Practice

Managerial Accounting – Final ExamWinter 2007

Student Number: __________________________

Pledge:

On my honor I have neither given or received help on this exam. I understand that any violation of the University Honor Policy will result in an automatic zero on this exam, and that I will be subject to all sanctions available under the University's Honor Policy.

Part I - Multiple Guess

Select your points: 225 _______ 200 ______ 175 _______

1. B

2. D

3. C

4. D

5. C

6. A

7. A

8. B

9. A

10. D

11. B

12. B

13. A

14. B

15. C

16. A

17. D

18. C

19. B

20. A

21. C

22. B

23. B

24. A

25. D

26. C

27. D

28. C

29. C

30. D

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1. Costs that are always relevant in decision-making are: A) variable costs. B) avoidable costs. C) sunk costs. D) fixed costs.

2. Consider a decision facing a firm of either accepting or rejecting a special offer for one of its products. A cost that is not relevant is: A) direct materials. B) variable overhead. C) fixed overhead that will be avoided if the special offer is accepted. D) common fixed overhead that will continue if the special offer is not accepted.

3. To maximize total contribution margin, a firm faced with a production constraint should: A) promote those products having the highest unit contribution margins. B) promote those products having the highest contribution margin ratios. C) promote those products having the highest contribution margin per unit of

constrained resource. D) promote those products having the highest contribution margins and

contribution margin ratios.

4. The opportunity cost of making a component part in a factory with no excess capacity is the: A) variable manufacturing cost of the component. B) fixed manufacturing cost of the component. C) cost of the production given up in order to manufacture the component. D) net benefit foregone from the best alternative use of the capacity required.

5. Which one of the following costs would not be considered an indirect cost of serving a particular customer at a Pizza Hut franchise?A) The salary of the franchise's manager.B) The cost of the tables and chairs used to furnish the restaurant.C) The cost of the dough used to make the pizza that is ordered.D) The cost of lighting and heating the restaurant.

6. Which of the following statements is (are) true?

A) Companies that produce many different products or services are more likely to use job-order costing systems than process costing systems.

B) Job-order costing systems are used by service firms and process costing systems are used by manufacturers.

C) Costs are traced to departments and then allocated to units of product when job-order costing is used.

D) All of the above.

7. The Precision Company used a predetermined overhead rate last year of $3 per

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direct labor hour, based on an estimate of 24,000 direct labor hours to be worked during the year. Actual costs and activity during the year were:

Actual manufacturing overhead cost incurred $84,000Actual direct labor hours worked 27,000

A) $3,000 underapplied. B) $3,000 overapplied. C) $12,000 underapplied. D) $12,000 overapplied.

8. Consider the following production and cost data for two products, L and C:

Product L Product CContribution margin per unit $130 $120Machine set-ups needed per unit 10 set-ups 8 set-ups

The company can only perform 65,000 machine set-ups each period due to limited skilled labor and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period? A) $845,000. B) $975,000. C) $910,000. D) $1,820,000.

Use the following to answer questions 9-11:

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is:

Variable production cost $4.60 Fixed production cost 1.80 Variable selling expense 1.00

If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit.

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9. If Immanuel accepts this special order, the change in the monthly net operating income will be a: A) $12,600 increase. B) $14,400 increase. C) $3,600 increase. D) $1,800 increase.

10. At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer? A) $7.40 B) $7.70 C) $6.40 D) $4.90

11. Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain the same. If Immanuel accepts the special order, the change in monthly operating income will be: A) $14,400 increase. B) $7,200 increase. C) $3,600 decrease. D) $5,400 decrease.

12. Variable cost: A) increases on a per unit basis as the number of units produced increases. B) remains constant on a per unit basis as the number of units produced

increases. C) remains the same in total as production increases. D) decreases on a per unit basis as the number of units produced increases.

13. Which of the following statements regarding fixed costs is incorrect? A) Expressing fixed costs on a per unit basis usually is the best approach for

decision-making. B) Fixed costs expressed on a per unit basis will react inversely with changes in

activity. C) Assumptions by accountants regarding the behavior of fixed costs rest heavily

on the concept of the relevant range. D) Fixed costs frequently represent long-term investments in property, plant, and

equipment.

14. Setting up equipment is an example of a: A) Unit-level activity. B) Batch-level activity. C) Product-level activity. D) Facility-level activity.

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15. Expense A is a fixed cost; expense B is a variable cost. During the current year the activity level has increased, but is still within the relevant range. In terms of cost per unit of activity, we would expect that: A) expense A has remained unchanged.B) expense B has decreased.C) expense A has decreased. D) expense B has increased.

Use the following to answer questions 16-18:

The following is Allison Corporation's contribution format income statement for last month: Sales $800,000 Less variable expenses 300,000 Contribution margin 500,000 Less fixed expenses 400,000 Net income $100,000

The company has no beginning or ending inventories. The company produced and sold 10,000 units last month. 16. What is the company's contribution margin ratio?

A) 62.5% B) 160.0% C) 500% D) 20%

17. If sales increase by 200 units, by how much should net income increase? A) $16,000 B) $5,000 C) $2,000 D) $10,000E) None of the above

18. How many units would the company have to sell to attain target profits of $120,000? A) 10,800 B) 12,000 C) 10,400 D) 11,200E) None of the above

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Use the following to answer questions 19-21:

Bryan Company employs a standard cost system in which direct materials inventory is carried at standard cost. Bryan has established the following standards for the prime costs of one unit of product:

Standard Standard StandardQuantity Price Cost

Direct materials 6.0 pounds $ 3.50/pound $21.00 Direct labor 1.3 hours $11.00/hour 14.30 $35.30

During March, Bryan purchased 165,000 pounds of direct material at a total cost of $585,750. The total factory wages for March were $400,000, 90 percent of which were for direct labor. Bryan manufactured 25,000 units of product during March using 151,000 pounds of direct material and 32,000 direct labor hours.

19. The price variance for the direct material acquired by the company during March is: A) $7,550 favorable. B) $8,250 unfavorable. C) $7,550 unfavorable. D) $8,250 favorable.

20. The direct material quantity variance for March is: A) $3,500 unfavorable. B) $3,550 favorable. C) $3,500 favorable. D) $3,550 unfavorable.

21. The direct labor rate variance for March is: A) $ 8,000 favorable. B) $48,000 unfavorable. C) $ 8,000 unfavorable. D) $48,000 favorable.

22. Beaver Company used a predetermined overhead rate last year of $2 per direct labor hour, based on an estimate of 25,000 direct labor hours to be worked during the year. Actual costs and activity during the year were:

Actual manufacturing overhead cost incurred $47,000 Actual direct labor hours worked 24,000

The under- or overapplied overhead last year was: A) $1,000 underapplied. B) $1,000 overapplied.C) $3,000 overapplied. D) $2,000 underapplied.

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23. Under Lamprey Company's job-order costing system, manufacturing overhead is applied to Work in Process inventory using a predetermined overhead rate. During January, Lamprey's transactions included the following:

Direct materials issued to production $ 90,000 Indirect materials issued to production 8,000 Manufacturing overhead cost incurred 125,000 Manufacturing overhead cost applied 113,000 Direct labor cost incurred 107,000

Lamprey Company had no beginning or ending inventories. What was the cost of goods manufactured for January? A) $302,000 B) $310,000 C) $322,000 D) $330,000E) None of the above

Use the following to answer questions 24 and 25:

Addy Company has two products: A and B. The annual production and sales of Product A is 1,700 units and of Product B is 1,100 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor-hours per unit and Product B requires 0.6 direct labor-hours per unit. The total estimated overhead for next period is $98,785.

The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools—Activity 1, Activity 2, and General Factory—with estimated overhead costs and expected activity as follows:

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EstimatedActivity Overhead Expected Activity

Cost Pool Costs Product A Product B Total Activity 1 $30,528 1,000 600 1,600 Activity 2 $17,385 1,700 200 1,900 General Factory $50,872 510 660 1,170 Total $98,785

(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor-hours.)

24. The overhead cost per unit of Product B under the traditional costing system is closest to: A) $50.66. B) $5.49. C) $26.09. D) $11.45.

25. The overhead cost per unit of Product B under the activity-based costing system is closest to: A) $50.66. B) $26.09. C) $35.28. D) $38.16.

26. An unfavorable labor efficiency variance indicates that: A) The actual labor rate was higher than the standard labor rate. B) The labor rate variance must also be unfavorable. C) Actual labor hours worked exceeded standard labor hours for the production

level achieve. D) Overtime labor was used during the period. E) None of the above.

27. A favorable labor rate variance indicates that A) actual hours exceed standard hours. B) standard hours exceed actual hours. C) the actual rate exceeds the standard rate. D) the standard rate exceeds the actual rate. E) None of the above.

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28. If the actual labor hours worked exceed the standard labor hours allowed, what type of variance will occur? A) Favorable labor efficiency variance. B) Favorable labor rate variance. C) Unfavorable labor efficiency variance. D) Unfavorable labor rate variance. E) None of the above.

29. The following are budgeted data:

One pound of material is required for each finished unit. The inventory of materials at the end of each month should equal 20% of the following month’s production needs. Purchases of raw materials for February should be: A) 19,600 poundsB) 20,400 poundsC) 18,400 poundsD) 18,600 poundsE) None of the above.

30. Douglas Company plans to sell 24,000 units of Product A during July and 30,000 units during August. Sales of Product A during June were 25,000 units. Past experience has shown that end-of-month inventory should equal 3,000 units plus 30% of the next month’s sales. On June 30 this requirement was met. Based on these data, how many units of Product A must be produced during the month of July? A) 28,800B) 22,200C) 24,000D) 25,800E) None of the above.

Part II - PROBLEMS

Select your points: 225 _______ 200 ______ 175 _______

There are SIX problems. You must work problem # 1 and at least THREE additional problems. You may work them all if you wish. The more you work the less weight assigned to each problem. Please clearly label your answers.

3 additional problems – 45 points each4 additional problems – 34 points each5 additional problems – 27 points each

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Required - 65 points

1. The Central Valley Company is a merchandising firm that sells a single product. The company's revenues and expenses for the last three months are given below:

Central Valley CompanyComparative Income Statement

For the Second Quarter

April May June

Sales in units 4,500 6,000 5,250

Sales revenue $ 810,000 $1,080,000 $ 945,000

Less cost of goods sold 495,000 660,000 577,500

Gross Margin 315,000 420,000 367,500

Less operating expenses: Shipping expense 37,000 46,000 41,500

Advertising expense 50,000 50,000 50,000

Salaries and commissions 92,500 115,000 103,750

Insurance expense 9,000 9,000 9,000

Depreciation expense 40,000 40,000 40,000

Total operating expenses 228,500 260,000 244,250

Net income $ 86,500 $ 160,000 $ 123,250

Required:

a. Determine which expenses are mixed and, by use of the high-low method, separate each mixed expense into its variable and fixed components. State the cost formula for each expense.

b. Compute the company's total contribution margin for May. c. Calculate the breakeven sales in units and in dollars.

Sales in units Variable Fixed

Sales revenue $180 0Less cost of goods sold 110 0Gross Margin Less operating expenses: Shipping expense 6 10,000 Advertising expense 0 50,000 Salaries and commissions 15 25,000 Insurance expense 0 9,000 Depreciation expense 0 40,000

B. Units 6,000 Sales 1,080,000 180

Variable Cost

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COGS 660,000 110

Shipping 36,000 6

Salaries 90,000 15Contribution Margin 294,000 49

C. Units 2,734.69 Sales 492,244 180

Variable Cost

COGS 300,816 110

Shipping 16,408 6

Salaries 41,020 15Contribution Margin 134,000 49

Fixed

Shipping 10,000 Advertising 50,000 Salary 25,000 Insurance 9,000

Depreciation 40,000

Total Fixed 134,000

Net Income (0)

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2. Production and cost data for the month of February for Process A of the Packer Manufacturing Company follow:

Production record:Units in process, February 1 (100% complete with respect to materials; 25% complete with respect to conversion cost) 2,000New units started in process 8,000Units completed 7,000Units in process, February 28 (100% complete with respect to materials; 1/3 complete with respect to conversion cost) 3,000

Cost record:Work in process inventory, February 1: Materials $600 Conversion 100 $ 700Costs for February: Materials issued 2,560 Conversion 1,500Total cost to be accounted for $4,760

The company uses the weighted-average cost method in its process costing system.

Required:

a. Calculate the equivalent units and unit costs for February for materials and for conversion costs.

Equivalent Units Materials: 10,000 Eq. Units Conversion: 8,000

b. Determine the amount of cost that should be assigned to the ending work in process and transferred to finished goods.

Ending WIP: 1,148 Finished Goods: 3,612

      Work in Progress          

      Units          

            Percent   Equivalent Units

Beginning Units      Transferred

out Comple

te  Material

sConversi

on

      2,000 7,000 Materials 100%   7,000 7,000

          Labor        

          Overhead        

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            Percent   Equivalent UnitsStarted into production       Ending Units

Complete  

Materials

Conversion

      8,000 3,000 Materials 100%   3,000  

          Conversion 33%     1000

      10,000 10,000 Total Equivalent Units   10,000 8,000

     Both sides must

equal!          

      Work in Progress      

      Costs      

Beginning Costs  Materia

lsConversi

on          

Total $700   $600 $100   3,612   Transferred out

                   Started into production                

Total 4,060   2,560 1,500   1,148   Ending WIP

Total 4,760   3,160 1,600 0 4,760   Note A                     

Equivalent units   10,000 8,000                             

Total$0.52   $0.316 $0.20  

Cost per equivanent unit

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3. Albert Manufacturing Company manufactures a single product. The standard cost of one unit of this product is:

Direct materials: 6 feet at $1.50 $ 9.00Direct labor: 1 hour at $6.75 6.75Variable overhead: 1 hour at $4.50 4.50Total standard variable cost per unit $20.25

During the month of October, 6,000 units were produced. Selected cost data relating to the month’s production follow:

Material purchased: 60,000 feet at $1.43 $85,800Material used in production: 38,000 feet -Direct labor: ? hours at $ ? per hr. $41,925Variable overhead cost incurred $30,713Variable overhead efficiency variance $ 2,250 U

There was no beginning inventory of raw materials. The variable overhead rate is based on direct labor-hours.

Required (INDICATE FAVORABLE or UNFAVORABLE!)

a. For direct materials, compute the price and quantity variances for the month.

Price Variance: 4,200 F Quantity Variance: 3,000 U

b. For direct labor, compute the rate and efficiency variances for the month.

Rate Variance: 1,950 F Efficiency Variance:_ 3,375 U

c. For variable overhead compute the spending variance for the month. 1,067 U

4. The following data (in thousands of dollars) have been taken from the accounting records of Larsen Corporation for the just completed year. Manufacturing overhead is applied on the basis of direct labor costs. The company had estimated direct labor cost in the amount of $100, and total manufacturing overhead of $200.

Sales $860Purchases of raw materials $150Direct labor $110Administrative expenses $130Selling expenses $180Raw materials inventory, beginning $ 40Raw materials inventory, ending $ 80Work in process inventory, beginning $ 20

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Work in process inventory, ending $ 80Finished goods inventory, beginning $ 80Finished goods inventory, ending $150

Assume that there is no over or under-applied overhead.

Required:

a. Prepare a Schedule of Cost of Goods Manufactured in good form.

b. Compute the Cost of Goods Sold. _____________________

c. Using data from your answers above as needed, prepare an Income Statement in good form.

You may prepare a diagram instead of a schedule to answer these questions!

Answer:

a. Schedule of cost of goods manufactured

Direct materials: Raw materials inventory, beginning $ 40 Add: Purchases of raw materials 150 Raw materials available for use 190 Deduct: Raw materials inventory, ending 80 Raw materials used in production 110Direct labor 110Manufacturing overhead 210Total manufacturing cost 430Add: Work in process inventory, beginning 20

450Deduct: Work in process inventory, ending 80Cost of goods manufactured $370

b. Computation of cost of goods sold

Finished goods inventory, beginning $ 80Add: Cost of goods manufactured 370Goods available for sale 450Deduct: Finished goods inventory, ending 150Cost of goods sold $300

c. Income statement

Sales $860Less: Cost of goods sold 300Gross margin 560Less: Administrative expenses 130Less: Selling expenses 180Net income $250

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5. Mateo Company's average cost per unit is $1.425 at the 16,000 unit level of activity and $1.38 at the 20,000 unit level of activity.

Assume that all of the activity levels mentioned in this problem are within the relevant range.

Required:

Predict the following items for Mateo Company:

a. Variable cost per unit. ______________

b. Total fixed cost per period. ________________

c. Total expected costs at the 18,000 unit level of activity: ________________

Answer:

Cost UnitsHigh level of activity (20,000 units × $1.38) $27,600 20,000Low level of activity (16,000 units × $1.425) 22,800 16,000 Change $ 4,800 4,000

a. $4,800 ÷ 4,000 units = $1.20 per unit variable cost

b. Total cost at the high level $27,600 Less variable element ($1.20 × 20,000 units) 24,000 Fixed element $ 3,600

c. Variable cost ($1.20 × 18,000 units) $21,600 Fixed cost 3,600 Total cost $25,200

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6. Prepare a cash flow statement for 2002 using the indirect method.

Balance SheetFor year ending December 31

($ 000's) 2001 2002 ChangeAssets

Cash & Equivalents 1,000 4,000 3,000 Net Receivables 5,000 6,000 1,000 Inventory 6,000 5,000 (1,000)

Total Current Assets 12,000 15,000 3,000

Net Plant, Property & Equipment 16,000 17,000 1,000

TOTAL ASSETS 28,000 32,000 4,000

LIABILITIES Accounts Payable 5,000 7,000 2,000 Accrued Expenses 6,000 5,000 (1,000) Total Current Liabilities 11,000 12,000 1,000

Long Term Debt 7,000 5,000 (2,000)EQUITY

Common Stock 6,000 7,000 1,000 Retained Earnings 4,000 8,000 4,000

TOTAL EQUITY 10,000 15,000 5,000

TOTAL LIABILITIES & EQUITY 28,000 32,000 4,000  

Income StatementFor year ending December 31

($ 000's) 2001 2002 Change

Sales 45,000 50,000 5,000 Cost of Goods Sold 28,000 30,000 2,000 Gross Profit 17,000 20,000 3,000 Selling, General, & Admin. 4,000 5,000 1,000 Depreciation 2,000 3,000 1,000 Operating Profit 11,000 12,000 1,000 Interest Expense 3,000 3,000 0 Taxable Income 8,000 9,000 1,000 Total Income Taxes 2,500 3,000 500 Net Income 5,500 6,000 500

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Cash Flow StatementFor year ending December 31

Cash flow from operations: 2002

Net Income $ 6,000 Depreciation expense 3,000

Net Receivables (1,000) Inventory 1,000 Accounts Payable 2,000 Accrued expense (1,000)Operating cash flow $ 10,000

Cash flow from investing activities: Gross Plant, Property & Equipment (4,000)Investing cash flow (4,000)

Cash flow from investing activities: Common Stock 1,000 Long Term Debt (2,000) Dividends (2,000)Financing cash flow (3,000)

Change in cash 3,000

Beginning cash 1,000 Ending cash 4,000

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