1 Question 1 (30 marks: questions with an “*” are worth 2 marks, all others, 1 mark.) For each of the following multiple-choice questions, circle only one of the four choices. 1.

Which of the following activities is a unit-related activity? a. Preparing and filing the annual tax return for the organization. b. Machine set-ups for each production run. c. Quality inspections of 2% of the items produced. d. Obtaining patents and regulatory approval for each product produced.

2.

Which of the following is NOT a period cost? a. Marketing costs b. General and administrative costs c. Costs of shipping finished goods to customers d. Manufacturing overhead costs

3.

The terms "direct cost" and "indirect cost" are commonly used in management accounting. Classifying a cost as either direct or indirect depends upon: a. the behavior of the cost in response to volume changes. b. whether the cost is expended in the period in which it is incurred. c. whether the cost can be easily traced to a cost object. d. whether an expenditure is unavoidable because it cannot be changed regardless of any action taken.

4.

The activity most likely to add value from the customer's perspective is: a. moving. b. storing. c. inspecting. d. assembly.

5.

__________ include the cost of raw-materials inspections and assembly-line inspections. a. Prevention costs b. Appraisal costs c. Internal failure costs d. External failure costs

6.

Which of the following managerial functions involves the coordination of daily activities within an organization? a. Planning b. Directing and motivating c. Controlling d. None of the above

7.

Assume only the specified parameters change in a cost-volume-profit analysis. The contribution margin ratio increases when a. total fixed costs increase. b. total fixed costs decrease. c. variable costs per unit increase. d. variable costs per unit decrease.

2 8*.

For the current year, Paxman Company incurred $250,000 in actual manufacturing overhead cost. The Manufacturing Overhead account showed that overhead was underapplied in the amount of $10,000 for the year. If the predetermined overhead rate was $20.00 per direct labour hour, how many hours were worked during the year? a. 12,000 hours. b. 12,500 hours. c. 13,000 hours. d. none of the above. Actual overhead of $250,000 (actual OH) - $10,000 (underapplied) = $240,000 applied overhead. $240,000/$20 = 12,000 direct labour hours worked during the year since Applied OH = Rate x actual hours worked.

9*. Black Company uses the weighted-average method in its process costing system. On April 1 there were 5,000 units in work-in-process, 10% complete with respect to conversion costs. Another 40,000 units were started during April. On April 30 there were 4,000 units in work-inprocess, 25% complete with respect to conversion costs. What were the equivalent units for April for conversion costs? a. 42,000 units b. 45,000 units c. 40,500 units d. none of the above WIP April 1 Started To account for Completed and transferred WIP April 30 Accounted for 10.

5,000 40,000 45,000 EU’s (conversion only) 41,000 41,000 (100%) 4,000 1,000 (4,000 x .25) 45,000 42,000

Which of the following is least likely to be classified as an organization sustaining activity cost in an activity based costing system? a. plant maintenance costs b. taxes on the property used for the manufacturing facilities c. insurance on the manufacturing equipment d. all of these would likely be classified as an organization sustaining activity cost

3 11.

In a job-order costing system, when a job is completed during June but only one-half of the units have been sold by the end of June, which of the following accounts, as at June 30, will include a portion of the overhead applied to the job? a. Work-in-process as at June 30. b. Cost of Goods Sold for the month ending June 30. c. Finished Goods as at June 30. d. Both b. and c.

12*. Average indirect labour costs are $30 per labour hour at an activity level of 4,000 labour hours and $36 per labour hour at an activity level of 2,500 labour hours. Assuming that this activity is within the relevant range, total expected indirect labour costs for a budgeted activity level of 3,250 direct labour hours would be which of the following? a. $107,250 b. $105,000 c. $ 65,000 d. none of the above $30 x 4,000 = $120,000 total costs $36 x 2,500 = $ 90,000 total costs Variable portion = ($120,000 - $90,000)/(4,000 – 2,500) = $20 per hour Solve for fixed using either level of activity: $120,000 – (4,000 x $20) = $40,000 $40,000 + 3,250($20) = $105,000 13*. At a sales level of $400,000, James Company's gross margin is $20,000 more than its contribution margin, its net income is $25,000, and its total selling and administrative expenses are $100,000. At this sales level, what is the company's contribution margin? a. $125,000 b. $105,000 c. $145,000 d. none of the above First Solve for gross margin: $25,000 + $100,000 = $125,000 Contribution = $125,000 - $20,000 = $105,000 14*. Due to purchasing equipment to perform a job that was previously done manually, fixed costs will go up by $40,000 per period and variable costs will be reduced by $12 per unit. What will be the effect of these changes on the number of units that must be sold to break-even? a. Increases break-even level. b. Decreases break-even level. c. No change to break-even level. d. Can’t determine the effect based on the information provided. As per our discussion, and example in class, the impact on break-even depends on the change in the fixed costs relative to the change in contribution margin per unit. Since we don’t know what fixed costs or contribution margin were before the change, we can’t determine the impact of the changes on break-even.

4 15. When preparing analyses, managers often neglect to consider ________ costs but frequently incorporate ________ costs. Which of the following pairs of cost terms best completes the above sentence, in the correct order? a. Differential costs; opportunity costs b. Differential costs; sunk costs c. Opportunity costs; sunk costs d. Sunk costs; opportunity costs 16*.At a break-even point of 800 units sold, White Company's variable expenses are $8,000 and its fixed expenses are $4,000. What will the company's net income be at a volume of 801 units? a. $15. b. $10. c. $ 5. d. $20. At the break-even point contribution margin must be $4,000 since fixed costs are $4,000. Contribution margin per unit is $4,000/800 = $5. Therefore, at a volume of 801 units, profit will be 1 x $5 = $5. 17. What will result from an increase in the activity level within the relevant range? a. An increase in fixed cost per unit. b. A proportionate increase in total fixed costs. c. An unchanged fixed cost per unit. d. A decrease in fixed cost per unit. 18. The linear equation Y = a + bX is often used to express cost formulas. Which of the following representations in this equation is correct? a. The b term represents variable cost per unit of activity. b. The a term represents variable cost in total. c. The X term represents total costs. d. The Y term represents total fixed costs. 19. Which of the following statements best defines an operation costing system? a. It is identical to a process costing system except that actual manufacturing overhead costs are traced to units of product. b. It is the same as a process costing system except that direct materials costs are accounted for in the same way as in job-order costing system. c. It is the same as a job-order costing system except that direct materials costs are accounted for in the same way as in a process costing system. d. It is identical to a job-order costing system except that actual manufacturing overhead costs are traced to units of product.

5 20*. Best Company's records show that overhead was overapplied by $8,000 last year. This overapplied overhead was closed out to the Cost of Goods Sold account at the end of the year. In trying to determine why overhead was overapplied by such a large amount, the company has discovered that $6,000 of indirect materials was mistakenly debited to the Office Supplies inventory account in error. Given the above information, which of the following statements is true? a. The company's net income is understated by $6,000 for the year. b. The company's net income is overstated by $6,000 for the year. c. Under the circumstances described above, the error in recording indirect materials would have no effect on net income for the year. d. The $6,000 in indirect materials should have been charged to Work in Process rather than to Office Supplies inventory. Had the $6,000 for indirect materials been correctly debited to the OH Control account, overapplied overhead would only have been $2,000 and the reduction of Cost of Goods Sold (credit CGS for overapplied overhead) would only have been $2,000. Since the $6,000 was debited to a balance sheet account (Office Supplies inventory) and not another expense account, income is overstated. Note: the example similar to this we did in class had the item incorrectly debited to depreciation expense which completely offset the adjustment to cost of goods sold. 21*. Delta Merchandising, Inc., has provided the following information for the year just ended: Net sales $128,500 Beginning inventory $ 24,000 Purchases $ 80,000 Gross margin $ 38,550 What was the ending inventory for the company at year-end? a. $65,450. b. $24,500. c. $14,050. d. $ 9,950. Gross Margin = Sales – cost of goods sold Cost of goods sold = $128,500 - $38,550 = $89,950 Cost of goods sold = Beginning inventory + purchases – ending inventory $89,950 = $24,000 + $80,000 – ending inventory Ending inventory = $14,050 22. How would the wages of factory maintenance personnel usually be classified? Indirect Manufacturing labour overhead a. No Yes b. Yes No c. Yes Yes d. No No

6 23. Which of the following statements reflects a key concept of a JIT production system? a. The raw materials, work-in-process, and finished goods inventories of manufacturing companies act as buffers so that operations can proceed smoothly, even if suppliers are late with deliveries or departments are unable to operate for a brief period due to breakdowns or other reasons. b. The use of many suppliers ensures rapid delivery of materials for production. c. The maintenance of a stock of raw materials allows defective materials to be replaced quickly so as to maintain a high rate of productivity. d. Inventories are costly to carry and can be kept to minimum levels or eliminated completely with careful planning. 24. Which of the following statements are true regarding financial and managerial accounting? I. Both are required for external reporting purposes. II. Both often rely on the same underlying financial data. III. Both emphasize the segments of an organization, rather than just looking at the organization as a whole. IV. Both are geared to the future, rather than to the past. a. b. c. d.

I, II, III, and IV II, III, IV only II and III only II only

25. Amounts spent for charitable donations are an example of a(n): a. committed fixed cost b. committed variable cost c. discretionary variable cost d. discretionary fixed cost 26. If a company wants to increase its safety margin, it should: a. increase fixed costs b. decrease the contribution margin c. stimulate sales volume d. attempt to raise the break-even point

7 Question 2 (17 marks) Best Blend Coffee Company (BBCC) is a distributor and processor of different blends of coffee. The major cost is raw materials; however, there are substantial amounts of overhead costs in the predominantly automated roasting and packing process. BBCC prices its coffee at full product cost, including manufacturing overhead, plus a markup of 30 percent. If prices for certain coffees are significantly higher than market, adjustments are made. Data for the 2004 budget include manufacturing overhead costs of $3,000,000. BBCC has always used a traditional product-costing system that allocates overhead costs on the basis of each product’s direct-labour cost. The budgeted direct-labour cost for 2004 totals $600,000. Based on the sales budget and raw-material budget, purchases and use of direct materials (mostly coffee beans) will total $6,000,000. The expected direct costs for one-pound bags of one of the company’s smaller volume products are as follows: Hawaiian Blend Direct material ……………………………… $3.20 Direct labour ………………………………… .30 BBCC’s controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 2004 budgeted manufacturing overhead costs shown in the following table. Activity

Cost Driver

Purchasing Material handling Quality control Processing and packaging

Purchase orders Setups Batches Processing hours

Budgeted Activity Cost $

579,000 720,000 144,000 1,557,000

Budgeted Activity Level

Activity Driver Rate

1,158 1,800 720 155,700

$ 500 per order $ 400 per setup $ 200 per batch $ 10 per hour

Data regarding the 2004 production of the Hawaiian coffee is shown in the following table. There will be no raw-material inventory at the beginning of the year. Budgeted sales1 Batch size Setups Purchase order size Processing and packaging 1

Production will equal sales for 2004.

2,000 lbs 500 lbs 3 per batch 500 lbs 1.6 hours per 100 lbs

8 Required: a. Using BBCC’s traditional product-costing system, determine the full product cost and selling price of one pound of Hawaiian coffee. (4 marks) b. Determine the full product cost, using an activity-based costing approach, for one pound of Hawaiian coffee. (9 marks) c. Briefly explain why the activity-based costing approach has led to a different product cost. Note, your explanation must relate specifically to the facts of this case. (4 marks) Question 2 Response:

9 Question 2 Response: a. Total 4 marks: POHR calculation: $3,000,000/$600,000 = $5 per Direct Labour Dollar .5 marks .5 marks Full Cost Per Pound: Direct materials $3.20 .5 marks Direct labour .30 .5 marks Overhead 1.50 ($5 x .30) .5 marks for each item in brackets: Total 1 Total costs $5.00 Mark-up $1.50 ($5 x 30%) .5 marks for each item in brackets: Total 1 Price $6.50 b. Total 9 marks: Stage two allocation of activity costs to product: Activity Purchasing Material handling Quality control Processing & packaging

Level of Driver 2,000/500 = 4 .5 .5 2,000/500 x 3 = 12 .5 .5 2,000/500 = 4 .5 .5 1.6/100 x 2,000 = 32 .5 .5 Total OH Costs Pounds of coffee

Cost per pound Direct Costs (.5) Direct materials Direct Labour Total Cost

Rate Cost $500 $2,000 1 $400 $4,800 1 $200 $800 1 $10 $320 1 $7,920 2,000 .5 $3.96 $3.20 $.30 $7.46

c. Total 4 marks: •

BBCC has significant overhead costs that are not driven by unit-level activities (e.g., purchasing, material handling and quality control) 1 mark for recognizing specific non-unit-level activities and 1 mark for specific identification of an example (at least one)

•

Hawaiian Blend is a very low volume product (e.g., only $6,400 of total direct material costs of $6,000,000 are for this blend; only 32 processing hours required; etc.)) yet it incurs significant purchasing and material handling costs. 1 mark for noting that it is a small volume product and 1 mark for identifying specific activity costs that seem high for this product.

10 Question 3 (15 marks) Wilmot Plastics Company manufactures a specialized plastic that is used in the toy industry. The following data pertains to the month of September for the Forming Department. Conversion costs are incurred evenly throughout the production process and all direct materials are added at the beginning of the process in the Forming Department. Costs Work in process, September 1: 50,000 units Direct material: ? complete Conversion: 40% complete Units started in September: 200,000 Units completed during September and transferred out: 190,000 Costs incurred during September: Direct materials: Conversion: Work in process, September 30: Direct materials: ? complete Conversion costs: 60% complete

$120,000 $34,400

$492,500 $349,800

Required: a. Prepare a quantity schedule and calculate the equivalent units of production for the month of September for direct materials and conversion costs. (5.5 marks) b. Calculate unit costs for direct materials and conversion and prepare a cost reconciliation showing the cost of: (i) the units completed and transferred out; and (ii) ending work-inprocess. (7.5 marks) c. Did the weighted average unit cost for direct materials change in September compared to August? Explain your answer. (2 marks)

11 Question 3 Response: a. Total 5.5 marks Quantity schedule and equivalent units: Work-in-process Sept. 1 Started during the month Units to account for

50,000 .5 200,000 .5 250,000

Equivalent units:

Total

Direct Materials

Conversion

Completed and transferred out Work-in-process Sept. 30

190,000 .5 60,0001 1

190,000 .5 60,000 (60,000 x 100%) .5 .5

190,000 .5 36,000 (60,000 x .60) .5 .5

Total units accounted for: 250,000 250,000 1 250,000 – 190,000 .5 .5 (Break-down of the 1 mark shown above) b. Total 7.5 marks Total Direct Materials Work-in-process Sept. 1 $154,400 .5 $120,000 .5 Costs incurred in September $842,300 .5 $492,500 .5 Costs to account for $996,700 $612,500 ÷ Equivalent units 250,000 (Must use EU’s from part a.) .5 Cost per unit: $2.45 Total cost:

226,000

Conversion $ 34,400 .5 $349,800 .5 $384,200 ÷ 226,000 .5 $1.70

$4.15 per unit .5

Cost reconciliation: Costs transferred out

$788,500

Work-in-process Sept. 30 Costs accounted for:

$208,200 $996,700

$4.15 x 190,000 .5 .5 ($2.45 x 60,000) + ($1.70 x 36,000) .5 .5 .5 .5

c. Total 2 marks: Average unit costs for direct materials for August were: $120,000/50,000 = $2.40 .5 .5 Average unit cost for September = $2.45 (or whatever amount was calculated in b.) per above calculations (.5) Thus it appears that costs have increased (or decreased depending on calculations in b.) during September. (.5)

12 Question 4 (14 marks) Gulf Shore Clothing Company applies overhead to jobs using machine hours as the basis. On January 1, 2004 there were no balances in either work-in-process or finished goods inventory. Total estimated manufacturing overhead for 2004 is $235,000 and total estimated machine hours are 47,000. During January the firm began the following jobs, which utilized machine hours during the month as shown: A79 N08 P82

1,000 machine hours 2,500 machine hours 500 machine hours

During January, jobs A79 and N08 were completed and all units from job A79 were sold during the month. No units from job N08 had been sold as of January 31. Job P82 was still in progress on January 31. Actual overhead incurred during January was $26,000. Required: a. Calculate the amount of underapplied or overapplied overhead for January. (4 marks) b. Prepare a journal entry to prorate the amount calculated in requirement a. to work-in-process inventory, finished goods inventory and cost of goods sold. (8 marks) c. Identify two reasons why companies use a predetermined rate to apply overhead to jobs rather than using the actual amount of overhead incurred. (2 marks) Question 4 Response: a. Total: 4 marks Rate: $235,000/47,000 = $5 per machine hour .5 .5 Applied overhead: (1,000 + 2,500 + 500) x $5 = $20,000 1 .5 Actual overhead: $26,000 .5 Underapplied overhead: $ 6,000 .5 .5

13 b. Total: 8 marks Job A79 N08 P82

(a) % of Total Applied OH 1,000 x $5 = $5,000 .25 .5 .5 .5 2,500 x $5 = $12,500 .625 .5 .5 .5 500 x $5 = $2,500 .125 .5 .5 .5 $20,000 Applied OH

Journal entry: Cost of good sold $1,500 .5 Finished goods $3,750 .5 Work-in-process $ 750 .5 Overhead control

(b) Underapplied Pro-Rated Overhead Underapplie d OH (a x b) 6,000 .5 $1,500 6,000

.5 $3,750

6,000

.5

$750 $6,000

$6,000 .5

c. Total: 2 marks (1 mark for each, maximum two) • • •

Some overhead costs are seasonal so using a predetermined rate spreads those costs evenly across all products whereas use of an actual rate would charge those costs to the jobs being worked on when they were incurred, which seems unfair. Jobs may be completed part way through a month or accounting period before all entries have been made. Use of a predetermined rate avoids the need to wait for a total job cost until the bookkeeping is complete. Simplifies bookkeeping.

14 Question 5 (14 marks) Lemon Tire Company (LTC) manufactures and sells only three types of tires: Radial, All Weather and Ultra Grip. The production process is very similar for each type of tire and direct labour is an integral element of that process. The following represents the per unit sales and cost information budgeted for 2004: Per Unit Amounts Selling Price Direct Materials Direct Labour (.5 hours per tire) Variable Selling Costs Overhead1

Radial $120 $75 $15 $5 $10

All Ultra Weather Grip $100 $205 $50 $70 $15 $15 $5 $5 $10 $10

1

Overhead per unit is based on the budgeted 2004 production and sales mix of 4,000 Radial Tires, 24,000 All Weather tires and 12,000 Ultra Grip tires. The $10 per unit rate was calculated using 2003 actual figures when actual total overhead costs were $350,000 and 35,000 tires were sold in total. You weren’t comfortable with the $10 per unit rate for overhead, so using data from the past several years, you ran a regression analysis which produced the following cost prediction model: y = $200,000 + $10x, where total overhead costs is the dependent variable and direct labour hours is the independent variable. The R2 for the model is .72 with a t-statistic for direct labour hours of 4.72. Total fixed administration costs are expected to be $150,000 in 2004. Required: a. Your boss wants a brief explanation of why you believe the model produced by the regression analysis is appropriate to use for predicting overhead costs. (4 marks) b. Using the budgeted sales mix for 2004, how many tires in total will LTC need to sell to breakeven? How many All Weather tires must be sold at the break-even level? (6 marks) c. Using the budgeted sales mix for 2004, if LTC wants to earn $500,000 in 2004 and has a tax rate of 40%, how many of each type of tire must they sell? (4 marks) Question 5 Response: a. Total: 4 marks The regression model satisfies the two criteria (identified and discussed in class) for using it: • Economic plausibility: labour hours are likely a good predictor of overhead because direct labour is an integral part of the production process. (2 marks for identifying that labour hours is likely a plausible predictor of overhead since labour is an “integral element” (or words to that effect) of the production process, as per the case facts.) • Goodness of fit: i. R2 is very good at .72 indicating a large portion of the variation in overhead costs is explained by variation in labour hours. (1 mark for identifying/explaining this criterion) ii. T-statistic is > 2.0 indicating labour hours is a statistically significant predictor of overhead costs. (1 mark for identifying/explaining this criterion)

15 Question 5 Response: b. Total 6 marks: Need to determine fixed and variable portions of manufacturing overhead: OH = $200,000 x $10 per direct labour hour Therefore variable overhead per tire = $10 x .5 = $5 (1 mark) (variable rate should have been used since the regression clearly shows overhead is a mixed cost and $10/tire is incorrect) Per Unit Amounts Selling Price Direct Materials Direct Labour (.5 hours per tire) Variable Selling Costs Variable Overhead for using rate calculated above) Contribution Margin

Radial $120 $75 $15 $5 $5

All Ultra Weather Grip $100 $205 $50 $70 $15 $15 $5 $5 $5 $5

$20 $25 $110 .5 .5 .5 (.5 deduction if any element is missing) Weighted average contribution margin: [(4,000/40,000) x $20] + [(24,000/40,000) x $25] + .5 .5 [(12,000/40,000) x $110] = $50 .5 Break-even: $200,000 + $150,000/$50 = 7,000 tires in total; All Weather tires: 7,000 x .6 = 4,200 .5 .5 .5 .5 c. Total: 4 marks .5 .5 1 $350,000 + $500,000/(1-.4) = 23,667 $50 (from part b.) .5 Radial: 23,667 x .1 = 2,367 .5 AW: 23,667 x .6 = 14,200 .5 UG: 23,667 x .4 = 7,100 .5

16 Question 6 (10 marks) Answer both of the following independent parts. Part A (6 marks): Month January February March April May June July August September October

Table 1 Machine Hours 3600 5040 5400 6600 7800 9000 8400 5400 3720 7800

Overhead Costs $96,000 $102,400 $107,200 $113,600 $118,400 $160,000 $120,000 $108,800 $87,000 $116,800

Scattergram 1 $180,000 $160,000 $140,000

Overhead Costs

$120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Machine Hours

Required: Based on Table 1 and Scattergram 1, use the high-low method to develop a cost prediction model for overhead costs. Briefly justify the two months you use in developing your model. (6 marks) Part A: Response: ($120,000 - $96,000)/(8,400 – 3,600) = $5 per machine hour .5 .5 .5 .5 Fixed: $120,000 – ($5 x 8,400) = $78,000; y = $78,000 + $5x Or $96,000 – ($5 x 3,600) = $78,000; y = $78,000 + $5x .5 .5 .5 .5 for showing cost prediction model Justification of months: Chose July because scattergram shows that June appears to be an outlier (1 mark) Note: Because June is clearly an outlier per the scattergram, no mark was given for attempting to justify its inclusion simply because it was the “high” level of activity. Chose January because it is the lowest activity level of the year (1 mark) Also accepted use of the “low” level of activity identified on the scattergram (e.g., approx. 3,000 machine hours)

17 Part B (4 marks): Table 2 Machine Hours 6000 6720 7200 10080 10800 13200 15600 18000 16800 10800 7440 15600 4000 149,240

Month 1 2 3 4 5 6 7 8 9 10 11 12 13 Totals

Overhead Costs $106,500 $119,347 $127,800 $180,432 $191,700 $231,660 $276,900 $316,800 $298,200 $192,348 $132,060 $277,992 $71,280 $2,646,739

Scattergram 2 $350,000

$300,000

Overhead Costs

$250,000

$200,000

$150,000

$100,000

$50,000

$0 0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Machine Hours

Required: a. What kind of cost behavior pattern for overhead costs is suggested by Scattergram 2? Defend your answer. (2 marks) b. Given your response to a. above, develop a model for predicting overhead costs using the data contained in Table 2. (2 marks)

18 Part B Response: a. The cost behavior pattern appears to be completely variable as since the line appears as though it will intercept the y-axis at or near 0 (1 mark) and overhead costs are going up in a linear fashion as machine hours increase (1 mark). b. Since the cost appears to be purely variable then the following approach can be used to develop a model for predicting costs: $2,646,730/149,240 1 1 Note: no value was given for use of the high/low method as the scattergram clearly indicates that no fixed costs exist in this case. Since the costs are completely variable the above approach is appropriate. Part marks were given for taking a particular month and dividing the cost by the activity level for that month.