Williams Company produces brooms and had the following costs, volumes, and price
ID: 2565457 • Letter: W
Question
Williams Company produces brooms and had the following costs, volumes, and prices in 1996:
Variable Manufacturing costs (per broom)
Raw Materials (straw and wood) $3.00
Direct Labor $2.00
Variable Overhead $1.00
Fixed Manufacturing Costs $6,000/year
Nonmanufacturing Costs: SG&A
Fixed SG&A $4,000/year
Variable SG&A $4/unit
1996 Selling Price $18.00/unit
1996 Sales 3,000 units
Net Income is $1500 greater if production increases from 3,000 units to 4,000 units. Where is the $1,500?
A) Nowhere, the company simply incurred $1500 less in producing the 4000 units.
B) On the balance sheet as ending inventory balance.
C) On the cash flow statement as investing cash.
D) On the Income Statement as Fixed Manufacturing costs.
Where is the $6000 fixed overhead recognized if the company produced 4000 units and the company uses variable costing?
A) Nowhere.
B) On the balance sheet as ending inventory balance.
C) On the cash flow statement as investing cash.
D) On the Income Statement as Fixed Manufacturing costs.
Would the COGS on the income statement and ending inventory balance on the balance sheet change if the Fixed Manufacturing costs consisted solely of depreciation on the plant?
A) Yes
B) No
Explanation / Answer
Answer: Option B) On the balance sheet as ending inventory
The net income of $1500 pertains to the fixed manufacturing costs included in the ending inventory.
Fixed manufacturing cost per unit = $6000 / 4000 units produced = $1.50 per unit
Fixed manufacturing cost in ending inventory = (4000 – 3000) units x $1.50 = $1500
Answer: Option D) On the Income Statement as Fixed Manufacturing costs.
Under variable costing, the fixed manufacturing costs are not considered a part of the product cost but charged off as period costs and hence $6000 would be on the income statement.
Answer: Option B) No
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