A 2007-6-12

QUIZ 2

___________ ___________ _______________

I. Dentech, Inc. uses 10 units of part RM67 each month in the production of dentistry equipment. The
cost of manufacturing one unit of RM67 is the following:
Direct material $ 3,000
Material handling (20% of direct-material cost) 600
Direct labor 24,000
Manufacturing overhead (150% of direct labor) 36,000
Total manufacturing cost $63,600
Material handling represents the direct variable costs of the Receiving Department that are
applied to direct materials and purchased components on the basis of their cost. This is a separate
charge in addition to manufacturing overhead. Dentechs annual manufacturing overhead budget
is one-third variable and two-third fixed. Scott Supply, one of Dentechs reliable vendors, has
offered to supply part number RM67 a unit price of $45,000.
Required: (45%)
1. If Dentech purchases the RM67 units from Scott, the capacity Dentech used to manufacture
these parts would be idle. Should Dentech decide to purchase the parts from Scott, the unit
cost of RM67 would increase (or decrease) by what amount?
2. Assume Dentech is able to rent out all its idle capacity for $75,000 per month. If Dentech
decides to purchase the 10 units from Scott Supply, Dentechs monthly cost for RM67 would
increase (or decrease) by what amount?
3. Assume that Dentech does not wish to commit to a rental agreement but could use its idle
capacity to manufacture another product that would contribute $156,000 per month. If
Dentechs management elects to manufacture RM67 in order to maintain quality control, what
is the net amount of Dentechs cost from using the space to manufacture part RM67?

II. Explain the advantage of using a flexible budget. (10%)

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 A 2007-6-12

QUIZ 2

III. Pinellas Pillow companys planned production for the year just ended was 10,000 units. This
production level was achieved, but only 9,000 units were sold. Other data follows:
Direct material used $85,000
Direct labor incurred 45,000
Fixed manufacturing overhead 50,000
Variable manufacturing overhead 24,000
Fixed selling and administrative expenses 60,000
Variable selling and administrative expenses 9,000
Finished-goods inventory, January 1 none
There were no work-in-process inventories at the beginning or end of the year.
Required: (45%)
1. What would be Pinellas Pillow Companys finished-goods inventory cost on December 31
under the variable-costing method?
2. Which costing method, absorption or variable costing, would show a higher operating
income for the year? By what amount?
3. Suppose Pinellas Pillow Company uses throughput costing, and direct material is its only
unit level cost. What would be Pinellas finished-goods inventory on December 31?

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SOLUTION:
I. Answer:
PROBLEM 14-47 (25 MINUTES)
1. Incremental unit cost if purchased:
Purchase price .................................................................................................. $ 45,000
Material handling .............................................................................................. 9,000
Total ................................................................................................................... $ 54,000

Incremental unit cost if manufactured:

Direct material ................................................................................................... $ 3,000
Material handling .............................................................................................. 600
Direct labor ........................................................................................................ 24,000
Variable manufacturing overhead ($36,000 1/3) ......................................... 12,000
Total ................................................................................................................... $ 39,600
Increase in unit cost if purchased ($54,000 $39,600) ..................................... $ 14,400

2. Increase in monthly cost of acquiring part RM67 if purchased

(10 $14,400, as computed above) .................................................................. $144,000
Less: rental revenue from idle space ................................................................. 75,000
Increase in monthly cost ..................................................................................... $ 69,000

3. Contribution forgone by not manufacturing alternative product ..................... $156,000

Savings in the cost of acquiring RM67
(10 $14,400 as computed in requirement 1) .................................................. 144,000
Net cost of using limited capacity to produce part RM67 ................................. $ 12,000

II.
11-2 The advantage of a flexible budget is that it is responsive to changes in the activity level. It
enables a comparison between actual costs incurred at the actual level of activity and the
standard allowed costs that should have been incurred at the actual level of activity.

III. Exercise 17-19 (25 minutes)

Inventory calculations (units):
Finished-goods inventory, January 1 .............................................. 0 units
Add: Units produced ......................................................................... 10,000 units
Less: Units sold ................................................................................. 9,000 units
Finished-goods inventory, December 31 ........................................ 1,000 units

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1. Variable costing:

Inventoriable costs under variable costing:

Direct material used .............................................................................. $ 80,000

Direct labor incurred ............................................................................. 40,000
Variable manufacturing overhead ........................................................ 24,000
Total ........................................................................................................ $144,000

Cost per unit produced = $144,000/10,000 units = $14.40 per unit

Ending inventory: 1,000 units $14.40 per unit .............................. $ 14,400

2. Absorption costing:
Predetermined fixed-overhead rate

fixed manufacturing overhead $50,000

= = = $5.00 per unit
planned production 10,000 units

Difference in fixed
change in predetermined
overhead expensed under
= inventory fixed-overhead
absorption and variable costing in units
rate
= (1,000 units) ($5.00 per unit)
= $5,000
Difference in reported income:
Since inventory increased during the year, income reported under absorption costing will be $5,000 higher
than income reported under variable costing.

3. Throughput costing:
Inventoriable costs under throughput costing:
Direct material used .............................................................................. $80,000
Total ........................................................................................................ $80,000

Cost per unit produced = $80,000/10,000 units = $8.00 per unit

Ending inventory: 1,000 units $8.00 per unit ................................ $ 8,000