COURSE:Accounting 505DATE:Wednesday, August 1
1:00 – 3:00 p.m.
QUARTER:Summer 2007
TEST:Final Exam
PLEASE PRINT YOUR NAME:______SOLUTION______
- All questions are to be answered in the spaces provided. . Answer only the questions asked. Do not do any unnecessary work.
- If you make any assumptions, please state them. They must not be contradictory to the fact patterns given.
- Where calculations are needed to arrive at a solution, you are advised to show enough work so I can understand how you arrived at your answer. Partial credit is available on some computational questions. However, unless your work is shown, it is not possible to determine if partial credit points are appropriate.
- Please confine your work to the examination paper.
- You have 120 minutes to complete this test. In the interests of maximizing your grade, I recommend you skim through the entire exam before you start to answer any question so you can plan your strategy.
- If you need clarification (e.g. definition of words, unclear instructions, unclear problem) during the test, raise your hand and I will come to you and provide clarification where appropriate and allowable. I will not re-teach any point.
- Space has been provided below each question for your response. Please be sure you answer all parts of a question.
- Point values for each question are indicated in parentheses at the end of each question.
- There are 12 pages (including this title page) in this examination packet. Count your pages and confirm that you have a complete package and that no pages are duplicated or missing.
- By signing below you certify that the answers provided on this exam are the result of your own legitimate efforts.
______
Your Name -- Signature
BUDGET YOUR TIME WISELY! GOOD LUCK!
Part 1.Multiple-choice – Topics Vary. 3 points each question; 36 total points.
1.Budgeting provides all of the following except
a.a means to communicate the organization's short-term goals to its members.
b.support for the management functions of planning and coordination.
c.a means to anticipate problems.
d.an ethical framework for decision making.
2.Budgeted production depends on
a.the direct materials usage budget and direct material purchases budget.
b.the direct manufacturing labor budget.
c.budgeted sales and expected changes in inventory levels.
d.the manufacturing overhead costs budget.
3.A primary consideration in assigning a cost to a responsibility center for evaluation purposes is
a.whether the cost is fixed or variable.
b.whether the cost is direct or indirect.
c.who controls that cost.
d.where in the organizational structure the cost was incurred.
- Which of the following statements about production variances is true?
a.The direct manufacturing labor price variance is likely to be favorable if higher-skilled workers are put on a job.
b.The use of high-quality raw materials may result in a favorable efficiency variance and an unfavorable price variance.
c.An unfavorable variable overhead efficiency variance indicates that variable overhead items were wasted and inefficiently used.
d.Production management is always held responsible for any production volume variance that may arise.
5.All of the following statements relating to decision analysis are true, except
a.A cost may be relevant for one decision, but not relevant for a different decision.
b.In a make-or-buy decision, when there are alternative uses for capacity, the opportunity cost relating to that capacity is relevant.
c.Regardless of any existing constraining resource, to maximize profits managers should produce more of the product with the greatest contribution margin per unit.
d.When replacing an old machine with a new machine, the sales value of the old machine is relevant to the decision, but the book value of the old machine is not relevant.
6.Frederick, inc., is considering replacing a machine. The following data are available:
Old Machine / Replacement MachineOriginal cost when purchased / $45,000 / $35,000
Useful life in years / 10 / 5
Current age in years / 5 / 0
Book value / $25,000
Disposal value now / $8,000
Disposal value in 5 years / 0 / 0
Annual cash operating costs / $7,000 / $4,000
The difference between keeping the old machine and replacing the old machine is
a.$37,000 in favor of keeping the old machine.
b.$12,000 in favor of keeping the old machine.
c.$37,000 in favor of replacing the old machine.
d.$12,000 in favor of replacing the old machine.
7.In using the net present value method in capital budgeting analysis, only projects with a zero or positive net present value are acceptable because
a.the return from these projects equals or exceeds the internal rate of return.
b.the return from these projects equals or exceeds the required rate of return.
c.the return from these projects equals or exceeds the accrual accounting rate of return.
d.a zero or positive net present value on a particular project guarantees company profitability.
8.All of the following should improve under decentralization except
a.Corporate control.
b.Local responsiveness.
c.Management training.
d.Timeliness of decision making.
9.What is the term used to describe the situation when a manager's decision which benefits one subunit is more than offset by the costs to the organization as a whole?
a.Suboptimal decision making
b.Subliminal decision making.
c.Congruent decision making.
d.Contingent decisionmaking.
10.A transfer-pricing method leads to goal congruence when
a.managers always act in their own best interest.
b.managers act in their own best interest and the decision is in the long-term best interest of the manager's subunit.
c.managers act in their own best interest and the decision is in the long-term best interest of the company as a whole.
d.managers act in their own best interest and the decision is in the short-term best interest of the company.
- A division earning a profit can increase its return on investment (ROI) by
- increasing sales revenue and operating expenses by the same dollar amount.
- decreasing sales revenues and operating expenses by the same percentage.
- increasing investment and operating expenses by the same dollar amount.
- increasing sales revenues and operating expenses by the same percentage.
12.A problem with using the residual income measure is that a subunit with a
- high investment turnover ratio always has a higher residual income than a corporation with a smaller investment turnover ratio.
- high return on sales always has a higher residual income than a corporation with a smaller return on sales.
- larger dollar amount of assets is likely to have a higher residual income than a subunit with a smaller dollar amount of assets.
- None of these answers is correct.
Acctg 505, Summer 2007, Final Exam. WiddisonPage 1 of 12
Part 2. Short-answer Questions. Topicsvary. 64 total points.
1.The following information pertains to Tiffany Company:
MonthSalesPurchases
January$30,000$16,000
February$40,000$20,000
March$50,000$28,000
Cash is collected from customers in the following manner: (All sales are credit sales.)
Month of sale30%
Month following the sale67%
Uncollectible3%
40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.
Labor costs are 20% of sales. Other operating costs are $15,000 per month (including $4,000 of depreciation). Both of these are paid in the month incurred.
The cash balance on March 1 is $4,000. A minimum cash balance of $3,000 is required at the end of the month. Money can be borrowed in multiples of $1,000.
What will be the cash balance at the end of March prior to any borrowing that may be necessary? [8]
$1,600($4,000 beginning balance + $41,800 receipts - $44,200 disbursements.)
Cash receipts from sales:From March sales:$15,000 ($50,000 x 30%)
From Feb. sales: 26,800 ($40,000 x 67%)
$41,800
Disbursements:
For purchases:From March purchases.$11,200 ($28,000 x 40%)
From Feb. purchases: 12,000 ($20,000 x 60%)
$23,200
Other:Labor: 10,000 ($50,000 x 20%)
Operating costs 11,000 ($15,000 - $4,000*)
Total disbursements$44,200
$4,000 BB + $41,800 receipts - $44,200 disbursements = $1,600 balance before borrowing
*Since depreciation is not a cash outflow, operating disbursements are reduced by $4,000.
2.Cox Company uses standard costing. The following data are available for April:
Actual quantity of direct materials used...... / 3,050 gallonsStandard price of direct materials...... / $4 per gallon
Material quantity variance...... / $2,000 unfavorable
Standard gallons allowed per unit produced / 3 gallons
How many units were actually produced during April? [4]
850 units
Actual gallons x Standard price (3,050 x $4)$12,200 (Prong 2)
Less. Unfavorable quantity variance 2,000
Standard gallons X standard price for actual output$10,200 (Prong 3)
$10,200 -:- (Actual output x 3 gallons per unit x $4 per gallon)
Actual output = $10,200 -:- $12.
3.The following labor standards have been established for a particular product:
Standard labor hours per unit of output...... / 8.7 hoursStandard labor rate...... / $18.10 per hour
The following data pertain to operations concerning the product for the last month:
Actual hours worked...... / 3,800 hoursActual total labor cost...... / $67,640
Actual output...... / 500 units
(a) Compute the labor rate and efficiency variances, and (b) prepare the journal entry to record the labor cost and to isolate any related variances. [6]
Actual Labor CostActual hours x std. rateStd. hours x std. rate
3,800 @ $18.10/hour500 units x 8.7 hrs x $10.10
$67,640$68,780$78,735
$1,140 F$9,955 F
WIP78,735
Labor rate variance1,140
Labor efficiency variance9,955
Wages payable67,640
4.Jenny’s Corporation manufactured 2,500 units of product during March. It allocates fixed manufacturing overhead (FMOH) on the basis of machine hours. The following selected fixed overhead data pertain to March.
ActualStatic Budget
Production2,500 units 2,400
Machine-hours6,100 hours6,000 hours
Fixed overhead costs$123,000?
The fixed overhead flexible-budget variance for March was $3,000 unfavorable.
(a)What are (i) the total FMOH budgeted for March and (ii) the FMOH allocation rate per standard machine hour? [2]
(i)$120,000 ($123,000 actual > budget by $3,000 unfavorable F-B variance)
(ii)$20 per machine hour. ($120,000 budget -:- 2,400 std. machine hrs at denominator level of activity – i.e what we expected to do, as in static budget.)
(b)What is the standard number of machine hours allowed per unit of production? [2]
2.5 standard machine hours per unit
(6,000 machine hours -:- 2,400 units)
(d)Determine the amount and nature (U or F) of any production volume variance for March [2]
FMOH BudgetedFMOH Applied
(2,500 x 2.5 x $20)
$120,000 $125,000
$5,000 F
(e)Who should be held primarily responsible for the incurrence of the variance you have shown in Part (b)? Why? [2]
Sales/marketing
Sales should drive production.
5.Silver Lake Cabinets is approached by a representative ofZhang Industries, not a regular customer, to fulfill a large one-time-only special order of 12,000 cabinets similar to that offered to regular customers. The following per unit data apply for sales to regular customers based on current production level:
Direct materials$100
Direct labor125
Variable manufacturing overhead60
Fixed manufacturing overhead75
Total manufacturing costs360
Markup (60%)216
Unit selling price$576
Zhang Industries wants to cabinets in cherry rather than oak, so direct material will increase by $30 per unit.
a.Assuming Silver Lake has sufficient capacity available to meet this order, and considering only quantitative factors, what is the minimum price per unit that Silver Lake Cabinets could accept for this one-time-only special order? [2]
$315
Sum of DM at $130, DL of $125, and VMOH of $60
b.Assume now that SilverLake has available capacity to make only 8,000 units of the special order. What is the minimum price now? [3]
$412
$315 from (a) plus opportunity cost of $97 per unit computed as follows:
Regular CM per unit of ($291* x 4,000 forfeited)/12,000 needed
= $97
$576 selling price less DM $100, DL $125, and VMOH $60. Note that the CM on regular sales is computed assuming regular materials used at $100 a unit.
c.What are other (i.e. qualitative) issues that Silver Lake Cabinets should consider before making a decision as to whether or not to accept this one-time-only special order? (Bullet-point format is preferred in your answer.) [4]
Any two of the following:
- Is this only a one-time deal? If not, fixed costs become relevant.
- What might be potential impact on regular customers if they learn about it?
- Might the customer attempt to resell these units and undercut SilverLake’s market?
6.Framingham Products is considering purchasing a new piece of equipment to improve its operations and increase production over the next six years. Working capital will need to increase by $5,000 at the beginning of the use of the equipment, but it is all expected to be released at the end of the 6-year period. Annual cash contribution margin will increase by $18,000. Salvage value of the equipment is estimated to be $2,500 at the end of the six years.
Framingham’s minimum required rate of return on projects of this type and level of risk is 15%. The net present value of the purchase and use of this machine is approximately $3,863.
(a)What is the cost of the new piece of equipment? [5]
$62,500
PV of cash inflows where n = 6, I = 15, payment = $18,000, and FV = $7,500 is $71,363.
NPV is PV of inflows less PV of outflows; therefore
$71,363 – increase in WC of $5,000 – cost of asset = $3,863
Cost of new equipment is $62,500
(b)Without calculating it, comment very briefly on the internal rate of return of this project compared with the required rate of return, and justify your comment. [2]
The IRR must be higher than the required rate of return because the net present value is positive.
(c)If Framingham sets its maximum payback period for investments in new equipment at 3 years, is this investment acceptable? Support your answer with an appropriate computation. [2]
NO. The project is not acceptable by the payback criterion.
Payback period is 3.75 years. Cost of $67,500 -:- $18,000 annual cash flows.
Acctg 505, Summer 2007, Final Exam. WiddisonPage 1 of 12
7.Division X makes a part with the following characteristics:
Production capacity...... / 25,000 unitsSelling price to outside customers...... / $18
Variable cost per unit...... / 11
Fixed cost, total...... / $100,000
Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each
(a)Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, will the company as a whole be better or worse off each period, and by what amount? [4]
Company as a whole would be worse off by $60,000
Since Div. X has ample excess capacity, any sales it makes to Div Y above its incremental cost of $11 variable cost per unit provides additional contribution margin. In this instance it is ignoring $60,000 of additional contribution margin. ($17 per unit from Y less $11 incremental cost per unit.)
(b).Suppose now that Division X is operating at capacity and can sell all of its output to outside customers. If senior management requires Division X to sell the parts to Division Y at $17 per unit “to keep the profits in the firm,”will the company as a whole be better or worse off, and by what amount: [4]
Worse off by $10,000
For the 10,000 units it is forced to sell to Y at $17 per unit, it is generating $60,000 of CM. If it sold those units externally at its regular CM of $7 per unit, it would generate total CM of $70,000. This is a misguided management decision.
8.(CMA adapted) James Webb is the general manager of the Industrial Product Division of Morgan Enterprises. One measure of his performance is divisional residual income. Webb anticipates that the divisional asset base and revenue for next year will be $19,000,000 and $30,000,000 respectively. If the target rate of return is 15% and Webb wants to achieve a residual income of $2,000,000 next year, what will costs have to be in order to achieve this target? [6]
$25,150,000
The solution is determined by setting up a residual income computation, filling in known data, then working backwards as shown below.
Revenues$30,000,000
Less expenses?1__
Operating income?2
Less target income?3__
Residual income desired$ 2,000,000
?3)Target income is $2,850,000($19,000,000 asset base x 15%)
?2)Operating income must be $4,850,000. (OI - $2,850,000 = $2,000,000) Therefore OI = $2,850,000 + $2,000,000
?3)$25,150,000. (Revenues of $30,000,000 less costs = $4,850,000. Therefore, costs must be $25,150,000
9.Why might reliance on ROI as a performance measure of a subunit lead to poor decision making? Provide an example to support your answer. [4]
Managers might choose not to enter into any new projects that have an estimated ROI below their current divisional ROI, even if that estimated return was greater than the division’s target ROI.
Example. Current divisional ROI is 24%. Target ROI for division is 12%. New investment opportunity promises a return of 20%. Manager of division might be reluctant to enter into the new investment, even though the promised return exceeds 12%, because the 20% ROI of the investment will reduce the 24% divisional ROI
Please complete the following to assist me in the determination of your professionalism points.
The syllabus stated that professionalism
“… consists of presenting yourself and your work ethically and in a manner consistent with respect for the subject, your class colleagues, yourself, and the instructor. It includes active participation in class topic discussion, cooperation, responsiveness to questions posed by the instructor, timeliness, and regular attendance.”
On a scale of 1 to 20, with 20 being in full compliance with the description in the syllabus, how many points do you believe you have earned for this aspect of your grade?
Why?
I have enjoyed working with you this summer. Good luck with the rest of 505. -- EW
Acctg 505, Summer 2007, Final Exam. WiddisonPage 1 of 12