Tuesday 24/06/2010 / / College of commerce
55 marks
2 hours / Accounting department
Name: …………………………………………………… Id.:…………………………
Question 1 (15 marks):True or False.
# / StatementF / 1 / Joint costs are incurred beyond the splitoff point and are assignable to individual products.
F / 2 / The focus of joint costing is assigning costs to individual products as assembly occurs.
F / 3 / All products yielded from joint product processing have some positive value to the firm.
F / 4 / Net realizable value generally means expected sales value plus expected separable costs.
F / 5 / The only allowable method of joint cost allocation is specified by IASB.
F / 6 / Companies that produce high quality products do not have to pay attention to the actions of their competitors.
F / 7 / Relevant costs for pricing decisions include manufacturing costs, but not costs from other value-chain functions.
F / 8 / When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions.
F / 9 / In a one-time-only special order, existing fixed manufacturing costs are relevant.
F / 10 / Relevant costs of a bidding decision should exclude revenues lost on lower-priced sales to existing customers.
T / 11 / A flexible budget is calculated at the end of the budget period.
T / 12 / The essence of variance analysis is to capture a departure from what was expected.
T / 13 / An unfavorable variance may be due to poor planning rather than due to inefficiency.
F / 14 / The flexible-budget variance may be the result of inaccurate forecasting of units sold.
F / 15 / An unfavorable variance is conclusive evidence of poor performance
Question 2(10marks) : choose the best answer.
1 / When a joint production process yields two or more products with high total sales values, these products are called:A / Main products
# / B / joint products
C / Byproducts
D / Scrap
2 / Which of the following methods of allocating costs use market-based data?
A / Sales value at splitoff method
B / Estimated net realizable value method
C / The constant gross-margin percentage method
# / D / All of these answers are correct.
3 / Outputs with a negative sales value are:
A / added to cost of goods sold
# / B / added to joint production costs and allocated to joint or main products
C / added to joint production costs and allocated to byproducts and scrap
D / subtracted from product revenue
4 / The benefits-received criteria for allocating joint costs indicate market-based measures are preferred because:
A / physical measures such as volume are a clearer basis for allocating cost than other measures
B / Other measures are more difficult to calculate
# / C / revenues are usually the best indicator of the benefits received
D / None of these answers is correct
5 / Companies should ONLY produce and sell units as long as:
A / There is customer demand for the product
B / the competition allows it
# / C / the revenue from an additional unit exceeds the cost of producing it
D / There is a generous supply of low-cost direct materials
6 / Companies must ALWAYS examine their pricing:
A / based on the supply of the product
B / based on the cost of producing the product
# / C / through the eyes of their customers
D / through the eyes of their competitors
7 / Fluctuations in exchange rates between different currencies can influence the:
A / cost of products using foreign suppliers
B / pricing of alternative products offered by foreign competitors
C / demand for products of foreign competitors
# / D / All of these answers are correct.
8 / In a noncompetitive environment, the key factor affecting pricing decisions is the:
# / A / customer's willingness to pay
B / Price charged for alternative products
C / cost of producing and delivering the product
D / All of these answers are correct.
9 / The sales-volume variance is due to:
A / Using a different selling price from that budgeted
# / B / inaccurate forecasting of units sold
C / Poor production performance
D / Both A and B are correct.
10 / The variance that is BEST for measuring operating performance is the:
A / Static-budget variance
# / B / flexible-budget variance
C / Sales-volume variance
D / selling-price variance
Question 3(10 marks): answer the following:
1. Robb Industries, Inc. (RII), developed standard costs for direct material and direct labor. In 2015, RII estimated the following standard costs for one of their major products, the 10-gallon plastic container.
Budgeted quantity Budgeted price
Direct materials 0.10 pounds $30 per pound
Direct labor 0.05 hours $15 per hour
During June, RII produced and sold 5,000 containers using 490 pounds of direct materials at an average cost per pound of $32 and 250 direct manufacturing labor-hours at an average wage of $15.25 per hour.
a.June's direct material flexible-budget variance is:
(490 × $32) - (5,000 × 0.10 × $30) = $680 U
b.June's direct material price variance is:
490 × ($32 - $30) = $980 U
c.June's direct material efficiency variance is:
$30 × (490 - 500) = $300 F
d.June's direct manufacturing labor price variance is:
250 dlh × ($15.25 - $15.00) = $62.50 U
e.June's direct manufacturing labor efficiency variance is:
[250 dlh - (5,000 × 0.05)] × $15 = Zero
2. Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing
costs to be $120 per table, consisting of 60% variable costs and 40% fixed costs. The company
has surplus capacity available. It is Northwoods' policy to add a 50% markup to full costs.
- Northwoods is invited to bid on a one-time-only special order to supply 200 rustic tables. What is
the lowest price Northwoods should bid on this special order?
$120 × 60% × 200 tables = $14,400
b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the
rustic style. Northwoods is invited to submit a bid to the hotel chain. What per unit price will
Northwoods MOST likely bid on this long-term order?
$120 + ($120 × 50%) = $180
3. Rogers' Heaters is approached by Ms. Yukki, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. Rogers' Heaters has
excess capacity. The following per unit data apply for sales to regular customers:
Direct materials$200
Direct manufacturing labor60
Variable manufacturing support30
Fixed manufacturing support100
Total manufacturing costs390
Markup (30%)117
Estimated selling price$507
a.For Rogers' Heaters, what is the minimum acceptable price of this one-time-only special order?
$200 + $60 + $30 = $290
b.Before accepting this one-time-only special order, Rogers' Heaters should consider the impact on:
current plant capacity , long-term customers , competitors
c.If Ms. Yukki wanted a long-term commitment for supplying this product, what price would MOST likely be quoted to her?
The estimated selling price of $507.
Question 4 (5 marks)Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During the summer of 2015, the joint costs of processing the tomatoes were $420,000. There was no beginning or ending inventories for the summer. Production and sales value information for the summer is as follows:
Product / Cases / Separable Costs / Selling PriceCatsup / 100,000 / $3.00 per case / $28 per case
Juice / 150,000 / 5.00 per case / 25 per case
Canned / 200,000 / 2.50 per case / 10 per case
Required:
Determine the amount allocated to each product if the estimated net realizable value method is used, and compute the cost per case for each product.
Product / Expected Sales Value / Separable Costs / Net Realizable Value / PercentageCatsup / $2,800,000 / $300,000 / $2,500,000 / 35.71
Juice / 3,750,000 / 750,000 / 3,000,000 / 42.86
Canned / 2,000,000 / 500,000 / 1,500,000 / 21.43
Totals / $7,000,000 / 100.00
Product / Percentage / Joint Costs / Allocated / Separable Costs / Product Costs
Catsup / 35.71% × / $420,000 = / $149,982 + / $300,000 = / $449,982
Juice / 42.86% × / 420,000 = / 180,012 + / 750,000 = / 930,012
Canned / 21.43% × / 420,000 = / 90,006 + / 500,000 = / 590,006
Catsup cost per case= $449,982/100,000 = $4.50
Juice cost per case= $930,012/150,000 = $6.20
Canned cost per case= $590,006/200,000 = $2.95
Question 5 (5 marks): Casey Corporation produces a special line of basketball hoops. Casey Corporation produces the hoops in batches. To manufacture a batch of the basketball hoops, Casey Corporation must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of basketball hoops.
Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to January 2015.
Static-budgetActual
AmountsAmounts
Basketball hoops produced and sold30,00028,000
Batch size (number of units per batch)200250
Setup-hours per batch54
Variable overhead cost per setup hour$10$9
Total fixed setup overhead costs$22,500$21,000
Required:
a.Calculate the efficiency variance for variable setup overhead costs.
((28,000 / 250) × 4 × $10) - (28,000 / 200) × 5 × $10) = $2,520 (F)
b.Calculate the spending variance for variable setup overhead costs.
(28,000 / 250) × 4 × ($9 - $10) = $448 (F)
c.Calculate the flexible-budget variance for variable setup overhead costs.
$2,520 (F) + $448 (F) = $2,968 (F)
d.Calculate the spending variance for fixed setup overhead costs.
$22,500 - $21,000 = $1,500 (F)
e. Calculate the production-volume variance for fixed setup overhead costs.
Normal setup-hours = (30,000 / 200) × 5 = 750 hours
OH rate = $22,500 / 750 = $30 per setup-hour
$22,500 - ((28,000 / 200) × 5 × $30) = $1,500 (U
Question 6 (10 marks): answer the following:
- When a unit has to be reworked, the rework may be classified in three ways. What are those ways, and how does the accounting for each differ?
The rework may be (1) normal rework attributable to a specific job; (2) normal rework common to all jobs; or (3) abnormal rework. If the rework is attributable to a specific job, then the cost of such rework should be charged to that job. If the rework is common to all jobs, then the cost of the rework should be charged to manufacturing overhead and spread across all jobs. If the rework is abnormal rework then the cost of the rework should be charged as a loss to the period in which the rework is required.
- Harriet has been reviewing the accounting system for her company and she is very concerned about the accounting for spoilage. It appears that spoilage is accounted for only at the end of the processing cycle. While this concept is acceptable in general, Harriet believes that a better method can be found to properly account for the spoilage when it occurs. She believes that there must be something better than the weighted-average method of accounting for spoilage. She would like the company to use a method that provides closer tracking of the spoilage with the accounting for the spoilage.
The main problem Harriet has is that she does not understand the accounting system. The use of weighted-average or FIFO is not for addressing the problems of spoilage tracking. While the methods differ slightly in the tracking of costs, FIFO keeps beginning inventories separate, and the point of accounting for spoilage is not affected by the accounting method. If the company can account foR spoilage at different stages of completion, these stages can be converted into percentage of completion points, and the spoilage can be accounted for as the process completes each stage.
- BIG Manufacturing Products has been using FIFO process costing for tracking the costs of its manufacturing activities. However, in recent months, the system has become somewhat bogged down with details. It seems that, when the company purchased Brown Electronics last year, its product lines increased six-fold. This has caused both the accountants and the suppliers of the information, the line managers, great difficulty in keeping the costs of each product line separate. Likewise, the estimation of the completion of ending work-in-process inventories and the associated costs has become very cumbersome. The chief financial officer of the company is looking for ways to improve the reporting system of product costs.
What can you recommend to improve the situation?
A beginning point would be to change to a standard costing system. Standard costing eliminates many of the problems of FIFO costing in tracking actual costs to products. With standard costing, only the equivalent units have to be determined immediately, not the actual cost of the period. A standard cost for materials and conversion is then applied to the equivalent units for the reporting period. Actual costs and variances from standard costing can be determined later. This approach is very appropriate for a company that has many products.
- Universal Industries operates a division in Brazil, a country with very high inflation rates. Traditionally, the company has used the same costing techniques in all countries to facilitate reporting to corporate headquarters. However, the financial accounting reports from Brazil never seem to match the actual unit results of the division. Management has studied the problem and it appears that beginning inventories may be the cause of the unmatched information. The reason for this is that the inventories have a different financial base because of the severe inflation.
How can process costing assist in addressing the problem facing Universal Industries?
Probably the best way to address the problem of inflation is to use FIFO costing. This method keeps the cost of beginning inventories separate from production units started and completed in a given period. Therefore, the company may be able to track the cost of items that were actually produced in a given period, versus mixing the units and costs of multiple periods.
- Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?
No. Traditional systems contain smaller and fewer cost distortions when the traditional systems' unit-level assignments and the alternative activity-cost drivers are relatively similar in proportion to each other. Still, the use of unit-level measures to assign indirect costs is more likely to undercost low- volume products and more complex products. Both traditional product-costing systems and ABC product-costing systems seek to assign all manufacturing costs to products. Cost distortions occur when a mismatch (incorrect association) occurs between the way support costs are incurred and the basis for their assignment to individual products.
With best wishes
Mohammad Marwan Al Ashi
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