The University of the South Pacific

Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

School of Accounting and Finance

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AF102: Introduction to Accounting and Financial

Management- Part II

FINAL EXAMINATION – SEMESTER 2, 2012

Time Allowed 3 hours plus 10 minutes reading

100 marks (55% of final grade)

INSTRUCTIONS
1. This exam has four questions:
a. Question 1: 25 marks
b. Question 2: 25 marks
c. Question 3: 30 marks
d. Question 4: 20 marks
2. Answer all questions. There are no choices.
3. Write your answers in the answer booklet provided.
4. Begin answering each question on a fresh page.
5. You can only use a silent, non-programmable calculator.
6. This exam is worth 55% of your overall mark. There is minimum
exam mark of 22/55.
Question 1 (25 marks)

Part A: (10 marks)

Floating Drifters is a company that specializes in the manufacturing of rafters

and water fun equipments. Its owner and CEO, Joseph Logan recently
received a phone call from the president of a brewing company. He was
calling to inquire about the possibility of Floating Drifters producing “floating
coolers” for a promotion his company was planning. These coolers resemble a
kayak but are one-third the size. They are used to float food and beverages
while paddling down the river on a weekend leisure trip. The company would
be interested in purchasing 100 coolers for the upcoming summer. It is willing
to pay $250 per cooler. The brewing company would pick up the coolers upon
completion of the order.

Joseph met with Anna Mani, controller, to identify how much it would cost
Floating Drifters to produce the coolers. After careful analysis, the following
costs were identified.

Direct materials $80/unit Variable overhead $20/unit

Direct labour $60/uniT Fixed overhead $1,000

Floating Drifters would be able to modify an existing mold to produce the

coolers. The cost of these modifications would be approximately $2,000.

Required:

1. Prepare an incremental analysis to determine whether Floating Drifters

should accept this special order to produce the coolers. (5 marks)

2. Discuss additional factors that Joseph and Anna should consider if

Floating Drifters is currently operating at full capacity. (5 marks)

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Part B: (15 marks)

Lego Man Corporation produces industrial robots for high-precision

manufacturing. The following information provided by the executive
management accountant is for Lego Man Corporation’s expected annual
volume of 500,000 units.
Per unit Total
Direct materials $7
Direct labour $9
Variable manufacturing overhead $15
Fixed manufacturing overhead $3,000,000
Variable selling and administrative
Expenses $ 14
Fixed selling and administrative
Expenses $1,500,000

The company has a desired ROI of 25%. It has invested assets of $26,000,000.

Required:

1. Compute the total cost per unit (4 marks)

2. Compute the desired ROI per unit (4 marks)
3. Compute the markup percentage using total cost per unit (3 marks)
4. Compute the target selling price (4 marks)

(Show all Relevant Working)

(Total marks 25 marks)

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Question 2: (25 marks)

Bob the Builder Company operates the Lady Sitters Division as a profit
centre. Operating data for this division for the year ended December 31, 2015
is as shown follows: Budgeted sales are $2,500,000. The division managed to
exceed its expected sales by 2%. The total budgeted cost of goods sold all of
which is controllable, amounts to $1,500,000; $200,000 relates to controllable
fixed, the remaining relates to variable cost of goods sold. The company was
able to control variable cost of goods sold only incurring $1,259,000,
however, fixed controllable cost of goods sold exceeded budget amount by
$3,000.

With regards to selling and administrative expenses, the company budgeted

variable selling and administrative expenses to be $220,000 and controllable
fixed to be $50,000. The sales and administrative department exceeded the
amounts by $6,000 and $2,000 respectively. Non-controllable costs budgeted
for was $70,000 of which the division overspent by $4,000.

In addition, Bob the Builder incurs $180,000 of indirect fixed costs that were
budgeted at $175,000. Twenty percent (20%) of these costs are allocated to
the Lady Sitters Division.

Required:

1. Prepare a responsibility report for Lady Sitters Division for the year.
(15 marks)
2. Comment on the manager’s performance in controlling revenues and
costs. (5 marks)
3. Explain the purpose of a participative budget, discussing its potential
benefits and potential disadvantages. (5 marks)
(Show all Relevant Working) (Total marks 25 marks)

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 Question 3: (30 marks)

The Fiji Athletics Doping labs perform steroid and banned substance test
service for all athlete competing in the High School, Colleges and Tertiary
sporting competition. Because the company deals solely with educational
institutions, the price of each test is strictly regulated. Therefore the costs
incurred must be carefully monitored and controlled.

Shown below are the standard costs for a typical test. The direct materials
details for one test are as follows: purchase price $1.00 and receiving and
handling $0.40 and freight-in $0.40; quantity- required material, one Petri
dish. The labour data for one test are as follows: Price- hourly wage rate
$18.00; payroll taxes $2.50; quantity-production time of 30 minutes. Variable
overhead per test is $8 per hour requiring only 0.5 hours and fixed
manufacturing per test is $5 per hour requiring only 0.5 hours.

The lab does not maintain an inventory on Petri dishes. Therefore the dishes
purchased each month are used that month. Actual activity for the month of
May 2014, when 2,500 tests were conducted, resulted in the following.

Direct materials consist of 2,530 dishes totaling $5,060 and actual direct
labour hours being 1,240 hours totaling $26,040. Total variable overhead costs
being $10,100 and fixed overhead costs being $5,700. Monthly budgeted fixed
overhead is $6,000. Revenues for the month were $55,000, and selling and
administrative expenses were $2,000.

Required:
1. Calculate the direct materials price variance and direct materials
quantity variance. (10 marks)
2. Calculate the labour price variance and labour quantity variance.
(10 marks)
3. Calculate the total overhead variance. (5 marks)
4. Provide possible explanations for each unfavorable variance. (5 marks)

(Show all Relevant Working) (Total marks 30 marks)

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Question 4: (20 marks)
Vaviti and Kiribati partnership is considering two long-term capital
investment proposals. Each investment has a useful life of 5 years. Relevant
data on each project are as follows:
Project Vura Project Mika
Capital investment $140,000 $175,000
Annual net income
Year 1 $10,000 $12,500
Year 2 10,000 12,000
Year 3 10,000 11,000
Year 4 10,000 8,000
Year 5 10,000 6,000
Total $50,000 $49,500

Depreciation is computed by the straight-line method with no salvage value.

The company’s cost of capital is 12%.

Required:
A. Calculate the NPV for the each project (12 marks)

B. Calculate the cash payback period for each project (5 marks)

C. Rank the projects on its NPV bases. Which project would you
recommend? (3 marks)

(Show all Relevant Working) (Total marks 20 marks)

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THE END

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Total materials variance:
( AQ X AP ) – ( SQ X SP )

Materials price variance:

( AQ X AP )– ( AQ X SP)

Materials quantity variance:

( AQ X SP ) – ( SQ X SP )

Labor price variance:

(AH X AR) – (AH X SR)

Labor quantity variance:

(AH X SR) – ( SH X SR )

Total overhead variance:

Actual Overhead – Overhead Applied

Target selling price = Cost + (Markup percentage X Cost)

Markup percentage = Desired ROI per unit

Total unit cost

NPV= SUM (PVcf) – Initial outlay

Cash payback period = initial outlay divide annual cash flow

Profitability Index = SUM(Pvcf) divide initial outlay

Present Value of $1 Present Value of an Annuity of $1

Period 12% Period 12%

1 0.89286 1 0.89286

2 0.79719 2 1.69005

3 0. 71178 3 2.40183

4 0.63552 4 3.03735

5 0.56743 5 3.60478