COURSE: - University of Washington
COURSE: Accounting 505 DATE: August 12, 2008
Cost Accounting
QUARTER: Summer 2008
TEST: Mid-Module Examination V2
NAME: (Please print) ___SOLUTION________________
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Part I. Multiple-choice Questions – Topics Vary (3 points each; total 36)
Please select the best answer in each of the following questions.
1. Which of the following statements about business strategy is true?
a. All strategies should be evaluated regardless of the resources and capabilities of the company.
b. The key to a company’s success is creating value for customers while differentiating itself from its competitors.
c. The best-designed strategies are valuable, whether or not they are effectively implemented.
d. Companies can decide on an appropriate strategy based only on internally available information.
2. All of the following statements are false except:
a. Both financial and managerial accounting reports must be prepared in accordance with generally accepted accounting principles (GAAP).
b. Financial accounting is broader in scope than managerial accounting.
c. Managerial accounting places less emphasis on precision and more emphasis on flexibility and relevance than financial accounting.
d. Managerial accounting focuses more on the business as a whole rather than on segments of an organization.
3. Identify the false statement, if any, of the options presented below:
a. A cost may be a direct cost for one cost object but an indirect cost for a different cost object.
b. Improvements in information-gathering technologies are making it possible to trace more costs as direct.
c. The materiality of a cost is a factor in classifying the cost as a direct or indirect cost.
d. Assigning direct costs poses more problems than assigning indirect costs.
4. The following costs relate to Springfield Manufacturing’s production of 40,000 units of its Big Bertha product during January, 2008:
Prime manufacturing costs $12,000,000
Manufacturing overhead 8,500,000
Management plans to produce 30,000 units in February because it has substantial inventories of Big Bertha remaining at the end of January. This production level is within the relevant range with respect to production costs for this product.
Which of the following would you expect to happen with respect to February’s production of Big Bertha?
a. Unit cost will remain the same as in January because variable cost per unit is constant and total fixed costs are constant at all production levels within the relevant range.
b. Unit cost will decrease because total variable costs will decrease more than the increase in unit fixed cost.
c. Unit cost will increase because variable cost per unit will remain the same but unit fixed cost will increase.
d. There is insufficient information to determine what might happen in February with respect to Big Bertha’s production cost.
5. An understanding of the underlying behavior of costs helps in all of the following situations, except:
a. Sales volume can be better estimated.
b. Costs can be better estimated as volume of activity expands and contracts.
c. “True” costs can be better determined.
d. Process inefficiencies can be better identified and, as a result, improved.
6. Activity-based costing (ABC) can help eliminate cost distortion because it
a. Recognizes interactions between different departments in assigning support.
b. Determines cost drivers that have a cause-and-effect relationship with the activities performed.
c. Establishes multiple cost pools.
d. Eliminates product and process variations.
7. (CPA adapted). Conversion is added uniformly to Product XYZ in Department 1 of a two-stage manufacturing process. If there was no beginning work-in-process inventory and ending inventory was 50% complete as to conversion costs, the EU for conversion costs under the weighted-average method would be:
a. The same as the number of units started during the month.
b. Less than the number of units started during the month.
c. The same as the number of units completed and transferred during the month.
d. Less than the number of units completed and transferred during the month
8. When comparing job-order costing with process costing
a. Job-order costing tracks prime costs directly to individual jobs, whereas process costing allocates all costs, materials and conversion costs, to processes.
b. Job-order costing provides more useful information for pricing and product mix decisions than does process costing.
c. A company may select either costing approach, regardless of the products it manufactures or the manufacturing processes it uses.
d. Job-order costing tracks individual jobs using job-cost sheets, whereas process costing tracks costs on a departmental basis and has no need to use job cost sheets.
9. The Morton Company allocates joint costs to joint products on the basis of total relative sales values at splitoff. During July, the company produced three joint products, A, B, and C, from the same joint process. Production and selling price information for these products is presented below:
| |Product A |Product B |Product C |
|Number of units produced |5,000 |3,000 |4,000 |
|Selling price per unit at splitoff |$3 |$7 |$6 |
If the amount of joint cost allocated to Product A was $9,375, the total amount of joint cost relating to the production of A, B, and C must have been exactly, or approximately,
a. $50,000
b. $22,484
c. $37,500
d. Not possible to determine from the information given.
10. Which of the following methods of allocating support department costs take(s) into account all of the effects of interdepartmental services and would encourage the most efficient cost control behavior in user departments?
Direct Step-Down
a. No No
b. No Yes
c. Yes No
d. Yes Yes
11. Cherry Street Market reported the following information for the sales of its only product, cherries sold by the pint:
|Sales |Total |Per unit |
|Sales |$31,500 |$4.50 |
|Variable expenses |9,450 |1.35 |
|Contribution margin |22050 |$3.15 |
|Fixed expenses |13,000 | |
|Net operating income |$ 9,050 | |
Cherry Street would like to increase its selling price by 50 cents per unit but feels that this will decrease sales volume by 10%. Would you recommend that Cherry Street increase the price? What will be the effect on net operating income if it does implement the increase?
a. No; no change.
b. No; $945 decrease.
c. Yes; $3,500 increase.
d. Yes; $945 increase.
12. Zachary’s bike shop has a history of good cost control and does not experience significant fluctuation in its costs. It manufactures and sells two products (A and B) which have contribution margin ratios of 25% and 75% respectively. During July, its sales in dollars were $10,000 for Product A and $90,000 for product B. During August, sales also totaled $100,000, but the break-even point for the company increased. What is the most likely explanation for this situation?
a. The contribution margins for one or both of the products decreased because variable costs per unit increased.
b. The contribution margins for both products remained the same, but fixed costs increased in total.
c. The contribution margin and total fixed costs remained the same as in July, but the relative number of sales in units of A compared to sale in units of B decreased
d. The contribution margin and total fixed costs remained the same as in July, but the relative number of sales in units of A compared to sales in units of B increased.
.
Part 2. Problems. Topics vary. 64 total points.
13. Browning’s is a manufacturing company that uses a traditional job-order costing system. It applies overhead to jobs using a predetermined overhead rate based on direct labor hours. Adjustments for over- or under-applied overhead are made directly to COGS. Selected partially completed T- accounts and additional information for Browning’s for the year 2007 follow: Question marks in accounts indicate missing information. (BB = beginning balance; EB = ending balance.)
Raw Materials Work-in-Process Finished Goods
BB 30,000 BB 20,000 BB 10,000
500,000 DM ?
475,000 DL 244,800 ? ? ?
MOHA ?
EB 12,800 EB 50,000
MOH Control MOH Allocated Cost of Goods Sold
295,000 ? ?
Additional Information:
• Average direct labor (DL) wage rate for the year was $17 per hour.
• Eighty percent (80%) of the raw materials issued to production during 2007 were direct materials (DM)
• The $295,000 balance of MOHC includes all indirect materials and indirect labor costs incurred during the year.
• Estimated MOH for the year was $300,000.
• The job cost sheet for Job 215,one of the jobs completed during the year, showed the following costs:
Direct materials $ 950
Direct labor 255
Manufacturing overhead applied based on DL hours incurred 300
Total cost of Job 215 $1,505
(a) How many direct labor hours were used on Job # 215? [2]
$255 -;- $17 = 15 DL hours
(b) What was the MOH predetermined overhead allocation rate (POHR) in use during the year? [2]
Job 215 data. $300 MOH allocated based on 15 DLH. Rate = $20/DLH
(c) What was the total number of actual labor hours used on all jobs during the year? [2]
$244,800 from WIP -:- $17 per DLH = 14,400 DL hours incurred
(d) What was the cost of goods manufactured (CoGM) for the year? [3]
Complete and analyze WIP entries to determine this
DM cost added, $380,000. ($475,000 materials credit to RM x 80%)
MOH allocate, $288,000. (14,400 DL hours x $20 per hour)
Total debits. BB $20,000 + 380,000 + 244,800 + 288,000 – EB 12,800 = $920,000 credited to WIP
(e) What was the cost of goods sold (COGS) for the year before any adjustment that may be necessary for under- or over-applied overhead-? [2]
Complete and analyze FG entries to determine this
BB $10,000 + COGM credited from WIP of $920,000 (see (d)) – EB 50,000 = $880,000 credited to FG
(f) Was MOH over- or under-applied for the year? Provide the general journal entry to clear any amount you have identified. (See introductory information on previous page for method.) [4]
Overhead applied: $288,000 (d) above vs. $295,000 (given information)
Overhead under-applied by $7,000
COGS 7,000
MOH allocated 288,000
MOH Control 295,000
(g) Identify four (4) factors that could have contributed to Raccap’s under- or over-applied overhead for 2007? (Use bullet form for your response.) [4]
Any four of the following:
• Numerator issue – poor estimation of budgeted MOH
• Numerator issue – good estimation, but unexpected price changes
• Numerator issue – poor cost control.
• Denominator issue – poor estimation of allocation base/cost driver
• Denominator issue – good estimation, but unexpected production volume changes.
• Denominator issue – fewer allocation DL hours used than expected.
(h) If Browning’s total sales revenue for 2007 was $1,320,000, what was the gross margin reported on its 2007 income statement? [2]
$1,320,000 – (880,000 + 7,000) = $433,000
14. Please respond to the following questions about activity-based costing (ABC): [10]
(a) How is an ABC system different from a traditional (simple) costing system? [3]
ABC sorts overhead into individual, homogeneous cost pools that relate to the different activities undertaken to manufacture a product or provide a service. The cost pool dollars are allocated to cost objects based on the cost objects’ relative consumption of the underlying driver of each cost pool. In a traditional system, all indirect costs are accumulated in a single cost pool, and only one cost base is used for allocation. This cost base was generally a labor or materials number, which bore no relationship to the overhead.
(b) What is a significant advantage it provides over a traditional system? [2]
ABC allocates indirect costs on more of a cause-and-effect basis, allowing management to determine the “true” costs being consumed by the cost objects.
(c) Give an example of a management decision that can be enhanced by the use of activity-based costing information. [2]
Examples could include pricing decisions; product-mix decisions; determination of elimination of activities that don’t add value (evaluation),and planning decisions, such as budgeting.
(d) Identify two difficulties associated with implementing and maintaining an ABC system. [4]
Difficulties: Requires identifying and analyzing a large amount of data. Needs a sophisticated information system. It is costly to implement and manage.
(e) Identify two indicators which suggest that implementation of an ABC system might be helpful. [4]
Any two of the following from class lecture:
• Few cost pools but large amount of overhead.
• Most overhead considered to be unit level.
• Products consume different amounts of (overhead) resources.
• Products that should be more profitable don’t appear to be.
Production diversity – dissimilar products
15. Injection Molding, Inc., manufactures plastic moldings. Its process costing system utilizes two cost categories: direct materials and conversion costs. Each product must pass through Department A and Department B. Direct materials are added at the beginning of processing in both departments; conversion costs are incurred uniformly throughout processing. The company uses the weighted-average method to determine equivalent units.
Unit and cost data for Department A for the month of March, 2008, are presented in the table below.
| |Number of Units |Costs |
|Work-in-process, March 1, |1,000 |Materials: $14,000 |
|40% converted | |Conversion: $22,150 |
|Units started during February |7,000 |Materials: $110,000 |
| | |Conversion: $165,500 |
|Work-in-process, March 31, |1,500 | |
|30% converted | | |
(a) How many units were completed and transferred out of Department A during March? [3]
BI 1,000 units + 7,000 started – 1,500 EI = 6,500 units completed and transferred out.
(b) Compute the equivalent units for materials and for conversion for the month. Clearly show your work and label each answer. [4]
Materials Conversion
Completed and transferred 6,500 6,500
Ending inventory
1,500 units 1,500 450 (1,500 x 30% converted)
EU 8,000 6,950
(c) Compute the cost per equivalent unit for materials and the cost per equivalent unit for conversion for the month. [4]
Materials: ($14,000 + $110,000)/8,000 EU = $15.50 per EU
Conversion: ($22,150+ $165,500)/6,950 EU = $27 per EU
(d) Determine the ending balance of WIP, Department A, as of March 31, 2008. (Be sure to show your work clearly here. () [4
Materials: 1,500 EU @ $15.50 per unit = $23,250
Conversion: 450 EU @ $27 per unit = 12,150
Ending WIP $35,400]
16. Echo Manufacturing produces a single product that sells for $80 a unit. Variable costs per unit are $32. The company expects total fixed costs to be $76,800 for the next month. Projected sales for the month are 2,000 units. (We will not consider any tax effects in this problem.)
(a) What is the breakeven point in units? [3]
($76,800)/$80 - $32 = 1,600 units to break even.
(b) What is next month’s estimated operating income (OI) based on sales of 2,000 units? [3]
(2,000 x $48 CM per unit) - $76,800 TFC = $19,200
(c) Management is considering increasing advertising by $5,040 next month in an attempt to increases its OI by 10%. How many additional units above 2,000 must Echo sell to accomplish its objective through this alternative? [5]
Increase in operating income desired, $19,200 x 10% = $1,920
Increase in fixed costs for advertising 5,040
Total increase in CM needed $6,960
$6,960 additional CM needed -:- $48 CM per unit = 145 more sales.
Alternatively:
($21,120 (new OI desired) + $76,800 FC + $5,040 increase in FC)/$48 per unit
Total unit sales of 2,145
2,145 – 2,000 = 145 additional sales
(d) What is Echo’s degree of operating leverage at the 2,000 unit sales level? Use this information to determine the expected percentage increase in NOI if sales increased by 3% beyond the 2,000 unit level. [2]
DOL is Total Contribution Margin/Operating Income at a given sales level.
2,000 x $48 = $96,000, total CM at 2,000 sales
$96,000/$19,200 (from b) = 5 (or 500%)
3% sales increase x 5 = 15% increase in NOI
OR 3% x 500% = .03 x 5 = 15%
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