COURSE:Accounting 505DATE:XXXXX
QUARTER:Summer 2007
TEST:Old Sample Exam Questions. (This exam is longer than yours will be, so don’t panic!)
NAME:______
Points Earned______
- All questions are to be answered in the spaces provided. 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. As on the quizzes, only partial credit will be given for a correct answer that is not supported by work shown. All scratch work must be done on the examination paper in the space provided.
- 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.
- Do NOT do unnecessary work. It wastes time. Answer ONLY the question asked. Do not take computations to unnecessary points beyond the information asked for. The test has been planned so that it can be completed well within the time allowed, assuming you have an understanding of the material and thoroughly prepared yourself.
- 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. Long answers to non-computational questions are NOT encouraged. Write complete but brief answers that are to the point. Do NOT tell me everything you know about a topic. If you find you are running out of room in the space provided, you are telling me too much!
- Point values for each question are indicated in parentheses alongside each question.
- There are X 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.
BUDGET YOUR TIME WISELY! GOOD LUCK!
Part 1. Budgeting
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.A budget should/can do all of the following EXCEPT
a.be prepared by managers from different functional areas working independently of each other.
b.be adjusted if new opportunities become available during the year.
c.help management allocate limited resources.
d.become the performance standard against which firms can compare the actual results.
3.Participation of line managers in the budgeting process helps to create
a.greater commitment.
b.greater anxiety.
c.better judgment.
d.better past performance.
4.Rolling budgets help management to
a.better review the past calendar year.
b.deal with a 5-year time frame.
c.focus on the upcoming budget period.
d.rigidly administer the budget.
5.The order to follow when preparing the operating budget is
a.revenues budget, production budget, and direct manufacturing labor costs budget.
b.costs of goods sold budget, production budget, and cash budget.
c.revenues budget, manufacturing overhead costs budget, and production budget.
d.cash expenditures budget, revenues budget, and production budget.
6DeArmond Corporation has budgeted sales of 18,000 units, target ending finished goods inventory of 3,000 units, and beginning finished goods inventory of 900 units. How many units should be produced next year?
a.21,900 units
b.20,100 units
c.15,900 units
d.18,000 units
7.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:
Month of sale30%
Month following the sale70%
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.
How much cash will be collected from customers in March?
a.$47,000
b.$43,000
c.$50,000
d.None of the above
8.What advantage does a flexible budget provide over a static budget?
Part 2. Variance Analysis
9.Explain the difference between static and flexible budget variances.
10.The following data for the telephone company pertain to the production of 450 rolls of telephone wire during June. Selected items are omitted because the costing records were lost during a wind storm.
Direct Materials. (Raw materials inventory increased by 730 pounds during the month)
Standard inputs per roll:__A__ pounds at $4 per pound.
Total actual pounds used:__B__
Total actual pounds purchased__C__ pounds at $4.10 per pound
Standard cost allowed for actual output$9,000
Materials purchase price variance:__D__
Materials efficiency variance:$80 unfavorable
Direct Manufacturing Labor
Standard inputs per roll:3 hours at $8 per hour
Actual cost per hour:$8.25
Total actual cost:__E__
Labor price variance:__F__
Labor efficiency variance:$400 unfavorable.
Compute the missing elements in the report represented by the lettered items.
A.
B.
C.
D.
E.
F.
11.Colfax Equipment Company develops clocks. The fixed overhead costs for the year are budgeted to be a total of $720,000, incurred uniformly each month. The company uses machine hours for fixed overhead allocation. It anticipates 240,000 machine hours during the year for total annual expected production of 480,000 clocks. Expected production is 40,000 units each month. During June, 42,000 clocks were produced and $64,000 was actually incurred for fixed overhead.
- Compute the fixed overhead application rate per machine hour to be used for the year.
- Determine the amount and nature (i.e. favorable or unfavorable) of the fixed overhead spending variance for June.
- Determine the amount and nature of the fixed overhead production volume variance for June.
12.Explain why a volume variance can arise for fixed overhead, but not for variable overhead.
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)
Proposal 1 Proposal 2
a.Total variable manufacturing overhead, Part A.__R_____I__
b.Total variable manufacturing overhead, Part B.______
c.Book value of old equipment for manufacturing Part B.______
d.Cost of new equipment for manufacturing Part B.______
e.Total variable selling and administrative costs.______
f.Disposal value of old equipment for manufacturing Part B.______
g.Sales revenue of the final product.______
h.Total variable costs of assembling final products.______
i.Total direct manufacturing materials, Part A.______
j.Total direct manufacturing materials, Part B.______
k.Total direct manufacturing labor, Part A.______
l.Total direct manufacturing labor, Part B.______
14.(CPA Adapted) BelleMichelle Products sells Product X at a selling price of $70 per unit. Its maximum manufacturing capacity is 60,000 units, but it is planning to operate at the 50,000 units level. The following cost per unit information is available:
Direct materials$10
Direct labor 15
Indirect manufacturing costs (2/3rd fixed) 24
$49
A one-time-only special order offering to buy 15,000 units was received from an overseas distributor. In negotiating a price for the special order, and assuming no additional capacity will be purchased, what is the minimum selling per unit BelleMichelle would be willing to accept for this special order? (Give your answer to the nearest whole dollar.)
15.All of the following are methods that aid management in analyzing the expected results of capital budgeting decisions EXCEPT
a.accrual accounting rate-of-return method.
b.discounted cash-flow method.
c.future-value cash-flow method.
d.payback method.
16.Net present value is calculated using
a.the internal rate of return.
b.the required rate of return.
c.the rate of return required by the investment bankers.
d.none of the above.
17.Which of the following statements concerning capital budgeting is true?
a.Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
b.A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.
c.The net present value method can be used in situations where the required rate of return varies over the life of the project.
d.Unlike the net present value method and the internal rate-of-return method, the payback method does not distinguish between the origins of the cash flows.
18.Investment A requires a net investment of $800,000. The required rate of return is 12% and the asset is expected to be used for a four-year period. If the net present value of the cash flows is zero, what are the expected annual cash inflows?
19.NetworkServiceCenter is considering purchasing a new computer network for $82,000. It will require additional working capital of $13,000. Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs, excluding depreciation, of $15,000. At the end of eight years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not considered.
Required:
a.If the company has a required rate of return of 14%, is this project acceptable based on NPV analysis? Support your answer with an appropriate computation.
b.What can you state about the internal rate of return based on your analysis in Part a?
20.Jensen Manufacturing is considering buying an automated machine that costs $250,000. It requires working capital of $25,000. Annual cash savings are anticipated to be $103,000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $10,000. The working capital will be recovered at the end of the machine's life.
Required:
- If Jensen requires an accrual accounting rate of return of at least 25% for all new projects of this type and risk level, is this project acceptable under this criterion?
- If Jensen requires a maximum payback period of 3 years, is this project acceptable?
- Comment on the advantages and disadvantages of using the accrual accounting rate of return and the payback methods for evaluating capital projects.
Part 4.Decentralization Issues
21.Identify two benefits of decentralization and two costs.
22.Division A of Trapper Company produces a part that it sells to other companies. Manufacturing, sales, and cost data for the part are as follows:
Manufacturing capacity in units / 60,000Selling price per unit / $40
Sales to external customers in units / 50,000
Variable costs per unit / $28
Fixed costs per unit / $9
Division B of Trapper Company uses this part in the manufacture of its own product. It is currently buying the 15,000 units of this part that it needs from an external supplier for $38 per unit, but it is interested in negotiating with Division A management to see if an intra-company transfer sale can be arranged. If Division A sells to Division B, $1.50 in variable costs per unit can be avoided. Managers of both divisions are evaluated based on their ability to generate a profitable return to their divisions and to the company as a whole.
(a)Determine the range of transfer prices within which a negotiated transfer could take place.
(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?
(c)Assuming that a transfer does take place, at what transfer price would Division A and Division B’s profits be equally benefited? [6]
23.The following selected information is available for Delta Company’s Southwest and Northwest regions for 2005:
Southwest Division / Northwest DivisionSales / $1,200,000 / $750,000
Operating income / $720,000 / $60,000
Average operating assets / $300,000 / $250,000
Target return on investment / 18% / 15%
Return on investment / 24% / 24%
(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.
(b)(There are two items in this question.) 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?
(ii) Which, if any, division would accept the opportunity if the decision were based on consideration of residual income (RI)? Why? [5]
Acctg 505 Final Examination, Sample1 of X