Managerial Accounting Exercises / Problems

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Problem 1.

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The following monthly budgeted data are available for a wholesale company:

Product L Product Z Product C
Sales $400,000 $200,000 $800,000
Variable expenses 240,000 140,000 640,000
Contribution margin $160,000 $ 60,000 $160,000

Budgeted net operating income for the month is $130,000.


a. Calculate the break-even sales for the month.

b. Calculate the margin of safety in sales dollars.

c. Calculate the operating leverage for both budgeted and actual data.

d. Actual total sales for the month were the same as the budgeted sales–$1,400,000. However, the sales mix changed so that sales by product were: L, $560,000; Z, $280,000; C, $560,000. Calculate the expected net operating income with this new sales mix. Explain why this net operating income figure differs from the original budgeted net operating income of $130,000.

Problem 2.

Data concerning Breedon Company’s operations last year appear below:

Units in beginning inventory -0-
Units produced 12,000
Units sold 11,250

Selling price per unit $90

Variable costs per unit:
Direct materials $20
Direct labor 10
Variable manufacturing overhead 8
Variable selling and administrative 5

Fixed costs in total:
Fixed manufacturing overhead $180,000
Fixed selling and administrative 150,000


a. Compute the unit product cost under both absorption and variable costing.

b. Prepare an income statement for the year using absorption costing.

c. Prepare an income statement for the year using variable costing.

d. Prepare a report reconciling the difference in net operating income between absorption and variable costing for the year.

Problem 3.

Maher Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price $129

Units in beginning inventory 0
Units produced 3,700
Units sold 3,600
Units in ending inventory 100

Variable costs per unit:
Direct materials $37
Direct labor 38
Variable manufacturing overhead 6
Variable selling and administrative 5

Fixed costs:
Fixed manufacturing overhead $103,600
Fixed selling and administrative 50,400


a. What is the unit product cost for the month under variable costing?
b. What is the unit product cost for the month under absorption costing?
c. Prepare an income statement for the month using the contribution format and the variable costing method.
d. Prepare an income statement for the month using the absorption costing method.
e. Reconcile the variable costing and absorption costing net operating incomes for the month.

Problem 4.

Hatch Hardwood Floors installs oak and other hardwood floors in homes and businesses. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Production overhead $160,000
Office expense $160,000
Total $320,000

Distribution of resource consumption:
Activity Cost Pools
Installing Job
Floors Support Other Total
Production overhead 45% 35% 20% 100%
Office expense 10% 60% 30% 100%

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool Annual Activity
Installing floors 800 squares
Job support 160 jobs
Other Not applicable

A “square” is a measure of area that is roughly equivalent to 1,000 square feet.

a. Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:

Floors Job Support Other Total
Production overhead
Office expense

b. Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors and Job Support activity cost pools by filling in the table below:

Floors Job Support Other Total
Production overhead
Office expense

c. Compute the overhead cost, according to the activity-based costing system, of a job that involves installing 2.4 squares.

Problem 5.

Randall Company is a merchandising company that sells a single product. The company’s inventories, production, and sales in units for the next three months have been forecasted as follows:

October November December
Beginning inventory 10,000 10,000 10,000
Merchandise purchases 60,000 70,000 35,000
Sales 60,000 70,000 40,000
Ending inventory 10,000 10,000 5,000

Units are sold for $12 each. One fourth of all sales are paid for in the month of sale and the balance is paid in the following month. Accounts receivable at September 30 totaled $450,000.

Merchandise is purchased for $7 per unit. Half of the purchases are paid for in the month of the purchase and the remainder is paid in the month following purchase. Selling and administrative expenses are expected to total $120,000 each month. One half of these expenses will be paid in the month in which they are incurred and the balance will be paid in the following month. There is no depreciation. Accounts payable at September 30 totaled $290,000.

Cash at September 30 totaled $80,000. A payment of $300,000 for purchase of equipment is scheduled for November, and a dividend of $200,000 is to be paid in December.


a. Prepare a schedule of expected cash collections in good form for each of the months of October, November, and December.

b. Prepare a schedule showing expected cash disbursements for merchandise purchases and selling and administrative expenses for each of the months October, November, and December.

c. Prepare a cash budget in good form for each of the months October, November, and December. There is no minimum required ending cash balance.

Problem 6.

A sales budget is given below for one of the products manufactured by the Key Co.:

Sales Budget
in Units
January 20,000
February 35,000
March 60,000
April 40,000
May 30,000
June 25,000

The inventory of finished goods at the end of each month must equal 20% of the next month’s sales. On December 31, the finished goods inventory totaled 4,000 units.

Each unit of product requires three specialized electrical switches. Since the production of these specialized switches by Key’s suppliers is sometimes irregular, the company has a policy of maintaining an ending inventory at the end of each month equal to 30% of the next month’s production needs. This requirement had been met on January 1 of the current year.


Prepare a budget showing the quantity of switches to be purchased each month for January, February, and March and in total for the quarter.

Solution Summary
The solution has various managerial accounting questions dealing with breakeven, operating leverage, margin of safety, absorption costing, variable costing, cost allocation and budget preparation.

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