Cost accounting (02) Spring 2024 © The McGraw-Hill Companies, Inc., 2021.

Assignment #2
Exercise Problems of the Textbook

Chapter 6

Exercise 6-7
Shannon Company segments its income statement into North and South divisions. The
company’s overall sales, contribution margin ration, and net operating income are $500,000,
46%, and $10,000, respectively. The North Division’s contribution margin and contribution
margin ratio are $150,000 and 50%, respectively. The South Division’s segment margin is
$30,000. The company has $90,000 of common fixed expenses that cannot be traced to either
division.

Required:
Prepare a segmented income statement for Shannon Company using the contribution format.
For the company as a whole and for each division, show each item on the segmented income
statements as a percent of sales.

Exercise 6-12
Whitman Company has just completed its first year of operations. The company’s absorption
costing income statement for the year follows:

Whitman Company
Income Statement
Sales (35,000 units x $25 per unit) $875,000
Cost of goods sold (35,000 units x $16 per unit) 560,000
Gross margin 315,000
Selling and administrative expenses 280,000
Net operating income $35,000

The company’s selling and administrative expenses consist of $210,000 per year in fixed
expenses and $2 per unit sold in variable expenses. The $16 unit product cost given above is
computed as follows:

Direct materials $5
Direct labor 6
Variable manufacturing overhead 1
Fixed manufacturing overhead ($160,000/40,000 units) 4
Absorption costing unit product cost $16

Required:
1. Redo the company’s income statement in the contribution format using variable costing.
2. Reconcile any difference between the net operating income on your variable costing
income statement and the net operating income on the absorption costing income
statement above.

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Cost accounting (02) Spring 2024 © The McGraw-Hill Companies, Inc., 2021.

Chapter 7

Exercise 7-5
Thermal Rising, Inc., makes paragliders for sale through speciality sporting goods stores.
The company has a standard paraglider model, but also makes custom-designed
paragliders. Management designed an activity-based costing system with the following
activity cost pools and activity rates:

Activity cost pool Activity rate

Supporting direct labor $26 per direct labor hour
Order processing $284 per order
Custom design processing $186 per custom design
Customer service $379 per customer

Management wants to calculate the profitability of a particular customer, Big Sky Outfitters,
which ordered the following products over the last 12 months:

Standard model Custom design

Number of gliders 20 3
Number of orders 1 3
Number of custom design 0 3
Direct labor-hours per glider 26.35 28.00
Selling price per gilder $1,850 $2,400
Direct materials cost per glider $564 $634

The company’s direct labor rate is $19.50 per hour.

Required:
Using the company’s activity-based costing system, compute the customer margin of Big Sky
Outfitters.

Exercise 7-13
Fogerty Company makes two products: titanium Hubs and Sprockets. Data regarding the two
products follow:

Direct labor hours per unit Annual Production

Hubs 0.80 10,000 units
Sprockets 0.40 40,000 units

Additional information about the company follows:

a. Hubs require $32 in direct materials per unit, and Sprockets require $18.
b. The direct labor wage rate is $15 per unit.
c. Hubs require special equipment and are more complex to manufacture than Sprockets.
d. The ABC system has the following activity cost pools:

Estimated Activity
Activity cost pools
overhead
(Activity measure) Hubs Sprockets Total
cost
Machine setups
$72,000 100 300 400
(number of setups)
Special processing
$200,000 5,000 0 5,000
(machine-hours)
General factory
$816,000 NA NA NA
(organization-sustaining)

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Cost accounting (02) Spring 2024 © The McGraw-Hill Companies, Inc., 2021.

Required:
1. Compute the activity rate for each activity cost pool. Did you compute an activity rate for
all of the activity cost pools? Why?
2. Determine the unit product cost of each product according to the ABC system.

Chapter 9

Exercise 9-2
Flight Café prepares in-flight meals for airlines and its planning budget for July appears below:

Flight Café
Planning Budget
For the Month Ended July 31
Budgeted meals (q) 18,000
Revenue ($4.50q) $81,000
Expenses:
Raw materials ($2.40q) 43,200
Wages and salaries ($5,200 + $0.3q) 10,600
Utilities ($2,400 + $0.05q) 3,300
Facility rent ($4,300) 4,300
Insurance ($2,300) 2,300
Micellaneous ($680 + $0.1q) 2,480
Total expenses 66,180
Net operating income $14,820

In July, 17,800 meals were actually served. The company’s flexible budget for this level of
activity appears below:

Flight Café
Flexible Budget
For the Month Ended July 31
Budgeted meals (q) 17,800
Revenue ($4.50q) $80,100
Expenses:
Raw materials ($2.40q) 42,720
Wages and salaries ($5,200 + $0.3q) 10,540
Utilities ($2,400 + $0.05q) 3,290
Facility rent ($4,300) 4,300
Insurance ($2,300) 2,300
Micellaneous ($680 + $0.1q) 2,460
Total expenses 65,610
Net operating income $14,490

Required:
1. Calculate the company’s activity variances for July.
2. Which of the activity variances should be of concern to management? Explain.

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Cost accounting (02) Spring 2024 © The McGraw-Hill Companies, Inc., 2021.

Exercise 9-3
Quilcene Oysteria farms and sells oysters in the Pacific Northwest. The company harvested
and sold 8,000 pounds of oysters in August. The company’s flexible budget for August appears
below:

Quilcene Oysteria
Flexible Budget
For the Month Ended August 31
Actual pounds (q) 8,000
Revenue ($4.00q) $32,000
Expenses:
Packing supplies ($0.50q) 4,000
Oyster bed maintenance ($3,200) 3,200
Wages and salaries ($2,900 + $0.3q) 5,300
Shipping ($0.80q) 6,400
Utilities ($830) 830
Other ($450 + $0.05q) 850
Total expenses 20,580
Net operating income $11,420

The actual results for August were as follows:

Quilcene Oysteria
Income Statement
For the Month Ended August 31
Actual pounds 8,000
Revenue $35,200
Expenses:
Packing supplies 4,200
Oyster bed maintenance 3,100
Wages and salaries 5,640
Shipping 6,950
Utilities 810
Other 980
Total expenses 21,680
Net operating income $13,520

Required:
Calculate the company’s revenue and spending variances for August.

Chapter 10

Exercise 10-3
Logistics solutions maintains warehouses that stock items carried by its dot.com clients. When
a client receives an order from a customer, the order is forwarded to Logistics Solutions, which
pulls the item from storage, packs it, and ships it to the customer. The company uses a
predetermined variable overhead rate based on direct labor-hours.
In the most recent month, 120,000 items were shipped to customers using 2,300 direct labor
hours. The company incurred a total of $7,360 in variable overhead costs.
According to the company’s standards, 0.02 direct labor-hour is required to fulfil an order for
one time and the variable overhead rate is $3.25 per direct labor-hour.

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Cost accounting (02) Spring 2024 © The McGraw-Hill Companies, Inc., 2021.

Required:
1. What is the standard labor-hours allowed (SH) to ship 120,000 items to customers?
2. What is the standard variable overhead cost allowed (SH x SR) to ship 120,000 itmes to
customers?
3. What is the variable overhead spending variance?
4. What are the variable overhead rate variance and the variable overhead efficiency
variance?

Exercise 10-6
Huron Company produces a cleaning compound known as Zoom. The direct materials and
direct labor standards for one unit of Zoom are given below:

Standard quantity of Standard price or Standard cost

hours rate
Direct materials 4.6 pounds $2.50 per pound $11.50
Direct labor 0.2 hour $18.00 per hour $3.60

During the most recent month, the following activity was recorded:
a. Twenty thousand pounds of material were purchased at a cost of $2.35 per pound.
b. All of the material purchased was used to produce 4,000 units of Zoom.
c. 750 hours of direct labor time were recorded at a total labor cost of $14,925.

Required:
1. Compute the materials price and quantity variances for the month.
2. Compute the labor rate and efficiency variances for the month.

Chapter 11

Exercise 11-15
Korvanis Corporation operates a Medical Services Department that charges its variable costs
to operating departments based on the actual number of employees in each department. It
charges fixed costs to operating departments based on the long-run average number of
employees.
The medical services department’s variable costs are budgeted at $80 per employee and its
fixed costs are budgeted at $400,000 per year. Actual medical service department costs for
the most recent year were $41,000 for variable costs and $408,000 for fixed costs. Data
concerning employees in the three operating departments follow:

Cutting Milling Assembly

Budgeted number of employees 170 100 280
Actual number of employees for 150 80 270
the most recent year
Long-run average number of 180 120 300
employees

Required:
1. Calculate the Medical Services Department charges to each of the operating departments-
Cutting, Milling, and Assembly.
2. How much, if any, of the Medical Services Department’s actual costs should be treated as
a spending variance and not charged to operating department?