Week 4 Quiz - Financial Statements and Cost Flows - Spring 2024 SOLUTION

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ACC 222: Introduction to Managerial Accounting (Spring 2024) Week 4 QUIZ: Financial Statements and Cost Flows ( SOLUTION) 1. TRUE or FALSE? The contribution margin income statement does not follow Generally Accepted Accounting Principles (GAAP) because it distinguishes between costs based on how the cost functions (i.e., as a manufacturing cost or non-manufacturing cost) rather than how the cost behaves (i.e., whether the cost is variable or fixed). a. TRUE b. FALSE Solution: GAAP requires firms to distinguish between manufacturing costs (i.e., product costs) and non- manufacturing costs (i.e., period costs). The contribution margin income statement, which does not follow GAAP, distinguishes between costs based on how they behave (as either fixed or variable). The c See Week 4 lecture slides, Slides 3 and 32. Also see Week 4 practice problems, Q1 and Q9. 2. TRUE or FALSE? When units of product are finished and transferred from work-in-process inventory to finished goods inventory, the manufacturing costs associated with those units are recognized as an expense called cost of goods sold expense, which is reported on the income statement. a. TRUE b. FALSE Cost of goods sold expense on the income statement includes manufacturing costs (i.e., product costs) associated with units sold in a period. These units may or may not have been finished in the same period. Cost of goods sold flows out of finished goods inventory when units are sold (not when they are finished). When units of product are finished (i.e., when they are transferred from work-in-process inventory to finished goods inventory), these costs flow out of WIP inventory and are called cost of goods manufactured. See Week 4 practice problems, Q2 and Q10 and Week 4 review slides, Review Q1.

3. Which of the following would never be reported on the balance sheet of a manufacturing firm as part of the value of inventory? a. Property taxes paid on the manufacturing facility b. Salary of the manufacturing facility supervisor c. Depreciation of manufacturing facility equipment d. The cost of maintenance on leased manufacturing equipment e. All of the above could be included in the value of inventory SOLUTION: GAAP distinguishes between manufacturing and non-manufacturing costs. Manufacturing costs (i.e., product costs) are capitalized to inventory and reported on the balance sheet until the units are sold. This means if an answer choice is a manufacturing cost, then it would be capitalized to inventory and reported on the balance sheet as part of the value of inventory until it’s sold. For each answer choice, we need to identify if it is a manufacturing cost (i.e., DM, DL, or MOH). If it is, then it could be included in inventory. One way to know all answer choices are manufacturing costs is because each answer choice refers to either the manufacturing facility or manufacturing equipment. If it’s related to manufacturing (even if its property taxes on the manufacturing facility or depreciation on manufacturing equipment), then it’s a manufacturing cost. Since none are direct materials or direct labor, these items must all be MOH. See Week 4 lecture slides 3 and 4. Also see Week 4 review slides, Review Q1.

4. CV Manufacturing produces and sells a single product. The following data are available for the month of January, which was the company’s first month of operations: Direct materials $241,920 Direct labor $162,792 Variable manufacturing overhead $5.25 per unit Fixed manufacturing overhead $193,032 Sales commissions $10.00 per unit The company produced 50,400 units in January and sold 43,900 units at a selling price of $109.35 each. What is the company’s contribution margin for the month of January? a) $2,274,400 b) $3,726,278 c) $2,477,540 d) $3,692,153 e) None of the above Solution : [NOTE: Everyone received full credit for this question] CM = Revenue – variable product costs – variable period costs = Revenue – (DM + DL + VMOH) – Sales Comm Most can calculate revenue without too much trouble, so we’ll start with variable product costs (usually called VCOGS or Variable Cost of Goods Sold). Variable product costs are DM, DL, and VMOH. The product costs given tell us what the company paid in January to produce 50,400 units. But we didn’t sell 50,400 units; we only sold 43,900 units. We want VCOGS on our CM income statement to reflect only the portion of the variable product costs associated with the units we sold. So, we’ll calculate VCOGS per unit = DM per unit + DL per unit + VMOH per unit. Next, we’ll multiply VCOGS per unit by sales volume to get total VCOGS, which is what we’ll deduct from revenue along with variable period costs (usually called VSGA or Variable Selling General and Admin) to get CM. (see Week 4 slides, slide 30; practice problems Q14). See Week 2 lecture slides, slides 37 and 41 for product and period cost formulas. Unit product cost = Total product cost/units produced DM per unit = $241,920/50,400 = $4.80 per unit produced DL per unit = $162,792/50,400 = $3.23 per unit produced VMOH per unit (given) = $5.25 per unit produced VCOGS per unit $13.28 per unit produced Total VCOGS = $13.28 per unit x 43,900 units sold = $582,992. Total VSG&A = $10 per unit sold x sales volume = $439,000. Therefore: CM = $4,800,465 - $582,992 - $439,000 = $3,778,473 (correct answer would’ve been none of the above) See Week 4 lecture slides, Slides 4 and 22. Also see Week 4 practice problems, Q8.

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5. MV Incorporated’s corporate office is in Oxford, Ohio. The company’s production facility is in East Lansing, Michigan. The company sells a single product for $12.50 per unit and incurred the following costs in the month of January: Direct materials purchased $14,000 Commissions paid to sales people $ 6,000 Direct labor paid $10,000 Depreciation on manufacturing equipment $18,000 Depreciation on headquarters office furniture $ 8,000 Advertising costs $ 2,500 If the company produced 20,000 units and sold 18,000 units in August, then what is the company’s gross margin for the month of January? a. $142,200 b. $137,800 c. $148,800 d. $178,200 e. None of the above SOLUTION: Unit product cost = Total product cost/units produced = $42,000*/20,000 = $2.10 per unit *Total product cost = DM + DL + MOH = $14,000 + $10,000 + $18,000 = $42,000 Cost of goods sold = Unit product cost x units sold = $2.10 per unit x 18,000 = $37,800 Gross margin = Revenue – COGS = ($12.50 x 18,000 units) - $37,800 = $187,200 Note: To be MOH, a cost must be 1) indirect and 2) related to manufacturing. Therefore, depreciation on manufacturing equipment is MOH while depreciation on HQ furniture is not. See Week 4 lecture slides, Slides 4 and 22. Also see Week 4 practice problems, Q12 is a similar question that shows us how to calculate COGS and includes exactly the same costs in the same amounts.

6. Brown Corporation provides the following information for its work-in-process (WIP) inventory account for the month of December: Beginning WIP $220,000 Ending WIP $155,000 Direct materials used $ 35,000 Direct labor cost $ 49,000 If the company’s cost of goods manufactured for December was $219,000, then how much money did the company spend on manufacturing overhead costs in December? a. $27,000 b. $58,000 c. $69,000 d. $70,000 e. None of the above Solution: COGM = BWIP + (DM + DL + MOH) – EWIP $219,000 = $220,000 + ($35,000 + $49,000 + MOH) - $155,000 $219,000 = $149,000 + MOH MOH = $70,000 See Week 4 lecture slides, Slides 20 and 21. Also see Week 4 Squarecap Q3.

7. Last year, Richmond Company produced 8,000 units and sold 6,000 units of its product at a price of $20. Costs for last year are as follows: Direct materials $3.00 per unit Direct labor $3.80 per unit Variable manufacturing overhead $0.80 per unit Fixed manufacturing overhead $40,000 Variable selling expense $0.50 per unit Fixed selling expense $ 4,900 Fixed administrative expense $11,000 Using a GAAP income statement, calculate Richmond Company’s operating income last year. (Round your answer to two decimal places.) a. $15,500 b. $25,500 c. $18,250 d. $25,000 e. None of the above Solution: Revenue ($20 x 6,000 units) $120,000 Less: COGS ($12.60 per unit* x 6,000 units) $ 75,600 Gross margin $ 44,400 Less: Variable selling ($0.50 x 6,000 units) $ 3,000 Fixed selling $ 4,900 Fixed admin $ 11,000 Operating income $ 25,500 *Unit product cost = DM per unit + DL per unit + VMOH per unit + FMOH per unit = $3.00 + $3.80 + $0.80 + ($40,000/8,000 units produced) = $12.60 This is Squarecap Q4 but with two important changes. First, we’re asked to use a GAAP income statement instead of a CM income statement. Second, production volume differs from sales volume in this question (while they were the same in the Squarecap question). The most common incorrect answer was answer choice a, which was the correct answer to Squarecap Q4 but not the correct answer to this question. It’s very important that you read every problem carefully. I typically include at least some questions on assessments that you’ve seen before (e.g., in the Lecture or Review Slides or Practice Problems) as an incentive for you to study, complete the practice problems, etc. But the questions usually (not always, but usually) have changes. Read every question carefully, even if it looks familiar, to make sure you can identify differences if there are any and handle them appropriately. See Week 4 lecture slides, Slide 22. Also see Week 4 review slides, Review Q6 and practice problems, Q8. ( Continued on next page )

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ALTERNATIVE SOLUTION (based on this week’s material): Yesterday (Monday 2/26), we learned another way to solve a problem like this (assuming you remembered the correct answer to Squarecap Q4 was $15,500). All cost data are the same, but we’re asked to use the GAAP income statement to solve for operating income, which uses absorption costing (AC) to value inventory. In Squarecap Q4, we were asked to solve using the contribution margin income statement, which uses variable costing (VC) to value inventory. The only difference between AC (GAAP income statement) and VC (CM income statement) is how we treat FMOH. Specifically, the difference in income will ALWAYS equal the FMOH that is coming out of or going into inventory. Since FMOH = $40,000 and we produced 8,000 units, FMOH per unit = $5. We know FMOH is deferred because we produced more units than we sold. So, FMOH deferred in inventory is: FMOH deferred = $5 FMOH per unit x 2,000 units deferred = $10,000 Since FMOH is deferred under AC, it is diverted away from the income statement and reported on the balance sheet as part of the value of inventory instead of being expensed. This means AC income will be higher than VC income by $10,000 (because the $10,000 isn’t in COGS). If VC income was $15,500, then AC income must be $25,500. NOTE: You would not have been able to solve this problem this way on last week’s quiz because we hadn’t covered it yet. I just wanted to point out we can solve it this way now since we talked about it in class yesterday and it might help you learn this week’s material. 8. EJM Inc. sells a single product for $8 per unit. In the most recently completed period, the company produced 120,000 units and sold 100,000 units. If the company’s fixed costs for the period were $150,000 and its variable costs are 60% of the product’s selling price, then what is the company’s operating income for the period using the contribution margin income statement? a. $180,000 b. $210,000 c. $320,000 d. $170,000 e. None of the above Solution: Revenue ($8 x 100,000 units) $800,000 Less: VC* ($4.80 x 100,000 units) $480,000 Contribution margin $320,000 Less: FC $150,000 Operating income $170,000 VC* = Selling price x 0.60 = $8 x 0.6 = $4.80 per unit See Week 4 lecture slides, Slide 30, and Squarecap Q4. Also see Practice Problems Q14.

9. Bella Inc. produces a single product that sells for $70 per unit. February sales volume was 71,000 units and production volume was 86,000 units. Total variable cost of goods sold in February was $1,350,000 and fixed manufacturing overhead costs in February were $9 per unit. Bella Inc. pays its salespeople a sales commission of $10 per unit. Fixed administrative costs in February were $100,000. The company is considering decreasing production volume to 80,000 units in the coming period due to lower than expected February sales. Using the contribution margin format income statement, calculate Bella’s February operating income. a) $2,171,000 b) $1,033,000 c) $1,887,500 d) $2,036,000 e) None of the above Solution: Revenue ($70 x 71,000) $4,970,000 Less: Variable COGS $1,350,000 (given) Less: Variable SGA ($10 x 71,000) $ 710,000 Contribution margin $2,910,000 Less: FMOH ($9 per unit x 86,000) $ 774,000 Less: Fixed admin $ 100,000 Operating income $2,036,000 Note: FMOH is a product cost. Therefore, Total FMOH = FMOH per unit x units produced Although you saw both VCOGS (which is DM, DL, and VMOH) and VSG&A (variable selling and/or administrative expenses) in the practice problems (Q14), I haven’t introduced these terms yet officially in class. We’ll do that next week, the week of 2/26. Therefore, Everyone received full credit for this question. See Week 4 lecture slides, Slide 30, and Squarecap Q4. Also see practice problems, Q14. 10. Segment margin is computed by: a. Subtracting variable costs traceable to that particular product from contribution margin b. Subtracting fixed costs traceable to that particular product from its contribution margin c. Subtracting all fixed costs from the segment’s contribution margin d. Summing all contribution margins, then subtracting common fixed costs e. None of the above Explanation: This is Week 4 lecture slides, Warmup Q4.