Module 5 Review Questions I. Absorption costing and over-production Under absorption costing, a company had the following per unit costs when 10,000 units were produced. 1. Compute the company’s total production cost per unit if 25,000 units had been produced. 2. Why might a manager of a company using absorption costing produce more units than can currently be sold? II. Computing contribution margin AirTel Company sold 10,000 units of its product at a price of $80 per unit. Total variable cost is $50 per unit consisting of $40 in variable production cost and $10 in variable selling and administrative cost. Compute the contribution margin. III. Computing unit cost under absorption costing Rajeev Company reports the following information regarding its production costs. Compute its production cost per unit under absorption costing. IV. Production level, absorption costing, and gross margin Tramor Company reports the following cost data for its single product. The company regularly sells 20,000 units of its product at a price of $80 per unit. If Tramor doubles its production to 40,000 units while sales remain at the current 20,000-unit level, by how much would the company’s gross profit increase or decrease under absorption costing? V. Variable costing income statement and conversion to absorption costing income Torres Company began operations this year. During this first year, the company produced 100,000 units and sold 80,000 units. The absorption costing income statement for its first year of operation follows: Sales (80,000 units x $50 per unit) ................................................ $4,000,000 Cost of goods sold Beginning inventory ……....……………………………………… $ 0 Cost of goods manufactured (100,000 units x $30 per unit) 3,000,000 Cost of goods available for sale .....…………………….………. 3,000,000 Ending inventory (20,000 units x $30) ......……………………... 600,000 Cost of goods sold ....…………………………………………….. 2,400,000 Gross margin .....………………………………………………………. 1,600,000 Selling and administrative expenses ......…………………………… 530,000 Net income .........……………………………………………………… $1,070,000 Additional information: a. Selling and administrative expenses consist of $350,000 in annual fixed expenses and $2.25 per unit in variable selling and administrative expenses. b. The company’s product cost of $30 per unit is computed as follows: Direct materials ………………………………… $5 per unit Direct labor ……………………………………… $14 per unit Variable overhead ……………………………… $2 per unit Fixed overhead ($900,000/100,000 units) …... $9 per unit 1. Prepare an income statement for the company under variable costing. 2. Explain any difference between the income under variable costing (from part 1) and the income reported above. Module 6 Case Study Near the end of 2013, the management of Simid Sports Co., a manufacturing company, pr ...

1. Module 5 Review Questions
I. Absorption costing and over-production
Under absorption costing, a company had the following per unit
costs when 10,000 units
were produced.
1. Compute the company’s total production cost per unit if
25,000 units had been
produced.
2. Why might a manager of a company using absorption costing
produce more units
than can currently be sold?
II. Computing contribution margin
AirTel Company sold 10,000 units of its product at a price of
$80 per unit. Total variable cost
is $50 per unit consisting of $40 in variable production cost and
$10 in variable selling and
administrative cost. Compute the contribution margin.

2. III. Computing unit cost under absorption costing
Rajeev Company reports the following information regarding its
production costs. Compute
its production cost per unit under absorption costing.
IV. Production level, absorption costing, and gross margin
Tramor Company reports the following cost data for its single
product. The company
regularly sells 20,000 units of its product at a price of $80 per
unit. If Tramor doubles its
production to 40,000 units while sales remain at the current
20,000-unit level, by how much
would the company’s gross profit increase or decrease under
absorption costing?
V. Variable costing income statement and conversion to
absorption costing income
Torres Company began operations this year. During this first
year, the company produced
100,000 units and sold 80,000 units. The absorption costing

3. income statement for its first
year of operation follows:
Sales (80,000 units x $50 per unit)
................................................ $4,000,000
Cost of goods sold
Beginning inventory ……....………………………………………
$ 0
Cost of goods manufactured (100,000 units x $30 per unit)
3,000,000
Cost of goods available for sale .....…………………….……….
3,000,000
Ending inventory (20,000 units x $30) ......……………………...
600,000
Cost of goods sold ....……………………………………………..
2,400,000
Gross margin
.....……………………………………………………….
1,600,000
Selling and administrative expenses
......…………………………… 530,000
Net income
.........………………………………………………………
$1,070,000
Additional information:
a. Selling and administrative expenses consist of $350,000 in
annual fixed expenses
and $2.25 per unit in variable selling and administrative
expenses.

4. b. The company’s product cost of $30 per unit is computed as
follows:
Direct materials ………………………………… $5 per unit
Direct labor ……………………………………… $14 per unit
Variable overhead ……………………………… $2 per unit
Fixed overhead ($900,000/100,000 units) …... $9 per unit
1. Prepare an income statement for the company under variable
costing.
2. Explain any difference between the income under variable
costing (from part 1) and
the income reported above.
Module 6 Case Study
Near the end of 2013, the management of Simid Sports Co., a
manufacturing company,
prepared the following estimated balance sheet for December
31, 2013.
To prepare a master budget for January, February, and March of

5. 2014, management has
gathered the following information:
• Simid Sports’ single product is purchased for $30 per unit and
resold for $55 per unit.
The expected inventory level of 2,500 units on December 31,
2013, is more than
management’s desired level for 2014 which is 20% of the next
month’s expected sales
(in units). Expected sales are:
o January, 3,500 units;
o February, 4,500 units;
o March, 5,500 units; and
o April, 5,000 units.
• Cash sales and credit sales represent 25% and 75%,
respectively, of total sales. Of the
credit sales, 60% is collected in the first month after the month
of sale and 40% in the
second month after the month of sale. For the December 31,
2013, accounts receivable
balance, $62,500 is collected in January and the remaining
$200,000 is collected in

6. February.
• Merchandise purchases are paid for as follows: 20% in the
first month after the month of
purchase and 80% in the second month after purchase. For the
December 31, 2013,
accounts payable balance, $40,000 is paid in January and the
remaining $140,000 is
paid in February.
• Sales commissions equal to 20% of sales are paid each month.
Sales salaries
(excluding commissions) are $30,000 per year.
• General and administrative salaries are $72,000 per year.
Maintenance expense equals
$1,000 per month and is paid in cash.
• Equipment reported in the December 31, 2013, balance sheet
was purchased in January
2013. It is being depreciated over eight years using the straight-
line method with no
salvage value. The following amounts for new equipment
purchases are planned in the
coming quarter: January, $18,000; February, $48,000; and
March, $14,400. This

7. equipment will be depreciated using the straight-line method
over eight years with no
salvage value. A full month’s depreciation is taken for the
month in which equipment is
purchased.
• The company plans to acquire land at the end of March at a
cost of $75,000, which will
be paid for with cash on the last day of the month.
• Simid Sports has a working arrangement with its bank to
obtain additional loans as
needed. The interest rate is 12% per year, and interest is paid at
each month-end based
on the beginning balance. Partial or full payments on these
loans can be made on the
last day of the month. The company has agreed to maintain a
minimum ending cash
balance of $12,500 each month.
• The income tax rate for the company is 40%. Income taxes on
the first quarter’s income
will not be paid until April 15.

8. Module 6 Review Questions
I. Preparation of merchandise purchases budgets (for three
periods)
Formworks Company prepares monthly budgets. The current
budget plans for a
September ending inventory of 15,000 units. Company policy is
to end each month with
merchandise inventory equal to a specified percent of budgeted
sales for the following
month. Budgeted sales and merchandise purchases for the three
most recent months
follow.
1. Prepare the merchandise purchases budget for the months of
July, August, and
September.
2. Compute the ratio of ending inventory to the next month’s
sales for each budget
prepared in part 1.
3. How many units are budgeted for sale in October?
II. Preparation of cash budgets (for three periods)

9. Kasik Company budgeted the following cash receipts and cash
disbursements for the
first three months of next year.
According to a credit agreement with the company’s bank,
Kasik promises to have a
minimum cash balance of $30,000 at each month-end. In return,
the bank has agreed
that the company can borrow up to $150,000 at an annual
interest rate of 12%, paid the
last day of each month. The interest is computed based on the
beginning balance of the
loan for the month. The company has a cash balance of $30,000
and a loan balance of
$60,000 at January 1. Prepare monthly cash budgets for each of
the first three months
of next year.
III. Computing budgeted cash payments for purchases
Powerdyne Company’s cost of goods sold is consistently 60% of
sales. The company
plans to carry ending merchandise inventory for each month
equal to 40% of the next
month’s budgeted cost of goods sold. All merchandise is
purchased on credit, and 50%
of the purchases made during a month is paid for in that month.
Another 35% is paid for
during the first month after purchase, and the remaining 15% is

10. paid for during the
second month after purchase.
Expected dollar sales are:
August (actual), $150,000
September (actual), $350,000
October (estimated), $200,000
November (estimated) $300,000.
Use this information to determine October’s expected cash
payments for purchases.
IV. Budgeted Cash Receipts
Emily Company has sales on account and sales for cash.
Specifically, 60% of its sales
are on account and 40% are for cash. Credit sales are collected
in full in the month
following the sale. The company forecasts sales of $525,000 for
April, $535,000 for May,
and $560,000 for June. The beginning balance of Accounts
Receivable on April 1 is
$300,000.
Prepare a schedule of budgeted cash receipts for April, May,
and June.

11. Activity 5.4 - Assignment: Research Paper
Samanta Shoes, which was launched by entrepreneurs Samanta
and Kelvin Joseph, produces high-quality shoes in unique styles
and limited quantities. Selling prices for a pair of Samanta
Shoes can range from $100 per pair to $350 per pair.
1. Based on information in this chapter’s opening, identify at
least four examples of the types of costs that likely explain the
wide range of shoe selling prices. Be sure to justify your
responses, not just show a listing of costs.
2. The founders of Samanta Shoes use variable costing in their
business decisions. If Samanta Shoes used absorption costing,
would you expect the company’s income to be more than, less
than, or about the same as its income measured under variable
costing? Explain.
Your paper should be from one to two pages in length. It should
be well-thought out and free of spelling and grammatical errors.
Be sure to state the reasons for your answers. You may wish to
explain the difference in variable and absorption costing in
explaining your difference in income.
Use the following Research Paper Format:
· Times New Roman, with 12-point font size
· Double Spaced
· 1-inch report margins
Your Research Paper will be graded based upon the Writing
Rubric (PDF) and receive a maximum of 100 points.
Submit a document containing your memorandum as an
attachment utilizing the Activity link above. Include your
surname, module number, and title of the assignment in the
document name (e.g., surname_M5_ResearchPaper).