Practice Final - ACCT&203, Winter 2013

Student: ______________________________________________________________

1. The following information summarizes the company's cost structure:

Required:

Estimate the following costs at the 40,000 unit level of activity:

a. Total variable cost.
b. Total fixed cost.
c. Variable cost per unit.
d. Fixed cost per unit.

2. Corio Corporation reports that at an activity level of 3,800 units, its total variable cost is
$221,464 and its total fixed cost is $94,848.

Required:

For the activity level of 3,900 units, compute: (a) the total variable cost; (b) the total fixed
cost; (c) the total cost; (d) the average variable cost per unit; (e) the average fixed cost
per unit; and (f) the average total cost per unit. Assume that this activity level is within the
relevant range.
3. Utility costs at one of Helker Corporation's factories are listed below:

Management believes that utility cost is a mixed cost that depends on machine-hours.

Required:

Estimate the variable cost per machine-hour and the fixed cost per month using the
high-low method. Show your work! Round off all calculations to the nearest whole cent.

4. Whitman Corporation, a merchandising company, reported sales of 7,400 units for May
at a selling price of $677 per unit. The cost of goods sold (all variable) was $441 per unit
and the variable selling expense was $54 per unit. The total fixed selling expense was
$155,600. The variable administrative expense was $24 per unit and the total fixed
administrative expense was $370,400.

Required:

a. Prepare a contribution format income statement for May.

b. Prepare a traditional format income statement for May.
5. Hartoon Company's quality cost report is to be based on the following data:

Required:

Prepare a Quality Cost Report in good form with separate sections for prevention costs,
appraisal costs, internal failure costs, and external failure costs.
6. Alam Company is a manufacturing firm that uses job-order costing. At the beginning of
the year, the company's inventory balances were as follows:

The company 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
45,000 machine-hours and incur $180,000 in manufacturing overhead cost. The following
transactions were recorded for the year:

a. Raw materials were purchased, $416,000.

b. Raw materials were requisitioned for use in production, $420,000 ($380,000 direct and
$40,000 indirect).
c. The following employee costs were incurred: direct labor, $414,000; indirect labor,
$60,000; and administrative salaries, $212,000.
d. Selling costs, $141,000.
e. Factory utility costs, $20,000.
f. Depreciation for the year was $81,000 of which $73,000 is related to factory operations
and $8,000 is related to selling, general, and administrative activities.
g. Manufacturing overhead was applied to jobs. The actual level of activity for the year was
48,000 machine-hours.
h. The cost of goods manufactured for the year was $1,004,000.
i. Sales for the year totaled $1,416,000 and the costs on the job cost sheets of the goods
that were sold totaled $989,000.
j. The balance in the Manufacturing Overhead account was closed out to Cost of Goods
Sold.

Required:

Prepare the appropriate journal entry for each of the items above (a. through j.). You can
assume that all transactions with employees, customers, and suppliers were conducted in
cash.
7. Babb Company 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:

The company 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 cost. The following
transactions were recorded for the year:

Raw materials were purchased, $416,000.

Raw materials were requisitioned for use in production, $412,000 $(376,000 direct and
$36,000 indirect).
The following employee costs were incurred: direct labor, $330,000; indirect labor,
$69,000; and administrative salaries, $157,000.
Selling costs, $113,000.
Factory utility costs, $29,000.
Depreciation for the year was $121,000 of which $114,000 is related to factory operations
and $7,000 is related to selling, general, and administrative activities.
Manufacturing overhead was applied to jobs. The actual level of activity for the year was
15,000 machine-hours.
 Sales for the year totaled $1,282,000.

Required:

a. Prepare a schedule of cost of goods manufactured in good form.

b. Was the overhead underapplied or overapplied? By how much?
c. Prepare an income statement for the year in good form. The company closes any
underapplied or overapplied manufacturing overhead to Cost of Goods Sold.
8. Sandler Corporation bases its predetermined overhead rate on the estimated
machine-hours for the upcoming year. Data for the upcoming year appear below:

Required:

Compute the company's predetermined overhead rate.

9. Job 434 was recently completed. The following data have been recorded on its job cost
sheet:

The company applies manufacturing overhead on the basis of machine-hours. The

predetermined overhead rate is $12 per machine-hour.

Required:

Compute the unit product cost that would appear on the job cost sheet for this job.
10. The following monthly data in contribution format are available for the MN Company
and its only product, Product SD:

The company produced and sold 300 units during the month and had no beginning or
ending inventories.

Required:

a. Without resorting to calculations, what is the total contribution margin at the break-even
point?

b. Management is contemplating the use of plastic gearing rather than metal gearing in
Product SD. This change would reduce variable expenses by $18 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?

c. Assume that MN Company is currently selling 300 units of Product SD per month.
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 $20,000 per month. Management
believes that these actions will increase unit sales by 50 percent. Should these changes be
made?

d. Assume that MN Company is currently selling 300 units of Product SD. Management
wants to automate a portion of the production process for Product SD. The new equipment
would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for
the new robotic equipment of $10,000. Management believes that the new equipment will
increase the reliability of Product SD thus resulting in an increase in monthly sales of 12%.
Should these changes be made?
11. Iron Decor manufactures decorative iron railings. In preparing for next year's
operations, management has developed the following estimates:

Required:

Compute the following items:

a. Unit contribution margin.
b. Contribution margin ratio.
c. Break-even in dollar sales.
d. Margin of safety percentage.
e. If the sales volume increases by 20% with no change in total fixed expenses, what will
be the change in net operating income?
f. If the per unit variable production costs increase by 15%, and if fixed selling and
administrative expenses increase by 12%, what will be the new break-even point in dollar
sales?
12. Randall Company is a merchandising company that sells a single product. The
company's inventories, production, and sales in units for the next three months have been
forecasted as follows:

Units are sold for $12 each. One fourth of all sales are paid for in the month of sale and the
balance are 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 are paid for in the month following purchase. 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 schedule of expected cash collections for each of the months of October,
November, and December.
b. Prepare a schedule showing expected cash disbursements for merchandise purchases
and selling and administrative expenses for each of the months October, November, and
December.
c. Prepare a cash budget for each of the months October, November, and December. There
is no minimum required ending cash balance.
13. Capp Corporation is a wholesaler of industrial goods. Data regarding the store's
operations follow:

 Sales are budgeted at $350,000 for November, $360,000 for December, and $340,000
for January.
 Collections are expected to be 60% in the month of sale, 39% in the month following the
sale, and 1% uncollectible.
 The cost of goods sold is 75% of sales.
 The company desires an ending merchandise inventory equal to 40% of the following
month's cost of goods sold. Payment for merchandise is made in the month following the
purchase.
 The November beginning balance in the accounts receivable account is $70,000.
 The November beginning balance in the accounts payable account is $257,000.

Required:

a. Prepare a Schedule of Expected Cash Collections for November and December.

b. Prepare a Merchandise Purchases Budget for November and December.
14. Diamond Company produces a single product. The company has set the following
standards for materials and labor:

During the past month, the company purchased 7,000 pounds of direct materials at a cost
of $17,500. All of this material was used in the production of 1,300 units of product. Direct
labor cost totaled $36,750 for the month. The following variances have been computed:

Required:

1. For direct materials:

a. Compute the standard price per pound of materials.
b. Compute the standard quantity allowed for materials for the month's production.
c. Compute the standard quantity of materials allowed per unit of product.

2. For direct labor:

a. Compute the actual direct labor cost per hour for the month.
b. Compute the labor rate variance.
15. The following materials standards have been established for a particular product:

The following data pertain to operations concerning the product for the last month:

Required:

a. What is the materials price variance for the month?

b. What is the materials quantity variance for the month?
16. The following labor standards have been established for a particular product:

The following data pertain to operations concerning the product for the last month:

Required:

a. What is the labor rate variance for the month?

b. What is the labor efficiency variance for the month?

17. Marcell Corporation is considering two alternatives that are code-named M and N.
Costs associated with the alternatives are listed below:

Required:

a. Which costs are relevant and which are not relevant in the choice between these two
alternatives?
b. What is the differential cost between the two alternatives?
18. The management of Therriault Corporation is considering dropping product U51Y. Data
from the company's accounting system appear below:

All fixed expenses of the company are fully allocated to products in the company's
accounting system. Further investigation has revealed that $280,000 of the fixed
manufacturing expenses and $140,000 of the fixed selling and administrative expenses are
avoidable if product U51Y is discontinued.

Required:

What would be the effect on the company's overall net operating income if product U51Y
were dropped? Should the product be dropped? Show your work!
19. Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following
product-line income data:

The following additional information is available:

* The factory rent of $1,500 assigned to Product C is avoidable if the product were
dropped.
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* All supervisors' salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce monthly
expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the administrative
staff; their combined salaries total $3,000.

Required:

Prepare an analysis showing whether Product C should be eliminated.

20. The Hayes Company manufactures and sells several products, one of which is called a
slip differential. The company normally sells 30,000 units of the slip differential each
month. At this activity level, unit costs are:

An outside supplier has offered to produce the slip differentials for the Hayes Company,
and to ship them directly to the Hayes Company's customers. This arrangement would
permit the Hayes Company to reduce its variable selling expenses by one third (due to
elimination of freight costs). The facilities now being used to produce the slip differentials
would be idle and fixed manufacturing overhead would continue at 60 percent of its
present level. The total fixed selling expenses of the company would be unaffected by this
decision.

Required:

What is the maximum acceptable price quotation for the slip differentials from the outside
supplier?
21. Kramer Company makes 4,000 units per year of a part called an axial tap for use in one
of its products. Data concerning the unit production costs of the axial tap follow:

An outside supplier has offered to sell Kramer Company all of the axial taps it requires. If
Kramer Company decided to discontinue making the axial taps, 40% of the above fixed
manufacturing overhead costs could be avoided. Assume that direct labor is a variable
cost.

Required:

a. Assume Kramer Company has no alternative use for the facilities presently devoted to
production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each,
should Kramer Company accept the offer? Fully support your answer with appropriate
calculations.
b. Assume that Kramer Company could use the facilities presently devoted to production of
the axial taps to expand production of another product that would yield an additional
contribution margin of $80,000 annually. What is the maximum price Kramer Company
should be willing to pay the outside supplier for axial taps?
22. Jerston Company has an annual plant capacity of 3,000 units. Data concerning this
product are given below:

The company has received a special order for 500 units at a selling price of $45 each.
Regular sales would not be affected, and sales commissions on the 500 units would be
reduced by one-third. This special order would have no impact on total fixed costs.

Required:

Determine whether the company should accept the special order. Show all computations.
23. Block Corporation makes three products that use the current constraint, which is a
particular type of machine. Data concerning those products appear below:

Required:

a. Rank the products in order of their current profitability from the most profitable to the
least profitable. In other words, rank the products in the order in which they should be
emphasized. Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the least
profitable product. Up to how much should the company be willing to pay to acquire more
of the constrained resource?

24. (Ignore income taxes in this problem.) Jim Bingham is considering starting a small
catering business. He would need to purchase a delivery van and various equipment
costing $125,000 to equip the business and another $60,000 for inventories and other
working capital needs. Rent for the building used by the business will be $35,000 per year.
Jim's marketing studies indicate that the annual cash inflow from the business will amount
to $120,000. In addition to the building rent, annual cash outflow for operating costs will
amount to $40,000. Jim wants to operate the catering business for only six years. He
estimates that the equipment could be sold at that time for 4% of its original cost. Jim uses
a 16% discount rate.

Required:

Would you advise Jim to make this investment?

25. (Ignore income taxes in this problem.) The management of Peregoy Corporation is
considering the purchase of an automated molding machine that would cost $255,552,
would have a useful life of 5 years, and would have no salvage value. The automated
molding machine would result in cash savings of $64,000 per year due to lower labor and
other costs.

Required:

Determine the internal rate of return on the investment in the new automated molding
machine. Show your work!

26. (Ignore income taxes in this problem.) Rosenholm Corporation uses a discount rate of
18% in its capital budgeting. Partial analysis of an investment in automated equipment
with a useful life of 5 years has thus far yielded a net present value of -$327,960. This
analysis did not include any estimates of the intangible benefits of automating this process
nor did it include any estimate of the salvage value of the equipment.

Required:

a. Ignoring any salvage value, how large would the additional cash flow per year from the
intangible benefits have to be to make the investment in the automated equipment
financially attractive?
b. Ignoring any cash flows from intangible benefits, how large would the salvage value of
the automated equipment have to be to make the investment in the automated equipment
financially attractive?
27. (Ignore income taxes in this problem.) Limon Corporation is considering a project that
would require an initial investment of $204,000 and would last for 6 years. The incremental
annual revenues and expenses for each of the 6 years would be as follows:

At the end of the project, the scrap value of the project's assets would be $12,000.

Required:

Determine the payback period of the project. Show your work!

ESSAY QUESTIONS

Topics for essay questions may come from any of the chapters covered in the course. Some
examples are:

 The theory of constraints  The use of standard costs

 Customer value propositions
 The approaches to mixed cost analysis
 Costs of quality
 Predetermined rates of manufacturing
overhead
 The uses of CVP analysis
 The construction of budgets
 The measurement of manufacturing
efficiency
 The application of the balanced
scorecard
 Determination of relevant costs
 Methods of capital budgeting

The following is a recommendations of ways to approach essay questions:

Plan before you write, but plan very quickly. Figure out
 a big point for the whole essay (thesis), which will go at the end of the first paragraph
 a big point (topic sentence) for each body paragraph (this will go at the beginning of the
paragraph)
Use specific detail, examples, within the paragraph.
Use an “Evidence sequence” as a way to think about what you’re trying to accomplish in your body
paragraphs. All analytic writing has three things in common
 Claims (topic sentences—that the claim is legitimate)
 Explanations of how the evidence validates the claim.
 Conclusion that summarizes the support for the claim
Here’s a paragraph that uses these three elements:
To increase your income, Tam, first you’ve got to get more customers [claim].
While the roadside stand brings in some, I think you should also begin selling at
nearby farmers’ markets [evidence/example]. Right away, you’ll be selling more
of your produce [explanation of evidence]. If you also have brochures that talk about
your farm and roadside stand [evidence/example], then there’s a good chance
that your market customers will also come to the stand and bring their friends [explanation
of evidence]. ]. This combination of selling and brochures will maximize
the time and energy you spend at the markets [sums up the explanations of
evidence].