Question #1 (10 points)
JT is the new controller for the consumer division of ABC company. In the past five years, ABC’s earnings have grown by at least 15% annually, with the consumer division’s earnings growing by over 20% annually over the same time-period. In the 4th quarter of the current year, however, it is projected that consumer’s income will grow by 8% and ABC’s will grow by 10%. WR, consumer division’s president, wants JT to take some of the following “end of the year” actions in order to improve consumer’s reported earnings. Under the previous controller, these types of actions were more or less taken as acceptable practices.
1) Deferring routine monthly maintenance on equipment by an outside vendor until January.
2) Extending the close of the fiscal year beyond December 31 so that some sales from next year are counted in the current fiscal year.
3) Altering dates on shipping documents so that sales made in January of the next year appear to have occurred in December of the current year.
4) Giving salespeople a double bonus to exceed December targets.
5) Reducing the number of December advertising spots and increasing the number to be run in January.
6) Deferring advertising costs by asking the outside advertising agency to delay sending out bills for December advertisements until January or by having the agency indicate that advertisements run in December were run in January.
7) Persuading customers to accept merchandise for shipment in December that they would normally not order until the following year.
a) Classify each of these possible actions as “acceptable” or “unacceptable” according to the IMA Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management. Be sure to justify / explain your classifications.
b) What should JT do if WR suggests that these actions are taken in every division of ABC and that the consumer division will be greatly harmed if its results are not portrayed in the it does not present “better” results than 8% growth?
Question #2 (10 points)
The following per unit information is based on expected production and sales of 1,200 units:
Selling price $25
Var COGS $8
Fixed COGS $6
Gross Profit $11
Var S&A $2
Fixed S&A $4
Operating Income $5
The firm’s tax rate is 40%.
a) How many units need to be sold to break-even?
Fixed cost – cont margin (25 -
Break-even point in units = Fixed Cost/Unit CM
b) How many units need to be sold to earn operating income of $7,500?
c) How many units need to be sold to earn net income of $6,000?
Question #3 (10 points)
The following is budgeted information for the Sophia Corporation:
Product A Product B
Monthly production & sales 10,000 5,000
Projected selling price $20 $23
Production Cost Information
Parts (per unit) $5.50 $6.40
Direct Labor (per unit) $3.50 $4.20
VMOH (per unit) $1.40 $1.40
• Fixed manufacturing overhead costs are budgeted to be $91,000.
• Selling & administrative costs are budgeted to be $40,000.
Assuming the budgeted sales mix remains intact, how many units of each product does Sophia need to sell in order to break even?
Question #4 (10 points)
Consider the following information:
DM purchased $240,000
WIP, Beg $70,000
DM, Beg $25,000
FG, Beg $320,000
Conversion costs $660,000
Total manufacturing costs added $840,000
Cost of goods manufactured $720,000
Based on the above information, determine the following amounts:
a) FG, Ending
b) WIP, Ending
c) DM, Ending
Question #5 (15 points)
Consider the following information concerning XYZ’s budgeted overhead costs.
Activity Budgeted Cost Activity Driver Budgeted Driver Qty
Purchasing $70,000 P.O.s processed 2,000
Material handling $87,500 Material moves 5,000
Machine maintenance $237,300 Machine-hours 10,500
Information concerning two of XYZ’s jobs follows:
Job 234 Job 397
# of P.O.s 25 8
# of material moves 10 4
Machine-hours 40 60
a) Compute total overhead allocated to each job under an allocation system where overhead is allocated based on machine-hours.
b) Computer total overhead allocated to each job under an ABC approach using the activity drivers identified in the first table.
c) What can XYZ do with the information from the ABC system? Be specific in your recommendations.
Question #6 (15 points)
On January 1, the XYZ Company had 8,500 physical units in WIP. During January, it started an additional 35,000 units. At the end of January, 10,500 units remained in WIP.
The units in WIP on January 1 were 100% complete with respect to direct materials and 20% complete with respect to conversion costs. The units in WIP on January 31 were 100% complete with respect to direct materials and 60% complete with respect to conversion costs. Conversion costs are incurred evenly throughout the process while direct materials are added at the beginning of the process.
WIP on January 1 totaled $108,610, consisting of $63,100 in direct materials and $45,510 in conversion costs. During January, $284,900 in direct materials and $485,040 in conversion costs were added to production.
a) Using the weighted-average method of process costing, assign total costs to units completed in January and to units in WIP as of January 31.
b) Using the first-in, first-out (FIFO) method of process costing, assign total costs to units completed in January and to units in WIP as of January 31.
Question #7 (10 points)
Consider the following volume and cost information:
Month Units Electricity
Jan 250 $13,400
Feb 275 $14,200
Mar 300 $15,000
Apr 225 $12,900
May 285 $14,600
June 310 $15,200
July 340 $15,800
Aug 375 $16,500
Sept 365 $16,300
Oct 295 $14,900
Nov 275 $14,400
Dec 325 $15,500
Using the high-low method, estimate the cost function for electricity costs.
Question #8 (20 points)
Consider the following information, prepared based on monthly production and sales of 20,000 units:
Category Cost per Unit
Direct materials $1.00
Direct manufacturing labor $1.20
Variable manufacturing overhead $0.80
Fixed manufacturing overhead $0.50
Variable marketing $1.50
Fixed marketing $0.90
In addition, the firm currently sells the product for $6 per unit.
Consider each of these scenarios independent of each other.
a) The company is currently producing 15,000 units per month. A potential customer has contacted the firm and offered to purchase 5,000 units this month only at a price of $4.25 per unit. There would be no variable marketing costs incurred on the contract. Should the company accept the special order? Why or why not? Be specific.
b) Assume the same facts as in part a, except that the company is producing 20,000 units per month. Should the company accept the special order? Why or why not? Be specific.
c) The company is considering selling 1,000 units that are in danger of becoming obsolete. What is the minimum price it would be willing to take for the 1,000 units?
d) Assume the company is producing and selling 20,000 units per month. It is considering an arrangement where an outside manufacturer would produce and ship the product directly to customers. Under this arrangement, variable marketing costs would decrease 20% per unit and fixed manufacturing costs would decrease 50%. Fixed marketing costs would not change. What is the maximum amount per unit the company would be willing to pay to the outside manufacturer?
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