Cost               \$8.00                  \$5.00                    \$3.00

In 2005, the company planned to produce 40,000 baseball bats at a level of 20,000 hours of
direct labor.
Actual results for 2005 are presented below:
1.    Direct materials purchased were 82,000 pounds of aluminum which cost \$344,400.
2.    Direct materials used were 73,000 pounds of aluminum.
3.    Direct labor costs were \$187,200 for 19,500 direct labor hours actually worked.
4.    Total manufacturing overhead was \$117,000.
5.    Actual production was 38,000 baseball bats.

Instructions
Compute the following variances:
a. Direct materials price variance and direct materials quantity variance
(6 marks)
b. Direct labor price variance and direct labor quantity variance
(6 marks)
c. Total variance for variable overhead
(4 marks)
d. List one possible cause for each of the following
i.     Materials price variance
ii.    Material usage variance
iii.   Labor efficiency variance
iv.    Labor rate variance
(4 x 1m = 4 marks)

End of question paper

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