EASY ROUND

1.
The estimated unit costs for a company using absorption (full) costing and
planning to produce and sell at a level of
12,000 units per month are as follows.

Estimated
Cost Item Unit Cost
--------- ---------
Direct materials $32
Direct labor 20
Variable manufacturing overhead 15
Fixed manufacturing overhead 6
Variable selling 3
Fixed selling 4

Source: CMA 1291 3-27
(Refers to Fact Pattern #1)
Estimated conversion costs per unit are

A. $35.

B. $41.

C. $48.

D. $67.


Answer (B) is correct. Conversion costs are incurred
in transforming raw materials into finished products.
They include direct labor and factory overhead. Thus,
unit conversion costs equal $41 ($20 direct labor +
$15 variable overhead + $6 fixed overhead).


2.
Because this allocation method recognizes that service
departments often provide each other with
interdepartmental service, it is theoretically considered to
be the most accurate method for allocating service
department costs to production departments. This method
is the

A. Direct method.

B. Variable method.

C. Reciprocal method.

D. Linear method.

Answer (C) is correct. The three most common
methods of allocating service department costs are
the direct method, the step method, and the
reciprocal method (also called the simultaneous
equations method). The reciprocal method is
theoretically the preferred method because it
recognizes reciprocal services among service
departments.

3.
With respect to backup procedures for master files that are
on magnetic tape as opposed to master files on magnetic
disk,

A. No special procedure is required for either.

B. A separate backup run is required for both tape
and disk.

C. A separate backup run is required for disk while
the prior master on magnetic tape serves as a
backup.

D. The grandfather cycle is required in either filing
situation.

Answer (C) is correct. Updating a magnetic tape file
involves running the old master file together with the
transaction data to create a new master file on a
separate tape. The old master file and transactions file
can then be retained as backup. Updating a magnetic
disk file, however, entails writing on the old disk, thus
destroying the original master file. Accordingly, the
disk files should be copied on magnetic tape at
appropriate intervals so that restart procedures can
begin at those points if data are lost or destroyed.
Tape provides an efficient and cost effective medium
for the backup.

4.
Which statement best describes Total Quality Management
(TQM)?

A. TQM emphasizes reducing the cost of inspection.

B. TQM emphasizes participation by all employees in
the decision-making process.

C. TQM emphasizes encouraging cross-functional
teamwork.

D. TQM emphasizes doing each job right the first
time.

Answer (D) is correct. TQM establishes quality as an
organizational objective and views it as a major
component of the organization's service to its
customers. It emphasizes employee training and
commitment, product/service design and production,
and customer service. Ordinarily, the quality of a
product or service is as important to customers as
cost and timeliness. Superior product quality is not
attained merely through more inspection, better
statistical quality control, and cross-functional
teamwork. Manufacturers must make fundamental
changes in the way they produce products and do
each job right the first time.

5.
The following information relates to Cinder
Co.'s Northeast Division:

Sales $600,000
Variable costs 360,000
Traceable fixed costs 60,000
Average invested capital 120,000
Imputed interest rate 8%
Cinder's residual income was

A. $170,400

B. $180,000

C. $189,600

D. $230,400

Answer (A) is correct. Residual income
is income of an investment center minus
an imputed interest charge for invested
capital. Accordingly, Cinder's residual
income is $170,400 [($600,000 sales -
$360,000 variable costs - $60,000
traceable fixed costs) net income - (8%
x $120,000 average invested capital)
imputed interest].


MODERATE

1. During a performance appraisal, the manager experienced difficulty
obtaining required information from a specific employee. The manager
requested a private meeting with the employee for the purpose of
identifying the problem and resolving the difficulty through open
discussion. Which conflict management technique was the auditor
applying?

A. Problem solving.

B. Expansion of resources.

C. Authoritative command.

D. Altering the human variable.

(A) The conflict
management technique that involves
face-to-face meetings is problem
solving. Problem solving is a means of
confronting the conflict and removing
its causes. The emphasis is on facts and
solutions, not personalities and
assignment of blame.

2.

Below is a consolidated balance sheet for a commercial
banking system. All figures are in billions. Assume that the
required reserve ratio is 12.5%.

Assets Liabilities and Net Worth
---------------------- ---------------------------
Reserves $ 60 Demand deposits $100
Loans 100 Capital stock 200
Securities 150
Property 200

This commercial banking system can increase the supply of
money by a maximum of

A. P0

B. P380 billion.

C. P400 billion.

D. P480 billion.

B is correct. There are excess reserves of
$47.5 billion ($60 billion actual - $12.5 billion
required). The money multiplier is calculated by
dividing 1 by the reserve requirement. A reserve
requirement of 12.5% indicates a money multiplier of
8. Multiplying 8 by the $47.5 billion of excess
reserves results in an opportunity to expand the
money supply by $380 billion.








3

The data available for the current year are given below:

Whole Division Division Division Division
Company 1 2 3 4
--------- -------- -------- -------- --------
Variable
manufacturing
cost of goods sold $400,000 $140,000 $80,000 $70,000 $110,000
Unallocated costs
(e.g., president's
salary) 100,000
Fixed costs
controllable by
division managers
(e.g., advertising,
engineering,
supervision costs) 90,000 30,000 20,000 20,000 20,000
Net revenue 1,000,000 300,000 200,000 250,000 250,000
Variable selling
and administrative
costs 120,000 40,000 20,000 30,000 30,000
Fixed costs
controllable by
others (e.g.,
depreciation,
insurance) 120,000 40,000 30,000 25,000 25,000

Using the information presented, the contribution by which of the four
divisions was the highest?


DIVISION 3. The contribution margin for
Division 3 is $150,000 ($250,000 net revenue -
$100,000 total variable costs). The contribution
controllable by Division 3's manager is $130,000
($150,000 contribution margin - $20,000
controllable fixed cost). The total contribution by
Division 3 equals its net revenue minus all costs
traceable to it. Accordingly, the total contribution is
$105,000 ($130,000 controllable contribution -
$25,000 allocated but controllable by others).
Unallocated costs are excluded from the calculation.
If separate amounts are determined for the division's
contribution and the controllable contribution, the
difference between the division's and the manager's
performance may be ascertained (assuming
controllability of fixed costs can be assigned).

4
Dick Rixard is a quality control specialist for the Lasser
Company. Lasser makes ball bearings that require close
tolerances. In a recent production run Rixard found that the
bearings had an average diameter of .755 inches with a
standard deviation of .01 inches for a sample of 100
bearings. In his quality control testing he uses a 95%
confidence interval. If the Z score is 1.96, the lower
boundary of the confidence interval for this production run
is?

A. .755 inches.

B. .7354 inches.

C. .7746 inches.

D. Some amount other than those given.



Answer (D) is correct. Because a 95% confidence
interval equals 1.96 standard deviations in either
direction from the mean, the desired lower boundary
is found using the following formula:

_
x - z (s / (n) )

.755 - 1.96(.01 / (100) )
.755 - .00196 = .75304


5
Ryerson Company has three sales departments, each
contributing the following percentages of total sales:
clothing, 50%; hardware, 30%; and household sundries,
20%. Each department has had the following average
annual damaged goods rates: clothing, 2%; hardware, 5%;
and household sundries, 2.5%. A random corporate audit
has found a weekly damaged goods rate of sufficient
magnitude to alarm Ryerson's management. The probability
(rounded) that this rate occurred in the clothing department
is

A. 50%.

B. 1%.

C. 25%.

D. 33 1/3%.

Answer (D) is correct. Weighting the percentage of
sales by the percentage of quality control problems
for each department determines the annual company
rate of damaged goods as follows:

Department Sales Damages Weighted
---------- -------- -------- -----------
Clothing 50% 2% 1%
Hardware 30% 5% 1.5%
Household 20% 2.5% 0.5%
------
3%
======
The clothing department accounts for 33-1/3% (1%
3%) of the total company rate. Thus, the
probability that an observed problem is in the clothing
department is 33-1/3%.


5

Bulgaria production possibilities table
---------------------------------------
Production Alternatives
--------------------------------
Product A B C D E F
----- ----- --- --- --- ---
Cars 1,500 1,200 900 600 300 0
Tractors 0 100 200 300 400 500


Andorra production possibilities table
--------------------------------------
Production Alternatives
-------------------------------
Product A B C D E
----- ----- ----- ----- ---
Cars 4,000 3,000 2,000 1,000 0
Tractors 0 200 400 600 800

Which of the following statements is not true?

A. Bulgaria should specialize in the production of
tractors.

B. Bulgaria has a comparative advantage in the
production of tractors.

C. Andorra should specialize in the production of
tractors.

D. Andorra has a comparative advantage in the
production of cars.

Answer (C) is correct. Andorra should not specialize
in the production of tractors because it does not have
a comparative advantage in tractors. Total output is
maximized when each country specializes in the
products in which it has the lower opportunity cost
(or comparative advantage). The cost of a tractor in
Andorra is 5 cars (1,000 200), whereas the cost of
a tractor in Bulgaria is 3 cars (300 100). Thus,
Bulgaria has the comparative advantage with tractors.


7
Merkle, Inc. has a temporary need for funds. Management
is trying to decide between not taking discounts from one
of their three biggest suppliers, or a 14.75% per annum
renewable discount loan from its bank for 3 months. The
suppliers' terms are as follows:

Fort Co. 1/10, net 30
Riley Manufacturing Co. 2/15, net 60
Shad, Inc. 3/15, net 90
Using a 360-day year, the cheapest source of short-term
financing in this situation is

A. The bank.

B. Fort Co.

C. Riley Manufacturing Co.

D. Shad, Inc.

Answer (D) is correct. The first step is to determine
the actual annual percentage interest rate for each of
the four options. Assuming a $100 invoice, the Fort
Company discount represents interest of $1 on a loan
of $99 for 20 days (30-day credit period - 10-day
discount period). The annual interest rate is
18.1818% [(360/20) periods x ($1/$99)]. The Riley
Company discount represents an interest charge of
$2 on a loan of $98; i.e., by not paying on the 15th
day, the company will have the use of $98 for 45
days (60-day credit period - 15-day discount
period). The number of periods in a year would be 8
(360/45). The interest would be 16.326% ($2/$98 x
8 periods). The Shad loan would be for $97 at a cost
of $3. The loan would be for 75 days (90 - 15).
Given 4.8 interest periods in a year (360/75), the
annual interest rate would be 14.845% ($3/$97 x
4.8). The bank loan was quoted at 14.75% on a
discount basis. On a $100 note, the borrower would
only receive $85.25, giving an interest rate of
17.302% ($14.75/$85.25). Thus, not paying Shad,
Inc.'s invoices on time would be the lowest cost
source of capital, at a cost of 14.845%.

8. A condensed comparative balance sheet for a company
appears below:

12-31-Year 1 12-31-Year 2
------------ ------------
Cash $40,000 $30,000
Accounts receivable 120,000 100,000
Inventory 200,000 300,000
Property, plant, & equipment 500,000 550,000
Accumulated depreciation (280,000) (340,000)
-------- --------
Total assets $580,000 $640,000
======== ========
Current liabilities $60,000 $100,000
Long-term liabilities 390,000 420,000
Stockholders' equity 130,000 120,000
-------- --------
Total liabilities and equity $580,000 $640,000
======== ========

In looking at liquidity ratios at both balance sheet dates,
what happened to the (1) current ratio and (2) acid-test
(quick) ratio?






(1) (2)
Current Ratio Acid-Test Ratio
------------- ---------------
A.

Increased Increased
B.

Increased Decreased
C.

Decreased Increased
D.

Decreased Decreased

Answer (D) is correct. The current ratio is
determined by dividing current assets by current
liabilities. The acid-test ratio is determined by dividing
quick assets by current liabilities. At December 31,
year 1, the current ratio is 6 to 1 [($40,000 +
$120,000 + $200,000)/$60,000]. At December 31,
year 2, the current ratio is 4.3 to 1 [($30,000 +
$100,000 + $300,000)/$100,000]. Hence, there
was a decrease in the current ratio. At December 31,
year 1, the acid-test ratio is 2.667 to 1 [($40,000 +
$120,000)/$60,000]. At December 31, year 2, the
acid-test ratio is 1.3 to 1 [($30,000 +
$100,000)/$100,000]. Thus, the acid-test ratio also
declined.

9.
Fast Freight, Inc. is planning to purchase equipment to
make its operations more efficient. This equipment has an
estimated life of 6 years. As part of this acquisition, a
$75,000 investment in working capital is anticipated. In a
discounted cash flow analysis, the investment in working
capital

A. Should be amortized over the useful life of the
equipment.

B. Can be disregarded because no cash is involved.

C. Should be treated as an immediate cash outflow.

D. Should be treated as an immediate cash outflow
that is later recovered at the end of 6 years.

Answer (D) is correct. The investment in a new
project includes more than the initial cost of new
capital equipment. In addition, funds must be
provided for increases in receivables and inventories.
This investment in working capital is treated as an
initial cost of the investment that will be recovered in
full at the end of the project's life.

10

Mulva Inc. is considering the following five independent
projects:

Required Amount
Project of Capital IRR
------- --------------- ------
A $300,000 25.35%
B 500,000 23.22%
C 400,000 19.10%
D 550,000 9.25%
E 650,000 8.50%
The company has a target capital structure which is 40
percent debt and 60 percent equity. The company can
issue bonds with a yield to maturity of 10 percent. The
company has $900,000 in retained earnings, and the
current stock price is $40 per share. The flotation costs
associated with issuing new equity are $2 per share.
Mulva's earnings are expected to continue to grow at 5
percent per year. Next year's dividend (D1) is forecasted
to be $2.50. The firm faces a 40 percent tax rate. What is
the size of Mulva's capital budget?

A. $1,200,000

B. $1,750,000

C. $2,400,000

D. $800,000

Answer (B) is correct. The size of Mulva's capital
budget will be determined by the number of projects
it can profitably undertake, i.e., those projects for
which the IRR > applicable WACC. First, find the
costs of each type of financing: cost of retained
earnings = ks = ($2.50 $40) + 0.05 = 11.25% and
cost of debt = kd = 10%. To calculate the cost of
new equity, ke, we solve for ke =[$2.50 ($40 -
$2)] + 0.05 = 0.1158 = 11.58%.


DIFFICULT

1.
Which one of the following variances is of least significance from a
behavioral control perspective?

A. Unfavorable material quantity variance amounting to 20% of the
quantity allowed for the output attained.

B. Unfavorable labor efficiency variance amounting to 10% more than the
budgeted hours for the output attained.

C. Favorable labor rate variance resulting from an inability to hire
experienced workers to replace retiring workers.

D. Fixed overhead volume variance resulting from management's decision
midway through the fiscal year to reduce its budgeted output by 20%.

Answer (D) is correct. Most variances are of
significance to someone who is responsible for that
variance. However, a fixed overhead volume
variance is often not the responsibility of anyone other
than top management. The fixed overhead volume
variance equals the difference between budgeted
fixed overhead and the amount applied (standard rate
x standard input allowed for the actual output). It can
be caused by economic downturns, labor strife, bad
weather, or a change in planned output. Thus, a fixed
overhead volume variance resulting from a top
management decision to reduce output has fewer
behavioral implications than other variances.









2.
Mountain View Hospital (MVH) has adopted a standard
cost accounting system for evaluation and control of nursing
labor. Diagnosis Related Groups (DRGs), instituted by the
U.S. government for health insurance reimbursement, are
used as the output measure in the standard cost system. A
DRG is a patient classification scheme in which hospitals
are regarded as multiproduct firms with inpatient treatment
procedures related to the numbers and types of patient
ailments treated. MVH has developed standard nursing
times for the treatment of each DRG classification, and
nursing labor hours are assumed to vary with the number of
DRGs treated within a time period.

The nursing unit on the fourth floor treats patients with four
DRG classifications. The unit is staffed with registered
nurses (RNs), licensed practical nurses (LPNs), and aides.
The standard nursing hours and salary rates and actual
numbers of patients for the month of May were as follows.

Standard
Actual Hours per DRG Total Standard Hours
DRG No. of ------------- --------------------
Classification Patients RN LPN Aide RN LPN Aide
-------------- -------- -- --- ---- ----- ----- -----
1 250 6 4 5 1,500 1,000 1,250
2 90 26 16 10 2,340 1,440 900
3 240 10 5 4 2,400 1,200 960
4 140 12 7 10 1,680 980 1,400
----- ----- -----
7,920 4,620 4,510
===== ===== =====
Standard Hourly Rates
---------------------
RN $12.00
LPN 8.00
Aide 6.00
The results of operations during May for the fourth floor
nursing unit are presented below:

RN LPN Aide
-------- ------- -------
Actual hours 8,150 4,300 4,400
Actual salary $100,245 $35,260 $25,300
Actual hourly rate $12.30 $8.20 $5.75

Because MVH does not have data to calculate variances
by DRG, it uses a flexible budgeting approach to calculate
labor variances for each reporting period by labor
classification (RN, LPN, Aide). Labor mix and labor yield
variances are also calculated because one labor input can
be substituted for another. The variances are used by
nursing supervisors and hospital administration to evaluate
the performance of nurses.

What is the total flexible budget variance?

Answer (D) is correct. The total flexible budget
variance is the difference between the standard cost
of labor and the actual cost of labor. Based on the
standard hours and rates given, the standard cost of
labor is $159,060 [(7,920 x $12.00) + (4,620 x
$8.00) + (4,510 x $6.00)]. The actual cost of labor
is $160,805 ($100,245 + $35,260 + $25,300).
Thus, the total flexible budget variance is $1,745
unfavorable ($160,805 actual - $159,060 standard).


3.
The market share variance equals

A. Actual units x (budgeted weighted-average UCM
for planned mix - budgeted weighted-average UCM
for actual mix).

B. (Actual units - master budget units) x budgeted
weighted-average UCM for the planned mix.

C. Budgeted market share percentage x (actual
market size in units - budgeted market size in units) x
budgeted weighted-average UCM.

D. (Actual market share percentage - budgeted
market share percentage) x actual market size in units
x budgeted weighted-average UCM.


Answer (D) is correct. The market share variance
gives an indication of the amount of contribution
margin gained (forgone) because of a change in the
market share.








4.
The DCL Corporation is preparing to evaluate the capital
expenditure proposals for the coming year. Because the
firm employs discounted cash flow methods of analyses,
the cost of capital for the firm must be estimated. The
following information for DCL Corporation is provided.

Market price of common stock is $50 per share.
The dividend next year is expected to be $2.50 per share.
Expected growth in dividends is a constant 10%.
New bonds can be issued at face value with a 13% coupon rate.
The current capital structure of 40% long-term debt and 60% equity
is considered to be optimal.
Anticipated earnings to be retained in the coming year are $3 million.
The firm has a 40% marginal tax rate.
If the firm must assume a 10% flotation cost on new stock
issuances, what is the cost of new common stock?

Answer (B) is correct. The formula to determine the
cost of retained earnings, with the additional flotation
cost entered into the calculation, is

D
1
K = -------------------- + G
s P (1-Flotation Cost)
0
If: K = Cost of retained earnings
s
P = Current price of the stock
0
D = Next dividend
1
G = Dividend growth rate

This yields a cost of new common stock of 15.56%.
$2.50
K = ------------ + 10%
s $50.00 x 90%
$2.50
= ------------ + 10% = 15.56%
$45.00

5.
Monosone, Inc.
Statement of Financial Position
December 31, Year 1
Total assets $10,000,000
===========
Current liabilities $ 2,000,000
Long-term debt 3,000,000
Common stock (1,000,000 shares
authorized, 100,000 shares
outstanding at $5 par value) 500,000
Paid-in capital in excess of par 1,600,000
Retained earnings 2,900,000
-----------
Total liabilities and shareholders'
equity $10,000,000
===========
Expected dividend payments:
December 31, year 2 $2.00
December 31, year 3 $2.10
December 31, year 4 $2.25
Expected selling price on
December 31, year 4 $25.00

An investor is considering buying Monosone, Inc.'s
common stock on January 1, year 2 and anticipates, with
reasonable assurance, selling it December 31, year 4 at
$25.00 per share. What is the intrinsic value on January 1,
year 2 of each share (rounded to the nearest dollar) when
the required rate of return is 10%?

Answer = 24.
The intrinsic value of the stock
is its discounted present value given the 10% required
rate of return (discount rate), annual dividend
payments, and the expectation of sale at the end of 3
years for a specified price ($25). Hence, the intrinsic
value has two components: the sales price and
income. The present values of the future $25 selling
price and the related annual dividends of $2.00,
$2.10, and $2.25 for year 2, year 3, and year 4,
respectively, can be determined by applying the
relevant time value of money factors rounded to the
nearest dollar. Accordingly, the sum of the present
values (the intrinsic value of a share of stock) is $24.


6
Condensed monthly operating income data for Korbin Inc.
for May follows:

Urban Suburban
Store Store Total
------- -------- --------
Sales $80,000 $120,000 $200,000
Variable costs 32,000 84,000 116,000
------- -------- --------
Contribution margin $48,000 $36,000 $84,000
Direct fixed costs 20,000 40,000 60,000
------- -------- --------
Store segment margin $28,000 $(4,000) $24,000
Common fixed cost 4,000 6,000 10,000
------- -------- --------
Operating income $24,000 $(10,000) $14,000
======= ======== ========
Additional information regarding Korbin's operations follows:
* One-fourth of each store's direct fixed costs would continue if
either store is closed.
* Korbin allocates common fixed costs to each store on the basis of
sales dollars.
* Management estimates that closing the Suburban Store would result in
a 10% decrease in the Urban Store's sales, while closing the Urban
Store would not affect the Suburban Store's sales.
* The operating results for May are representative of all months.

A decision by Korbin to close the Suburban Store would
result in a monthly increase (decrease) in Korbin's
operating income of


10,800. If the Suburban Store is
closed, one-fourth of its direct fixed costs will
continue. Thus, the segment margin that should be
used to calculate the effect of its closing on Korbin's
operating income is $6,000 {$36,000 contribution
margin - [$40,000 direct fixed costs x (1.0 - .25)]}.
In addition, the sales (and contribution margin) of the
Urban Store will decline by 10% if the Suburban
store closes. A 10% reduction in Urban's $48,000
contribution margin will reduce income by $4,800.
Accordingly, the effect of closing the Suburban Store
is to decrease operating income by $10,800 ($6,000
+ $4,800).


7.
The financial transactions for a country with values stated in
billions of dollars follow.

Gross domestic product (GDP) $4,000
Transfer payments 500
Corporate income taxes 50
Social Security contributions 200
Indirect business taxes 210
Personal taxes 250
Undistributed corporate profits 25
Depreciation 500
Net income earned abroad for the country 0

Compute: Net Domestic Product and Disposable Income?

NDP :3,500
Net domestic product (NDP)
is defined as gross domestic product (GDP) minus
consumption of fixed capital (depreciation). GDP is
the total market value of all final goods and services
produced in an economy during some specified
period of time. It excludes the market value of goods
and services produced outside the U.S. but includes
domestic production by foreign-owned resources.
NDP equals $3,500 ($4,000 GDP - $500
Depreciation).


DI= 3265.
Disposable income is defined
as personal income minus personal income taxes.
Personal income is defined as national income, minus
corporate income taxes, minus undistributed
corporate profits, minus Social Security contributions,
plus transfer payments. National income is $3,290
($4,000 GDP - $500 depreciation - $210 indirect
business taxes). Hence, personal income is $3,515
($3,290 - $50 - $25 - $200 + $500). Therefore,
disposable income is $3,265 ($3,515 - $250).

8.
Brown Maintenance Services has been performing
technical maintenance service on a wide variety of business
machines for small businesses in a large metropolitan area
for many years. Brown has been considering a change in its
fee structure. The analysis requires a probability distribution
for each week for the number of anticipated service calls
related to each of several different types of equipment.

[99] Source: Publisher
(Refers to Fact Pattern #17)
Phil Brown suggested establishing the distribution using the
relative frequency of various numbers of weekly service
calls over the last 4 years. The following tabulation was
prepared:

Number of Calls Number of Occurrences
--------------- ---------------------
801-850 4
851-900 10
901-950 80
951-1,000 40
1,001-1,050 20
1,051-1,100 12
1,101-1,150 12
1,151-1,200 10
1,201-1,250 8
1,251-1,300 4

Based on this probability distribution, the probability of
more than 1,150 calls for service during a given week is

Answer (D) is correct. Of the 200 recorded
occurrences, only 22 were over 1,150 per week: 10
in the 1,151-1,200 range, 8 in the 1,201-1,250
range, and 4 in the 1,251-1,300 range. Thus, the
probability of a number of calls greater than 1,150 is
simply (10 + 8 + 4) 200 = .11.

9
The exhibit below reflects a summary of performance for a single item of a
retail stores inventory for the month ended April 30, 2006.
Flexible Static
Actual Budget Flexible (Master)
Results Variations Budget Budget
Sales (units) 11,000 - 11,000 12,000
Revenue (sales) P208,000 P12,000 U P220,000 P240,000
Variable costs 121,000 11,000 U 110,000 120,000
CM 87,000 23,000 U 110,000 120,000
Fixed costs 72,000 - 72,000 72,000
Operating income P 15,000 P23,000 U P 38,000
P 48,000

Compute: Sales Volume Variance

Answer: 10,000 unfavourable

The sales volume variance refers to the contribution margin volume variance
which is the difference in actual and budgeted quantity times the budgeted
unit contribution margin of P10 (I.e., P120,000 / 12,000). Therefore, the
net sales volume variance is P(10,000) UF [i.e., (11,000 12,000) x P10].
The variance is unfavorable because the actual unit sales are lower than the
budgeted unit sales, a negative variance, and is an unfavorable variance in
sales variance analysis.


10.

PortCo Products is a divisionalized furniture manufacturer.
The divisions are autonomous segments, with each division
being responsible for its own sales, costs of operations,
working capital management, and equipment acquisition.
Each division serves a different market in the furniture
industry. Because the markets and products of the divisions
are so different, there have never been any transfers
between divisions.

The Commercial Division manufactures equipment and
furniture that is purchased by the restaurant industry. The
division plans to introduce a new line of counter and chair
units that feature a cushioned seat for the counter chairs.
John Kline, the division manager, has discussed the
manufacturing of the cushioned seat with Russ Fiegel of the
Office Division. They both believe a cushioned seat
currently made by the Office Division for use on its deluxe
office stool could be modified for use on the new counter
chair. Consequently, Kline has asked Russ Fiegel for a
price for 100-unit lots of the cushioned seat. The following
conversation took place about the price to be charged for
the cushioned seats:

Fiegel: "John, we can make the necessary modifications to
the cushioned seat easily. The raw materials used in your
seat are slightly different and should cost about 10% more
than those used in our deluxe office stool. However, the
labor time should be the same because the seat fabrication
operation basically is the same. I would price the seat at
our regular rate--full cost plus 30% markup."

Kline: "That's higher than I expected, Russ. I was thinking
that a good price would be your variable manufacturing
costs. After all, your capacity costs will be incurred
regardless of this job."

Fiegel: "John, I'm at capacity. By making the cushion seats
for you, I'll have to cut my production of deluxe office
stools. Of course, I can increase my production of

economy office stools. The labor time freed by not having
to fabricate the frame or assemble the deluxe stool can be
shifted to the frame fabrication and assembly of the
economy office stool. Fortunately, I can switch my labor
force between these two models of stools without any loss
of efficiency. As you know, overtime is not a feasible
alternative in our community. I'd like to sell it to you at
variable cost, but I have excess demand for both products.
I don't mind changing my product mix to the economy
model if I get a good return on the seats I make for you.
Here are my standard costs for the two stools and a
schedule of my manufacturing overhead."

Kline: "I guess I see your point, Russ, but I don't want to
price myself out of the market. Maybe we should talk to
Corporate to see if they can give us any guidance."

Office Division
Standard Costs and Prices
Deluxe Economy
Office Office
Stool Stool
------ --------
Raw materials
Framing $ 8.15 $ 9.76
Cushioned seat
Padding 2.40 --
Vinyl 4.00 --
Molded seat
(purchased) -- 6.00
Direct labor
Frame fabrication
(.5 x $7.50/DLH) 3.75 (.5 x $7.50/DLH) 3.75
Cushion fabrication
(.5 x $7.50/DLH) 3.75 --
Assembly* (.5 x $7.50/DLH) 3.75 (.3 x $7.50/DLH) 2.25
Manufacturing
Overhead (1.5DLH x $12.80/DLH) 19.20 (.8DLH x $12.80/DLH) 10.24
------ ------
Total standard cost $45.00 $32.00
====== ======
Selling price (30% markup) $58.50 $41.60
====== ======
*Attaching seats to frames and attaching rubber feet.
Office Division
Manufacturing Overhead Budget
Overhead
Item Nature Amount
----------------- ------------------------ ----------
Supplies Variable--at current
market prices $ 420,000
Indirect labor Variable 375,000
Supervision Nonvariable 250,000
Power Use varies with activity;
rates are fixed 180,000
Heat and light Nonvariable--light is
fixed regardless of
production while heat/
air conditioning varies
with fuel charges 140,000
Property taxes and Nonvariable--any
insurance taxes change in amounts/
rates is independent
of production 200,000
Depreciation Fixed dollar total 1,700,000
Employee benefits 20% of supervision,
direct and indirect
labor 575,000
----------
Total overhead $3,840,000
==========
Capacity in DLH 300,000
==========
Overhead rate/DLH $12.80
==========
What is the opportunity cost of the Office Division if 125 economy stools can
be made in the time required for 100 deluxe stools?

Answer (D) is correct. Opportunity cost is the benefit
of the next best opportunity forgone. The opportunity
cost here is the contribution margin forgone by
shifting production to the economy office stool
($2,520 - $1,980 = $540).

Deluxe Economy
------ ------
Selling price $58.50 $41.60
------ ------
Costs
Materials $14.55 $15.76
Labor ($7.50 x 1.5) 11.25 ($7.50 x .8) 6.00
Variable O/H ($5 x 1.5) 7.50 ($5 x .8) 4.00
Fixed O/H -- --
------ ------
Total costs $33.30 $25.76
------ ------
Unit CM $25.20 $15.84
Units produced x 100 x 125
------ ------
Total CM $2,520 $1,980
====== ======