Spring 05 solution

# Spring 05 solution - ACCTG 321 Spring 2005 Exam II Solution...

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ACCTG 321 Spring, 2005 Exam II - Solution I. A. COST RETAIL Beg. Inventory \$ 180,500 \$ 300,000 Purchases 970,000 1,453,000 Markups 31,000 Markup Cancellations (14,000) \$1,150,500 \$1,770,000 Ratio: 1,150.5/1,770 = 65% Markdowns (11,000) Markdown Cancellation 3,000 Sales (1,302,000) ENDING INVENTORY AT RETAIL \$ 460,000 ENDING INVENTORY AT COST (460,000)(65%) = \$ 299,000 1

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B. The auditors observed the physical inventory count. This has to be weighed verses the ESTIMATE of the inventory using the retail method using LCM. It is very likely that SHRINKAGE occurred in the inventory through loss or theft. If one had to choose, one should place more reliance on the observed physical count. C. The inventory should be written down to the COST of the physical count. For LCM it would be: (\$400,000)(65%) = \$260,000 \$299,000 - \$260,000 = \$39,000 Cost of Goods Sold 39,000 Inventory 39,000 D. The following are possible internal control deficiencies which may have been causes: 1. Lack of separation of duties. 2. Lack of supervision. 3. Lack of limiting access to inventory by unauthorized employees. 4. Poor record keeping. NOTE: “Reconciliation” is NOT a correct answer (that is what caught the error). 2
II. A. Possible reasons are: (1) The numerator reason: Actual costs may be subject to short run fluctuations that managers view as misleading for individual job costs (e.g., cost of heating in winter months). (2) The denominator reason: Actual costs allocated are affected by changes in the level of the activity used as the cost driver to allocate costs to jobs (e.g., a different number of days in the month for February and March). (3) The cost-benefit reason: Revising overhead rates takes management effort. The shorter the time period, the more often managers need to reestimate the numerator and denominator. (4) An accounting system using budgeted rates can provide managers with cost information on A TIMELY BASIS during the year when decisions about pricing, bidding on jobs, or product emphasis must be made. Information is available on a continuous basis. B.

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Spring 05 solution - ACCTG 321 Spring 2005 Exam II Solution...

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