Acccob3 Long Quiz 3 Coverage

ACCCOB3
LONG QUIZ 3 COVERAGE

Chapter 3
Over and Underapplied Overhead
• Compute underapplied or overapplied
overhead cost and prepare the journal
entry to close the balance in
Manufacturing Overhead to the
appropriate accounts.
Key Concepts
• The difference between the overhead cost applied to Work
in Process and the actual overhead costs of a period is
referred to as either under- or overapplied overhead.
• Underapplied overhead • Overapplied overhead

exists when the amount of exists when the amount of
overhead applied to jobs overhead applied to jobs
during the period using the during the period using the
predetermined overhead rate predetermined overhead
is less than the total amount rate is greater than the total
of overhead actually incurred amount of overhead actually
during the period. incurred during the period.
Quick Check 5
Tiger, Inc., had actual manufacturing overhead costs of
$1,210,000 and a predetermined overhead rate of $4.00 per
machine-hour. Tiger, Inc., worked 290,000 machine-hours during
the period. Tiger’s manufacturing overhead is:
a. $50,000 overapplied.
b. $50,000 underapplied.
c. $60,000 overapplied.
d. $60,000 underapplied.
Quick Check 5a
• Tiger, Inc., had actual manufacturing overhead costs of
$1,210,000 and a predetermined overhead rate of $4.00
per machine-hour. Tiger, Inc., worked 290,000 machine-
hours during the period. Tiger’s manufacturing overhead
is:
•a. $50,000 overapplied.
•b. Answer: $50,000 underapplied.
• c. $60,000 overapplied.
• d. $60,000 underapplied.
• Overhead applied
• $4.00 per hour × 290,000 hours = $1,160,000
• Underapplied overhead
• $1,210,000 − $1,160,000 = $50,000
Overhead Application 1
• PearCo’s actual overhead for the year was $650,000

with a total of 170,000 direct labor-hours worked on jobs.
• PearCo’s predetermined overhead rate is $4.00 per
direct labor-hour.
• Overhead applied during the period:

Applied overhead = POHR×Actual direct labor-hours
Applied overhead = $4.00 per DLH×170,000 DLH = $680,000
Overhead Application 2
• PearCo’s actual overhead for the year was $650,000

with a total of 170,000 direct labor-hours worked on jobs.
• PearCo’s predetermined overhead rate is $4.00 per
direct labor-hour.
• PearCo has overapplied

overhead for the year by $30,000.
What will PearCo do?
• Overhead applied during the period:
Applied overhead = POHR×Actual direct labor-hours
Applied overhead = $4.00 per DLH×170,000 DLH = $680,000
Disposition of Overapplied and
Underapplied Overhead 1
• Any remaining balance in the Manufacturing

Overhead account, such as PearCo’s $30,000 of
overapplied overhead, is disposed of in one of
two ways:
1. It can be closed to Cost of Goods Sold.
2. It can be closed proportionally to Work in
Process, Finished Goods, and Cost of Goods
Sold.
The journal entry, in T-account form, to close out PearCo’s

$30,000 of overapplied overhead into Cost of Goods Sold:
• Access the text alternative for slide images.

Calculating the allocation of under- or overapplied overhead

between Work in Process, Finished Goods, and Cost of Goods
Sold:
Let’s assume the overhead applied in Ending Work in Process
Inventory, Ending Finished Goods Inventory, and Cost of Goods
Sold is $68,000, $204,000, and $408,000, respectively (total
value of accounts $680,000).
In this case, the allocation percentages for Work in Process,

Finished Goods, and Cost of Goods would be:
Ending WIP inventory = $68,000 ÷ $680,000 = 10%

Ending finished goods inventory = $204,000 ÷ $680,000 = 30%
Cost of goods sold = $408,000 ÷ $680,000 = 60%
The allocation of the $30,000 of overapplied overhead

would be:
Percent of Allocation of
Amount Total $30,000
Work in process $ 68,000 10% $ 3,000
Finished goods 204,000 30% 9,000
Cost of goods sold 408,000 60% 18,000
Total $680,000 100% $30,000
Percent of Allocation of
Amount Total $30,000
Work in process $ 68,000 10% $ 3,000
Finished goods 204,000 30% 9,000
Cost of goods sold 408,000 60% 18,000
Total $680,000 100% $30,000
Manufacturing Overhead 30,000

Work in Process Inventory 3,000
Finished goods Inventory 9,000
Cost of Goods Sold 18,000
• In summary, there are two methods for disposing of

under- and overapplied overhead:
1. Close out to Cost of Goods Sold.
2. Allocate between Work in Process, Finished Goods,
and Cost of Goods Sold.
• The latter method is

considered more accurate, but
it is more complex to compute.
Quick Check 6
What effect will the overapplied overhead have on net operating
income?
a. Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Quick Check 6a
What effect will the overapplied overhead have on net operating
income?
a. Answer: Net operating income will increase.
b. Net operating income will be unaffected.
c. Net operating income will decrease.
Cost-Volume-Profit
Relationships
CHAPTER 5
Managerial Accounting
Seventeenth edition
• © 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution
permitted without the prior written consent of McGraw Hill.
Cost-Volume-Profit Analysis: Key
Assumptions
To simplify CVP calculations, managers typically adopt the
following assumptions with respect to these factors:
1. Selling price is constant. The price of a product or service will
not change as volume changes.
2. Costs are linear and can be accurately divided into variable
and fixed components. The variable costs are constant per
unit and the fixed costs are constant in total over the entire
relevant range.
3. In multiproduct companies, the mix of products sold remains
constant.
Chapter 5: COST-VOLUME PROFIT ANALYSIS
ELEMENTS OF CVP ANALYSIS
1. Sales (selling price and units or volume)
2. Total fixed costs
3. Variable costs per unit
4. Sales mix
APPLICATION OF CVP ANALYSIS
1. Type of product to produce and sell
2. Pricing policy to follow
3. Marketing strategy to use
4. Productive facilities to acquire
INHERENT SIMPLIFYING ASSUMPTIONS
OF CVP ANALYSIS
• All costs are classified as to variable or fixed.
• Cost & revenue relationships are predictable &
linear over a relevant range of activity & a
specified period of time.
• Total Variable Cost changes directly with the cost
driver. Variable Cost per unit is constant.
• Total Fixed Cost is constant. Fixed cost per unit
changes indirectly with the cost driver.
• Selling prices per unit, market condition,
productive efficiency are constant.
• Production equals sales.
Financial Accounting Management Accounting
Income Statement
Contribution Margin
Sales Pxx Income Statement
Less: Sales Discounts xx
Sales Pxx
Net Sales Pxx
Less: Cost of Sales xx Less: Variable Costs xx
Gross Profit Pxx Contribution Margin Pxx
Less: xx
Less: Fixed Costs
Selling/ Admin Expenses xx
Net Operating
Net operating income Pxx
Income Pxx
THE CONTRIBUTION MARGIN INCOME STATEMENT
Sales (units x selling price) P xx
Less: Variable costs (VC per unit x no. of units) xx
Contribution Margin xx
Less: Total Fixed Expenses xx
Net Operating Income P xx
The costs & expenses are classified as to
BEHAVIOR: (Variable or Fixed)
BREAK-EVEN ANALYSIS
Contribution Margin Method (Formula Approach)
Consider the following data:
Sales (10,000 units @ P10) P100,000
Variable Costs (10,000 units @ P6) 60,000
Contribution margin (10,000 units @ P4) 40,000
Fixed expenses 30,000
Profit 10,000
Amount in thousands Break-Even Graph
P0 10 20 30 40 50 60 70 80 90 100
Fixed
Expenses
P30,000
0 2,500 5,000 7,500 10,000 12,500 15,000 Units

BREAK-EVEN ANALYSIS
1. Contribution Margin Method (Formula Approach)
Consider the following data:
Sales (10,000 units @ P10) P100,000
Variable Costs (10,000 units @ P6) 60,000
Contribution margin (10,000 units @ P4) 40,000
Fixed expenses 30,000
Profit 10,000
CM = S - VC P100,000 – P60,000 = P40,000
CM/u = SP - VC/u P10 – P6 = P4
CMR = CM divided by S P40,000 / P100,000 = 40%
VCR = VC divided by S P60,000 / P100,000 = 60%
CMR + VCR = 100% or 1 40% + 60% =100%
CMR = 1 - VCR 1 – 0.60 = 0.40 or 40%
VCR = 1 - CMR 1 – 0.40 = 0.60 or 60%
1. Break-even Point in PESOS
BEPp = FxC = P30,000
CMR
where BEPp =Break-even point in pesos
FxC =Total fixed costs
CMR =Contribution margin ratio
BEPp = FxC = P30,000
CMR
BEPp = FxC = P30,000 = P75,000
CMR 40%
BEPp = FxC = P30,000 = P75,000
CMR 40%
2. Break-even Point in UNITS
BEPu = FxC = P30,000
CM/u
where BEPu =Break-even point in units
CM/u =Contribution margin per unit
BEPp = FxC = P30,000 = P75,000
CMR 40%
2. Break-even Point in UNITS
BEPu = FxC = P30,000 = 7,500 units
CM/u P4
where BEPu =Break-even point in units
CM/u =Contribution margin per unit
Amount in thousands 1. Break-Even Graph
P100,000 Sales Sales
P0 10 20 30 40 50 60 70 80 90 100
Total Expenses
P75,000 BEP Sales
Break-Even Point:
7,500 BEP units
P75,000: 7,500 units x P10 SP
Fixed
Expenses
P30,000
0 2,500 5,000 7,500 10,000 12,500 15,000 Units

Illustrative Problem 1: Break-Even Sales
Caffe Expresso average selling price per cup of coffee is
$1.49. The average variable expense per cup is $0.36.
The average fixed expense per month is $1,300. An
average of 2,100 cups are sold each month. What is the
break-even sales in dollars?
Unit Selling Price $ 1.49
Less: Variable expense 0.36
Unit Contribution Margin $ 1.13
Divide by Unit Selling Price 1.49
Contribution Margin Ratio 0.758 *
*Denominator in the computation of BEP - Sales
1. Break-even Sales in Dollars

BEP = FxC $ 1,300
CMR
where BEPp =Break-even point in dollars
FxC =Total fixed expenses
1. Break-even Sales in Dollars

BEP = FxC $ 1,300 = $1,715
CMR 0.758
where BEPp =Break-even point in dollars
FxC =Total fixed expenses
Illustrative Problem 2: Break-Even Units
Caffe Expresso average SP per cup of coffee is $2.25. The
average variable expense per cup is $0.60. The average
fixed expense per month is $1,500. An average of 2,000
cups are sold each month. What is the break-even sales
in UNITS? Round off answer in whole number.
Unit Selling Price $ 2.25
Less: Variable expense 0.60
Fixed expenses $ 1,500
Divide by Unit Contribution Margin $ 1.65
Break-Even Point in UNITS 909 units
Graded Seatwork: Break-even Graph
Hero Trading’s total sales during the period was 10,000
units. Selling price and Variable Cost on this product are
$35 and $19.25, respectively. Total fixed cost amounts to
$78,750.
Required:
1. Prepare a contribution format income statement.
2. Compute for Break-even point in sales and units.
3. Prepare Break-even graph.
Time alloted: 30 minutes.

HERO TRADING
Contribution Format Income Statement
Total Sales ($35 x 10,000 units) $350,000

Less: Total Variable Cost ($19.25 x 10,000 units) 192,500
Contribution Margin ($15.75 x 10,000 units) 157,500
Less: Fixed Cost 78,750
Profit 78,750
BEP units: Fixed Cost $78,750 5,000 units

CM/unit $15.75
BEP sales: Fixed Cost $78,750 $175,000

CMR ($15.75/$35)
To check: 5,000 units x $35 per unit SP = $175,000

1. Break-Even Graph
Amount in thousands Sales
$0 50 100 150 200 250 300 350 400 P350,000 Sales Total
Expenses
$175,000
Break-Even Point:
5,000 BEP units
BEP Sales
$175,000: 5,000 units x P35 SP
Fixed
Expenses
$78,750
Thousand
0 1 2 3 4 5 6 7 8 9 10 11 12 units
Learning Objective 6
Determine the level of sales needed to
achieve a desired target profit.
Target Profit Analysis
In target profit analysis, we estimate what sales
volume is needed to achieve a specific target
profit.
We can compute the number of units that must be
sold to attain a target profit using either the:
• Equation method, or
• Formula method.
Required Sales with Desired Profit (Formula Method)
Required Sales in Units Required Sales in Amount
Target Profit + FxC Target Profit + FxC
CM/u CMR
Selling price per unit P5
Contribution margin per unit P2
Fixed costs P12,000
Target Profit P10,000
Target Profit + FxC = P10,000 + P12,000 =11,000
RSu = units
CM/u P2
Target Profit + FxC = P10,000 + P12,000 =P55,000
RSa = P2/P5 or 40%
CMR
Quick Check 4
Coffee Klatch is an espresso stand in a downtown office building.
The average selling price of a cup of coffee is $1.49, and the
average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. Use the formula method to
determine how many cups of coffee would have to be sold to
attain a target profit of $2,500 per month.
a. 3,363 cups.
b. 2,212 cups.
c. 1,150 cups.
d. 4,200 cups.
Quick Check 4a
determine how many cups of coffee would have to be sold to
attain a target profit of $2,500 per month.
a. Answer: 3,363 cups.
Unit sales
b. 2,212 cups. Target profit  Fixed expenses
to attain 
c. 1,150 cups. Unit CM
d. 4,200 cups. target profit
$2,500  $1,300

$1.49  $0.36
$3,800

$1.13
 3,363 cups
Quick Check 5
determine the sales dollars that must be generated to attain a
target profit of $2,500 per month.
a. $2,550.
b. $5,013.
c. $8,458.
d. $10,555.
Quick Check 5a
determine the sales dollars that must be generated to attain a
target profit of $2,500 per month.
a. $2,550.
Sales $
b. Answer: $5,013. Target profit  Fixed expenses
c. $8,458.
to attain 
target profit CM ratio
d. $10,555.
$2,500  $1,300

 $1.49  $0.36   $1.49
$3,800

0.758
 $5, 013
Compute the margin of safety and
explain its significance.
Margin of Safety in Dollars
• The margin of safety is the excess of budgeted or actual
sales dollars over the break-even volume of sales dollars. It
is the amount by which sales can drop before losses are
incurred. The higher the margin of safety, the lower the
risk of not breaking even and incurring a loss.
•Margin of safety in dollars = Total sales − Break-even sales
• Let’s look at RBC and determine the margin of safety.

Margin of Safety in Dollars – Example
If we assume that RBC has actual sales of $250,000, given
that we have already determined the break-even sales to
be $200,000, the margin of safety is $50,000 as shown.
Break-Even Actual
Sales Sales
400 units 500 units
Sales $ 200,000 $ 250,000
Less: Variable expenses 120,000 150,000
Contribution margin 80,000 100,000
Less: Fixed expenses 80,000 80,000
Net operating income $ - $ 20,000
Margin of Safety Percentage
RBC’s margin of safety can be expressed as 20% of
sales ($50,000 ÷ $250,000).
Break-Even Actual
Sales Sales
400 units 500 units
Sales $ 200,000 $ 250,000
Net operating income $ - $ 20,000
Margin of Safety in Units
The margin of safety can be expressed in terms of
the number of units sold. The margin of safety at RB
C is $50,000, and each bike sells for $500; hence, RB
C’s margin of safety is 100 bikes.
$50, 000
Margin of safety in units   100 bikes
$500
Quick Check 6a
• Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49,
and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. An average of
2,100 cups are sold each month. What is the margin of safety
expressed in cups?
– a. 3,250 cups.
– b. Answer: 950 cups.
– c. 1,150 cups.
– d. 2,100 cups.
•Margin of safety = Total sales – Break-even

sales
• = 2,100 cups − 1,150 cups
• = 950 cups
Cost Structure and Profit Stability
Cost structure refers to the relative
proportion of fixed and variable costs in an
organization. Managers often have some
latitude in determining their organization’s
cost structure.
Cost Structure and Profit Stability –
High and Low Fixed Cost Structures
• There are advantages and disadvantages to high
fixed cost (or low variable cost) and low fixed
cost (or high variable cost) structures.
• An advantage of a high fixed cost • Companies
structure is that income will be higher in with low fixed
good years compared to companies cost structures
with a lower proportion of fixed costs. enjoy greater
stability in
• A disadvantage of a high fixed cost income across
structure is that income will be lower good and bad
in bad years compared to companies years.
with a lower proportion of fixed costs.
Compute the degree of operating
leverage at a particular level of sales and
explain how it can be used to predict
changes in net operating income.
Operating Leverage
Operating leverage is a measure of how sensitive
net operating income is to percentage changes in
sales. It is a measure, at any given level of sales, of
how a percentage change in sales volume will
affect profits.
Degree of Contribution margin


operating leverage Net operating income
Operating Leverage – Example
To illustrate, let’s revisit the contribution income
statement for RBC.
Actual Sales
500 Bikes
Sales $ 250,000
Less: Variable expenses 150,000
Contribution margin 100,000
Less: Fixed expenses 80,000
Net income $ 20,000
Degree of $100, 000

 5
operating leverage $20, 000
Operating Leverage – Changes in Profit
• With an operating leverage of 5, if RBC increases
its sales by 10%, net operating income would
increase by 50%.
Percent increase in sales 10%

Degree of operating leverage × 5
Percent increase in profits 50%
• Here’s the verification!

Operating Leverage – Proof of Changes
Actual Sales Increased
(500) Sales (550)
Sales $ 250,000 $ 275,000
Net operating income $ 20,0000 $ 30,000
• 10% increase in sales from • . . . results in a 50% increase in

• $250,000 to $275,000 . . . • income from $20,000 to
$30,000.
Quick Check 7
Coffee Klatch is an espresso stand in a downtown office building. The average
selling price of a cup of coffee is $1.49, and the average variable expense per cup is
$0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are
sold each month. What is the operating leverage?
a. 2.21.
b. 0.45.
c. 0.34.
d. 2.92.
Quick Check 7a
Coffee Klatch is an espresso stand in a downtown office building. The average
selling price of a cup of coffee is $1.49, and the average variable expense per cup is
$0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are
sold each month. What is the operating leverage?
a. Answer: 2.21. Actual Sales

2,100 cups
b. 0.45.
Sales $ 3,129
c. 0.34. Less: Variable expenses 756
Contribution margin 2,373
d. 2.92.
Less: Fixed expenses 1,300
Net operating income $ 1,073
Contribution margin
Operating leverage 
Net operating income
$2,373
  2.21
$1, 073
Quick Check 8
At Coffee Klatch, the average selling price of a cup of coffee is
$1.49, the average variable expense per cup is $0.36, the
average fixed expense per month is $1,300, and an average of
2,100 cups are sold each month.
If sales increase by 20%, by how much should net operating
income increase?
a. 30.0%.
b. 20.0%.
c. 22.1%.
d. 44.2%.
Quick Check 8a
At Coffee Klatch, the average selling price of a cup of coffee is
$1.49, the average variable expense per cup is $0.36, the
average fixed expense per month is $1,300, and an average of
2,100 cups are sold each month.
If sales increase by 20%, by how much should net operating
income increase?
a. 30.0%.
b. 20.0%.
c. 22.1%. Percent increase in sales 20.0%
× Degree of operating leverage 2.21
d. Answer: 44.2%.
Percent increase in profits 44.2%
Verify Increase in Profit
Actual Increased
Sales Sales
2,100 cups 2,520 cups
Sales $ 3,129 $ 3,755
Less: Variable expenses 756 907
Net operating income $ 1,073 $ 1,548
% change in sales 20.0%
% change in net operating income 44.2%
Structuring Sales Commissions
Companies generally compensate salespeople by
paying them either a commission based on sales or
a salary plus a sales commission. Commissions
based on sales dollars can lead to lower profits in a
company.
Let’s look at an example.

Structuring Sales Commissions –
Example
• Pipeline Unlimited produces two types of
surfboards, the XR7 and the Turbo. The XR7 sells
for $100 and generates a contribution margin
per unit of $25. The Turbo sells for $150 and
earns a contribution margin per unit of $18.
• The sales force at Pipeline Unlimited is

compensated based on sales commissions.
Structuring Sales Commissions –
Solution
• If you were on the sales force at Pipeline,
you would push hard to sell the Turbo
even though the XR7 earns a higher
contribution margin per unit.
• To eliminate this type of conflict,

commissions can be based on contribution
margin rather than on selling price alone.

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ACCCOB3

LONG QUIZ 3 COVERAGE

• Underapplied overhead • Overapplied overhead

• PearCo’s actual overhead for the year was $650,000

• Overhead applied during the period:

• PearCo’s actual overhead for the year was $650,000

• PearCo has overapplied

• Any remaining balance in the Manufacturing

The journal entry, in T-account form, to close out PearCo’s

• Access the text alternative for slide images.

Calculating the allocation of under- or overapplied overhead

In this case, the allocation percentages for Work in Process,

Ending WIP inventory = $68,000 ÷ $680,000 = 10%

The allocation of the $30,000 of overapplied overhead

Manufacturing Overhead 30,000

• In summary, there are two methods for disposing of

• The latter method is

0 2,500 5,000 7,500 10,000 12,500 15,000 Units

0 2,500 5,000 7,500 10,000 12,500 15,000 Units

1. Break-even Sales in Dollars

1. Break-even Sales in Dollars

Time alloted: 30 minutes.

Total Sales ($35 x 10,000 units) $350,000

BEP units: Fixed Cost $78,750 5,000 units

BEP sales: Fixed Cost $78,750 $175,000

To check: 5,000 units x $35 per unit SP = $175,000

•Margin of safety in dollars = Total sales − Break-even sales

• Let’s look at RBC and determine the margin of safety.

•Margin of safety = Total sales – Break-even

Degree of Contribution margin

Degree of $100, 000

Percent increase in sales 10%

• Here’s the verification!

• 10% increase in sales from • . . . results in a 50% increase in

a. Answer: 2.21. Actual Sales

Let’s look at an example.

• The sales force at Pipeline Unlimited is

• To eliminate this type of conflict,

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