COURSE:Accounting 505DATE:XXXXXXXX
QUARTER:Summer 2006 – Mid-module
TEST:Selected sample questions and study guidance.
NOTE: (1) THIS IS A SAMPLE OF QUESTION TYPE AND HOW SOME ASPECTS OF THE TOPICS HAVE BEEN TESTED IN THE PAST. ACTUAL EXAM QUESTIONS MAY COVER THE SAME OR DIFFERENT ASPECTS OF A TOPIC AREA. (2) IN YOUR EXAM, SPACE WILL BE PROVIDED AFTER EACH QUESTION FOR YOUR SOLUTION/ANSWER.
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Introduction, Cost Concepts and Terminology
1.Management accounting
a.focuses on estimating future revenues, costs, and other measures to forecast activities and their results.
b.provides information about the company as a whole.
c.reports information that has occurred in the past that is verifiable and reliable.
d.provides information that is generally available only on a quarterly or annual basis.
2.What is meant be a firm’s business strategy? How can management accounting help in formulating such a strategy?
A firm’s business strategy is a formulated plan of action in which the objectives isi to achieve the long-term profitability goals of a company.
Management accounting can help formulate strategy by providing information about a firm’s sources of competitive advantage. Possibilities range from capitalizing on low-cost or efficiency advantage relative to competitors so as to be able to charge lower prices, to capitalizing on the ability to charge premium prices through providing distinctive features that consumers value.
3.What is meant by (a) a firm’s value chain, and (b) its supply chain? What is management accounting’s function with respect to these chains?
A firm’s value chain is the sequence of business processes in which utility/usefulness is added to a product or service in the eyes of the customer. For a manufacturing concern, production is at the heart of the chain. Upstream links are R&D and design; downstream links are distribution, marketing, and product support. Not all firms engage in all activities in the chain. Some links are “outsourced” (e.g. Boeing manufacturing of 787) and some are vertically integrated with other companies (e.g. use of distributors in the soft-drink industry.)
A firm’s supply chain is the flow of goods, services, and information from the firm’s suppliers, through production, to the delivery of products and services to the firm’s customers.
The most significant function of management accounting with respect to these chains is the providing of relevant cost information so that the “links” in which the firm actively participates so that managers can make appropriate cost-benefit analyses of the options available to them. With respect to the supply chain, management accounting plays an important role in the integration of activities across companies in the chain.
4.Archambeau Products Company manufactures custom office furniture. Recently, the company decided to develop a formal cost accounting system and classify all costs into three categories. Categorize each of the following items as being appropriate for (1) direct cost tracing to the finished furniture, (2) allocation of an indirect manufacturing cost to the finished furniture, or (3) as a nonmanufacturing item – i.e. a period cost. Additionally, speculate as to the most likely behavior of this cost: variable, fixed, or mixed.
CostCostPeriodCost
ItemTracingAllocationCostBehavior
Carpenter’s wages___X______V___
Depreciation - office building______X______F___
Glue for assembly______X______V___
Lathe department supervisor’s
salary______X______F___
Lathe depreciation______X______F____
Lathe maintenance______X______V*___
Lathe operator wages___X______V____
Lumber___X______V____
Metal brackets for drawers______X______V____
Power for lathe dept.______X______M___
Factory washroom supplies______X______V____
* Depends on process. If scheduled routinely, then there is a fixed component. However, it would be reasonable to assume that the higher the production volume, the more maintenance would be needed. Answer could also be M for mixed.
Job Costing
5.(a) Describe the essential elements of the mechanics of a job costing system. Include, but do not limit your description to, an explanation of how job cost sheets are used and their role in keeping track of costs. (b) Under what circumstances would a company use a job-costing rather than a process-costing system?
a.In a job costing system, direct costs (materials and labor) are recorded on job cost sheets (one for each job) on a daily basis as incurred/used. Overhead is applied upon job completion based on a predetermined overhead application rate. Costs of individual jobs are moved between inventories (WIP, FG, and COGS) as the jobs move/sell. Summary entries to transfer total materials, labor, and overhead costs applied into WIP from the appropriate accounts are made at the end of each month. Any over/underapplied overhead is closed out periodically. [5 points]
b.Job costing is used when high-value, somewhat customized products are being made, often to customer specification. It identifies the costs relating to each specific job rather than relying on an averaging approach. [3 points]
6.Job-cost records for Boucher Company contained the following data:
Total Cost
DateDateDateof Job
Job No.StartedFinishedSoldat June 30
220May 18June 12June 20$6,000
221May 20June 19June 214,000
222June 7July 5July 127,000
223June 10June 28July 16,500
224June 19July 16July 258,000
Required:
a.Provide the journal entry to record cost of goods manufacture for June.
a.Compute WIP inventory at June 30.
b.Compute finished goods inventory at June 30.
c.Compute cost of goods sold for June.
Solution:
a.Goods completed and moved to finished goods during June were Jobs Nos. 220, 221, and 223. The total cost of these jobs is $16,500
Debit:Finished goods16,500
Credit:Work in process16,500
b.7,000 + $8,000 = $15,000
c.$6,500
d.$6,000 + $4,000 = $10,000
7.Peterson’s Plastic Products Company manufactures pipes and applies manufacturing costs to production at a budgeted indirect-cost rate of $8 per direct labor-hour. The following data are obtained from the accounting records for June 20x2:
Direct materials$400,000
Direct labor (8,000 hours @ $21/hour)$168,000
Indirect labor$ 22,000
Plant facility rent$ 10,000
Depreciation on plant machinery and equipment$ 15,000
Other indirect manufacturing costs$ 12,000
Sales commissions$ 30,000
Administrative expenses$ 40,000
Required:
a.What actual amount of manufacturing overhead costs was incurred during June 20x2? $59,000. See highlighted items in list above.
b.What amount of manufacturing overhead was allocated to all jobs during June 20x2?
$64,000. (8,000 DL hours @ $8 per hour.)
c.For June 20x2, was manufacturing overhead under-allocated or over-allocated? Explain. MOH was over-allocated by $5,000 because $64,000 applied is greater than the $59,000 MOH actually incurred.
d.What are some possible reasons for overhead allocated to be different from overhead actually incurred?
Numerator error. Poor estimation of budgeted overhead for the coming period, resulting in an application rate that was too high.
Denominator error: Actual labor hours incurred during the period was greater than anticipated for planned production. In this scenario, the application rate of $8 per hour might have been a reasonable estimation, but excess labor hours worked led to over-application of overhead.
e.Assume that the ratios of MOH in the ending balances of WIP, FG, and COGS were 10%, 20%, and 70% respectively. What approach would you recommend be taken to clearing out the misallocation amount that you have identified in (c)? Why?
Adjust the entire $5,000 directly to Cost of Goods Sold. If the proration approach were used, COGS would be reduced by 70% of the $5,000 (i.e. $3,500). This is only $1,500 less than the direct adjustment amount and is not materially different. Additionally, the effect of proration on both WIP and FG is not material because of the low amount of MOH remaining in those balances. A cost-benefit position supports direct write-down.
If you believe that accuracy of reporting is of supreme importance, you would argue for proration. However, you would need to justify this approach from a cost-benefit point of view.
Activity-based Costing
8.(a)How is an Activity Based Costing (ABC) system different from a traditional costing system? (b)What is a significant advantage it provides over a traditional system? (c)Give an example of a management decision that can be enhanced by the use of activity-based costing information. (d) Identify two difficulties associated with ABC. (Note there are 4 parts to this question for you to address – see highlighting. Please be sure you address all parts in your answer.) (10 points)
a.ABC sorts overhead into individual, homogeneous cost pools that relate to several activities undertaken to manufacture a product or provide a service. The cost pool dollars are allocated to cost objects based on their 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. [3 points]
b.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. [3 points]
c.Examples could include pricing decisions; product-mix decisions; determination of elimination of activities (evaluation), planning decisions.. [2 points]
d.Difficulties: Requires identifying and analyzing a large amount of data. Needs a sophisticated information system. It is costly to implement and manage. [ 1 point each disadvantage, total 2 points]
9.Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager believes it is time to refine the method of cost allocation and has the accounting department identify the primary production activities which generate indirect costs and their cost drivers:
ActivitiesCost driverAllocation Rate
Materials handlingNumber of parts$2 per part
AssemblyLabor hours$20 per hour
InspectionTime at inspection station$3 per minute
What is the total indirect manufacturing cost per remote control assuming an activity-based-costing method is used and a batch of 50 remote controls is produced? The batch requires the assembly of 100 parts, the use of 6 direct manufacturing labor hours, and total inspection time of 2.5 minutes.
Materials handling: 100 parts x $2 per part = $200
Assembly 6 hours x $20 per hour = 120
Inspection 2.5 mins. x $3 per min. = 7.50
Total indirect costs $327.50 (+3 points)
Divided by 50 remotes $6.55 per remote (+3 points)
Process Costing
10.Assume that direct materials are added at the start of the process. If there was no beginning work-in-process inventory and no ending work-in-process inventory, under the weighted-average process costing method, the number of equivalent units for direct materials would be
- equal to the units started or transferred in.
- equal to the units completed.
- less than the units completed.
- both (a) and (b).
- none of the above.
- The president of the Gulf Coast Refining Corporation wants to know why his golfing partner, who is the chief financial officer of a large construction company, calculates his costs by the job when his own corporation calculates costs by average units rather than by individual barrel of oil.
Construction companies “manufacture” highly individualized “products” which have high value; therefore, it is necessary to track costs relating to each individual job. This requires a job-order system. Refining corporations, however, produce large quantities of like units of product from a barrel of oil. There is no need for differentiation of costs relating to the different batches produced. This calls for a processing costing system.
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 12 through 15.
Injection Molding, Inc., manufactures plastic moldings for car seats. Its 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 production. Conversion costs are allocated evenly throughout production.
Data for Department A for February 20x3 are:
Work in process, beginning inventory, 40% converted 1,000 units
Units started during February 7,000 units
Work in process, ending inventory, 30% converted500 units
Costs for Department A for February 20x3 are:
Work in process, beginning inventory:
Direct materials$100,000
Conversion costs$100,000
Direct materials costs added during February $1,000,000
Conversion costs added during February $1,250,000
12.How many units were completed and transferred out of Department A during February?
7500. (1000 beginning inventory + 7000 units started – 500 ending inventory)
13What is the unit cost per equivalent unit in Department A?
Determine EU for materials and conversion:
Materials / ConversionUnits completed / 7500 / 7500
Ending inventory, complete as to materials; 30% converted / 500 / 150
WA Equivalent Units / 8000 / 7650
Materials cost per EU ($1,100,000/8000 units)$137.50
Conversion cost per EU $1,350,000/7650 units)176.47
Total cost per EU$313.97
14.Provide the journal entry to transfer the units finished and transferred to Dept. B at the end of February.
WIP – Department B2,354,775
WIP – Department A2,354,775
15.What was the balance of WIP of Dept. A at the end of February?
500 EU as to materials at $137.50/EU$68,750.00
150 EU as to conversion at $176.47/EU 26,480.50
Balance of WIP Dept. A end of Feb.$95,220.50
Note that the total of costs transferred out and ending WIP are not quite equal to total costs to be accounted for of $2,450,000. The small difference is due to rounding of conversion cost per EU
16.Munir Hassan, controller, gathered data on overhead costs and direct labor-hours over the past 12 months. List and discuss the different approaches Munir can use to estimate a cost function for overhead costs using direct labor-hours as the cost driver. Include in your discussion an assessment of the reliability and applicability of each approach.
The four approaches to cost estimation are:
1. Industrial engineering method
2. Conference method
3. Account analysis method
4. Quantitative analysis of cost relationships and behavior
The industrial engineering method, also called the work-measurement method, estimates cost functions by analyzing the relationship between inputs and outputs in physical term.s This method is quite reliable when applied to measurement of easily traceable costs. It is applicable to cost estimation for new projects.
The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of an organization (purchasing, process engineering, manufacturing, employee relations, etc.). It is not a very reliable method since it incorporates judgmental opinions. It is applicable to cost estimation for new projects.
The account analysis methodestimates cost functions by classifying cost accounts in the ledger as variable, fixed, or mixed with respect to the identified cost driver. The reliability of this method is dependent on the experience and expertise of the estimate in relation to this cost. It can be highly effective, but is subject to individual judgment. It is applicable to estimation of continuing costs which have a historical record.
Quantitative analysis of cost relationships and behavior are formal methods, such as the high-low method or regression, to fit linear cost functions to past data observations. Although these methods are generally the most reliable, some are less reliable than others. The high-low method is quick and easy, but ignores all but two data observations. Graph methods rely on subjective estimation for the line of best fit. Least-squares regression is the most reliable method since it takes into account all historical data observations. It is applicable in any cost estimation where there are historical data observations.
Cost-Volume-Profit Analysis
17.The Tessmer Company has fixed costs of $400,000 and variable costs are 75% of the selling price. Its tax rate is 35%. If Tessmer plans to sell 500,000 units and wants to realize an after-tax profit of $130,000, what must the unit selling price be? (Give your answer in dollars and cents, please.)
Let X be unit selling price
500,000X – 0.75(500,000X) – 400,000 = 130,000/(1-.35)
125,000X = $200,000 + $400,000
X = $4.80
18.(CPA adapted) The strategy most likely to reduce the breakeven point would be to
a.increase both the fixed costs and the contribution margin.
b.decrease both the fixed costs and the contribution margin.
c.decrease the fixed costs and increase the contribution margin.
d.increase the fixed costs and decrease the contribution margin.
19.Why is the cost-volume-profit decision model described as “fragile?” Identify and describe two of the underlying assumptions that support your answer. (Please confine your answer to the space provided.)
The CVP model is fragile because its underlying assumptions are simplistic and not often actually realized.
Any two of the following items identified in Chapter 3 lecture notes. The comments in parentheses address the reason for the fragility in the assumption.
Volume of units produced and sold is the only driver affecting changes in revenue and costs. (Many activities have more than one driver.)
Total costs can be divided into fixed and variable components. (Some costs are mixed and regardless of the analytical method used to separate the fixed and variable components, such data are only estimates.)