Professional Documents
Culture Documents
Coursepack
Fall 2005
(all sections)
Handouts &
Practice Exams
TABLE OF CONTENTS
Page #
HANDOUTS/ASSIGNMENTS:
Chapter Objectives ----------------------------------------------------------Comparison of Forms of Business Ownership ---------------------------Transaction analysis steps worksheet -------------------------------------Cash Basis of Accounting transaction analysis worksheet ----------Deferrals and Accruals notes -----------------------------------------------Accrual Basis of Accounting transaction analysis worksheet -------Process Costing Problems & Solutions -----------------------------------Chapter 6: Class Notes ------------------------------------------------------Present Value Problems ------------------------------------------------------
3
8
9
10
11
13
14
20
22
24
25
27
30
34
36
37
41
47
48
51
59
64
68
71
73
Describe the types and forms of businesses, business strategies, value chains and stakeholders,
Describe the three business activities of financing, investing and operating,
Define accounting and its role in business,
Describe and illustrate the basic financial statements and how they interrelate, and
Describe eight basic accounting concepts underlying financial reporting.
Chapter 10 Variance Analysis: A Tool for Cost Control and Performance Evaluation
Students should be able to:
1.
2.
3.
4.
5.
6.
Additional funding
Losses are shared
More specialization
Has characteristics of
both a partnership and a
corporation
Many rules in order to
qualify
75 or fewer shareholders
Owned by 1 or more
members
Offers limited liability
Flexibility with respect to
tax
Control is shared
Profits are shared
Uncertainty as to the tax
consequences in some states due to
newness of this type of form
Limited liability
Access to funds
Transfer of ownership
TYPE
Sole
Proprietorship
GENL INFORMATION
Owned by a single owner
Approx. 70% of all
business are this, but
generates only 10% of the
revenue
Partnership
S-Corporation
Limited
Liability
Company
(LLC)
C-Corporation
Control is shared
Unlimited liability (or for general
partner if a LP)
Profits are shared
Control is shared
Profits are shared
Strict eligibility requirements
TAXES
Business pays taxes at the sole
proprietor level (Schedule C on
Form 1040)
publicly-held
Agency problems
Double taxation
LIABILITIES
OWNERS EQUITY
REVENUES
EXPENSES
DIVIDENDS
Acct Name
Beginning Bal.
Balances
Note: The various account balances (versus individual transactions) go on their respective financial statement. With retained earnings being
the exception, each account balance will be used only once.
10
ABC Company (a service organization) had the following transactions occur during its first month of operations:
Jan 1 --Jan 3 --Jan 4 --Jan 10 -Jan 11 -Jan 20 --
The ABC Company is formed when the owners contribute a total of $10,000 cash.
The company purchases machinery costing $3,000.
The company borrows $4,000 from the bank by signing a note payable.
The company performed services for customers and received $1,000 cash.
The company incurred expenses of $300 paid in cash.
The company paid its owners a dividend of $100.
Required:
1. Enter each of the above transactions in the following worksheet. Use + and signs to indicate whether the balance sheet account is going up or down.
Remember to be specific regarding which account is affected. For numbers entered in the revenue, expense, or dividend columns, use their absolute
value (no + or signs).
2. At the bottom of the worksheet, compute account balances.
3. On a separate page, prepare the first three financial statements Income Statement, Statement of Retained Earnings, and Balance Sheet.
ASSETS
LIABILITIES
OWNERS
EQUITY
REVENUES
EXPENSES
DIVIDENDS
Balances
11
12
Once this adjustment has been made, the balances on the financial statement are
correctly stated and the matching principle has been adhered to.
13
ACCRUAL:
An accrual is created when either one of these transactions occurs:
Cash will be received after the revenue is earned, or
Cash will be paid after the expense is incurred
Either at the time of the event leading to the accrual or, at the latest, the end of the
accounting period, a recordable transaction occurs. If it is being recorded at the end of the
accounting period, it is called an adjustment (also known as an adjusting journal entry).
A. Accrued Revenue:
B. Accrued Expense:
Some time after the adjustment is made, there will be a subsequent receipt of cash from
the customer (Cash and AR) or a subsequent payment to the creditor (Cash and AP).
Once these adjustments have been made, the financial statement balances are correctly
stated and the revenue recognition and matching principles will have been adhered to.
14
Helen Ingersoll owns and operates an interior design studio called Ingersoll Interiors. The company began operations on January 1, 2003 and is organized as a
corporation. After the first month of operations, the companys accounts had the following beginning balances.
ASSETS
Transaction
Cash
A/R
Prepd
Insur.
Inventory
LIABILITIES
Equip.
(net of
acc. dep)
Land
12,000
Unearned Notes
Revenue Payable
8,000
OWNERS
EQUITY
Accounts
Payable
Capital
Stock
Retained
Earnings
6,750
1,000
Detail
of RE
effect
15
For the beginning and ending inventories, you will need to note how complete they are.
STEP #2:
Using the three items from step #1, compute the total number of equivalent units for the current
period.
STEP #3
Compute the cost per equivalent unit. Do this by taking the current periods costs total EUs
(from Step #2).
STEP #4:
Calculate the cost of ending inventory by taking the number of EUs in ending inventory (from
Step #1) and multiplying it by the cost per EU (from step #3).
STEP #5:
Solve for the CGM. Do this by taking the Beginning Costs + Current periods costs ending WIP
cost.
PRACTICE PROBLEM #1:
Linus Inc. manufactures a product that goes through three departments. Information relating to
activity in the first department is as follows:
# units
Work-in-process Beginning (20% complete)
Started in current period
Work-in-process Ending (60% complete)
50,000 units
200,000 units
30,000 units
STEP #1:
STEP #2:
STEP #3:
STEP #4:
STEP #5
16
3,000
35,000
10,000
STEP #1:
STEP #2:
STEP #3:
STEP #4:
STEP #5:
17
200,000
800,000
90,000
STEP #1:
STEP #2:
STEP #3:
STEP #4:
STEP #5:
18
60,000 units
510,000 units
30,000 units
$40,000
900,000
QUESTION: What was the cost of goods transferred out (CGM) during August?
19
Beginning units
+ units started
- Ending units
Units completed
Step #2:
Step #3
50,000
200,000
(30,000)
220,000
40,000 eus
170,000 eus
18,000 eus
228,000 eus
$340,000
228,000 eus
$1.49
Step #4
Step #5
Per EU
$26,820
$40,000
340,000
380,000
(26,820)
$353,180
Beginning units
+ units started
- Ending units
Units completed
Step #2:
Step #3
3,000
35,000
(10,000)
28,000
600 eus
25,000 eus
2,000 eus
27,600 eus
$225,000
27,600 eus
$8.15
Step #4
Step #5
Per EU
$16,300
$10,000
225,000
235,000
(16,300)
$218,700
20
Beginning units
+ units started
- Ending units
Units completed
Step #2:
Step #3
200,000
800,000
(90,000)
910,000
20,000 eus
710,000 eus
81,000 eus
811,000 eus
$1,000,000
811,000 eus
$1.23
Step #4
Step #5
Per EU
$99,630
$300,000
1,000,000
1,300,000
(99,630)
$1,200,370
Beginning units
+ units started
- Ending units
Units completed
Step #2:
Step #3
60,000
510,000
(30,000)
540,000
12,000 eus
480,000 eus
21,000 eus
513,000 eus
$900,000
513,000 eus
$1.75
Step #4
Step #5
Per EU
$36,750
$40,000
900,000
940,000
(36,750)
$903,250
21
Chapter 6
(Class Notes)
TRADITIONAL INCOME STATEMENT VS. CONTRIBUTION MARGIN FORMAT
The ABC Company has the following information available:
Variable selling & admin. costs -----------Direct materials ------------------------------Variable manufacturing overhead ---------Direct Labor -----------------------------------
$60,000
$35,000
Assume that the company produced and sold 50,000 units at a sales price of $70 per unit.
Part I: Prepare a traditional format income statement.
Part II: Prepare a contribution margin format (a.k.a. variable costing) income statement.
22
Answer the following questions using your contribution margin format income statement:
1. What is the contribution margin per unit? What does this number mean?
2. What is the contribution margin ratio? What does this ratio mean?
3. What does the contribution margin need to be in order for the company to break-even?
4. How many units need to be sold in order for the company to break-even?
5. All else being equal, if the variable costs per unit increase, what happens to the break-even point?
6. All else being equal, if the variable costs per unit decrease, what happens to the break-even point?
7. All else being equal, if fixed costs increase, what happens to the break-even point?
8. All else being equal, if fixed costs decrease, what happens to the break-even point?
9. If the company wishes to have net income of $2,000,000, what does the contribution margin need to be?
10. Continuing with #10, how many units would need to be sold?
11. If the company believes they can only sell 55,000 units, what should be the price per unit in order to have net
income of $2,000,000?
23
Chapter 8
(Class Notes)
PRESENT VALUE PROBLEMS
1. You invested in a savings account at the beginning of the year that pays 12% compounded monthly. If you
expect to withdraw $11,000 at the end of the year, how much did you originally deposit?
Solution:
You must solve for the present value (PV) where the future value (FV) = $11,000, the interest rate per
compounding period (r) = .01 (12% annual rate / 12 compounding periods per year), and the number of
compounding periods per year (n) = 12.
Using the present value formula,
PV = FV X DF12, .01
PV = $11,000 x .889 = $9,757
Mathematically, PV = $11,000/ (1+.01)12 = $9,757
2. Barron deposits $2,000 in a mutual fund and 5 years later has $3,221 in the investment account. At what rate
of interest (assuming annual compounding) did the investment appreciate?
Solution:
You must solve for the interest rate (r) where PV = $2,000, FV = $3,221 and n = 5.
Using the present value formula,
PV = FV x DF5, r%?
$2,000 = $3,221 x DF5, r%?
DF5, r% = .6209
Looking across the present value of an annuity table (see page 276 in your book) for an n of 5, you will
find .6209 in the 10% column.
24
25
2. B
3. E
4. D
5. B
6. E
26
$500,000
300,000
?
End of year:
Assets
Liabilities
Owners Equity
700,000
?
450,000
15,000
600,000
?
50,000
REQUIRED: Solve for the three question marks above. Put your answers in the blanks below:
Beginning of year Owners Equity = ________________
End of year Liabilities
= ________________
Expenses during the year
= ________________
MULTIPLE CHOICE:
1. Which financial statement is normally prepared first?
A.
B.
C.
D.
Cost Concept
Objectivity Concept
Adequate Disclosure Concept
Going Concern Concept
Matching Concept
27
Cost Concept
Objectivity Concept
Adequate Disclosure Concept
Going Concern Concept
Matching Concept
Cost Concept
Objectivity Concept
Adequate Disclosure Concept
Going Concern Concept
Matching Concept
----------------------------------------------------------------------------------------------------------------------SOLUTIONS:
PROBLEM I:
1.
2.
3.
4.
Beg OE = $200,000
End Liab = $250,000
Expenses = $315,000
D
C
A
B
28
39,000
10,000
1,000
75,000
18,000
52,000
8,000
15,000
8,000
190,000
HINT: Before answering the following questions, label which financial statement each of the above accounts
would go on. There is only one place for each of the above. Also note that since this is a brand new company,
the beginning retained earnings balance is zero.
A. What is net income? CIRCLE ANSWER.
MULTIPLE CHOICE
29
1. During 2005, Thomas Inc. earned fees of $150,000, of which $100,000 was collected in cash. The
company also incurred $65,000 in expenses, of which $35,000 was paid.
If Thomas Inc. uses the cash basis of accounting, what was net income for 2005?
A.
B.
C.
D.
$100,000
$65,000
$85,000
$280,000
2. During 2005, Jagger Inc. earned revenue totaling $1,000,000, of which $700,000 was collected in cash in
2003. The company also incurred $200,000 in expenses, of which $100,000 was paid in 2005.
If Jagger uses the cash basis of accounting, net income for 2005 would be:
A.
B.
C.
D.
E.
$600,000
$500,000
$800,000
$900,000
$700,000
3. Stager Co. uses the cash basis of accounting. Which of the following transactions by Stager would cause
4. Rivers Inc. uses the cash basis of accounting. The company began business in September of 2004 and had the
following transactions occur in its first month of operations:
Sept 1
Sept 3
Sept 4
Sept 5
Sept 7
Sept 20
Sept 25
The company was started by the owners investing $5,000 cash in the business.
Borrowed $10,000 from the bank.
Purchased equipment costing $3,000.
Received cash from fees earned totaling $2,000.
Paid advertising, $100.
Paid salaries, $800.
Paid dividends, $100.
After doing transaction analysis on the above information, what would be the cash balance at the end of September?
A. $16,000
B. $13,000
C. $10,000
D. $3,000
E. $17,900
30
5. After doing transaction analysis on the information, what would be the ending retained earnings balance
at the end of September?
A.
B.
C.
D.
E.
$1,100
$18,000
$5,900
$6,000
$1,000
-----------------------------------------------------------------------------------------------------------SOLUTIONS:
PROBLEM I:
A.
B.
C.
D.
E.
$115,000
$132,000
$8,000
$114,000
$124,000
MULTIPLE CHOICE:
1.
2.
3.
4.
5.
B
A
D
B
E
31
Wolfpack, Inc. was created when the owners deposited $25,000 in the cash account.
The company purchased inventory for $7,000 cash.
The company paid for one-years worth of insurance totaling 1,200.
The company collected $500 from a customer for services to be provided in the future.
The company sold inventory which cost $200 for $600 cash.
The company paid salaries totaling $1,000.
The company paid a dividend of $500 to the owners.
REQUIRED: Enter each of the above transactions into the worksheet below. You do not need to do end of month adjustments. Remember to do the
following:
Write the column headings for the accounts affected in the above transactions. All of the columns in the worksheet may not
necessarily be used.
Put the amount and whether it is increasing or decreasing in the correct column
If your transaction affects retained earnings, also show which particular component of retained earnings is affected.
After recorded all the above transactions, total up your column headings.
=
A.
B.
C.
D.
E.
F.
G.
32
Asset
Liability
Stockholders Equity
Revenue
Expense
2. As prepaid insurance expires over time, which of the following statements is true? (Assume the company
uses accrual-basis accounting)
A.
B.
C.
D.
E.
3. On 1/1/2003, a company (accrual-basis) collected $6,000 from a customer to be earned over the next six
month. At the end of the first month, to properly reflect revenues, which account should be increased?
A.
B.
C.
D.
E.
Cash
Unearned Revenue
Retained Earnings
Accounts Receivable
Accounts Payable
4. True or False: All public corporations must use the cash basis of accounting.
5. A company sold inventory costing $2,000 for $5,000 cash. What is the overall net effect on the
accounting equation?
Assets
Increase
Increase
Decrease
Decrease
No effect
A.
B.
C.
D.
E.
Liabilities
Increase
No effect
No effect
Decrease
Decrease
Owners Equity
No effect
Increase
Decrease
No effect
Increase
33
Prepaid Insurance
Unearned Revenue
Capital Stock
Retained Earnings
Sales Revenue
8. During 2005, Jagger Inc. earned revenue totaling $1,000,000, of which $700,000 was collected in cash in
2005. The company also incurred $200,000 in expenses, of which $100,000 was paid in 2005.
If Jagger uses the accrual basis of accounting, net income for 2005 would be:
A.
B.
C.
D.
E.
$600,000
$500,000
$800,000
$900,000
$700,000
9. As Unearned Revenue is earned over time, which of the following statements is TRUE? (assume
accrual basis accounting)
A.
B.
C.
D.
E.
34
10. During 2005, Thomas Inc. earned fees of $150,000, of which $100,000 was collected in cash. The
company also incurred $65,000 in expenses, of which $35,000 was paid.
If Thomas Inc. uses the accrual basis of accounting, what is net income for 2005?
A.
B.
C.
D.
E.
$100,000
$65,000
$85,000
$150,000
$280,000
SOLUTIONS:
PROBLEM I:
Cash
A.
B.
C.
D.
E.
+ 25,000
- 7,000
- 1,200
+ 500
+ 600
Invento
ry
Prepaid = Unearned +
Ins
Revenue
CC
- 1,000
- 500
16,400
Rev
+ 600
- 200
- 1,000
- 500
-1,100
600
Exp
Divid
+ 25,000
+ 7,000
+ 1,200
+ 500
- 200
F.
G.
Bal
RE
6,800
1,200
500
25,000
200
1,000
600
1,200
500
500
MULTIPLE CHOICE:
1. A
2. D
3. C
4. FALSE
5. B
6. C
7. A
8. C
9. D
10. C
35
Introduction to Taxation
(from supplement)
PROBLEM I:
Caroline is a single individual. In 2004, she has gross income of $60,000. Her total itemized deductions are
$15,000, her standard deduction is $4,850. She can claim one personal exemption equal to $3,100.
A. Using the tax tables provided at the back of the supplement, what is her tax liability for 2004?
B. If Caroline has already had $8,000 withheld from her paycheck, does she need to send in additional
money to the IRS, or is she owed a refund?
PROBLEM II:
Thayer Enterprises ( a corporation) reports total income of $100,000. The corporations taxable income is
$80,000.
B. What is the companys marginal tax rate?
C. What is the companys average tax rate?
D. What is the companys effective tax rate?
PROBLEM III:
You would like to buy a $1,000 bond. Your marginal tax rate is 15%. You have narrowed it down to two choices:
Buy a 5% taxable bond or a 4% municipal bond.
Based on your circumstances, which bond would be the better financial choice and why? Clearly show your
calculations and explain your answer.
36
MULTIPLE CHOICE:
1. Which of the following would be an example of a progressive tax?
A.
B.
C.
D.
E.
37
2. Operational planning:
A.
B.
C.
D.
3. When comparing financial and managerial accounting, which of the following statements is true?
A.
B.
C.
D.
E.
4. Sunk costs:
A.
B.
C.
D.
SOLUTIONS:
1.
2.
3.
4.
C
C
B
D
38
Beginning
$3,000
35,000
12,000
Ending
$1,000
40,000
10,000
$20,000
10,000
7,000
39
MULTIPLE CHOICE:
Use the following information to answer the next 10 questions.
A company uses job-order costing. Use the following key to indicate the best cost classification for each of
the following costs:
A = Direct materials (Product cost)
B = Direct labor (Product cost)
C = Manufacturing Overhead (Product cost)
D = Period Cost
1. Factory utilities
2. Advertising
3. Machine operator salaries
4. Administrative building rent
5. Indirect materials used in the factory
6. Direct materials used in the factory
7. Supplies used in the administrative building
8. Shipping charges
9. Factory maintenance worker salaries
10. Insurance on factory equipment
11. The account called Work-in-Process would be found on which financial statement?
A.
B.
C.
D.
E.
Income Statement
Statement of Retained Earnings
Balance Sheet
All of the above
None of the above
12. The account called Cost of Goods Sold would be found on which financial statement?
A.
B.
C.
D.
E.
Income Statement
Statement of Retained Earnings
Balance Sheet
All of the above
None of the above
40
13. During 2005, the Happy Face Co. manufactured a product that had a product cost of $20 per unit. Total
non-manufacturing costs for 2005 were $50,000. If 50,000 units were produced in 2005, of which 40,000
units were sold for $50 each, what would be net income?
A.
B.
C.
D.
E.
$1,200,000
$1,450,000
$1,650,000
$1,949,950
$1,150,000
15. Wolfpack Inc. had the following information available for the month of August:
Raw materials inventory --------------Work-in-process inventory -----------Finished goods inventory --------------
Beginning
$10,000
80,000
20,000
Ending
$20,000
70,000
25,000
$70,000
200,000
50,000
$255,000
$320,000
$380,000
$340,000
$315,000
41
SOLUTIONS:
PROBLEM I:
A. $22,000
B. $34,000
C. $36,000
MULTIPLE CHOICE:
1. C
2. D
3. B
4. D
5. C
6. A
7. D
8. D
9. C
10. C
11. C
12. A
13. E
14. B
15. E
42
B. Assume that during the year, a particular job took 115 direct labor hours to complete. How much
overhead should be assigned to that job? CIRCLE ANSWER.
C. At the end of the year, by how much was total overhead under or over-applied? Also, indicate whether it
was over or under-applied. CIRCLE ANSWER.
43
PROBLEM II:
Watkins Inc. manufactures a product that goes through two departments. The company applies the FIFO method
to process costing. Information relating to activity in the first department is as follows:
Work-in-process Beginning (30% complete)
Started in current period
Work-in-process Ending (80% complete)
# units
10,000 units
200,000 units
25,000 units
A. What are the total equivalent units for the period? CIRCLE ANSWER.
B. What is the cost per equivalent unit for the period? Round to nearest penny. CIRCLE ANSWER.
C. What is the cost of ending work-in-process inventory at the end of the period? CIRCLE ANSWER.
D. What is the cost of goods manufactured for the period? CIRCLE ANSWER.
44
MULTIPLE CHOICE
1. Conversion Costs are made up of which types of costs?
A.
B.
C.
D.
E.
5,000 units
100,000 units
8,000 units
97,400 eus
102,400 eus
100,600 eus
96,400 eus
113,000 eus
3. Assume that the total equivalent units for the period were 100,000 eus, what would be the cost per
equivalent unit?
A.
B.
C.
D.
E.
$25
$.25
$4
$.23
$4.30
45
4. The ABC Company under-applied overhead in 2004 by $4,000. At the end of 2004, they had the
following account balances before the end of year adjustment to dispense of this under-applied overhead:
Ending direct materials --------------------Ending work-in-process -------------------Ending finished goods ---------------------Cost of goods sold -------------------------Sales revenue -------------------------------Selling and administrative expenses -----
$ 6,000
0
0
28,000
60,000
12,000
After correctly adjusting for the under-applied overhead of $4,000, which of the following statements is
true regarding the balances that should be shown on either the balance sheet or income statement for
2004?
A. Direct materials should have a balance of $10,000.
B. Selling and administrative expenses should have a balance of $8,000.
C. Sales revenue should have a balance of $64,000.
D. Cost of goods sold should have a balance of $32,000.
E. Cost of goods sold should have a balance of $24,000.
5. In a traditional manufacturing environment, applied overhead is first accumulated in the ___________
account.
A. cost of goods sold account
B. direct materials account
C. finished goods account
D. work-in-process account
E. sales revenue account
6. In its initial year of operation, Maple Inc. started 4,000 units of a particular product. At the end of the
period, 800 of these units were only 25% complete. How many equivalent units were produced in the
period?
A. 3,000
B. 4,200
C. 3,800
D. 3,200
E. 3,400
7. When using process costing, which of the following statements is true regarding the FIFO method?
A. It assumes that all units in beginning and ending inventory are the same percentage complete.
B. It assumes that of the units completed in the current period, the first ones completed were beginning
inventory units.
C. It assumes that of the units completed in the current period, the first ones completed were ending
inventory units.
D. It assumes that of the units completed in the current period, one-half were from the beginning
inventory and the other half were from units started in the current period.
E. It assumes that all the units completed in the current period were started in the current period.
46
40,000 units
60,000 units
10,000 units
Using the FIFO method of process costing, how many units were both started and completed in
2004?
A.
B.
C.
D.
E.
70,000 units
60,000 units
110,000 units
40,000 units
50,000 units
SOLUTIONS:
PROBLEM I:
A. $5 per direct labor hour
B. $575
C. $5,000 underapplied
PROBLEM II:
A. Step #1: Compute number of EUs started and completed in current period:
Beginning units
Add: started in current period
Less: Ending units
Finished
10,000 units
200,000
(25,000)
185,000 (10,000 from beg and 175,000 started
and completed in current period)
7,000 EU
175,000
20,000
202,000
47
D.
Beginning WIP
Add: Current Costs
Less: Ending WIP
CGM
$20,000
400,000
(39,600)
$380,400
MULTIPLE CHOICE:
1.
2.
3.
4.
5.
6.
7.
8.
D
A
C
D
D
E
B
E
48
Ch 4: Activity-Based Costing
PROBLEM I:
The following overhead information is available for the Columbus Corporation for the year ended June 30, 2002:
Activity
Purchasing
Receiving
Machine Setups
Allocation Base
Number of purchase orders
Number of shipments received
Number of setups
Overhead Cost
$300,000
100,000
500,000
30,000
20,000
2,500
ABC and traditional costing systems often produce similar product-cost information.
ABC systems are generally more accurate than traditional costing systems.
Traditional costing systems are generally more accurate than ABC systems.
ABC systems are usually less expensive to implement than traditional costing systems.
ABC systems usually result in a plant-wide overhead application rate.
SOLUTIONS:
PROBLEM I:
A. $10 per purchase order
B. $5 per shipment received
C. $200 per setup
Multiple Choice:
1. B
49
$10
$8,000
If next years production is 30,000 units, estimated total costs would be: CIRCLE ANSWER.
PROBLEM II:
The administrator of Wake Hospital would like a cost formula to help predict overhead costs for the number of
patients admitted during a month. The following data for the past five months has been collected. The activity
base is number of patients admitted.
Month
May -------------June -------------July --------------August ----------September -------
# of patients
admitted
1,800
1,900
1,700
1,600
1,500
Overhead
Costs
$14,700
15,200
13,700
14,000
14,300
A. Using the high-low method, what is the variable cost per patient? Round to nearest penny. CIRCLE
ANSWER.
B. Using the high-low method, what are the fixed costs per month? CIRCLE ANSWER.
C. Using the high-low method, write the equation to predict total overhead costs for the month. CIRCLE
ANSWER. (Answer should be in the format of Y = a + bx)
D. If management expects 2,000 patients to be admitted in October, what are the total expected overhead
costs for the month? CIRCLE ANSWER.
50
MULTIPLE CHOICE:
1. You are given the following cost and volume information for a product:
Volume
Total Cost
1 unit
$25
5 units
125
10 units
250
What type of cost is given?
A. Variable cost
B. Fixed cost
C. Step cost
D. Mixed cost
E. Can not be determined
2. Yang Mfg. makes a product called Yin. The company incurs three cost types (Type I, II, and III) in the
production of Yin. The relevant range of operations is between 2,500 units and 10,000 units of Yin per
month. Per unit costs at two activity levels for each cost type are presented below.
5,000 units
7,500 units
Type I
$4.00
$4.00
Type II
$9.00
$6.00
Type III
$4.00
$3.00
Refer to the above information. Identify the cost behavior of each type.
A.
B.
C.
D.
E.
Type I
Fixed
Fixed
Variable
Variable
Mixed
Type II
Variable
Mixed
Mixed
Fixed
Variable
Type III
Mixed
Variable
Fixed
Mixed
Fixed
3. Within the relevant range, which of the following statements is true with respect to fixed costs?
A. Fixed costs per unit increase as the activity level increases.
B. Fixed costs per unit remain constant as the activity level changes.
C. Fixed costs per unit decreases as the activity level increases.
D. Fixed costs in total dollar amount will decrease as the activity level decreases.
4. A mixed cost is one which:
A. Arises from annual decisions by management to spend in certain areas such as research.
B. Contains both variable and fixed cost elements.
C. Varies in direct proportion to changes in a particular activity.
D. Remains constant in total dollar amount within the relevant range.
51
5. The Ritter Company plans on making a tax-deductible contribution of $2,000 to a local charity. If the
companys tax rate is 30%, what would be the after-tax cost?
A. $2,000
B. $1,400
C. $600
D. $2,600
E. $3,400
SOLUTIONS:
PROBLEM I: $309,600
PROBLEM II:
A.
B.
C.
D.
$2.25
$10,925
Y=10,925 + 2.25x
$15,425
MULTIPLE CHOICE:
1. A
2. D
3. C
4. B
5. B
52
C. What is the break-even point in terms of units? Round to nearest whole unit.
D. Fill in the blank: For each additional dollar in sales, net income will go up by $ _____.
E. Assume that total sales are currently totaling $900,000. If sales go up by 10%, what will be the increase
in net income?
53
PROBLEM II:
Jasper, Inc. produces one type of machine with the following costs and revenues for the year:
Total revenues
Total fixed costs
Total variable costs
Total units produced and sold
$5,000,000
$1,600,000
$2,000,000
100,000 units
B. What is the break-even point in terms of sales dollars? Round to nearest whole dollar.
D. How many units must be sold in order to earn an operating profit of $1,500,000 (ignore income taxes)?
Round to nearest whole unit.
E. If the company is in a 40% tax bracket, what would sales have to be for an after-tax net income of
$1,000,000?
54
PROBLEM III:
Wolfpack Inc. plans to sell 15,000 special Peach Bowl t-shirts with fixed costs of $20,000 and variable expenses
at 60 percent of sales.
QUESTION: In order to have net income of $100,000, the sales price of each t-shirt must be set at what?
Ignore taxes.
Product A
$200
120
Product B
$160
100
55
MULTIPLE CHOICE:
1. Which of the following would normally be classified as a variable cost?
A.
B.
C.
D.
E.
Direct materials
Direct labor
Variable overhead
Both B and C
A, B, and C
2. Company A has a lower operating leverage ratio than Company B. Which of the following statements is
TRUE?
A. Company As net income is lower than Company Bs net income.
B. Given the same percentage increase in sales, Company As net income would increase less than
Company Bs.
C. Company As sales revenue must be less than Company Bs.
D. Company A has few assets than Company B.
E. All of the above are true.
3. Sales of gizmos are down, and management has planned to increase salespersons commissions on the
sales of this product by 10%. If sales revenue goes up by more than 10% as a result of this change, which
of the following statements is TRUE (all else being equal)?
A.
B.
C.
D.
quantitative factors
qualitative factors
both quantitative and qualitative factors
none of the above
56
Variable costs:
Variable product costs
Variable period costs
Fixed costs:
Fixed product costs
Fixed period costs
5. Fill in the blank: For each additional unit sold, net income will go up by $ ______.
A.
B.
C.
D.
E.
$70
$.70
$100
$30
$79,970
6. Fill in the blank: For each additional dollar in sales, net income will go up by $______.
A.
B.
C.
D.
E.
$70
$.70
$100
$30
$79,970
7. What is the break-even point in terms of units? Round to nearest whole unit.
A.
B.
C.
D.
E.
114,286 units
70 units
80,000 units
1,143 units
800 units
8. Assume that sales are currently totaling $500,000. If sales go up by 20%, what will be the increase in net
income (ignore taxes)?
A.
B.
C.
D.
E.
$350,000
$100,000
$520,000
$600,000
$70,000
57
$600,000
$300,000
$150,000
20,000 units
63,334 units
10,000 units
1,900,000 units
53,333 units
93,333 units
11. If the company is in a 40% tax bracket, what would sales have to be to generate an after-tax net income of
$900,000? Round to nearest whole dollar.
A.
B.
C.
D.
E.
$3,300,000
$2,250,000
$4,800,000
$1,020,000
$5,800,000
12. Tarheel Corp plans to sell 10,000 special t-shirts with fixed costs of $30,000 and variable expenses at 70%
of sales. In order to generate net income of $100,000, the sales price of each t-shirt must be set at what?
Ignore taxes.
A.
B.
C.
D.
E.
$18,57
$23.33
$43.33
$13.00
$30.33
58
13. Marshall Inc. produces three products, A, B, and C. 50% of sales are of product A, 30% are of product B,
and 20% are of Product C.
Other information is as follows:
Sales price per unit
Variable costs per unit
Product A
$100
60
Product B
$80
50
Product C
$70
40
**In addition, the company incurs $40,000 in fixed costs per year.
In order to earn a profit of $200,000, how many units of Product A need to be sold? Round to nearest
whole unit. Ignore income taxes.
A.
B.
C.
D.
E.
3,429 units
2,728 units
3,600 units
1,200 units
2,857 units
Rent
Direct material
Direct labor
Factory supplies
59
SOLUTIONS:
PROBLEM I:
A.
B.
C.
D.
E.
$42
70%
4,762 units
70 cents
$63,000
A.
B.
C.
D.
E.
$50
$2,666,667
2.14
103,333 units
$5,444,445
PROBLEM II:
60
Product A
$130,000
38,000
92,000
85,000
$7,000
Product B
$130,000
50,000
80,000
90,000
($10,000)
Product C
$250,000
60,000
190,000
100,000
$90,000
Total
$510,000
148,000
362,000
275,000
$87,000
The company is considering the discontinuation of Product B. If they do discontinue Product B, one-half of
Product Bs fixed costs would go away.
QUESTION: By how much would net income increase or decrease if Product B were discontinued? Indicate
whether an increase or decrease.
PROBLEM II:
Bakery Creations has a particular pastry it makes that can be sold immediately after baking or decorated and then
sold for a higher price. The following information is available regarding the sales prices and costs if it is sold
immediately after baking or processed further:
Initial sales price -------------------- $2.00
Initial cost ---------------------------.50
Sales Price after decorating -------- 2.30
Cost of decorating -----------------.40
Regardless of whether the pastries are decorated or not, the bakery can sell as many as 75 pastries per day.
QUESTION: If Bakery Creations does process the pastries further, what would be the increase or decrease in
contribution margin? Indicate in your answer whether it is an increase or decrease.
61
PROBLEM III:
Soft Mattress Inc. produces both a queen and a king size bed. Selected data related to each product is as follows:
Sales price per unit --------------Variable costs per unit -----------
Queen
$800
300
King
$1,200
450
PROBLEM IV:
The Southwest Desk Company needs 20,000 doorknobs annually to complete their desk drawers. Currently, the
company makes the doorknobs internally with the following costs:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Southwest is considering purchasing the doorknobs externally from a supplier. The supplier would charge $1.20
per doorknob. If Southwest purchases the doorknobs from the supplier, 50% of the fixed overhead costs would go
away.
QUESTION: If Southwest purchases the doorknobs from the supplier, what will be the increase or decrease in
net income (ignore income taxes)? Indicate whether it is an increase or decrease.
62
PROBLEM V:
Championship T-Shirts Ltd. has the following cost information at the expected production level of 30,000 shirts:
Direct Materials
Direct Labor
Variable overhead
Fixed overhead
$4 per shirt
$4 per shirt
$2 per shirt
$1 per shirt
The company has the capacity to produce as many as 25,000 shirts. Normally, the company sells each shirt for
$18.00.
A local charity has contacted the company requesting 400 t-shirts. The charity would like Championship to
monogram each shirt. The cost to monogram each t-shirt would be $3.00 per shirt.
The charity wishes to pay $12 per shirt.
QUESTION: If Championship accepts this special order, and sells the shirts to the charity for $12.00 each, by
how much would the companys net income increase or decrease? Indicate whether it is an increase or decrease.
QUESTION: What would be a qualitative reason for Championship to make the t-shirts? (one sentence)
MULTIPLE CHOICE:
1. When are fixed costs relevant to a make or buy decision?
A.
B.
C.
D.
63
2. The Optimum Computer Company produces and sells computers. Each of the computers that it makes
needs a keyboard. Currently, the company is making 10,000 keyboards internally with the following
costs:
Direct materials
Direct labor
Variable overhead
Fixed overhead
The company is considering purchasing the keyboards externally from a supplier. The supplier would
charge $20 per keyboard. If the company purchases the keyboard from a supplier, 70% of the fixed costs
would go away.
Assuming the company does decide to purchase the keyboards externally, what would be the increase or
decrease in net income (ignore taxes)?
A.
B.
C.
D.
E.
3. Extra Balance Company manufactures hockey sticks. The companys capacity is 5,000 sticks per month;
however, it is currently only selling 4,000 sticks per month. The company normally asks a selling price of
$130 per stick. A local team has asked Extra Balance to sell it 500 sticks for $100 per stick.
When they produce 4,000 sticks, Extra Balance records the variable cost of each stick to be $40 and the
fixed costs of each stick to be $10. If Extra Balance were to accept this special order, what would be
effect on net income?
A
B.
C.
D.
E.
64
4. Treehouses, Inc. produces two types of custom-crafted treehouses the Standard and the Deluxe.
Selected data related to each product is as follows:
Sales price per unit ------Variable costs per unit ---
Standard
$2,000
500
Deluxe
$3,000
1,000
10
The company employs four employees who are trained to assemble these treehouses. There are a total of
8,000 assembly hours available per year.
The company believes it could sell a maximum of 700 standard and 500 deluxe treehouses per year.
If the company maximizes profits, but assembly hours are a constraint, what is the maximum contribution
margin for the year? (ignore income taxes)
A.
B.
C.
D.
E.
$2,316,000
$1,150,000
$1,810,000
$2,050,000
$251,000
SOLUTIONS:
PROBLEM I: Overall decrease in net income of $35,000
PROBLEM II: Overall contribution margin would decrease $7.50
PROBLEM III: maximum net income would be $2,700,000
PROBLEM IV: $4,000 increase in net income
PROBLEM V:
A. $400 overall decrease in net income
B. Gesture of goodwill, future sales contact
MULTIPLE CHOICE:
1.
2.
3.
4.
C
B
B
C
65
2. On 1/1/2005, Sullivan Inc. purchased a machine costing $40,000 by making a down-payment of $8,000
and financing (borrowing) the rest at 10% compounded annually. The loan will be paid off in equal
payments over the next ten years, with the first payment beginning on 12/31/2005. What will be the
amount of each of the annual payments? Round to nearest whole dollar.
A.
B.
C.
D.
E.
$24,578
$6,510
$12,336
$83,009
$5,208
3. Crazy Inc. purchased a machine for $9,533 on 1/1/2005. The machine will generate annual cash inflows
of $2,000 for the next six years. Assuming these cash inflows occur at the end of each year, what rate of
return did the company earn on this machine?
A.
B.
C.
D.
E.
7%
21%
26%
5%
4%
4. Candice will be buying a car costing $30,000 by borrowing the money at 12% interest compounded
quarterly. She will be paying off her loan by making equal quarterly payments of $2,016.47. How many
quarterly payments will she need to make in order to pay back the loan?
A.
B.
C.
D.
E.
23
15
14
20
17
66
$56,400
($8,779)
$6,408
$105,000
($251,771)
.75 years
5 years
1.33 years
3.53 years
3.75 years
7. The Unique Gardner Company is considering the purchase of a customized delivery van costing
approximately $40,000. Using a discount rate of 15%, you estimate the present value of future cost
savings at $50,000. To yield the 15% return, the actual cost of the van should not exceed the $40,000
estimate by more than:
A.
B.
C.
D.
E.
$10,000
$50,000
$7,500
$6,000
$13,500
8. A company is considering investing in an asset which cost $17,000. The cash flows are expected to be as
follows:
- $5,000 in year 1
- $4,000 in year 2 and 3
- $2,000 in years 4 through 7
Approximately how long is the payback period?
A.
B.
C.
D.
E.
5 years
4 years
1.5 years
7 years
3 years
67
9. Shaeffer Inc. invested $70,000 in a new machine. The machine will generate cash flows at year-end of
$50,000, $40,000, and $30,000 for the next three years, respectively. The company uses a 15% cost of
capital. What is the net present value (ignore income taxes)?
A.
B.
C.
D.
E.
$107,004
$203,984
$23,449
$19,207
$50,000
10. The Tiger Golf Club is considering an investment into golf carts that requires $60,000 and promises to
return $108,637 in four years. The companys internal rate of return is: (ignore taxes)
A.
B.
C.
D.
E.
14%
12%
16%
1.81%
.55%
11. Waller, Inc. purchased an asset at a cost of $102,000. Annual operating cash flows are expected to be
$30,000 each year for six years. At the end of the assets life, there will be a $10,000 residual (salvage)
value. The income tax rate is 30%, and the company uses straight-line depreciation with no half-year
convention. Taking into account income tax effects, what is the net present value if the cost of capital is
12%? Round to nearest whole dollar.
A.
B.
C.
D.
E.
$26,408
$8,853
$57,779
$36,811
$10,373
68
13. The ABC Company only invests in assets which generate a return of 20%. The company is considering
the purchase of an asset costing $100,000, whose net present value is ($5,000). Based on these facts,
which of the following statements is TRUE?
A.
B.
C.
D.
E.
The present value of the cash inflows is greater than the present value of the cash outflows.
The actual return the asset generates is more than 20%.
The actual return the asset generates is equal to 20%.
The actual return the asset generates is negative.
The actual return the asset generates is less than 20%.
--------------------------------------------------------------------------------------------------------SOLUTIONS:
1. A
2. E
3. A
4. D
5. B
6. E
7. A
8. A
9. C
10. C
11. B
12. C
13. E
69
20,000 units
24,000 units
30,000 units
Inventory at March 31 was budgeted at 2,000 units. Sales for July are expected to be 35,000 units. The desired
quantity of finished-goods inventory at the end of each month is to be equal to 10% of the next months budgeted
unit sales.
Each completed unit of finished product required 5 ounces of material. The cost per ounce is $1.25 per ounce.
The company has determined that it needs 20% of next months raw material needs on hand at the end of each
month.
1. What is the total projected production for the second quarter?
A.
B.
C.
D.
E.
81,400 units
73,400 units
75,500 units
74,000 units
72,500 units
2. How much should the company plan on spending on direct material for the month of May?
A.
B.
C.
D.
E.
$161,125
$153,750
$166,375
$142,063
$128,900
70
3. Brown Inc. sells high-end bicycles. The price of each bicycle is $600. All sales are on account. Brown
collects 40% of a months sales in the month of sale, 50% in the month following sale, and 10% in the
second month following sale. Budgeted sales (in units) for the first six months of 2006 are as follows:
January --------February ------March ---------April -----------May -----------June ------------
3,000 units
4,000 units
6,000 units
8,000 units
9,000 units
9,000 units
$10,800,000
$3,060,000
$4,800,000
$8,040,000
none of the above
$200,000
190,000
150,000
210,000
230,000
200,000
Historically, the company pays one-third at the time of purchase and the remainder in the month following
purchase. What are the expected cash disbursements for October?
A.
B.
C.
D.
E.
$150,000
$210,000
$170,000
$223,333
$70,000
71
-----------------------------------------------------------------------------------------------------------------SOLUTIONS:
1.
2.
3.
4.
5.
6.
C
A
E (3,960,000)
C
C
B
72
Ch 10: Variance Analysis- A Tool for Cost Control and Performance Evaluation
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS:
Gibson Inc. produces hand-crafted office desks. The direct materials and direct labor standard costs for one desk
are as follows:
In July, 400 sheets of lumber were purchased for $12 per piece. Of that number, 350 pieces of material were used
to produce 65 desks.
Labor costs for July were $14,000 for 1,000 hours.
1. What would be the direct materials price variance?
A.
B.
C.
D.
E.
$1,300 U
$1,300 F
$1,550 U
$800 U
$800 F
$750 U
$750 F
$250 U
$250 F
none of the above
$1,000 F
$1,000 U
$1,600 F
$1,600 U
$600 F
$1,000 F
$1,000 U
$1,600 F
$1,600 U
$600 F
73
5. The advantage of a flexible budget over a static budget is that, in a flexible budget, actual costs are
compared to the costs that should be incurred for the:
A.
B.
C.
D.
6. As a hobby, Denise makes and sells clay pottery bowls for sale at local art festivals. Her budget for the
production and sale of 100 sculptures is as follows:
Sales Revenue
Variable Costs
Fixed Costs
Net Income
@ 100 sculptures
$7,000
1,500
2,000
$3,500
Due to an increased interest in handmade pottery, Denise was able to actually make and sell 180
sculptures. If she prepares a flexible budget for 180 sculptures, what would be net income?
A.
B.
C.
D.
E.
$6,300
$9,100
$3,500
$9,900
$7,900
---------------------------------------------------------------------------------------------------------------SOLUTIONS:
1.
2.
3.
4.
5.
6.
D
C
A
E
B
E
74
91.7%
157%
183.3%
220%
54.55%
3. A certain division of company has $5,000,000 in sales, operating profit of $400,000, and investment of
$1,500,000. Assuming a 12% cost of capital, what is the divisions residual income?
A.
B.
C.
D.
E.
$220,000
$4,820,000
$420,000
$200,000
none of the above
75
4. Lovely, Inc. has two types of product lines skin care and hair care. The following is a segmented
income statement for the most recent year:
Sales revenue ----------------Variable expenses ------------Contribution margin ---------Traceable fixed costs --------Segment margin --------------Common fixed costs ---------Net Income -------------------
Total
$2,000,000
1,245,000
$755,000
200,000
$555,000
200,000
$355,000
Skin Care
$1,100,000
660,000
$440,000
140,000
$300,000
Hair Care
$900,000
585,000
$315,000
60,000
$255,000
Lovely, Inc. plans on having an aggressive advertising campaign, but the company can only afford to
advertise for one of its products. The cost of the advertising will be $40,000. Marketing studies have
indicated that such a campaign would increase sales of the Skin Care division by $300,000 and increase
sales of the Hair Care division by $400,000.
Which of the following statements is TRUE about the division they should select for the campaign, and
the overall effect on net income of the campaign?
A.
B.
C.
D.
E.
They should select the Skin Division because the incremental effect on net income will be $120,000.
They should select the Skin Division because the incremental effect on net income will be $20,000.
They should select the Hair Division because the incremental effect on net income will be $100,000.
They should select the Hair Division because the incremental effect on net income will be $140,000.
It does not matter which division they select. Incremental net income will go up by the same amount
for each division.
----------------------------------------------------------------------------------------------------------SOLUTIONS:
1.
2.
3.
4.
C
C
A
C
76