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INTRODUCTORY MANAGERIAL ACCOUNTING ACCT2242 .1B (Prof. Shirley Carras) MIDTERM EXAM SUMMER SESSION I of 2011 THURSDAY, MAY 26th

NAME:
AVAILABLE MARKS
16 12 8 14 26 12 12

A:
MARK RECEIVED

QUESTION
1 2 3 4 5 6 7

TOTAL

100

QUESTION 1 (16 marks)

Answer any four (4) of the following short answer questions. If you answer more than the four, only the first four will be marked.

1 .

What are the three costs that make up the Total Manufacturing Costs? For each cost, indicate whether it is a direct cost or an indirect cost.

Cost 1. 2. 3.

Direct or Indirect

Direct Materials Direct Labour (Applied) Overhead

Direct Direct Indirect

2 .

When a company is developing its strategy to attract customers by distinguishing itself from competitors, the company will generally focus on one reason a customer might choose them over their competitors. These reasons are more formally called "customer value propositions". Name the three customer value propositions.
1 . 2 . 3 .

Customer Intimacy we know you and understand you and we can serve your needs better than someone else Operational Excellence we can provide you with goods easier, faster, cheaper Product Leadership we have better quality, more innovative products

3 .

Describe the characteristics of fixed costs from the perspectives of (1) total costs, and (2) unit costs.

Within the Relevant Range ... Fixed costs in total are constant (or the same) regardless of changes of level of activity Fixed costs per unit vary inversely with the level of activity (the higher the level of activity, the lower the per unit fixed cost; the lower the level of activity, the higher the per unit fixed cost)

4 .

Indicate whether the costs itemized below are a Product cost or a Period cost. Cost Cost of sand spread on the factory floor to absorb oil from manufacturing machines Depreciation on the warehouse used to store the finished goods Cost of guided public tours through the company's facilities Depreciation on the computer system that controls the operation of the factory machinery Product or Period

a . b . c . d .

Product Period Period Product

5 .

(a) What do the debits to the Work-in-Progress Inventory account represent?

Debits represent the total manufacturing costs which are comprised of direct materials, direct labour and applied overhead.
(b) What do the credits to the Work-in-Progress Inventory account represent?

Credits represent the cost of goods manufactured, which are the goods finished and transferred into finished goods inventory.
6 . We discussed three methods of analyzing mixed costs to determine which portion is Fixed and which portion is Variable. Of the three methods, which method is the Least precise and why? Which method is the Most precise, and why? Method LEAST Precise Why

Scattergra m

Because it uses at most only one data point, and the placement of the line is subjective.

MOST Precise

Because it uses all data Regression points, giving a more precise Analysis fit.

QUESTION 2 (12 marks)

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The newly hired cost accountant at Demgren Company was asked to analyze the companys overhead costs for the last year, and to predict what the overhead costs for the 12-month period ending April 30, 2012 might be. He was aware that the overhead costs were mixed costs and, therefore, collected the following monthly data. UNITS OVERHEAD MONTH PRODUCED COSTS May 7,900 $ 715,000 June 7,200 $ 655,000 July 12,500 $ 1,001,000 August 12,800 $ 1,111,000 September 12,500 $ 1,119,000 October 11,500 $ 996,000 November 13,600 $ 1,131,000 December 14,400 $ 997,000 January 8,400 $ 835,000 February 13,300 $ 1,042,000 March 12,200 $ 1,050,000 April 9,000 $ 991,000 The management team at Demgren Company has estimated that 15,180 units will be produced over the next year. Month. Required: Calculate an estimate of what the company will incur in actual overhead costs for the next year by analyzing the cost data which has been collected. Show ALL calculations. Step 1: Use High-Low to analyse the Mixed Cost, breaking it into the Fixed and the Variable components

Variabl e: = =

$ at High activity - $ at Low activity High activity - Low activity $997,000 - $655,000 14,400 - 7,200

$342,000 7,200 = $47.50 per unit Fixed : O R Using the Low volume... Y = a + bX $655,000 = a + ($47.50 x 7,200) a = $655,000 $342,000 a= $313,000

Using the High volume... Y = a + bX $997,000 = a + ($47.50 x 14,400) a = $997,000 - $684,000 a = $313,000

Step 2:

Predict overhead costs at the level of 15,180 units. Y = $313,000 + $47.50X Y = $313,000 + ($47.50 x 15,180) Y = $313,000 + $721,050 Y = $1,034,050

Because of the typo, I would also accept 12 x $1,034,050, or using (12 x 15,180) as the activity level.

QUESTION 3 (8 marks)
Circle the correct response. 1. In a normal job-order costing system, the use of indirect materials would usually be recorded as a debit to which account? A) B) C) D) 2. Raw Materials Manufacturing Overhead Work in Process Finished Goods

The Watts Company uses predetermined overhead rates to apply manufacturing overhead to jobs. The predetermined overhead rate is based on labour cost in Department A and on machine hours in Department B. At the beginning of the year, the company made the following estimates: Department A Department B Direct labour cost $30,000 $40,000 Manufacturing $60,000 $50,000 overhead Direct labour hours 6,000 8,000 Machine hours 2,000 10,000 A) B) C) D) 50% and $8.00 110% and $15.00 50% and $5.00 200% and $5.00 Dept. A $60,00 0 $30,00 0 Dept. B $50,0 00 10,00 0 5

Estimated Overhead Estimated Labour Cost Estimated Machine Hours

$60,000 / $30,000 = 2 POHR - Dept. A times or 200% $50,000 / 10,000 = POHR - Dept. B $5 3. Lucy Sportswear manufactures a specialty line of T-shirts. The company uses a job-order costing system. During March, the following costs were incurred on Job ICU2: Direct materials: Direct labour: $13,700 $ 4,800

In addition, selling and shipping costs of $7,000 were incurred on the job. Manufacturing overhead was applied at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours. If Job ICU2 consisted of 7,000 shirts, what was the Cost of Goods Sold per shirt? A) $5.50 B) $5.70 C) $6.00 D) $6.50 Direct materials Direct labour Applied overhead 800 machine hours x $25 $13,70 0 $4,800 $20,00 0 $38,50 0

Total job costs Total # shirts produced 7,000 Cost per shirt $5.50 Note: Selling & shipping costs are NOT included in the product cost.

QUESTION 4 (14 marks)

Southwest Manufacturing uses job order costing to accumulate costs for billing purposes. It applies overhead to its jobs using a pre-determined overhead rate based on direct labour hours. The direct labour cost is $23.75 per hour. The controllers office has provided you with the following estimated costs for the upcoming year. Estimated Expense Category Costs Direct materials $ 800,000 Factory supervision $ 62,500 Selling expenses $ 210,500 6

Indirect materials Utilities for factory Administrative expenses Depreciation factory building and equipment Depreciation administrative offices and equipment Other miscellaneous factory costs Direct labour Required: (a)

$ $ $ $ $ $ $

45,000 88,500 300,000 100,000 60,000 39,000 475,000

Calculate the predetermined overhead rate that Southwest Manufacturing will use to apply overhead to its jobs. Show your work.

POHR =

Total Estimated Overhead Cost * Total Estimated Direct Labour Hours ** $335,000 20,000 per direct $16.75 labour hour

= =

* Estimated Factory Overhead Factory supervision Indirect materials Utilities for factory Depreciatiopn factory building & equipment Other miscellaneous factory costs $62,5 00 $45,0 00 $88,5 00 $100, 000 $39,0 00 $335, 000

** Estimated Direct Labour Hours Estimated Direct Labour Cost = Cost per hour of Direct Labour $475,000 = $23.75 direct labour = 20,000 hours

(b)

The job cost sheet for Job Y236 indicated that $18,000 of direct materials and 480 direct labour hours were charged to the job. What was the total cost of Job Y236?

Costs of Job Y236 Direct

$18,000 7

materials Direct labour 480 hours x $23.75 Applied overhead 480 DL hours x $16.75 POHR

.00 $11,400 .00 $8,040. 00 $37,440 .00

Total Job Costs

QUESTION 5 (26 marks)

Abbott Manufacturing uses a job order costing system and applies overhead on the basis of machine hours. The overhead costs which were applied during 2010 totalled $298,600. Abbott Manufacturing has also provided you with the following information of its actual costs for the year ended December 31, 2010. Administrative costs Direct labour Direct material purchases Indirect labour Indirect materials Other factory overhead Selling costs $ $ $ $ $ $ $ 311,600 217,800 160,000 94,400 23,000 187,000 178,900

Additional information regarding the inventory balances is as follows: Inventory Raw materials Work in progress Finished goods Required: (a) Prepare a Statement of Cost of Goods Manufactured for the year ended December 31, 2010 for Abbott Manufacturing. Abbott Manufacturing Cost of Goods Manufactured for the year ended December 31, 2010 Beginning $14,000 $51,000 $66,200 Ending $16,500 $47,300 $72,000

Direct Materials Raw materials inventory, beginning Add: Purchases Raw materials available for use Less: Raw materials inventory, ending

14,000 160,000 174,000 16,500 8

Raw materials used Direct Labour Applied Overhead Total Manufacturing Costs Add: Work in progress inventory, beginning Less: Work in progress inventory, ending COST of GOODS MANUFACTURED

157,500 217,800 298,600 673,900 51,000 724,900 47,300 677,600

NOTE: if you subtracted Indirect Materials from the Raw Materials to get Direct Materials used, I accepted that. That is the more technical solution, but the simper one (assuming the inventory was only direct materials) is presented here.

(b)

Prepare a Statement of Cost of Goods Sold for the year ended December 31, 2010 for Abbott Manufacturing. Assume that any over or under applied overhead is shown separately as an adjustment to the cost of goods sold.

Abbott Manufacturing Cost of Goods Sold for the year ended December 31, 2010

Finished goods inventory, beginning Add: Cost of Goods Manufactured Cost of goods available for sale Less: Finished goods inventory, ending Unadjusted Cost of Goods Sold ADD: UNDER applied Overhead ADJUSTED COST OF GOODS SOLD Actual Overhead: Indirect materials Indirect labour Other factory overhead Total ACTUAL Overhead APPLIED Overhead UNDER APPLIED Overhead

66,200 677,600 743,800 72,000 671,800 5,800 677,600

23,000 94,400 187,000 304,400 298,600 5,800

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QUESTION 6 (12 marks)

Horngren Manufacturing has asked you to reformat their traditional income statement into a Contribution Margin format Income Statement. Horngren Manufacturing Income Statement for the year ended March 31, 2011 Sales Cost of Goods Sold Gross Margin Operating Expenses Administrative Selling Net Income 180,00 0 139,00 0 850,000 490,000 360,000

319,000 41,000

Horngren has advised you that both the administrative and selling expenses are mixed costs. The administrative expenses are 40% variable, but the selling costs are only 20% variable. Required: Prepare a Contribution Margin format Income Statement for Horngren for the year ended March 31, 2011. Horngren Manufacturing Income Statement for the year ended March 31, 2011 Sales 850,000 Variable Expenses Cost of goods sold 490,000 Administrative (40% x $180,000) 72,000 Selling (20% x $139,000) 27,800 589,800 Contribution Margin 260,200 Fixed Expenses Administrative (60% x $180,000) 108,000 Selling (80% x $139,000) 111,200 219,200 Net Income 41,000 NOTE: CofGS is a variable expense; also there is no such thing as a gross margin when using this format.

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QUESTION 7 (12 marks)

Fill in the blanks in each of the independent questions below. Show your work. (a) Applied Overhead Direct Labour Cost of Goods Manufactured Work in Progress, beginning Work in Progress, ending Direct Materials used in Production $900,000 $700,000 $2,500,000

$500,00 0
$400,000 $800,000

Total Manufacturing Costs = DM + DL + Applied OH TMC = $800,000 + $700,000 + $900,000 TMC = $2,400,000 TMC + WIP(b) - WIP(e) CofGM 2,400,000 500,000 2,900,000 400,000 2,500,000

(b) Estimated manufacturing overhead Estimated direct labour hours Actual manufacturing overhead Actual direct labour hours Applied Overhead (based on direct labour hours) $150,000 10,000 $186,000 12,000

$180,000

POHR =

Estimated Overhead 12

= =

Estimated direct labour hours $ 150,000 10,000 $ 15.00 / dlh

Applied Overhead = POHR x actual DLH = $15 x 12,000 = $180,000

(c) Actual manufacturing overhead COMPARE: Applied manufacturing overhead Actual 80 Estimated manufacturing 0,600 overhead Applied 80 1,350 Over or Under applied overhead Differen or Under applied (fill in Is it Over ce O or U) 750 $800,600 $801,350 $804,900 $750 OVER

OVER because the applied was more than the actual

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