Exam

Textbook Problems

Final Exam: Problems from your textbook

Complete the following problems from your textbook. The problems must be completed using either Word or Excel.

Question #1 – Problem 3-25 (pp. 131–132)

Question #2 – Problem 6-22 (p. 270)

Question #3 – Problem 9-19 (pp. 403–404)

Question #4 – Problem 11A-9 (pp. 498–499)

Question #5 – Problem 13-21 (pp. 614–615)

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AC505: Advanced Managerial/Cost Accounting

Unit 6 Final Exam

Professor:

Final Exam

Question #1 – Problem 3-25 (pp. 131–132)Multiple Departments; Overhead Rates; Underapplied or Overapplied Overhead[LO3, LO5, LO8]

Hobart, Evans, and Nix is a small law firm that employs 10 partners and 12 support persons. The firm uses a job-order costing system to accumulate costs changeable to each client, and it is organized into two departments-the Research and Documents Department and the Litigation Department. The firm uses predetermined overhead rates to change the costs of these departments to its clients. At the beginning of the year, the firm’s management made the following estimates for the year:

The predetermined overhead rate in the Research and Documents Department is based on research-hours, and the rate in the Litigation Department is based on direct attorney cost.

The costs charged to each client are made up of three elements: legal forms and supplies used, direct attorney cost incurred, and an applied amount of overhead from each department in which work is performed on the case.

Case 418-3 was initiated on February 23 and completed on May 16. during this period, the following costs and time were recorded on the case:

Required:

1. Compute the predetermined overhead rate used during the year in the Research and Documents Department. Compute the rate used in the Litigation Department.

2. Using the rates you computed in (1) above, compute the total overhead cost applied to Case 418-3.

3. what would be the total cost changed in Case 418-3? Show computations by department and in total for the case.

4. At the end of the year, the firm’s records revealed the following actual cost and operating data for all cases handled during the year:

    

Determine the amount of underapplied or overapplied overhead cost in each department for the year.

Question #2 – Problem 6-22 (p. 270) Basics of CVP Analysis; Cost Structure[LO1, LO3, LO4, LO5, LO6]

Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Inc., has been experiencing difficulty for some time. The company’s contribution format income statement for the most recent month is given below:

Required:

1. Compute the company’s CM ratio and its break-even point in both units and dollars.

2. The president believes that a $ 16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $ 80,000 increase in monthly sales. If the president is right, what will be the effect on the company’s monthly net operating income or loss? (Use the incremental approach in preparing your answer.)

3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $ 60,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted?

4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,750?

5. Refer to the original data. By automating certain operations, the company could reduce variable costs by $ 3 per unit. However, fixed costs would increase by $ 72,000 each month.

   1. Compute the new CM ratio and the new break-even point in both units and dollars.

   2. Assume that the company expects to sell 26,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for alternative.)

   3. Would you recommend that the company automate its operations? Explain.

      Question #3 – Problem 9-19 (pp. 403-404) Cash Budget; Income Statement; Balance Sheet[LO2, LO4, LO8, LO9, LO10]

      Minden Company is a wholesale distributor of premium European chocolates. The company’s balance sheet as of April 30 is given below:

The company is in the process of preparing budget data for May. A number of budget items have already been prepared, as stated below:

1. Sales are budgeted at $ 200,000 for May. Of these sales, 4 60,000 will be for cash; the remainder will be credit sales. One-half of a month’s credit sales are collected in the month the sales are made, and the reminder is collected in the following month. All of the april 30 accounts receivable will be collected in May.

2. Purchases of inventory are expected to total $ 120,000 during May. These purchases will all be on account. Forty percent of all purchases are paid for in the month of purchase; the remainder are paid in the following month. All of April 30 accounts payable to suppliers will be paid during May.

3. The May 31 inventory balance is budgeted at $ 40,000.

4. selling and administrative expenses for May are budgeted at $72,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,000 for the month.

5. The note payable on the April 30 balance sheet will be paid during May, with $100 in interest. (All of the interest relates to May.)

6. New refrigerating equipment costing $6,500 will be purchased for cash during May.

7. During May, the company will borrow $20,000 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

   Required:

   1. Prepare a cash budget for May. Support your budget with a schedule of expected cash collections from sales and a schedule of expected cash disbursements for merchandise purchases.

   2. Prepare a budget income statement for May. Use the absorption costing income statement format as shown in schedule 9.

   3. Prepare a budget balance sheet as of May 31.

       

      Question #4 – Problem 11A-9 (pp. 498–499) Comprehensive Standard Cost Variances[LO2, LO3, LO4, LO6]

      “Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $18,300 overall manufacturing cost variance is only 1.2% of the $1,536,000 standard cost of products made during the year. That’s well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year.”

      The company produces and sells a single product. The standard cost card for the product follows:

The fallowing additional information is available for the year just completed:

1. The company manufactured 30,000 units of product during the year.

2. A total of 64,000 feet of material was purchased during the year at a cost of $8.55 per foot. All of this material was used to manufacture the 30,000 units. There were no beginning or ending inventories for the year.

3. The company worked 43,500 direct labor-hours during the year at a direct labor cost of $15.80 per hour.

4. Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow:

Required:

1. Compute the direct materials price and quality variances for the year.

2. Compute the direct labor rate and efficiency variances for the year.

3. For manufacturing overhead compute:

   1. The variable overhead rate and efficiency variance for the year.

   2. The fixed overhead budget and volume variance for the year.

4. Total the variances you have computed, and compare the net amount with the $ 18,300 mentioned by the president. Do you agree that bonuses should be given to everyone for good cost control during the year? Explain.

    

   Question #5– Problem 13-21 (pp. 614–615) Make or Buy Decision[LO3]

   Silven Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions and creams to prevent dry and chapped skin.

   After considerable research, a winter products line has been developed. However, Silven’s president has decided to introduce only one of the new products for this coming winter.If the product is a success, further expansion in future years will be initiated.

   The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for $8 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product.

   However,a $ 90,000 charge for fixed manufacturing overhead will be absorbed by the product under the company’s absorption costing system.

   Using the estimated sales and production of 100,000 boxed of Chap-Off, the Accounting Department has developed the following cost per box:

    

The cost above includes costs for producing both the lip balm and the tube that contains it. Ans an alternative to making the tubes, Silven has approached a supplier to discuss the possibility of purchasing the tubs for Chap-Off. The purchase price of the empty tubes from the suppliers would be $1.35 per box of 24 tubes. If Silven Industries accepts the purchase proposal, direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and direct materials costs would be reduced by 25%.

Required:

1. Should Silven Industries make or buy the tubs? Show calculations to support your answer.

2. What would be the maximum purchase price acceptable to Silven Industries? Explain.

3. Instead of sales of100,00 boxes, revised estimates show a sales volume of 120,000 boxes. At this new volume, additional equipment must be acquired to manufacture the tubes at an annual rental of $ 40,000. Assuming that the outside supplier will not accept an order for less than 100,000 boxes, should Silven Industries make or buy the tubs. Show calculation to support your answer.

4. Refer to the data in (3) above. Assume that the outside suppliers will accept the order of any size for the tubes at $ 1.35 per box. How, if at all, would this change your answer? Show computations.

5. What qualitative factors show Silven Indus tires consider in determining whether they should make or but the tubs?