QUESTION ONE

1.   Jane is in the market for a new television set.  She has sought her mother’s help in deciding  between two models.  The View model has a 30 cm colour screen and has one speaker.  The selling price is $200. The second model she is considering is the Accu-View model. It has a

90 cm high-definition colour screen and two all- surround sound speakers. The selling price of the Accu-View model is $1,200.

Jane’s mother recommended to Jane that she should purchase the Accu-View  model because it is of better quality as compared to the View model.

Do you agree with Jane’s mother?  Explain your answer.

2.   Can ABC be used as a replacement to the traditional costing system? Explain your answer.

3.   A manufacturing company leased a new building.  80% of the building is occupied by the         factory and 20% of the building is occupied by the office.  The president   of the company        wants to classify the entire lease cost as a manufacturing cost, since the employees in the office process purchase orders, payroll, customer  orders and invoices for the sole product                  manufactured in the factory.

a.   Is the president’s viewpoint correct? Why?

b.   Is net operating income affected by how the lease cost is classified? Fully explain your answer.

4.   Companies X and Y are in the same industry. Company X is highly automated, whereas       Company Y relies primarily on labour to make its products. If sales and total expenses in the two companies are about the same, which would you expect to have the lower margin of       safety?  Why?

QUESTION TWO

Marconi Limited is a small manufacturer of pet accessories and uses a job order costing  system. The corporate policy is to treat all over and under applied overhead as immaterial when the amount is less than $1,000. The company had the following balances.

The actual data for the year included:

1.   Overhead was applied at a budgeted rate of $4.50 per direct labour hour.

2.   Purchases of materials and supplies totaled $219,000. Both are accumulated in  the Raw Materials Inventory account.

3.   Of the total materials requisitioned for the year, 90% was for direct materials and  10% was for supplies.

4.  Normal direct labour hours totaled 33,000 and total labour cost was $264,000.

$38,000 of this amount related to overtime premiums due to time needed to make up for several power outages during the year.

5.   Work in process at the end of the year, consisted of units with the following costs:

a.   Direct materials                                  $15,000

b.   Direct labour (7,500 hours)                $60,000

6.   At year end, the manufacturing overhead account has a debit balance of $750.

7.   Sales for the year were $744,000, with gross profit equal to 25% of sales before adjusting for under or over applied overhead.

Required:

1.   Calculate and show your calculations for each ofthe following:

a)  Direct materials used during the year.

b)  Work in process inventory at the end of the year.

c)   Cost of goods manufactured during the year.

d)  Finished goods inventory at the end of the  year.

e)  Actual manufacturing overhead incurred during the year.

2.   Complete a partial income statement in good form for the current year ended December 31.

QUESTION THREE

Wellington Manufacturing Limited is a manufacturer of pool supplies used by pool attendants         throughout Winnipeg. Wellington started its business in the summer of 2005  and is still only          producing one product. Its new accountant Andrew was playing golf with the CEO one afternoon   when he encouraged the CEO to look at the financial numbers using a variable costing approach.    Andrew explained that a variable costing approach will help the company determine what the break even point is and will help it decide whether it should start to introduce new products. Andrew was given the current income statement and some of the balances from selected general ledger accounts. From this information it is up to Andrew to present the information using a variable costing             approach.

Wellington Manufacturing Limited Income Statement For the quarter ended 30 June of the Current Year

Sales

Cost of Goods Sold

Gross Margin

$164,640

130,520

34,120

Administrative Expenses

Administrative Rent Expense

Income before income taxes

19,208

9,450

$ 5,462

Selected General Ledger Account Balances

Account Name

Sales

Direct Labour

Administrative Rent Expense

Factory Overhead

Direct Materials

Administrative Expenses

Other information:

April

$27,600

6,900

3,150

8,525

5,750

3,220

May

$51,600

12,900

3,150

12,025

10,750

6,020

June

$85,440

21,360

3,150

16,960

17,800

9,968

Administrative rent expense represents 35% of the total rent paid by the company. Fixed manufacturing overhead other than rent was $13,500.

All units produced were sold in the month they were produced.

The company uses an actual costing system.

Required:

Prepare a contribution margin format income statement in good form for the quarter ending June 30 of the current year.  Show all your calculations.

QUESTION FOUR

Feed ‘N Grow Co. manufactures fertilizer for farmers in the prairies. It specialises in      fertilizer that helps crops grow during dry seasons. The income statement presented        below shows the operating results for the fiscal year just ended. Feed ‘N Grow had sales of 1,800 tonnes of product during that year. The maximum output under the existing      manufacturing facilities at Feed ‘N Grow is 4,800 tonnes.

Feed ‘N Grow Co.

Income Statement

For the year ended June 30, Year 6

Revenues

Variable Costs:

Direct materials

Direct labour

Sales commissions

Maintenance expenses

Administration expenses

Total variable costs

Fixed costs:

Amortization – Factory equipment Marketing expenses                       Administrators’ salaries

Other

Total fixed costs

Operating income before income taxes Income taxes

Net Income

$1,080,000

225,000

75,000

55,000

44,000

33,000

432,000

125,000

90,000

60,000

25,350

300,350

347,650

69,530

$ 278,120

Required:

a)   If the sales volume is estimated to increase by 600 tonnes for next year, and if the selling price and cost behaviour patterns remain the same next year, how much net income does Feed ‘N Grow expect to earn next year? Show all your calculations.

b)  Assume Feed ‘N Grow estimates the selling price per tonne will increase 10% next year due to the popular demand of the product and variable cost will increase by $57 per       tonne. To cope with the expected additional demand, the company is going to hire two  more administrative assistants at a total cost of $65,000 per year. Compute how many  tonnes must be sold next year to earn net income of $1,000,000. Show all your              calculations.

QUESTION FIVE

Flyer Corporation manufactures two products, Product A and Product B. Both products’ prices are determined by the market.

Overhead is currently assigned to the products on the basis of direct labour hours. Product A requires three hours of direct labour time per unit to manufacture, compared to two        hours of direct labour time for Product B. The company estimated it would incur $57,000 in manufacturing overhead costs and produce 5,500 units of Product A and 6,000 units of Product B during the current year. Unit costs for direct materials and direct labour are:

Product A           Product B

Direct Materials

Direct Labour

$19

$24

$20

$16

Required:

a)  Determine the unit product cost of each product under the current normal costing system.  Show all your calculations.

b)  The newly hired controller suggests using an ABC system in the future. The            company's overhead costs can be attributed to four major activities. These  activities and the amount of overhead cost attributable to each for the current year  are given  below:

Estimated Expected Activity

Activity

Machine setups           Purchase orders issued Machine-hours            Maintenance requests  Total

Overhead Cost

$24,000  5,000  13,000 15,000 $57,000

Product A

720

126

1,000

113

Product B

480

74

625

87

Total

1,200

200

1,625

200

Using the data above and an ABC approach, determine the unit product cost of each    product for the current year. Round the unit cost to the second decimal place. Show all your calculations.

c)   Should the company adopt an ABC system? Support your conclusion.

QUESTION SIX

1.   A company manufactures two products. Product A is stamped out in a machine   press, at the rate of 10,000 per hour. Product B is identical to product A, with the exception that it is made from thicker steel, and requires the machine press to be adjusted. Product A is produced on the morning shift and product B is produced on the afternoon shift, allowing set up changes to be done between shifts. In this case, set up hours are related to which ofthe following?

a.   The number ofcustomers.

b.   Batches of output.

c.   Labour hours.

d.   Machine hours.

e.   Units of output.

2.   The determination of a cost as being either direct or indirect depends upon:

a.   the cost object chosen.

b.   the allocation system.

c.   the accounting system.

d.   the cost tracing system.

e.   the choice of the cost object, and the materiality ofthe cost in question.

3.   Management accounting must:

a.   help managers improve their decisions.

b.   be useful for external and internal users.

c.   be simple and easily understood.

d.   help creditors evaluate the company's performance.

e.   be all of the above.

4.   Which of the following formulas is correct when using the contribution margin method to determine the breakeven point?

a.   Revenues less operating income equals variable costs less total fixed costs.

b.   Unit contribution margin times the breakeven number ofunits equals total variable costs.

c.   Unit contribution margin times unit variable cost equals the breakeven number ofunits.

d.   Unit contribution margin times the breakeven number ofunits equals total fixed costs.

e.   Selling price less unit contribution margin equals unit fixed cost for all values below or at the breakeven number ofunits.

5.   A materials requisition record and a labour time record are examples of which of the following?

a.   Job cost sheets.

b.   Source documents.

c.   Cost object statements.

d.   Normal cost schedule.

e.   Process cost records.

QUESTION SIX (cont’d)

6.   Which of the following does NOT represent a cause-and-effect relationship?

a.   The number of phone minutes used determines the telephone cost.

b.   Utility costs increase at the same time that insurance costs increase.

c.   Material costs increase as the number of units produced increases.

d.   It makes sense that if a complex product has a large number of parts it will take longer to assemble than a simple product with fewer parts.

e.   A company is charged 40 cents for each brochure printed and mailed.

7.   Which of the following statements about normal costing is TRUE?

a.   Direct costs are actual costs, and indirect costs are allocated using a budgeted rate.

b.   Direct costs are calculated using a budgeted rate, and indirect costs are allocated using an actual rate.

c.   Direct costs are calculated by using the actual direct-cost rate times the budgeted quantity ofthe direct costs input.

d.   Direct costs and indirect costs are allocated using an actual rate.

e.   Direct costs and indirect costs are calculated using budgeted rates.

8.   Which of the following is NOT an assumption of CVP analysis?

a.   Costs may be separated into separate fixed and variable components.

b.   Total revenues and total costs are linear in relation to output units.

c.   There will be a change between beginning and ending levels of inventory.

d.   The price of a product will not change as volume changes.

e.   The unit selling price, unit variable costs, and fixed costs are known.

9.   Honda Heaven produces and sells an auto part for $20.00 per unit. Direct            materials are $8 per unit, while direct manufacturing labour averages $1.50 per  unit. Variable manufacturing overhead is $0.50 per unit and fixed manufacturing overhead is $250,000 per year. Administrative expenses, all fixed, run $90,000  per year, with sales commissions of $2 per part. Production is 100,000 parts per year. This year, 75,000 boxes were sold.

What is the inventoried cost per box using absorption costing?

a.   $14.50.

b.   $12.50.

c.   $9.50.

d.   $16.50.

e.   $10.00.

QUESTION SIX (cont’d)

10. Consumer Lumber shows the following balances in selected accounts:

What is the difference between operating incomes under absorption costing and variable costing?

a.   $35,000.

b.   $25,000.

c.   $2,500.

d.   $20,000.

e.   $1,500.

11. What would operating income be when fixed costs equal $6,000, unit    contribution margin equals $40.00, and the number ofunits equals 400?

a.   $10,000.

b.   $6,000.

c.   $60,000.

d.   $20,000.

e.   $16,000.

12. Chris Muss is going to sell Ad-hoc compact disks for $40 a box; one box is         considered to be one unit. The disks cost Chris $10 a unit. She is planning to rent a booth at the up-coming Area Computer Show. She has three options for            attending the show:

paying a fixed fee of $3,000,

paying a $1,000 fee plus 10% of her revenue made at the convention, or paying 25% of her revenue made at the convention.

Which of the following statements is TRUE?

a.   One of the options will allow Chris Muss to break even, even if she         doesn't sell any disks, assuming she can return any unsold disks for a full refund.

b.   Fixed costs are inherent in all of the options.

c.   CVP analysis can show that the risks are identical in each case.

d.   The breakeven point is identical in each case.

e.   Operating income per unit is the same in each case, as both selling price and costs are the same.

QUESTION SIX (cont’d)

13. Presented below is the production data for the last six months of the year for the mixed costs incurred by Wagner Company.

Wagner Company uses the high-low method to analyze mixed costs.

The total cost at an operating level of 10,000 units would be:

a.   $42,550.

b.   $30,200.

c.   $31,136.

d.   $21,416.

e.   $46,625.

14. The following information pertains to Payton's Shoe Manufacturing:

Manufacturing costs

Shoes manufactured

Beginning finished goods inventory

$1,000,000

pairs

pairs

99,500 pairs of shoes are sold during the year for $18 a pair.

What is the amount of ending finished goods inventory?

a.   $8,000.

b.   $5,000.

c.   $500.

d.   $99,500.

e.   $0.

QUESTION SIX (cont’d)

15. Bill Cobb Corporation had the following activities, traceable costs, and physical flow of driver units: