NEW YORK UNIVERSITY
NEW YORK UNIVERSITY
Leonard N. Stern School of Business
Final Exam Solution
C10.0002 Principles of Managerial Accounting
Fall 2004 II – Exams A&B
Answer all questions of this examination in the exam booklet provided.
Points Distribution:
Part A
Multiple Choice 50 points
Part B
Question 1 20
Question 2 20
Question 3 10
Total 100 points
1. If the cost of goods sold is greater than the cost of goods manufactured, then:
a. work in process inventory has decreased during the period.
b. finished goods inventory has increased during the period.
c. total manufacturing costs must be greater than cost of goods manufactured.
d. finished goods inventory has decreased during the period.
2. Wages paid to the factory supply shop foreman are considered an example of:
| |Direct Labor |Period Cost |
|A) |Yes |Yes |
|B) |Yes |No |
|C) |No |Yes |
|D) |No |No |
3. The following costs were incurred in April:
| |Direct materials |$18,000 |
| |Direct labor |$21,000 |
| |Manufacturing overhead |$33,000 |
| |Selling expenses |$14,000 |
| |Administrative expenses |$19,000 |
Conversion costs during the month totaled:
A) $39,000.
B) $54,000.
C) $105,000.
D) $51,000.
4. . The following costs were incurred in April:
| |Direct materials |$29,000 |
| |Direct labor |$24,000 |
| |Manufacturing overhead |$14,000 |
| |Selling expenses |$18,000 |
| |Administrative expenses |$18,000 |
Direct costs during the month totaled:
A) $53,000.
B) $67,000.
C) $38,000.
D) $103,000.
5. In a job-order cost system, the application of manufacturing overhead usually would be recorded as a debit to:
A) Cost of Goods Sold.
B) Work in Process inventory.
C) Manufacturing Overhead.
D) Finished Goods inventory.
6 The Work in Process inventory account of a manufacturing firm shows a balance of $3,000 at the end of an accounting period. The job cost sheets of two uncompleted jobs show charges of $500 and $300 for materials, and charges of $400 and $600 for direct labor. From this information, it appears that the company is using a predetermined overhead rate, as a percentage of direct labor costs, of:
A) 83%.
B) 120%.
C) 40%.
D) 300%.
7. Equivalent units for a process costing system using the weighted-average method would be
equal to:
A) units completed during the period and transferred out.
B) units started and completed during the period plus equivalent units in the ending work in process inventory.
C) units completed during the period less equivalent units in the beginning inventory, plus equivalent units in the ending work in process inventory.
D) units completed during the period plus equivalent units in the ending work in process inventory.
8. In computing its predetermined overhead rate, Brady Company included its factory insurance cost twice. This error will result in:
A) the ending balance of Finished Goods to be understated.
B) the credits to the Manufacturing Overhead account to be understated.
C) the Cost of Goods Manufactured to be overstated.
D) the Net Operating Income to be overstated.
9. Steele Company uses a predetermined overhead rate based on machine hours to apply manufacturing overhead to jobs. Steele Company has provided the following estimated costs for next year:
| |Direct materials |$20,000 |
| |Direct labor |60,000 |
| |Sales commissions |80,000 |
| |Salary of production supervisor |40,000 |
| |Indirect materials |8,000 |
| |Advertising expense |16,000 |
| |Rent on factory equipment |20,000 |
Steele estimates that 10,000 direct labor hours and 16,000 machine hours will be worked during the year. The predetermined overhead rate per hour will be:
A) $4.25.
B) $8.00.
C) $9.00.
D) $10.25.
10. . The Assembly Department started the month with 24,000 units in its beginning work in process inventory. An additional 309,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 29,000 units in the ending work in process inventory of the Assembly Department. How many units were transferred to the next processing department during the month?
A) 333,000
B) 362,000
C) 304,000
D) 314,000
11. Stay Company uses the weighted-average method in its process costing system. The company's ending work in process inventory consists of 8,000 units, 60% complete with respect to materials and 80% complete with respect to labor and overhead. If the total cost in this inventory is $200,000 and if the cost for materials is $16 per equivalent unit for the period, the cost of labor and overhead per equivalent unit of the production for the period must be:
A) $19.25.
B) $16.00.
C) $25.67.
D) $31.25.
12. Which of the following is not a limitation of activity-based costing?
A) Maintaining an activity-based costing system is more costly than maintaining a traditional direct labor-based costing system.
B) Changing from a traditional direct labor-based costing system to an activity-based costing system changes product margins and other key performance indicators used by managers. Such changes are often resisted by managers.
C) In practice, most managers insist on fully allocating all costs to products, customers, and other costing objects in an activity-based costing system. This results in overstated costs.
D) More accurate product costs may result in increasing the selling prices of some products.
13. Jennifer Company has two products: A and B. The company uses activity-based costing. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows:
| | |Estimated |Expected Activity |
| |Activity Cost Pool |Cost |Product A |Product B |Total |
| |Activity 1 |$23,500 |400 |100 |500 |
| |Activity 2 |$18,000 |500 |200 |700 |
| |Activity 3 |$34,600 |600 |300 |900 |
The activity rate under the activity-based costing system for Activity 3 is closest to:
A) $36.24.
B) $38.44.
C) $84.56.
D) $115.33.
14. . Anola Company has two products: A and B. The company uses activity-based costing. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows:
| | |Estimated |Expected Activity |
| |Activity Cost Pool |Cost |Product A |Product B |Total |
| |Activity 1 |$18,000 |300 |200 |500 |
| |Activity 2 |$16,000 |500 |100 |600 |
| |Activity 3 |$27,000 |600 |300 |900 |
The activity rate under the activity-based costing system for Activity 3 is closest to:
A) $30.00.
B) $30.50.
C) $90.00.
D) $67.78.
Reference: M-1 (use Data in M=1 to answer 15-20)The following T accounts are for Stanford Company: The letters in parentheses refer to the corresponding ledger entries.
Raw Materials Cost of Goods Sold
Beg. Bal. 7,000 | 24,000(b) |
(a)19,000 | |
| |
| |
| |
Sales Salaries Expense Work in Process
(d) 11,000 | Beg. Bal. 11,000 | ? (g)
| (b) 15,000 |
| (d) 18,000 |
| (f) 31,000 |
| |
Accounts Payable Manufacturing Overhead
| 19,000 (a) (b) 9,000 | 31,000 (f)
| 5,000 (e) (c) 9,000 |
| (d) 8,000 |
| (e) 5,000 |
| |
Wages & Salaries Payable Finished Goods
| 7,000 Beg. Bal. Beg. Bal. 18,000 |
| 37,000 (d) (g) 62,000 |
| End. Bal. 15,000 |
| |
Accumulated Depreciation—
Factory
| 82,000 Beg. Bal.
| 9,000 (c)
|15. |The indirect labor cost is: |
|Refer To: M-1 |a. $8,000. |
| |b. $15,000. |
| |c. $18,000. |
| |d. $37,000. |
|16. |The cost of goods manufactured is: |
|Refer To: M-1 |a. $82,000. |
| |b. $64,000. |
| |c. $71,000. |
| |d. $62,000. |
|17. |The cost of goods sold is: |
|Refer To: M-1 |a. $58,000. |
| |b. $69,000. |
| |c. $72,000. |
| |d. $65,000. |
|18. |The manufacturing overhead applied is: |
|Refer To: M-1 |a. $24,000. |
| |b. $31,000. |
| |c. $38,000. |
| |d. $42,000. |
|19. |The cost of direct materials used is: |
|Refer To: M-1 |a. $14,000. |
| |b. $15,000. |
| |c. $18,000. |
| |d. $24,000. |
|20. |The ending Work in Process account balance would be: |
|Refer To: M-1 |a. $13,000. |
| |b. $75,000. |
| |c. $20,000. |
| |d. $64,000. |
Part B: Problems
1. The following monthly data in contribution format are available for the MN Company and its only product, Product SD: The company produced and sold 300 units during the month and had no beginning or ending inventories.
| | |Total |Per Unit |
| |Sales |$83,700 |$279 |
| |Variable expenses | 32,700 | 109 |
| |Contribution margin |51,000 |$170 |
| |Fixed expenses | 40,000 | |
| |Net operating income |$11,000 | |
Required:
a. Without resorting to calculations, what is the total contribution margin at the break-even point?
b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SD. This change would reduce variable expenses by $18 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 250 units per month. Should this change be made?
c. Assume that MN Company is currently selling 300 units of Product SD per month. Management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50 percent. Should these changes be made?
d. Assume that MN Company is currently selling 300 units of Product SD. Management wants to automate a portion of the production process for Product SD. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SD thus resulting in an increase in monthly sales of 12%. Should these changes be made?
Answer:
a. (2 points)The total contribution margin would be $40,000 since it is equal to the fixed expenses at the break-even point.
b. (5 points)The $18 decrease in variable costs will cause the contribution margin per unit to increase from $170 to $188.
| |Expected total contribution margin: | |
| |250 units x $188 per unit |$47,000 |
| |Present total contribution margin: | |
| |300 units x $170 per unit | 51,000 |
| |Decrease in total contribution margin |$(4,000) |
The less costly components should not be used in the manufacture of Product SD. Net operating income will decrease by $4,000.
c. (5 points)The decrease in selling price per unit will cause the unit contribution margin to decrease from $170 to $148.
| |Expected total contribution margin: | |
| |300 units x 150% x $148 per unit |$66,600 |
| |Present total contribution margin: | |
| |300 units x $170 per unit | 51,000 |
| |Incremental contribution margin |15,600 |
| |Change in fixed expenses: | |
| |Less incremental advertising expense | 20,000 |
| |Reduction in net operating income |$(4,400) |
**The changes should not be made.
d. (8 points) The use of the automated process would affect both fixed and variable costs. Fixed expenses will increase by $10,000 from $40,000 to $50,000. Variable costs will decrease by $20 from $109 to $89, and the unit contribution margin will increase from $170 to $190.
| |Expected total contribution margin: | |
| |300 units x 112% x $190 per unit |$63,840 |
| |Present total contribution margin: | |
| |300 units x $170 per unit | 51,000 |
| |Increase in total contribution margin |12,840 |
| |Change in fixed expenses: | |
| |Less monthly equipment rental | 10,000 |
| |Increase in net operating income |$ 2,840 |
** The changes should be made.
2. Juliani Company produces a single product with a normal selling price of $75.00 per unit.. The cost of producing and selling a single unit of this product at the company's normal activity level of 50,000 units per month is as follows:
| |Direct materials |$32.50 |
| |Direct labor |7.20 |
| |Variable manufacturing overhead |1.30 |
| |Fixed manufacturing overhead |20.90 |
| |Variable selling & administrative expense |1.90 |
| |Fixed selling & administrative expense |7.30 |
An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. The variable selling and administrative expense would be $0.30 less per unit on this order than on normal sales. The order would have no effect on the company's normal sales and fixed manufacturing overhead costs would remain unchanged. However, fixed selling & administrative expense would increase by 5% if the order is accepted.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $65.60 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,000 units for regular customers. What would be the minimum acceptable price per unit for the special order?
Answer:
5% increase in fixed selling & administrative expense = .05x($7.30x50,000)= $18,250
Increase in fixed selling & administrative per unit of special order = 18,250/1000=$18.25
|a. 9 pts. |Variable cost per unit on normal sales: | |
| |Direct materials |$32.50 |
| |Direct labor |7.20 |
| |Variable manufacturing overhead |1.30 |
| |Variable selling & administrative expense | 1.90 |
| |Variable cost per unit on normal sales |$42.90 |
| | | |
| |Variable cost per unit on special order: | |
| |Normal variable cost per unit |$42.90 |
| |Reduction in variable selling & administration | 0.30 |
| |Variable cost per unit on special order |$42.60 |
| | | |
| |Selling price for special order |$65.60 |
| |Variable cost per unit on special order | 42.60 |
| |Unit contribution margin on special order |$23.00 |
| |Number of units in special order |3,000 |
| |Increase (decrease) in net operating income |$69,000 |
| |Less Increase in fixed selling & administrative |18,250 |
| |Net increase (decrease) in net operating income |$50,750 |
| | | |
|b. 4 pts. |The opportunity cost is just the contribution margin on normal sales: |
| |Normal selling price per unit |$75.00 |
| |Variable cost per unit on normal sales | 42.90 |
| |Unit contribution margin on normal sales |$32.10 |
| | | |
|c. 7 pts |Minimum acceptable price: | |
| |Unit contribution margin on normal sales |$32.10 |
| |Displaced normal sales |1,000 |
| |Lost contribution margin displaced sales |$32,100 |
| |Total variable cost on special order |$127,800 |
| |Increase in fixed selling & administrative |18,250 |
| | |$178,150 |
| |Number of units in special order |3,000 |
| |Minimum acceptable price on special order |$59.38 |
3. Holton Company makes three products in a single facility. Data concerning these products follow:
| | |Products |
| | |A |B |C |
| |Selling price per unit |$76.10 |$72.70 |$77.10 |
| |Direct materials |$33.10 |$40.60 |$46.40 |
| |Direct labor |$24.00 |$13.10 |$7.20 |
| |Variable manufacturing overhead |$4.60 |$4.40 |$3.30 |
| |Variable selling cost per unit |$1.60 |$3.20 |$2.00 |
| |Mixing minutes per unit |2.80 |1.90 |2.60 |
| |Monthly demand in units |3,000 |1,000 |2,000 |
The mixing machines are the constraint in the production facility. A total of 14,700 minutes are available per month on these machines.
Required:
A machine shop has offered to rent Holton additional mixing machine time on an hourly basis. Determine the maximum amount Holton should be willing to pay for one additional hour of milling machine time supplied by the machine shop.
Answer(10 points total)
Determination of Contribution margin per minute and rank
| | |Products |
| | |A |B |C |
| |Selling price per unit |$76.10 |$72.70 |$77.10 |
| | | | | |
| |Direct materials |$33.10 |$40.60 |$46.40 |
| |Direct labor |24.00 |13.10 |7.20 |
| |Variable manufacturing overhead |4.60 |4.40 |3.30 |
| |Variable selling cost per unit | 1.60 | 3.20 | 2.00 |
| |Total variable cost per unit |$63.30 |$61.30 |$58.90 |
| | | | | |
| |Contribution margin per unit |$12.80 |$11.40 |$18.20 |
| |Mixing minutes per unit | 2.80 | 1.90 | 2.60 |
|5pts |Contribution margin per minute |$ 4.57 |$ 6.00 |$ 7.00 |
| | | | | |
|2 pts |Rank in terms of profitability |3rd |2nd |1st |
(3 pts) The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $4.57.x60 minutes= $274.28 per hour (10pts)
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