TEST CODE 02201020 FORM TP 2005160 MAY/JUNE 2005 CARIBBEAN EXAMINATIONS COUNCIL ADVANCED PROFICIENCY EXAMINATION ACCOUNTING UNIT 2 — PAPER 02 25 hours NI 2005 1. This paper consists of THREE questions. Each question is worth 35 marks. 3. ALL questions are compulsory 4. Begin EACH answer on a new page. 5. Silent non-programmable calculators may be used, but ALL necessary working should be clearly shown, 6. _ Present value tables are provided in the appendix. ‘Copyright © 2004 Caribbean Bi All rights reserved. 02201020/CAPE 2005Factory utili Depreciation on factory equipment Depreciation on delivery truck Indirect factory labour Indirect materials, Direct materials used Factory manager's salary Direct labour Sales salaries Property taxes on factory buildi Repairs to office equipment Factory repairs Advertising Office supplies used Require (a) Sparrow Company reports the following costs and expenses in May: s 9500 12.650 3.500 48 900 96 200 137 600 8.000 79 100 49 400 2.500 1300 2.000 18 000 3.000 From the information provided for Sparrow Company, calculate the following: @ Gi) ii) (iv) Ww) 03201020/CAPE 2005 Prime costs Manufacturing overheads Conversion costs Product costs Period costs [ 1 mark } [ 2 marks] [ 2 marks] { 2 marks] { 2 marks} GO ON TO THE NEXT PAGE(©) Georgetown Company is a manufacturer of toys. Its controller, Mrs. Lara, resigned in August 2004 and an inexperienced assistant accountant prepared the following income statement for the month of August. Georgetown Company Income Statement For the Month Ended August 31, 2004 Sales (net) $670 000 Less: Operating expenses Raw materials purchased $200 000 Direct labour cost 150 000 Advertising expense 75.000 Selling and administrative salaries 70000 Rent on factory facilities 60.000 Depreciation on sales equipment 55.000 Depreciation on factory equipment 35.000 Indirect labour cost 20000 Utilities expense 10000 Insurance expense 5000 680.000 Net loss S(10 000) Prior to August 2004 the company had been profitable every month. The company's President is concerned about the accuracy of the income statement. You have been asked ‘o review the income statement and make necessary corrections. After examining other manufacturing cost data, you were provided with additional information as follows: 1. Inventory balances at the beginning and end of August were: August1 August 31 Raw materials $19 500 $33 000 Work-in-process 25.000 21 000 Finished goods 40.000 62.000 2. Only 60 per cent of the utilities expense and 70 per cent of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities. Required: (i) Prepare a cost of goods manufactured schedule for August 2004. [15 marks) Gi) Prepare a corrected income statement for August 2004. [11 marks} Total 35 marks GO ON TO THE NEXT PAGE 02201020/CAPE 20054- (a) Fresno Corporation uses a job order costing system. On July], the following balances were extracted from the general ledger: $ Work-in-process 50900 Finished goods 118 700, Cost of goods sold 185 400 Work-in-process consists of two jobs, No. 421 ($13 700), and No. 423 ($19 200). During July, direct materials requisitioned from the storeroom amounted to $73 700, and direct labour incurred totalled $87 500. These figures are subdivided as follows: Direct Materials Direct Labour Job No. Amount $ Job No. Amount $ 421 10 100 421 15 000 425 22.400 423 19 600 426 29 300 425 24300 Other jobs 11.900 426 11 100 73700 Other 17.500 87500 JobNo.425 was the only job in process by the end of the month. Job No. 421 and three of the “Other” jobs were sold during July at a profit of 40 per cent of cost. The “Other” jobs contained material ‘and labour charges of $9 400 and $14 500, respectively. Fresno Company applies overhead at the rate of 180 per cent of direct labour cost. The firm’s fiscal year ends on July 31. (Compute the total overhead applied to production during July. { Lmark } Gi) Compute the cost of the ending work-in-process inventory. [ 2marks} Compute the cost of jobs completed during July (10 marks} (iv) Compute the cost of goods sold during July. [ 4 marks} (6) Fresno Corporation has aplantcalled Telcom Manufacturing Inc. This plantapplies factory overhead to its products on the basis of direct labour hours. Estimated factory overhead for the current accounting period is $400 000 and direct labour hours are 10 000 hours. The plant produces two products, L23 and L24. Information about the products is as follows: 123 124 Estimated production volume 1.000 1.400 Direct materials per unit $30 $19 Direct labour per w 3 hours at $8 $24 S hours at $8 $40, Fresno had installed aconsiderable amount of automated equipment several years ago in its Teleom plant. However, the company has been noticing a significant decline in profit since the installation. Management believes that incorrect calculations of product cost are a major contributor to the problem. GO ON TO THE NEXT PAGE 02201020/CAPE 2005Sue ‘The Management Accountant of Telcom has identified overhead with THREE major activities. ‘These activities and other relevant data are summarized below. Volume of Cost Driver* * (Number of purchase orders processed, machine hours worked, and inspection hours, respectively.) Cost 123 124 Total Purchase order processing $ 40.000 300 100 400. Purchase orders) Machine processing 220000 4500-3500 8.000 (Machine hrs) Inspection 140.000 250 750 1000 (Inspection hrs) $.400 000 (Using the traditional costing system of applying overhead to production based on direct labour hours, compute the total cost of L23 and L24. 1 4 marks} Gi) Fresno is considering the implementation of activity-based costing. Compute activi application rates for (i) purchase order processing, (ii) machine processing, and (i inspection. [ 3 marks] Gii) Assuming that the expected manufacturing volume is attained, use the application rates computed in (b)(ii) above to compute the total cost of L23 and L24. (7 marks} (iv) Telcom’s selling prices are based heavily on cost. Use the data presented and the results, from (b)(i) and (b)(iii) above to determine why the firmisexperiencing a significant decline in profit. ( 4 marks] Total 35 marks GO ON TO THE NEXT PAGE 02201020/CAPE 2005(@) Corbin Company bottles and distributes LO-KAL, a fruit drink. The beverage is sold for 50 cents per 16-ounce bottle. At full (100%) plant capacity, management estimates the following revenues and costs. $ Net sales 2.000 000 Direct materials 360 000 Direct labour 650 000 Manufacturing overhead — variable 270 000 ‘Manufacturing overhead — fixed 260 000 Selling expense — variable 90 000 Selling expense — fixed 150 000 Administrative expense — variable 30.000 Administrative expense ~ fixed 70.000 (Compute the total variable costs as a percentage of sales, [mark } (i) Compute the contribution margin ratio. [2 marks] Gil) Compute the break-even point in (a) units and (b) dollars. {3 marks] Gv) Compute the margin of safety ratio. (2 marks] (v) Determine the sales required by Corbin Company to earn net income of $240 000. [2 marks] (6) Corbin Company is planning an expansion programme. ‘The company has received information pertaining to THREE long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows: Capital investment 130.000 Annual net income: Year 1 11000 2 11.000 3 11.000 4 11000 5 11.000 Total $55 000 02201020/CAPE 2005 Project Tac Project Toe $ $ 150 000 180.000 17000 24.000 16 000 20.000 15 000 19.000 11000 16 000 __ 8000 __11.000 $_67 000 90 000 GO ON TO THE NEXT PAGEDepreciation is computed by the Straight-line method with no salvage value. The of capital is 15%. (Compute the net cash flow associated with EACH investment proposal. Gi) Compute the payback period for EACH project. i (ii) Compute the net present value for EACH project. 9 (iv) Compute the annual rate of return for EACH project. [4r (¥) Rank the projects on EACH of the foregoing bases. Which project is MOST attrac Corbin? Ra Total 35 m GO ON TO THE NEXT PAGE 02201020/CAPE 2005APPENDIX Present Value of 1 Year 10% 12% 15% 1 0.9091 0.8927 0.8686 2 0.8265 0.7972 0.7561 3 0.7513 o.71i2 0.6575 4 0.6830, 0.6355 05718 | 5 0.6209 0.5674 0.4972, Present Value of an Annuity of 1 ‘Year 10% 12% 15% 1 0.9091 0.8927 0.8686 2 1.7356 1.6899 1.6247 3 2.4869 2.4011 2.2822 4 3.1699. 3.0366 2.8540 5 3.7908 3.6040 3.3512 END OF TEST 02201020/CAPE 2005