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Managerial Accounting Comprehensive Exam Practice Problems

The Big Themes in managerial accounting are the following: 1. 2. 3. 4. Fixed versus variable costs and the related concept of operating leverage. Product versus period costs. Direct and indirect materials and direct and indirect labor. Manufacturing overhead (MO) development of the predetermined rate, how MO is allocated to work in process, and what to do with over/underapplied MO (you need to know ONLY the close out to cost of goods sold method). 5. Job order costing. 6. Process costing using the weighted-average method (you DO NOT need to know the FIFO method) 7. The Contribution Format income statement and Cost-Volume-Profit analysis. 8. Absorption costing versus variable costing. 9. Standard costs and variance analysis. 10. Static versus flexible budgets. 11. Profit planning and budgeting (but you DO NOT need to prepare a master budget for the exam). Practice Problems: 1. Whitman Corporation, a merchandising company, reported sales of 7,400 units for May at a selling price of $577 per unit. The cost of goods sold (all variable) was $411 per unit. Selling expense was a mixed cost with a variable component of $54 per unit and a fixed component of $145,600. Administrative expense was also a mixed cost with a variable component of $24 per unit and a fixed component of $370,400. Finally, the company had $66,000 of depreciation expense. Required: a. Prepare a contribution format income statement for May.

2.

Delta Company (Delta) is a manufacturing firm that uses job-order costing. The company's inventory balances were as follows at the beginning and end of the year: Month Raw materials Work in process Finished goods Beginning Balance $11,000 $32,000 $108,000 Ending Balance $15,000 $14,000 $123,000

Delta applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the beginning of the year, the company estimated that it would work 17,000 machine-hours

and incur $272,000 in manufacturing overhead costs. The following transactions were recorded for the year (assume that all transactions are on account): 1. Raw materials were purchased, $416,000. 2. Raw materials were used in production, $412,000 ($376,000 direct, and $36,000 indirect). 3. Employee wages were incurred, $556,000 ($330,000 direct labor; $69,000 indirect labor; and $157,000 administrative salaries). 4. Selling costs were $113,000. 5. Factory utility costs were $29,000. 6. Depreciation for the year was $121,000 of which $114,000 is related to factory operations and $7,000 is related to executive office operations. 7. Manufacturing overhead was applied to jobs. The actual level of activity for the year was 15,000 machine-hours. 8. Completed jobs were transferred from work in process to finished goods. 9. Sales for the year totaled $1,282,000 (dont forget to also account for the cost of goods sold). 10. Over/underapplied manufacturing overhead was closed out to cost of goods sold Required: a. Calculate the predetermined overhead rate for the period. b. Prepare journal entries for transactions 1-10 (see attached page). c. What was the Cost of Goods Manufactured during the period? d. What was the Cost of Goods Sold during the period? e. Was manufacturing overhead under applied or over applied? By how much?

Delta Company Journal Entries Description 1. Debit Credit

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Candice Corporation (Candice) has had record profits the last two years and currently has excess cash to invest in expansion. As a result, Candice has decided to introduce a new product in the durable goods market space. The product can be manufactured using either a capitalintensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows: Capital-Intensive $10.00 $1,420,000 Labor-Intensive $13.00 $1,000,000

Variable manufacturing cost per unit Fixed manufacturing cost per year

The company's market research department has recommended a selling price of $30 per unit for the new product. The annual fixed selling and administrative expenses of the new product are $200,000. The variable selling and administrative expenses are $2 per unit regardless of how the new product is manufactured. Required: a. Calculate the break-even point in units and dollars if Candice uses the: 1. capital-intensive manufacturing method. 2. labor-intensive manufacturing method. b. Assuming sales of 140,000 units, what is the degree of operating leverage if the company uses the: 1. capital-intensive manufacturing method. 2. labor-intensive manufacturing method. c. If management is highly confident that sales will be 140,000 units or above for the foreseeable future, what is your recommendation concerning which manufacturing method should be used? Explain fully. 4. The following monthly data in contribution format are available for the Corinth Company and its only product, the Whizzer: Total $83,700 32,700 51,000 40,000 $11,000 Per Unit $279 109 $170

Sales Variable costs Contribution margin Fixed costs Net operating income

The company produced and sold the same number of Whizzers during the month and had no beginning or ending inventory.

Required (assume that each of the following is based on the original assumptions above): a. Management is contemplating the use of plastic gearing rather than metal gearing in the Whizzer. This change would reduce variable costs by $15 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 250 units per month. Should this change be made? b. Management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $10,000 per month. Management believes that these actions will increase unit sales by 50 percent. Should these changes be made? c. Management believes that by increasing the attractiveness of product packaging along with a new advertising campaign, sales will increase by 25%. The new packaging costs will increase variable costs by $6 per unit. How much can Corinth spend on the new advertising campaign if they want to make net operating income of $15,000? 5. Magdella Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price per unit Units in beginning inventory Units manufactured Units sold Units in ending inventory Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs: Fixed manufacturing overhead Fixed selling and administrative $150 0 3,100 ???? 400

$46 $50 $7 $11

$86,800 $8,100

Required: a. What is the product cost per unit for the month under variable costing? b. What is the product cost per unit for the month under absorption costing? c. Prepare a contribution format income statement for the month using variable costing. d. Prepare an income statement for the month using absorption costing.

e. Prepare a reconciliation of the variable and absorption costing net operating incomes for the month and explain any difference between the two. 6. SP Company (SP) manufactures a gourmet brand of barbecue sauce called Flamin Steves BBQ Sauce. SP uses process costing and has two different departments: Mixing, where the ingredients are mixed together and cooked, and Bottling, where the sauce is bottled and packaged. The company's Mixing Department inventory balances were as follows at the beginning and end of the year: Beginning Balance $32,100 20,000 Ending Balance ??? 40,000

Work in Process-Mixing Pounds of sauce (Mixing)

The beginning WIP-Mixing consisted of $21,000 of Materials and $11,100 of Conversion Costs. The ending inventory (pounds of sauce) was 100% complete as to Materials, and 50% complete as to conversion costs. SP applies overhead using departmental predetermined overhead rates. For the Mixing Department the rate for the year was $0.40 per direct labor dollar. The following transactions were recorded in the Mixing Department for the year: 1. 2. 3. 4. Raw materials were used in production: $327,000 direct; $25,800 indirect. Labor costs were incurred: $156,000 direct; $28,000 indirect. Manufacturing overhead was applied. 270,000 pounds of sauce were started into production in the Mixing Department during the year. 5. Other actual manufacturing overhead costs of $11,200 were incurred. Required: a. Calculate the Equivalent Units of Production for the Mixing Department for the year. b. Calculate the Cost per Equivalent Unit for the Mixing Department for the year. c. What was the total ending WIP-Mixing balance at the end of the year? d. How much Cost of Goods Manufactured was transferred from the Mixing Department to the Bottling Department during the year? 7. Randall Company is a merchandising company that sells a single product. The company's sales in units for the next four months have been forecasted as follows: October 60,000 November 70,000 December 50,000 January 40,000

Sales in Units

Units are sold for $12 each. One fourth of all sales are paid for in the month of sale and the balance is paid for in the following month. Accounts receivable at September 30 totaled $450,000.

Merchandise is purchased for $7 per unit. Half of the purchases are paid for in the month of the purchase and the remainder is paid for in the month following purchase. The targeted ending inventory is 15% of the next months needs. Inventory at September 30 totaled 10,000 units. Selling and administrative expenses are expected to total $120,000 each month. One half of these expenses will be paid in the month in which they are incurred and the balance will be paid in the following month. There is no depreciation. Accounts payable at September 30 totaled $290,000. Cash at September 30 totaled $80,000. A payment of $300,000 for purchase of equipment is scheduled for November, and a dividend of $200,000 is to be paid in December. Required: a. Prepare a Merchandise Purchases Budget in units for each of the months October, November, and December include a quarter total column. b. Prepare a schedule showing expected cash disbursements for merchandise purchases for each of the months October, November, and December include a quarter total column. c. Using the budgets you prepared in a and b above, answer the following questions: a. What amount would be reported on the Balance Sheet as Inventory? b. What amount would be reported on the Balance Sheet as Accounts Payable? c. What amount would be reported on the Income Statement as Cost of Goods Sold? 8. Tervo Jeep Tours operates jeep tours in the heart of the Colorado Rockies. The company bases its budgets on two measures of activity (i.e., cost drivers), namely guests and jeeps. One vehicle used in one tour on one day counts as a jeep. Each jeep has one tour guide. The company uses the following data in its budgeting: Fixed element per month $0 $0 $4,900 $1,000 Variable element Variable element per guest per jeep $101 $0 $0 $136 $8 $57 $2 $0

Revenue Tour guide wages Vehicle expenses Administrative expenses

In March, the company budgeted for 492 guests and 165 jeeps. The companys income statement showing the actual results for the month appears below:

Tervo Tours Income Statement For the month Ended March 31 Actual guests Actual jeeps Revenue Expenses: Tour guide wages Vehicle expenses Administrative expenses Total expenses Net operating income 497 163 $49,067 21,858 17,917 2,014 41,789 $ 7,278

Required: a. Prepare a flexible budget performance report showing both the company's activity variances and revenue and spending variances for March. Label each variance as favorable (F) or unfavorable (U). b. What does the activity variance tell us? c. What are potential causes of the revenue variance? d. What are potential causes of the tour guide wages spending variance? 9. Fastic Corporation makes a product with the following standard costs: Standard Quantity Standard Price or Hours or Rate 6.9 liters $5.00 per liter 0.3 hours $17.00 per hour 0.3 hours $6.00 per hour Standard Cost Per Unit $34.50 $5.10 $1.80

Inputs Direct materials Direct labor Variable overhead

The company reported the following results concerning this product in August. Originally budgeted output Actual output Raw materials used in production Actual direct labor-hours Purchases of raw materials Actual price of raw materials Actual direct labor rate Actual variable overhead rate 8,600 units 8,400 units 58,330 liters 2,310 hours 62,500 liters $4.90 per liter $17.10 per hour $5.50 per hour

The materials price variance is recognized when materials are purchased. Variable overhead is applied on the basis of direct labor-hours. Required: a. Compute the materials quantity variance and the materials price variance. b. Compute the labor efficiency variance and the direct labor rate variance. c. Compute the variable overhead efficiency variance and the variable overhead rate variance.