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Accounting 505
QUARTER:
TEST:
Summer 2006
Mid-Module Examination B
NAME:
(Please print)
__SOLUTION_______
Note: In all questions where there was potential flow-through error, that was
allowed for and full credit was given for doing the right thing with a number that
had been computed incorrectly in a previous question part.
Where calculations are needed to arrive at a solution, you are advised to show enough
work so I can understand how you arrived at your answer. Partial credit is available on
some computational questions. However, unless your work is shown, it is not possible to
determine if partial credit points are appropriate.
Do not make any unsupported assumptions. However, if you feel the need to make
an assumption, please state it clearly.
You have approximately 120 minutes to complete this test. In the interests of maximizing
your grade, I recommend you skim through the entire exam before you start to answer
any question so you can plan your strategy.
If you need clarification (e.g. definition of words, unclear instructions, unclear problem)
during the test, raise your hand and I will come to you and provide clarification where
appropriate and allowable. I will not re-teach any point.
Space has been provided below each question for your response. Write complete
answers. For example, if asked to identify and explain, a list of items with no
explanations is not a complete answer.
Point values for each question are indicated in parentheses at the end of each
question.
There are 9 pages (including this title page) on this examination. Count your pages and
confirm that you have a complete package and that no pages are duplicated or missing.
By signing below you certify that the answers provided on this exam are the result of
your own legitimate efforts.
___________________________________
Your Name -- Signature
Page 1 of 9
Page 2 of 9
Part I.
1.
a.
2.
Senior management is responsible for strategic planning. Identify and briefly describe the three
major roles of the management accountant in the strategic planning process. [6]
Which of the following statements about customer value is not true? [3]
The value of a companys customers is reported on a corporations balance sheet.
Creating value for customers is an important part of planning and implementing strategy.
How our product or service delivers customer value should be determined as part of our
companys strategy formulation.
d.
It is possible to simultaneously lower cost and increase customer value.
a.
b.
c.
Page 3 of 9
4.
Applied Materials, headquartered in San Jose, California, is the worlds largest manufacturer of the highly specialized equipment used by
microchip manufacturers such as Intel and Motorola. For each of the costs incurred by Applied Materials identified below, indicate to which
classification/s the cost would most likely belong. Note that costs can be classified in more than one way. The first item has been completed as
an example. [8]
Attachability
Product
Period
Traceability
Direct
Indirect
Variable
Behavior
Fixed
Mixed
Refer to the column indicated mixed cost in the previous section, and answer the following questions:
(a)
What is the formula (i.e. the equation) that represents this type of cost behavior? [2]
Y = a + bX
(b)
Which is the theoretically best method for analyzing a mixed cost, and what specific information is obtained from such analysis? [4]
Least-squares regression analysis is the best method
Information obtained: total fixed costs, variable cost per unit, and strength (significance) of relationship between cost driver (X)
and total cost (Y).
If some lights are left on all the time, then there is a minimum level of cost incurred regardless of activity; this is a fixed cost portion. Additional cost will be
incurred as more lights and other power is used when the building is in use. Thus this is a mixed cost.
2
I accepted mixed cost for this answer IF you stated the assumption that there was a fixed cost charged by the electricity company. If you did not state that
assumption, the appropriate response was variable cost.
Acctg 505 Mid-Module Examination B. Widdison, Summer 2006
Page 4 of 9
Part 2.
5.
Marsha Granberry is going to sell novelty Christmas tree lights for $15 a box. The lights cost Marsha $4 a
unit, but any unsold lights can be returned for a full refund. She is planning to rent a booth at the
upcoming Happy Holidays Convention, which offers three fee options:
1. paying a fixed fee of $800,
2. paying a $400 fee plus 10% of revenues made at the convention, or
3. paying 25% of revenues made at the convention.
7.
Goodfellows, Inc., sells a single product. The company's most recent income statement at 5,000 units of
sales is given below.
Sales
Less variable expenses
Contribution margin
Less fixed expenses
Pretax income
Taxes (at 35%)
Net income
$275,000
(123,750)
151,250
(90,000)
$ 61,250
21,438
$ 39,812
Please answer the following questions. Give answers to the nearest whole dollar where appropriate.
a.
________55 % [2]
$ 163,636________ [2]
$ 83,250_________ [2]
$40,000 x 55% = $22,000 increase in pretax income. (Since there is no increase in fixed costs, the CM
relating to the sales increase will drop down to the bottom line.)
$61,250 + $22,0003
c.
To achieve $60,000 in net income, sales in units must be
_______________ [3]
{$90,000 + ($60,000 -:- 65%)} -:- $30.25 per unit (CM per unit)
Or divide by 55% to get target sales in dollars then divide by $55 unit selling price.
3
Several responses used different approaches. In each instance, working was checked and allowance for rounding
differences was made in the grading.
Acctg 505 Mid-Module Examination B. Widdison, Summer 2006
Page 5 of 9
What was the total manufacturing cost for Job #225? [2]
Selling price of $22.500 less cogs = gross profit of $4,750
Therefore, manufacturing cost of job was $17,750
(b)
What was the overhead application rate per machine hour being used during the month of July? [3]
$17,750 - $5,000 materials - $6,000 labor = $6,750 total overhead applied to Job 225
$6,750 -:- 50 machine hours = $135/machine hour
9.
Abernathy Company uses a job-order costing system to record its manufacturing operations. It applies
manufacturing overhead using a predetermined budgeted rate. Any material amount of under- or over-applied
overhead is accounted for at the end of each month using a proration approach based on ending balances in
WIP, Finished Goods, and Cost of Goods Sold. The following journal entry was made on March 31 to close the
Manufacturing Overhead account:
Work in Process
Finished Goods
Cost of Goods Sold
Manufacturing Overhead
(a)
1,800
3,600
18,600
24,000
Under-applied. . (Since MOH is beginning credited, there must have been a debit balance after
overhead was applied.)
(b)
Speculate as to what reasons could cause overhead to be over- or underapplied? Be specific. [3]
Since overhead is applied based on a predetermined overhead application rate, that rate was not equal
to actual overhead rate because of estimation errors about the numerator (overhead to be incurred)
and/or about the denominator (application base driver units to be incurred). Noteyou needed to
address the potential for error in both the numerator and the denominator to receive full credit for this
question.
Page 6 of 9
Page 7 of 9
12. Wilson Manufacturing uses the weighted-average method to compute equivalent units in its processing
cost system. The Forming Department is the first of a two-stage production process. The following
information concerns the departments conversion costs for May
Beginning inventory
Units started in May
Ending inventory
a.
Number of Units
1,000, 40% converted
8,000
4,000, 75% converted
Conversion Costs
$5,200
$72,800 added in May
What is the conversion cost per equivalent unit for the month of May? [4]
1,000
4,000
3,000
8,000
b.
If materials cost per equivalent unit was $2.50 for the month of May, what would be the journal entry to
transfer total processing costs relating to units transferred from the Forming to the Finishing Department at the
end of May? [4]
5,000 units were completed and transferred from Forming to Finishing at $12.25 per unit ($9.75 for
conversion + $2.50 for materials.) Total cost transferred, $61,250
WIP Finishing Department
WIP Forming Department
61,250
61,250
Page 8 of 9
Part 6.
13.
Decision Analysis.
All of the following statements relating to decision analysis are true, except [3]
a.
Regardless of any existing constraining resource, to maximize profits managers should produce
more of the product with the greatest contribution margin per unit.
b.
When replacing an old machine with a new machine, the sales value of the old machine is relevant
to the decision, but the book value of the old machine is not relevant.
c.
A cost may be relevant for one decision, but not relevant for a different decision.
d.
In a make-or-buy decision, when there are alternative uses for capacity, the opportunity cost relating
to that capacity is relevant.
14.
Silver Lake Cabinets has been approached by Ms. Jenny Zhang, not a regular customer, to fulfill a large
one-time-only special order for a product similar to one offered to regular customers. The following per unit data
apply for sales to regular customers:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total manufacturing costs
Markup (60%)
Unit selling price
$100
125
60
75
360
216
$576
Silver Lake Cabinets has excess capacity available to meet this special order. Ms. Zhang wants the
cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit.
a.
Considering only quantitative factors, what is the minimum price that Silver Lake Cabinets could
accept for this one-time-only special order? [3]
Sum of incremental costs. $100 + $30 direct materials + $125 direct labor +$60 variable manufacturing
overhead = $315. Fixed costs are not relevant because (a) we assume that Silver Lake is
planning to recover it all through its regular sales, and (b) you were not told that Silver Lake
was considering acquiring additional capacity.
b.
How would your quantitative analysis differ if Silver Lake had limited capacity available? [4]
You would need to add opportunity cost related to the contribution margin of regular sales forfeited to
the incremental manufacturing costs. Note that some of you calculated an amount here. However,
strictly speaking, since you did not know how many regular sales were to be forfeited, nor did you know
how many units Ms Zhang ordered, you could not work out a specific opportunity cost per unit. Those
that did the calculation assumed a one-to-one relationship between forfeited sales and special order
sales.
c.
What are other (i.e. qualitative) issues that Silver Lake Cabinets should consider before making a
decision as to whether or not to accept this one-time-only special order? (Bullet-point format is preferred in
your answer.) [6]
I accepted any two of the following:
How the regular sales/market would be affected.
Whether Ms. Zhang would sell to the same market and undercut our prices.
Whether this was really a one-time order, or was there a long-term potential issue.
If there was limited capacity, whether or not to expanded and incur additional fixed costs.
(The issues of employee morale and intellectual property rights do not really apply here. They relate to
outsourcing decisions, which this was not.)
Page 9 of 9
15.
In using the net present value method in capital budgeting analysis, only projects with a zero or positive
net present value are acceptable because [3]
a.
the return from these projects equals or exceeds the required rate of return.
b.
the return from these projects equals or exceeds the internal rate of return.
c.
the return from these projects equals or exceeds the accrual accounting rate of return.
d.
a zero or positive net present value on a particular project guarantees company profitability.
16.
Cabins and Ignoble Bookstore wants to buy a new coding machine to help control book inventories. The
machine under consideration costs $38,000 and requires working capital of $4,000. Its estimated useful
life is eight years after which it will have a salvage value of $2,000. Recovery of working capital will be
$4,000 at the end of its useful life. Annual cash savings from the use of the machine will be $7,000.
(a)
If Cabins and Ignoble has a required minimum rate of return of 10% on projects of similar type and risk,
would this project be acceptable? Why? Support your answer with an appropriate NPV computation. [5]
NO. The project is not acceptable because it generates a return less than the required 10%
NPV calculation
Inflows *:
42,000
$(1,853)
(b)
Without calculating it, comment on the internal rate of return of this project compared with the required
rate of return, and justify your comment. [3]
The IRR is less than the RRR. We know this because the NPV is negative.
Page 10 of 9