Acctg 505 – Old Sample Final Exam – Answers and Solutions
Part 1. Budgeting.
1.d.Responses a, b, and c are roles of budgeting. However, engaging in budgeting does not, in of itself, promote an ethical framework for decision-making.
2.a.Budgeting requires that managers work in coordination and through communicating with one another. Working independently is counter-productive to the budgeting process.
3.a.Presumably, participation in the budgeting process will provide an opportunity for line managers to “buy into” the standards being set.
4.c.A rolling budget allows for one-year’s budget to be on hand at the end of any given incremental period within the budget year.
5.a.All the other options are out of sequence. (b) is incorrect because it places cost of goods sold before production budget; (c) is incorrect because the manufacturing overhead budget cannot be done before the production budget; (d) is incorrect because the cash expenditures budget cannot be done before revenue levels and production have been determined.
6.b.Desired ending inventory of 3,000 + budgeted sales of 18,000 less goods on hand in beginning inventory of 900.
7.b.30% of March’s sales + 70% of February’s sales. Note that the information provided could also set up questions about cash disbursements and an entire cash budget. What would be the cash disbursed in March? What is the cash paid for labor and other operating expenses in any given month? How much cash, if any, might need to be borrowed in March to achieve the desired minimum ending balance?
- A flexible budget allows comparison of actual operating results with budgeted figures for the operating level actually achieved. A static budget provides values for one predicted or fixed level of activity. If that level is not achieved, it is of limited usefulness for comparison with actual results.
Part 2. Variance Analysis
- A static budget variance compares actual results with the master (static) budget. A flexible budget variance compares actual results with the flexible budget for actual activity. Note that the flexible budget variance is one of two components of the static variance. The second component is the (sales) volume variance – arising between the flexible budget and the master budget.
- A = 5 pounds. Standard cost allowed for actual output means that $9,000 is the flexible budget amount for materials. This is the product of output in units times pounds per unit times standard cost per pound. So, $9,000 = 450 units times ? pounds per unit times $4 per unit. The value of the unknown is 5 pounds.
B = 2,270 pounds. This is determined by examining the components of the efficiency variance. This arises between Actual pounds times Standard cost per pound and Standard pounds times Standard cost per pound. We are told that S times S = $9,000. We are also told that the efficiency variance is $80 unfavorable. Therefore, A pounds times S cost must be $9,080. Divide this by standard cost per unit of $4, producing actual usage of 2,270 pounds.
C = 3,000 pounds. Item B indicates usage of 2,270 pounds. However, we are told that the inventory increased by 730 pounds. Therefore, regardless of the amount of the beginning inventory, the company must have purchased 730 pounds more than it used: a total of 3,000 pounds.
D = $300 U. The purchase price variance arises between Actual pounds purchased times Actual cost per pound and Actual pounds purchased and Standard cost per pound. A x A = 3,000 pounds x $4.10 per pound, or $12,300. A x S = 3,000 pounds x $4 per pound. or $12,000. This produces an unfavorable variance of $300. (Alternatively, 3000 pounds times $.10 per pound.)
E = $11,550. This takes a little more figuring out. First, use the efficiency variance information to help you determine the number of actual hours used. 450 rolls x 3 hours per roll x $8 per hour = $10,800 standard cost (S x S for labor). The unfavorable efficiency variance of $400 must mean that Actual hours worked times Standard labor cost per hour was $11,200. This product, divided by standard labor cost per hour of $8, reveals that 1,400 hours must actually have been worked. 1,400 hours x $8.25 actual pay per hour (given) = $11,550.
F = $350 U. Actual labor cost of $11,550 vs. actual hours times standard labor cost per hour of $11,200
- a.$3 per machine hour. $720,000/240,000 machine hours.
- $4,000 U. $64,000 actual cost incurred vs. $60,000 budgeted per month. ($720,000/12 months)
- $3,000 F. Budgeted overhead of $60,000 must be compared with fixed overhead applied for the output actually achieved. 42,000 clocks x 0.5 machine hours per clock x $3 per machine hour = $63,000. Thus, overhead applied at standard is $3,000 in excess of overhead budgeted. This produces a favorable volume variance. (Notice that, based on annual production of 480,000 clocks, budgeted monthly production would be 40,000 clocks. This volume was exceeded in June – setting up a favorable volume variance situation.)
- A volume variance arises for fixed overhead because the allocation rate is different depending on anticipated production volume. Unless the actual production volume is equal to that anticipated when the denominator was selected for determining the allocation rate, the rate will be either too high or too low. This does not happen for variable overhead because the allocation rate is constant, regardless of volume level anticipated or achieved. The ratio of total variable cost to underlying activity remains constant.
Part 3.Decision Analysis
13.Fluty Corporation manufactures a final product that has two parts, A and B. It is currently considering two independent proposals related to these parts. These proposals are not mutually exclusive (i.e. Fluty could choose to go ahead with both options, with only one of the options, or with neither of them)
Proposal 1 is for buying Part A. This would free up some of the plant space for the manufacture of more of Part B and assembly of the final product. The product vice president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed. Decision question: buy Part A or continue to make it?
Proposal 2 is for buying new equipment for the production of Part B. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of $1,000. Decision question: continue with old equipment or buy new?
Please indicate whether the following items are relevant (R) or irrelevant (I) for each proposal. You are reminded to treat each proposal independently. The first item has been done for you as an example of what is required. [1 point each response. Total of 22 points)
Note that key aspects of the information have been highlighted in the information section above. In particular, although the decisions are independent of each other, Proposal 1 has implications for both Product A and Product B. If Proposal 1 is implemented, more of Product B will be produced and more final product.
Proposal 1 Proposal 2
a.Total variable manufacturing overhead, Part A.__R_____I__
b.Total variable manufacturing overhead, Part B.__ R______R__
Relevant to Proposal 1 because more of Part B will be made if this proposal is initiated. It is obviously relevant to Proposal 2 because of the reduction in power costs, a component of overhead.
c.Book value of old equipment for manufacturing Part B.__I____ I__
Book value is irrelevant to Proposal 1 because equipment replacement is not an issue in this proposal. It is irrelevant to Proposal 2 because book value is irrelevant in equipment replacement decisions.
d.Cost of new equipment for manufacturing Part B.___I____R__
Proposal 1 does not involve equppment replacement. In Proposal 2, cost of new equipment is relevant since it exists only if the Proposal is implemented.
e.Total variable selling and administrative costs.__ R______I__
Relevant to Proposal 1 since its implementation will increase final product sales, so related total selling and administrative costs will increase. Implementation of Proposal 2, in of itself, will not cause an increase in sales of final product.
f.Disposal value of old equipment for manufacturing Part B. __ I___ __R___
Not relevant to Proposal 1 since equipment replacement not an issue. Is relevant to Proposal 2 since the disposal value of old equipment will be realized only if the proposal is implemented.
g.Sales revenue of the final product.___R_____I__
Final product sales increase under Proposal 1. They do not under Proposal 2.
h.Total variable costs of assembling final products.___R_____I__
Assembly activity will increase only if Proposal 1 is implemented. Implementation of Proposal 2 does not cause assembly costs to change.
i.Total direct manufacturing materials, Part A.___R_____I__
Part A manufacturing costs are affected by Proposal 1, not by Proposal 2.
j.Total direct manufacturing materials, Part B.___R_____I__
Relevant to Proposal 1 because its implementation would increase production of Product B. Irrelevant to Proposal 2 because its implementation will have no effect on materials costs for Part B.
k.Total direct manufacturing labor, Part A.___R_____I__
Relevant to Proposal 1 since purchasing Part A will reduce direct labor costs related to is manufacture. Irrelevant to Proposal 2 since labor relating to Part A does not affect labor related to manufacturing Part B.
l.Total direct manufacturing labor, Part B.___R_____R__
Relevant to Proposal 1 since implementation will cause increased production of Part B. Relevant to Proposal 2 because use of new equipment will require fewer workers.
14.Minimum selling price is the sum of incremental costs incurred plus any opportunity cost involved.
Information indicates that additional capacity will not be purchased. Therefore, BelleMichelle must take into consideration the contribution margin that would have to be forfeited if the special order were accepted.
Incremental costs per unit are $10 for materials, $15 for labor, and $8 (1/3rd of $24) for indirect costs = $33 (+3)
Opportunity cost is regular contribution margin of $37 ($70 – 10 – 15 – 8) x 5,000 units that would be forfeited to allow the manufacture of 15,000 special order units.
($37 x 5,000) -:- 15,000 units ~ $12 per unit. (+3)
Therefore, minimum acceptable selling price is $45. ($33 + $12)
15.c.There is no such method as future-value cash flow method.
16.b.NPV is calculated using a minimum target rate of return appropriate to the type of investment opportunity and its related risk. Note that this return is based on cash flows analysis and is not to be confused the with ROI computation, which uses accounting numbers.
17.c.The net present value method can be used in situations where the required rate of return varies over the life of the project. The output of the analysis is in dollars. The IRR and accrual accounting rate of return give information about the expected rate of return over the life of the project. They do not provide individual annual return rate information.
18.Solve for payment where N = 4, I = 12%, present value = $(800,000), future value = $0
Payment is approximately $263,388.
Using tables approach: $800,000 = payment x PVOA412
$800,000 -:- 3.037 = $263,418
19.a.The project is not acceptable, since the net present value of cash flows is negative, as shown in the following computation:
PV of cash in flows (N = 8, I = 14%, payment = $18,000, future value = $14,500) is $88,583.
PV of cash outflows is $95,000.
NPV is $(6,417)
b.Without computing the IRR, the only statement that can be made with certainty is that the IRR is less than 14% because the NPV is negative.
The IRR can be computed as follows: Solve for I where N = 8, payment = $18,000, present value = $(95,000), future value = $14,500. IRR is approximately 12.1%
20.(a).This project is not acceptable because its AARR is less than 25% as shown in the following computation:
$103,000 cash savings -$48,000 annual depreciation/$275,000 = 20%
(b).Using payback analysis, the project is acceptable, as indicated in the following computation:
$275,000/ $103,000 annual cash flows = 2.7 years. (Note that the cash flow relating to the terminal value at the end of the fifth year is not relevant to this analysis since all annual cash flows can realistically be assumed to occur before that final cash flow.)
(c)The accrual accounting rate of return is an appropriate analytical approach if managers of the projects which are to use the assets involved are evaluated based on return on investment (a similar ratio). However, since it does not focus on cash flows, it is less useful than the other capital budgeting analytical approaches. Additionally, the required rate of return used in the discounted cash flow methods is different from the required ROIs. This can be misleading.
The payback method is easy to compute and easy to understand. It is particularly useful when analyzing long-term projects since the longer the time-line, the more risk and uncertainty exist. Furthermore, it uses cash flows as opposed to accrual numbers. However, it ignores the time value of money and disregards cash flows (and related profits) beyond the payback period. It is considered to be an inadequate analytical tool.
Although this was not asked, note that the two analytical approaches taken by Jensen provide the basis for different conclusions concerning whether or not to proceed with the acquisition. Jensen would have to determine which of the two criteria was the most important. Additional analysis using discounted cash flow approaches would be extremely useful in further assessing the project.
Part 4.Decentralization Issues
- Any two of the benefits and costs listed on Page 2 of Chapter 22 class notes would be acceptable answers.
22.(a)Determine the range of transfer prices within which a negotiated transfer could take place.
$30.50 less than or equal to TP less than or equal to $38
($28 -$1.50 avoided) + {($12 CM x 5,000 external sales forfeited)/15,000 transfer sales)
$26.50 +$4=$30.50 minimum acceptable TP
$38 is price Division B currently incurring from external supplier, so will not pay more than this.
((b)If a transfer price can be agreed to within the range you have identified in (a) above, what is the benefit (in dollars) that the company as a whole would realize?
$112,500
Cost saving per unit for Division B of $7.50 ($38 - $30.50 minimum acceptable price) x 15,000 units.
OR
Increased profits for Division A of $7.50 per unit ($38 maximum TP less incremental cost of $30.50 per unit) x 15,000 units.
(c)Assuming that a transfer does take place, at what transfer price would Division A and Division B’s profits be equally benefited?
$34.25 per unit.
$112,500 -:- 2 = $56,250 increase in profits for each division is needed.
$56,250/15,000 units = $3.75 increased profits needed per unit.
Either($38 – 3.75) = $34.25, (Division B’s perspective),OR
($30.50 + $3.75) = $34.25, (Division A’s perspective)
Or simply split the difference: $7.50/2 = $3.75. $30.50 + $3.75 or $38 - $3.75
23.(a)Note that the ROI for both divisions is the same. Is it appropriate, therefore, to state that management of both divisions is performing equally well? Include in your response a computation of the two components of ROI that we learned in class and indicate for both divisions which component of ROI needs improvement and which component appears to be contributing most to the current ROI level.]
- No, it is not appropriate to assume that management of both divisions is performing equally well. The components of ROI (profit margin and asset turnover) reveal that management in each division has different strengths and weaknesses.
- An examination of the ROI components shows that Southwest Division’s profit margin of 6% is lower than Northwest Division’s 8%. However, Southwest Division’s asset turnover is 4, while Northwest’s is 3. (See computations below)
- Therefore, Southwest management should concentrate on improving its profit margin while maintaining its healthy asset turnover; Northwest division should focus on improving its asset turnover while maintaining its healthy profit margin.
(b)(This item has two questions.) Suppose management in each division is considering investing in a new opportunity which promises to yield an ROI of 16%.
(i) Which, if any, division would accept the opportunity if the decision were based on consideration of ROI only? Why?
Since both divisions have a current ROI of 24%, neither would want to accept a proposal that offers a 16% return if only ROI is considered. The 16% ROI would lower the division ROI.
(ii) Which, if any, division would accept the opportunity if the decision were based on consideration of residual income (RI)? Why?
If the decision were based on consideration of residual income, the Northwest Division would accept the project because its 16% ROI is greater than its 15% target ROI. However, Southwest would still not accept because the 16% is lower than its 18% target ROI.
Acctg 505 – Old Sample Exam Questions -- Solutions1