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QUARTER:
TEST:
Accounting 505
DATE:XXXXXXXX
Summer 2006 Mid-module
Selected sample questions and study guidance.
NOTE: (1) THIS IS A SAMPLE OF QUESTION TYPE AND HOW SOME ASPECTS
OF THE TOPICS HAVE BEEN TESTED IN THE PAST. ACTUAL EXAM QUESTIONS
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Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
Management accounting
a. focuses on estimating future revenues, costs, and other measures to
forecast activities and their results.
b. provides information about the company as a whole.
c. reports information that has occurred in the past that is verifiable and reliable.
d. provides information that is generally available only on a quarterly or annual
basis.
2.
3.
What is meant by (a) a firms value chain, and (b) its supply chain? What is
management accountings function with respect to these chains?
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
4.
Archambeau Products Company manufactures custom office furniture. Recently, the
company decided to develop a formal cost accounting system and classify all costs into three
categories. Categorize each of the following items as being appropriate for (1) direct cost
tracing to the finished furniture, (2) allocation of an indirect manufacturing cost to the
finished furniture, or (3) as a nonmanufacturing item i.e. a period cost. Additionally,
speculate as to the most likely behavior of this cost: variable, fixed, or mixed.
Item
Carpenters wages
Depreciation - office building
____F___
Glue for assembly
____V___
Lathe department supervisors
salary
____F___
Lathe depreciation
____F____
Lathe maintenance
____V*___
Lathe operator wages
____V____
Lumber
____V____
Metal brackets for drawers
____V____
Power for lathe dept.
Factory washroom supplies
____V____
Cost
Tracing
___X____
________
Cost
Allocation
________
________
Period
Cost
_________
___X____
________
____X____
________
________
____X___
________
________
____X____
________
________
____X____
________
___X____
________
________
___X_____ ________
________
________
____X____
________
________
________
___X____
____X____
________
________
Cost
Behavior
____V___
____M___
* Depends on process. If scheduled routinely, then there is a fixed component. However, it would be reasonable to
assume that the higher the production volume, the more maintenance would be needed. Answer could also
be M for mixed.
Job Costing
5.
(a) Describe the essential elements of the mechanics of a job costing system. Include,
but do not limit your description to, an explanation of how job cost sheets are used and their role
in keeping track of costs. (b) Under what circumstances would a company use a job-costing
rather than a process-costing system?
a.
In a job costing system, direct costs (materials and labor) are recorded on job
cost sheets (one for each job) on a daily basis as incurred/used. Overhead is applied
upon job completion based on a predetermined overhead application rate. Costs of
individual jobs are moved between inventories (WIP, FG, and COGS) as the jobs
move/sell. Summary entries to transfer total materials, labor, and overhead costs
applied into WIP from the appropriate accounts are made at the end of each month. Any
over/underapplied overhead is closed out periodically. [5 points]
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
b.
Job costing is used when high-value, somewhat customized products are being
made, often to customer specification. It identifies the costs relating to each specific job
rather than relying on an averaging approach. [3 points]
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
6.
Date
Started
May 18
May 20
June 7
June 10
June 19
Date
Finished
June 12
June 19
July 5
June 28
July 16
Date
Sold
June 20
June 21
July 12
July 1
July 25
Total Cost
of Job
at June 30
$6,000
4,000
7,000
6,500
8,000
Required:
a.
Provide the journal entry to record cost of goods manufacture for June.
a.
Compute WIP inventory at June 30.
b.
Compute finished goods inventory at June 30.
c.
Compute cost of goods sold for June.
Solution:
a.
Goods completed and moved to finished goods during June were Jobs Nos.
220, 221, and 223. The total cost of these jobs is $16,500
b.
c.
d.
7.
Debit:
Finished goods
16,500
Credit:
Work in process
7,000 + $8,000 = $15,000
$6,500
$6,000 + $4,000 = $10,000
16,500
$400,000
$168,000
$ 22,000
$ 10,000
$ 15,000
$ 12,000
$ 30,000
$ 40,000
Required:
a.
What actual amount of manufacturing overhead costs was incurred during June
20x2?
$59,000. See highlighted items in list above.
b.
What amount of manufacturing overhead was allocated to all jobs during June 20x2?
$64,000. (8,000 DL hours @ $8 per hour.)
c.
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
d.
What are some possible reasons for overhead allocated to be different from
overhead actually incurred?
Numerator error. Poor estimation of budgeted overhead for the coming period,
resulting in an application rate that was too high.
Denominator error: Actual labor hours incurred during the period was greater than
anticipated for planned production. In this scenario, the application rate of $8 per hour
might have been a reasonable estimation, but excess labor hours worked led to overapplication of overhead.
e.
Assume that the ratios of MOH in the ending balances of WIP, FG, and COGS were
10%, 20%, and 70% respectively. What approach would you recommend be taken
to clearing out the misallocation amount that you have identified in (c)? Why?
Adjust the entire $5,000 directly to Cost of Goods Sold. If the proration approach were
used, COGS would be reduced by 70% of the $5,000 (i.e. $3,500). This is only $1,500 less than the
direct adjustment amount and is not materially different. Additionally, the effect of proration on
both WIP and FG is not material because of the low amount of MOH remaining in those balances.
A cost-benefit position supports direct write-down.
If you believe that accuracy of reporting is of supreme importance, you would argue for
proration. However, you would need to justify this approach from a cost-benefit point of view.
Activity-based Costing
8.
(a) How is an Activity Based Costing (ABC) system different from a traditional costing
system? (b) What is a significant advantage it provides over a traditional system? (c) Give an
example of a management decision that can be enhanced by the use of activity-based costing
information. (d) Identify two difficulties associated with ABC. (Note there are 4 parts to this
question for you to address see highlighting. Please be sure you address all parts in your
answer.) (10 points)
a.
ABC sorts overhead into individual, homogeneous cost pools that relate to several
activities undertaken to manufacture a product or provide a service. The cost pool dollars are
allocated to cost objects based on their relative consumption of the underlying driver of each cost
pool. In a traditional system, all indirect costs are accumulated in a single cost pool, and only
one cost base is used for allocation. This cost base was generally a labor or materials number,
which bore no relationship to the overhead. [3 points]
b.
ABC allocates indirect costs on more of a cause-and-effect basis, allowing management to
determine the true costs being consumed by the cost objects. [3 points]
c.
Examples could include pricing decisions; product-mix decisions; determination of
elimination of activities (evaluation), planning decisions.. [2 points]
d.
Difficulties: Requires identifying and analyzing a large amount of data. Needs a
sophisticated information system. It is costly to implement and manage. [ 1 point each
disadvantage, total 2 points]
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
9.
Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate
for allocating manufacturing overhead. The plant manager believes it is time to refine the
method of cost allocation and has the accounting department identify the primary production
activities which generate indirect costs and their cost drivers:
Activities
Materials handling
Assembly
Inspection
Cost driver
Number of parts
Labor hours
Time at inspection station
Allocation Rate
$2 per part
$20 per hour
$3 per minute
What is the total indirect manufacturing cost per remote control assuming an activitybased-costing method is used and a batch of 50 remote controls is produced? The batch
requires the assembly of 100 parts, the use of 6 direct manufacturing labor hours, and total
inspection time of 2.5 minutes.
Materials handling: 100 parts x $2 per part =
Assembly
6 hours x $20 per hour =
Inspection
2.5 mins. x $3 per min. =
Total indirect costs
Divided by 50 remotes
$200
120
7.50
$327.50 (+3 points)
$6.55 per remote (+3 points)
Process Costing
10.
Assume that direct materials are added at the start of the process. If there was no
beginning work-in-process inventory and no ending work-in-process inventory, under the
weighted-average process costing method, the number of equivalent units for direct materials
would be
a.
b.
c.
d.
e.
11. The president of the Gulf Coast Refining Corporation wants to know why his golfing
partner, who is the chief financial officer of a large construction company, calculates his costs by
the job when his own corporation calculates costs by average units rather than by individual
barrel of oil.
Construction companies manufacture highly individualized products which have high value;
therefore, it is necessary to track costs relating to each individual job. This requires a job-order
system. Refining corporations, however, produce large quantities of like units of product from a
barrel of oil. There is no need for differentiation of costs relating to the different batches
produced. This calls for a processing costing system.
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
12.
1,000 units
7,000 units
500 units
$100,000
$100,000
$1,000,000
$1,250,000
How many units were completed and transferred out of Department A during February?
7500. (1000 beginning inventory + 7000 units started 500 ending inventory)
13
Materials
7500
Conversion
7500
500
8000
150
7650
Provide the journal entry to transfer the units finished and transferred to Dept. B at the end
of February.
WIP Department B
WIP Department A
15.
$137.50
176.47
$313.97
2,354,775
2,354,775
$68,750.00
26,480.50
$95,220.50
Note that the total of costs transferred out and ending WIP are not quite equal to total costs to be
accounted for of $2,450,000. The small difference is due to rounding of conversion cost per EU
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
16.
Munir Hassan, controller, gathered data on overhead costs and direct labor-hours
over the past 12 months. List and discuss the different approaches Munir can use to estimate a
cost function for overhead costs using direct labor-hours as the cost driver. Include in your
discussion an assessment of the reliability and applicability of each approach.
The four approaches to cost estimation are:
1.
2.
3.
4.
The Tessmer Company has fixed costs of $400,000 and variable costs are 75% of the
selling price. Its tax rate is 35%. If Tessmer plans to sell 500,000 units and wants to
realize an after-tax profit of $130,000, what must the unit selling price be? (Give your
answer in dollars and cents, please.)
18.
(CPA adapted) The strategy most likely to reduce the breakeven point would be to
a.
increase both the fixed costs and the contribution margin.
b.
decrease both the fixed costs and the contribution margin.
c.
decrease the fixed costs and increase the contribution margin.
d.
increase the fixed costs and decrease the contribution margin.
19.
Why is the cost-volume-profit decision model described as fragile? Identify and
describe two of the underlying assumptions that support your answer. (Please confine your
answer to the space provided.)
The CVP model is fragile because its underlying assumptions are simplistic and not
often actually realized.
Any two of the following items identified in Chapter 3 lecture notes. The
comments in parentheses address the reason for the fragility in the assumption.
Volume of units produced and sold is the only driver affecting changes in
revenue and costs. (Many activities have more than one driver.)
Total costs can be divided into fixed and variable components. (Some
costs are mixed and regardless of the analytical method used to separate
the fixed and variable components, such data are only estimates.)
All costs and revenues are linear,( but this is not always the case. It is,
therefore, critical that the analysis be confined to the range of activity and
time period over which the costs are linear.)
Unit SP, VC, and total fixed costs are known and constant. (This is not
always the case particularly the constant aspect of this assumption.)
OPTION 2:
In addition to the above costs, regardless of which site is selected, Northwestern expects to
incur $1,800 for administrative and marketing expenses. It also plans to hire a band, which will
cost another $800. Tickets are expected to be $30 per person. Local business supporters will
donate any other items required for the event.
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
10
(a) At what number of ticket sales would Northwestern generate the same amount of profits,
regardless of which option it selects?
Contribution margin for Option 1 is $30 - $12 = $18; for Option 2 is $30 - $8 = $22 (Partial
credit of 1 point each is available if each CM is shown.)
Let X be the number of ticket sales at indifference point.
18X ($1,000 + $1,800 + $800) = 22X ($3,000 + $1,800 + $800)
18X $3,600 = 22X $ 5,600
X = 500 tickets
(Note that full credit is awarded if you used simply the fixed cost for each option in your
equation above. Since the other fixed costs are the same in either option, they are
essentially irrelevant, and the answer is the same in terms of tickets at indifference
point.)
(b) Which option has the lower level of risk? What is the disadvantage of this option? (Provide
calculations that will support your answer.)
The lower-risk option is Option 1, the one with the lower break-even point. Even though
its contribution margin per ticket is lower than that of Option 2, the lower total
fixed costs provide a break-even point at lower ticket sales. +2 points
Disadvantage is that, once the break-even point has been reached, the profit per ticket is
smaller than Option 2. +2 points
Contribution margins: Option 1 is 200 tickets ($3,600/$18). Option 2 is 255 tickets
($5,600/$22) +1 point to show calculation.
(Note that the total fixed costs must be used to determine actual break-even points. If
only the fixed costs for each option are used, the break-even points will be
incorrect.)
(c) Which option has more profit potential? What is the disadvantage of this option? Again,
please provide calculations to support your answer.
Option 2 has more profit potential. Once breakeven point is reached, profit is generated
at the rate of $22 per ticket as opposed to $18 per ticket for Option 1. +2 points
The disadvantage is that the break-even is higher, and so this option is more risky. +2
points
Calculation of break-even point for Option 2 needs to be presented either here or shown
in your response to (b) above. +2 point
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison
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