Exam 9: Inventory Costing and Capacity Analysis

Answer the following questions using the information below: Henry Inc., a manufacturing firm, is able to produce 1,000 pairs of sneakers per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 800 units per hour. The plant actually operates only 27 days per month. Based on the current budget, Henry estimates that it will be able to sell only 500,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 515,000. Assume the month has 30 days. -What is the master-budget capacity utilization level for this budget period?

Usually there is no production-volume variance when normal capacity utilization is used as the denominator level.

To reduce the undesirable incentives to build up inventories that absorption costing can create,a number of companies use variable costing for internal reporting.

Practical capacity rather than master-budget volume is a better way to price product and avoid downward demand spiral.

The use of theoretical capacity results in an unrealistically low fixed manufacturing cost per unit because it is based on ________.

Tall Statues Inc., produces wood statues. Management has provided the following information: Actual sales 30,000 statues Budgeted production 50,000 statues Selling price \ 46.00 per statue Direct material costs \ 6.90 per statue Variable manufacturing costs \ 3.45 per statue Variable administrative costs \ 5.75 per statue Fixed manufacturing overhead \ 4.60 per statue -What is the total throughput contribution?

Which of the following is true of absorption costing?

Unile Auto produces and sells an auto part for $60.00 per unit. In 2015, 100,000 parts were produced and 75,000 units were sold. Other information for the year includes: Direct materials \ 20.00 per unit Direct manufacturing labor \ 4.00 per unit Variable manufacturing costs \ 1.00 per unit Sales commissions \ 6.00 per part Fixed manufacturing costs \ 750,000 per year Administrative expenses all fixed \ 270,000 per year -What is the inventoriable cost per unit using absorption costing?

Which of the following is true of absorption costing?

Galliart Company has two identical divisions,East and West.Their sales,production volume,and fixed manufacturing costs have been the same for the last five years.The amounts for each division were as follows: Units produced 50,000 55,000 55,000 44,000 44,000 Units sold 45,000 45,000 50,000 50,000 50,000 Fixed manufacturing costs \ 55,000 \ 55,000 \ 55,000 \ 55,000 \ 55,000 East Division uses absorption costing and West Division uses variable costing. Both use FIFO inventory methods. Variable manufacturing costs are $5 per unit. Selling and administrative expenses were identical for each division. There were no inventories at the beginning of 20X1. Which division reports the highest income each year? Explain.

Soul Socket Inc.manufactures socket wrenches. • For next month,the vice president of production plans on producing 4,450 wrenches per day. • The company can produce as many as 5,000 wrenches per day,but is more likely to produce 4,500 per day. • The demand for wrenches for the next three years is expected to average 4,250 wrenches per day. • Fixed manufacturing costs per month total $374,000. • The company works 22 days a month. • Fixed manufacturing overhead is charged on a per-wrench basis. Required: a.What is the theoretical fixed manufacturing overhead rate per wrench for the next month? b.What is the practical fixed manufacturing overhead rate per wrench for the next month? c.What is the normal fixed manufacturing overhead rate per wrench for the next month? d.What is the master-budget fixed manufacturing overhead rate per wrench for the next month?

________ provides the lowest estimate of denominator-level capacity in case demand of the product is not a limiting factor.

Advocates of throughput costing argue that ________.

Proration approach has no effect on year-end financial statements.

Customers expect to pay a price that includes ________.

Answer the following questions using the information below: Jupiter Corporation incurred fixed manufacturing costs of $16,000 during 2015. Other information for 2015 includes: The budgeted denominator level is 2,000 units. Units produced total 2,200 units. Units sold total 1,900 units. Variable cost per unit is $4. Beginning inventory is zero. The fixed manufacturing cost rate is based on the budgeted denominator level. -Under absorption costing,fixed manufacturing costs expensed on the income statement (excluding adjustments for variances)total ________.

Absorption costing helps managers to artificially inflate profits by encouraging the production of products that absorb the highest amount of fixed manufacturing costs.

Sutton Hot Dog Stand sells hot dogs for $1.35.Variable costs are $1.05 per unit with fixed production costs of $90,000 per month at a level of 400,000 units.Fixed administrative costs total $30,000.Sales average 400,000 units per month,with planned production of 400,000 hot dogs. Required: a.What are breakeven unit sales under variable costing? b.What are breakeven unit sales under absorption costing if she sells everything she prepares? c.What are breakeven unit sales under absorption costing if average sales are 498,000 and planned production is changed to 500,000?

________ are subtracted from sales to calculate gross margin.

Answer the following questions using the information below: Henry Inc., a manufacturing firm, is able to produce 1,000 pairs of sneakers per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 800 units per hour. The plant actually operates only 27 days per month. Based on the current budget, Henry estimates that it will be able to sell only 500,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 515,000. Assume the month has 30 days. -What is the practical capacity for the month?