1.Jago Co. has 2 products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the:
a. Lower total variable manufacturing costs for the manufacturing capacity.
b. Greater contribution margin per hour of manufacturing capacity.
c. Lower total manufacturing costs for the manufacturing capacity.
d. Greater gross profit per hour of manufacturing capacity.
Choice "b" is correct. To maximize profit at full capacity, contribution margin per hour should be maximized.
Choice "c" is incorrect. To maximize profit, the sales price of the products must also be considered.
Choice "a" is incorrect. To maximize profit, the sales price of the products must also be considered.
Choice "d" is incorrect. Contribution margin is a better measure of profit maximization than gross profit because it includes all variable costs. Gross margin includes consideration of cost of goods sold, but may exclude other variable costs, such as selling, general, and administrative costs.
2.Which of the following costing methods will yield the lowest inventory value?
Choice "b" is correct. Variable costing typically produces the lowest inventory values since only variable costs are capitalized. Other methodologies of inventory accounting will account for fixed costs in inventory and result in greater values than variable costing.
Choice "a" is incorrect. Absorption costing accounts for fixed manufacturing overhead costs in inventory and produces inventory values greater than variable costing.
Choice "c" is incorrect. Hybrid costing methods may blend different inventory methodologies but would likely include valuations greater than pure direct cost approaches that only include variable costs.
Choice "d" is incorrect. Process costing methods represent a cost accumulation approach that uses any number of assumptions. Process costing will normally include fixed costs in the valuation of inventory and would thereby result in higher amounts than direct costing approaches.