Sample exam solutions copy.pdf - PART A MULTIPLE CHOICE...

Unformatted text preview: PART A MULTIPLE CHOICE QUESTIONS (20 marks) Each question is worth 1 mark. Answers to these questions must be indicated on the separate answer sheet provided. 1. Indirect labour is part of: A Conversion cost B Prime cost C Period cost D Product cost 2. Upstream costs for a manufacturing firm consist of: A Research and Development; Manufacturing; Distribution B Customer service; Distribution; Marketing C Manufacturing; Customer service, Supply D Research and Development; Product Design; Supply 3. All of the following would be classified as product costs except: Property taxes on production equipment Insurance on factory machinery Salaries of the advertising staff Wages of machine operators UOCUD> Questions 4-8 relate to the following information. Annenbaum Corporation uses the weighted average method in its process costing system. The company has the following information available for the month of June. Work in process, 1 June — 400 units Direct material: 65% complete $5 700 Conversion costs: 45% complete 6 800 A total of 6500 units were started and 5900 units were transferred out. Costs incurred during June: Direct material: $125 500 Conversion costs: 207 000 Work in process, 30 June Direct material: 50% complete Conversion costs: 35% complete (Note: Your answers may differ from those offered below due to rounding errors. In all cases, select the answer that is the closest to the answer you computed) 4. What are the equivalent units for conversion costs for the month? A 6 250 B 5 900 C 350 D 6 900 5. The cost per equivalent unit for conversion costs for the month? A $30.99 B $35.92 C $33.12 D $34.21 6. The cost per equivalent unit for materials for the month? A $19.01 B $19.61 C $20.50 D $18.19 7. The total cost of units completed and transferred out during the month is closest to: A $332 500 B $345 000 C $322 777 D $377 485 8. The cost of ending work in process inventory for the month is closest to: A $19 148 B $22 223‘ C $54 708 D $27 354 9. Car hire companies would be classified as: A Mass services B Service shops C Retailers D Professional service 10. Job costing for service entities applies when: Customer contact is low There is significant back office involvement The number of services produced is low The number of services produced is high UOW> 11. The value chain for a merchandising entity includes: i. design ii. purchasing iii. marketing iv. distribution A i and ii B ii, iii and iv C ii and iv D i, ii and iii Question 12 -14 relate to the following information: The Kelsey Manufacturing Company Ltd has two production departments (Assembly and Finishing) and two support departments (Janitorial and Personnel). The usage of the two support departments in 2012 is as follows: rovidedb = ——_—_ ————— The budgeted costs in the support departments of 2012 were as follows: Personnel $90 000 Janitorial $50 000 12. Using the direct method, what is the Janitorial Department cost allocated to the Assembly Department? A $28 948 B $21 053 C $34 158 D $25 000 13. Using the step-down method, what is the amount of Janitorial Department cost allocated to the Finishing Department? A $28 947 B $34 158 C $32 450 D $27 500 14. Using the reciprocal method, what is the amount of Personnel Department cost allocated to the Assembly Department? A $92 965 B $59 296 C $55 779 D $61 977 15. When the step-down method is used to allocate support department costs, a common way to select the first support department in the sequence is to choose the support department which: Obtains the highest yield Serves no other support department Serves the greatest number of other support departments Obtains the highest yield AND serves no other support department UOUJD> Questions 16 and 17 relate to the following information. St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labour hours. The company is considering a shift to activity-based costing with the following information provided: Overhead activi cost $ Cost driver Materials handlin 360,000 2250 arts 280,000 160,000 Direct labour hours 1,200 hours 2,800 hours 16. The overhead cost allocated to Beta using traditional costing procedures would be: A $240,000 B $356,000 C $444,000 D $560,000 17. The overhead cost allocated to Beta using activity-based costing procedures would be: A $240,000 B $356,000 C $444,000 D $560,000 18. The benefits of Activity based costing are the greatest when: A Manufacturing overhead costs account for a small portion of the total product costs. B Significant manufacturing overhead costs are driven by production volume. C Non-manufacturing costs that are related to production are significant. D Production involves little customization. 19. When a traditional, volume-based costing system is used, which of the following products is most likely to suffer fiom cost distortion? A A high-volume, medium-complexity product B A low-volume, low-complexity product C A low-volume, medium-complexity product D A low-volume, high-complexity product 20. C Limited produces two products (A and B) from a particular joint process. Each product may be sold at split-off or may be further processed. Joint production costs for the year amounted to $60 000. Sales values and costs are as follows. Further processing Product Units Sales value at Sales value Separable produced split-off costs A 0000 $40 000 WB 000 $10 000 B 5000 $?0 000 $90 000 $9000 If the joint production costs were assigned using the relative sales value method the joint costs allocated to A would be: A $20 339 B $27 383 C $27 857 D $0. All joint costs are allocated to B Part B commences on the next page Part B (80 marks) Question 1 (12 marks) The WildSide Company modifies production motorcycles for superbike racing to customer order. It opera1 a job costing system. The following information is available for the month of June 20X3: Account balances 01/06/20X3: Raw material inventory $30,000 Manufacturing supplies inventory $5,000 Work in process inventory $46,250 Finished goods inventory $34,500 Purchases during June: Direct material $30,000 Indirect material-Manufacturing supplies inventory $15,000 Direct labour costs incurred during June: 20,400 (i.e. $40 per hour * 510 hours) Manufacturing overhead is applied based on a rate $1.5 per direct labour dollar. Other costs incurred during June: Manufacturing supplies inventory issued $6,000 Indirect labour cost $3,500 Depreciation of manufacturing equipment $12,000 Electricity-Factory $2,500 Factory Rent $6,000 Jobs costing $64,500 were sold at the price of $76,400 on credit at the end of June. Account balances 30/06/20X3: Finished goods inventory $23,500 Work in process inventory $71,500 Required: Complete the relevant T- accounts (provided on the next page) to show the flow of costs through the company’s manufacturing accounts and answer the questions provided. (8 marks) Raw materials invento O/B $30,000 RM issued $27,500 Purchases 30000 C/B $32,500 Finished oodsinvento $34,500 CGS $64,500 53,250 C/B 23,250 $87,750 O/B CGM Manufacturin overhead Indir mat $6,000 Applied $30,600 Indir lab $3,500 Deprec $12,000 Electricity $2,500 Factory rent $6,000 Overapp OH $600 Accounts receivable Sales 76,400 Manufacturin su lies invento O/B $5,000 Issued $6,000 Purchase 15000 C/B 14000 Work in rocess invento O/B $46,250 Dir. Mat $27,500 Dir. Lab $20,400 Overhead $30,600 CGM 53,250 C/B 71,500 Cost of oods sold $64,500 $600 Wages anable WIP $20,400 Man OH $3,500 Sales 76,400 05 mm 7% ml} fill/41W)” lat/«glad (a) What was the cost of goods manufactured? (1 mark) $53 250 (b) What amount of raw materials were issued to production during June? 27 500 (1 mark) (c) Was overhead under/over applied during June and by how much? (1 mark) Overapplied by $600 ((1) Prepare the journal entry to adjust the under/over applied overhead costs. (1 mark) Dr Manufacturing overhead 600 Cr COGS 600 Question 2 (10 marks) Alphabet Corporation sells three products: J, K, and L. The following information was taken from a recent budget: l E L Unit sales 40,000 130,000 30,000 Selling price $60 $80 $75 Variable cost 40 65 50 Total fixed costs are anticipated to be $2,450,000. Required: (a) Determine the weighted-average contribution margin. (2 marks) Sales mix: 40,000 + 130,000 + 30,000 = 200,000 units J: 40,000 + 200,000 = 20% K: 130,000 + 200,000 = 65% L: 30,000 + 200,000 = 15% l K L Selling price $60 $80 $75 Less: Variable cost fl _65 i) Contribution margin & 3g 3; J: $20 x 20% $ 4.00 K: $15 X 65% 9.75 L: $25 x15% 3.75 Weighted-average CM $17.50 (b) Calculate the number of units of J, K, and L that must be sold to break even. (2 marks) Break-even volume: $2,450,000 “' $17.50 = 140,000 units I J: 140,000 x 20% = 28,000 units K: 140,000 x 65% = 91,000 units L: 140,000 x 15% = 21,000 units (0) If Alphabet Corporation desires to increase its profitability, should it attempt to increase or decrease the sales of product K relative to those of J and L? Briefly explain. (2 marks) As measured in units, K has 65% of the company's sales mix. Unfortunately, though, K is Alphabet's least profitable product ($15 contribution margin vs. $20 and $25). To increase overall profitability, the firm should strive to decrease sales of K relative to those of J and L. . J-f'i———_—__'_—'-—..~__‘__-___~ ((1) Calculate the number of units of J, K, and L that must be sold to achieve a target profit of $1750, 000 (ignore taxes) (2 marks) Break-even volume: ($2,450,000+1750 000) + $17.50 = 240,000 units I J: 240,000 X 20% = 48,000 units K: 240,000 x 65% = 156,000 units L: 240,000 x 15% = 36,000 units (e) What is the safety margin? What is the purpose of calculating safety margin? (2 marks) Safety margin is the difference between the budgeted sales revenues and the break even sales revenue. The safety margin gives management a feel for how close the expected sales revenues are to the break event point. Or it indicates the extent to which sales can decline before profits become zero. 10 Question 3 (11 marks) (a) Duo Company manufactures two products, Uno and Dos. Unit selling prices and unit costs for two products are as follows: Uno Dos Unit sales price ............................... $158 $300 Less: Direct material ........................ 80 70 Direct labour ($20 per hour) ...... 30 80 Variable overhead ..................... 18 75 Fixed overhead ........................ 15 20 The same employees work on both products and earn the same rate of $20 per hour. Required: (i) If the company can add more resources as needed (i.e. labour is not a constraint), which of the Company’s products is more profitable? Explain. Assume that there is sufficient demand for the additional production of any product. (2.5 marks) Uno Dos Unit sales price ............................... $158 $300 Less: Direct material ........................ 80 70 Direct labour (@ 20 per hour) ...... 30 80 Variable overhead ..................... fi fi Contribution margin 30 75 l i DWrofitable product, since product Dos has the highest contribution margin per unit. (ii) If the company has a limited amount of labour time, which product should the spare production capacity be devoted to producing? Explain. (2.5 marks) Uno Dos Unit sales price ............................... $158 $300 Less: Direct material ........................ 80 70 Direct labour (@ 20 per hour) ...... 30 80 Variable overhead ..................... E E Contribution margin 30 75 Labour hours per unit 1.5 4 Contribution margin per unit of the 20 18.75 scarce resource (labour hour) Therefore, Uno is a more rofi ble rod ince product Uno has the highest contribution margin per 1m 6 scarce resource (direct labour hours). The spare production capacity should be devoted to producing Uno product. 11 (iii)If the annual demand for Uno and Dos is 4000 units and 2250 units respectively, and if 12,000 labour hours are available, how many units of each product should the firm produce in order to maximise company’s profit? What is the maximum profit? (2 marks) Product Units produced Contribution r-«uired 3 4000 6000 hours $120,000 1500 6000 hours $112,500 Total contribution $232,500 (b) The managing director of Allens Home Interiors, an interior design firm, asked the accountant to consider developing a service costing system. The accountant responded: ‘We’re a service business. All our costs are period costs that have to be expensed in the period in which they have been incurred. We don’t need product costing.’ The managing director is furious. (He’s never heard of period costs!) He asks you to evaluate the accountant’ 5 response and to prepare a clear explanation of how service costing could help him manage the business. (4 marks) While the Australian accounting standards do not require disclosure of the cost of individual services, it is nonetheless essential in many businesses that managers know the cost of the services they provide. Knowing the cost of the services can help: I o as a basis for setting fees for interior design services offered 0 to determine which services to promote, refine or withdraw . to control costs (although, given the heterogeneity of services in many industries, this may sometimes be of limited value). / o to assess the profitability of each service I l 12 Question 4 (15 marks) (a) J iambalvo Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 40 000 units per month is as follows: Direct materials ........................................... $38.80 Direct labour ............................................. 9.70 Variable manufacturing overhead ...................... 2.30 Fixed manufacturing overhead .......................... 18.10 Variable selling and administrative expenses. . . . 1.70 Fixed selling and administrative expenses. . . . . 8.80 The normal selling price of the product is $81.10 per unit. An order has been received fi'om an overseas customer for 3 000 units to be delivered this month at a special discounted price. This order would have no effect on the company’s normal sales and would not change the total amount of the company’s fixed costs. The variable selling and administrative expense would be $0.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company. Required: (i) Suppose the company has sufficient idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $75.30 per unit. By hwo much would this special order increase (decrease) the company’s net operating income for the month? (3 marks) If the special order is accepted: Incremental revenues: 75.3 *3000 = 225 900 I Incremental costs: Unit variable costs = 38.8 +9.7 + 2.3 +1.5 = 52.30 Total incremental costs = 52.3 *3000 = 156900 Increase in profit = 225 900 — 156 900 = $69 000 (ii) Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? (2 marks) Selling price = 81.10 Unit variable cost = 38.8 +9.7 + 2.3 +1.7 = (52.50) Opportunity cost per unit (UCM) = $28.60 13 (iii) Assume now that the company does not have enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1000 units for regular customers. What would be the minimum acceptable price per unit for the special order? (rounded to the nearest two decimal palces). (4 marks) If order is accepted: Incremental variable costs = 52.3*3000 = 156900 Opportunity costs (lost of normal sales) = 28.6* 1000 = 28600 Total incremental costs 185 500 Number of units in special order = 3000 Therefore, minimum price to be charged per unit = 185 500/3 000 =$61.83 [ (iv) Identify two qualitative factors that J iambalvo should consider before a final decision is made in part (c). (2 marks) 1. Whether the discounted price will affect the relationship With existing customers or the i company’s reputation. 2. The future customer potential of the buyer of the special order, generating additional revenues (b) Conventional costing systems tend to report lower product costs than those reported by activity-based costing systems for low-volume, small-batch, speciality product lines. Critically evaluate this statement. (4 marks) This statement is correct. ‘=:‘:'.:;:ge:~.;:::iii:3:;::='zaz=Ei-:-;::a‘ conventional costing system assumes all MOH costs are volume driven (or unit level costs), it therefore tends to / report lower product cost for low-volume products. Due to the same reason (i.e.assume all MOH costs are unit level costs), while small batch products actually consume the same amount of batch costs as big batch / products, small batch products are allocated more MOH costs/unit under conventional costing system. Speciality product lines are more complex and require a larger no. of OH support activities compared to simple product lines. However, under conventional costing i system they will be allocated the same amount of MOH/unit. 14 Question 5 (8 marks) Local Steel Construction Company produces two products, steel and wood beams. Steel beams have a unit contribution margin of $200, and wood beams have a unit contribution margin of $150. The demand for steel beams exceeds Local Steel Construction Company's production capacity, which is limited by available direct labour and machine-hours. Management desires that the product mix should maximize weekly profits. Direct manufacturing labour is limited to 4,800 hours a week and the company's outdated machines can only run for 3,200 hours a week. The steel beams require 160 hours of labour and 160 machine—hours. Wood beams require 160 labour hours and 80 machine-hours. Required: (a) State the objective function and the constraints that Granite Ltd should use to maximise the total contribution margin generated by the two products. (2 marks) Let S= No. of steel beams. W= No. of wood beams Maximize: 2008 +150 W i Labour hours: 1608 +16OW S 4800 Machine hours: 1608 +80W S 3200 (b) Graph the constraints and determine the optimal amount of units of each product that should bvgproduced in order to maximise the profits of the company (rounded to the nearest integer). (5 marks) @ Hem, M m 6%“ WW {0 swam/n! M )0 W W 750 WfW ’DM FW% (0) What is the maximum profit at the optimal solution? W l (1 mark) 16 Question 6 (11 marks) Scot Company plans to sell 400,000 units of finished product in July 20X3. Management anticipates a growth rate in sales of 5% per month thereafter and desires a monthly ending finished-goods inventory (in units) of 80% of the following month's estimated sales. There are 300,000 completed units in the June 30, 20X3 inventory. Each unit of finished product requires four kilograms of direct material at a cost of $1.50 per kilogram. There are 1,600,000 kilograms of direct material in inventory on June 30, 20X3. Required: . (a) Prepare a sales budget for the quarter ended September 30, 20X3. (2 marks) (b) Prepare a production budget for the quarter ended September 30, 20X3. (3 marks) (c) Independent of your answer to part "A," assume that Scot plans to produce 1,200,000 units of finished product for the quarter ended September 30. If the firm desires to stock direct materials at the end of this period equal to 25% of the quarter’s current production usage, compute the cost of direct material purchases for the quarter. (4 marks) A. Projected sales: July 400,000 August (400,000 x 1.05) 420,000 September (420,000 x 1.05) 441,000 Quarterly total 1,261,000 Total quarterly sales 1,261,000 Add: Desired 9/30 inventory (463,050* x 80%) 370,440 Total units needed 1,631,440 Less: 6/30 inventory 300,000 Total quarterly production requirement 1,331,440 *October sales: 441,000 x 1.05 = 463,050 B. Material to be used in production (1,200,000 x 4 pounds) 4,800,000 Add: Desired 9/30 inventory (4,800,000...
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