Accounting 285 – Exam II – Spring 2007

Use the following information for the next four questions.

Michaela Manufacturing has the following information for 2007 for its only product. Assume that there is no beginning inventory. All questions relate to 2007.

Selling Price$31

Variable Manufacturing cost per unit$11

Variable Selling and Administrative cost per unit$3

Fixed Manufacturing cost per year$7,000,000

Fixed Selling and Administrative cost per year$4,000,000

Units Produced800,000

Units Sold740,000

1. What is the cost of one unit of inventory using full costing?

a.$11.00

b.$14.00

c.$19.75

d.$22.75

2.What is total ending inventory using variable costing?

a.$1,365,000

b.$660,000

c.$1,185,000

d.$840,000

3.What is income using variable costing?

a.$2,105,000

b.$1,400,000

c.$740,000

d.$1,580,000

4.How much higher or lower is full costing income than variable costing?

a.$525,000 higher

b.They are the same

c.$345,000 higher

d.$180,000 lower

Use the following information for the next two questions

Caplan Company has a Power Department that produces power that is used by the managers of the machining department and the Finishing Department. During June, the following cost information for the Power Department is available:

BudgetActual

Fixed$100,000$102,000

Variable (budgeted at $0.25/KWH)$ 20,000$ 17,160

Hours used 80,000 70,000

The Machining Department budgeted using 40,000 hours of power and the Finishing Department also budgeted 40,000 hours of use. Due to mechanical breakdowns, Machining only used 30,000 hours, while Finishing used 40,000 hours. Machining has a peak monthly demand of 90,000 hours and Finishing has a peak of 60,000 hours.

10.The Power Department is evaluated as a cost center. How would the cost control in the Power Department best be described for June?

  1. Performance was good as spending was $840 under budget.
  2. Given the actual activity level, costs were over budget by $2,000
  3. Performance cannot be assessed from the above information since the actual activity level was below budget.

d.Given the actual activity level, costs were over budget by $1,660

11. Caplanallocates costs to departments at budgeted rates using a dual allocation method. Fixed costs are allocated using peak demand and variable costs are allocated using actual usage. What amount of power cost should be assigned to Machining and Finishing?

MachiningFinishing

a. $67,500$50,000

b. $51,069$68,091

c.$60,000$60,000

d.$60,000$40,000

12.Which of the following is not a problem caused by assigning actual service department costs to operating departments based on actual usage of service department activities by the operating departments?

  1. The cost assigned to one manager will be affected by the service usage of another manager.
  2. Inefficiencies in the service department will be passed along to the operating departments.
  3. Operating managers having high peak capacity requirements will not have to bear the full cost of meeting this peak capacity.

d.All of the above are problems caused by actual allocation.

Use the following information for the next 3 questions

Ritz Company makes products; Street Bikes and Racing Bikes. Information for overhead costs and for the two products appears below. The company makes 100,000 Street Bikes each year and 20,000 Racing Bikes.

Activity / Driver / Total Overhead Cost / Street Bike Usage / Racing Bike Usage
Set up / # of setups / $200,000 / 500 setups / 1,500 setups
Ordering parts / # of parts / $300,000 / 60,000 parts / 40,000 parts
Machining / machine hours / $600,000 / 12,000 machine hrs / 6,000 machine hours
Inspection / # of inspections / $400,000 / 10,000 inspections / 40,000 inspections
Shipping / # of shipments / $300,000 / 10,000 shipments / 10,000 shipments
Total overhead / $1,800,000
  1. Assume that all overhead is assigned to products using machine hours. How much overhead would be assigned to each Racing Bike?
  1. $100.00 per unit
  2. $10.00 per unit
  3. $15.00 per unit
  4. $30.00 per unit
  1. Assume that Activity Based Costing is used, with each activity in its own cost pool. What is the rate per inspection that should be used to assign inspection cost to the two products?
  1. $40 per inspection
  2. $400,000 per inspection
  3. $36 per inspection
  4. $8 per inspection
  1. What is the total overhead cost per Street Bike if all overhead is assigned using ABC and each activity above is treated as a separate pool?
  1. $47.00 per unit
  2. $8.60 per unit
  3. $15.00 per unit

d.$18.00 per unit

16.Mike’s Candy and Ice Cream Company is trying to decide whether or not to continue making Hard Candy. The following information is available for the segments. Assume that all direct fixed costs could be avoided if Hard Candy is dropped and that the total common fixed costs would remain unchanged if Hard Candy is dropped.

Hard Candy / Ice Cream / Chocolate
Sales / $120,000 / $420,000 / $360,000
Variable Costs / $64,000 / $220,000 / $140,000
Contribution Margin / $56,000 / $200,000 / $220,000
Direct Fixed Costs / $43,000 / $70,000 / $90,000
Allocated Common Fixed costs / $20,000 / $70,000 / $60,000
Net Income / ($7,000) / $60,000 / $70,000

If Hard Candy is dropped, overall net income would:

  1. Decrease by $13,000
  2. Increase by $13,000
  3. Increase by $7,000
  4. Decrease by $7,000

Use the following information for the next two questions:

Bunny Dairy makes a variety of dairy products. During September, 200,000 gallons of raw milk was processed at a joint cost of $140,000. This produced 190,000 gallons of skim milk and 10,000 gallons of cream. The cream could be processed further into cheese and the skim milk could be processed further into yogurt. Information on these follows:

Sales Value at Split Off point / Estimated further processing cost / Sales Value after processing
Skim Milk / $160,000 / $40,000 / $195,000
Cream / $40,000 / $25,000 / $70,000

17.Assume that the joint cost is allocated to the products based on the physical quantity of output (gallons) of each product. How much joint cost should be assigned to each gallon of cream?

  1. $1.00
  2. $0.70
  3. $2.80
  4. $0.59

18.Assume that the joint cost is assigned using relative sales value at split-off and that Skim Milk is assigned $90,000 of joint cost and Cream is assigned $50,000 of joint cost. Which products should be processed further?

  1. Cream
  2. Skim Milk
  3. Both
  4. Neither

19.Ripken Manufacturing Corporation produces a single product, the Utility Knife.

Budgeted amounts for the coming year are as follows:

Revenues (20,000 units at $12 each)$240,000
Direct material40,000
Direct labor70,000
Variable manufacturing overhead50,000
Fixed manufacturing overhead30,000
Net income$ 50,000

Gladden Company has offered to purchase 1,500 units of a special edition of the utility knife from Ripken at a price of $11.50 per unit. This special edition will have additional variable costs of $0.25 per unit. Ripken has the capacity to produce this order and it will not affect any of their other operations.

What is the incremental profit (loss) associated with the special order?

a.($4,250)

b.$5,625

c.$4,875

d.$5,250

20.A company has $27 per unit in variable costs and $1,000,000 per year in fixed costs. Demand is estimated to be 100,000 units annually. What is the price if a markup of 40% on total cost is used to determine the price?

a.$27

b.$37.80

c.$37

d.$51.80

21. Your are the new product manager for Slim Foods Inc. A product is in development that you have spent $10,000,000 developing to date, and you estimate that you need only spend $1,000,000 to finish development. A competitor has just launched a product that will compete with your product and your estimate of sales for the product will be 40% less than you expected when you made the decision to develop the product. You are now assessing whether you should continue to develop the product. Which of the following would not be relevant to your decision to continue development?

a.The $10,000,000 that you have spent so far

b.The $1,000,000 that it will cost to finish development.

c.The revised estimate of sales

d.The variable cost of the product

22.A company believes it can sell 5,000,000 of its proposed new optical mouse at a price of $11.00 each. There will be $8,000,000 in fixed costs associated with the mouse. If the company desires to make a profit $2,000,000 on the mouse, what is the target variable cost per mouse?

a.$11.00

b.$10.60

c.$9.40

d.$9.00

23.A company is currently making a necessary component in house (the company is producing the component for its own use). The company has received an offer to buy the component from an outside supplier. A machine is being rented to make the component. If the company were to buy the component, the machine would no longer be rented and could be returned without penalty. The rent on the machine, in relation to the decision to make or buy the component, is:

  1. sunk and therefore not relevant.
  2. avoidable and therefore not relevant.
  3. avoidable and therefore relevant.
  4. unavoidable and therefore relevant.

24.Blink Corporation currently makes the screws that it uses for its furniture. It uses 20,000 screws annually. The costs to make the screws are given below:

Materials$0.04 per screw

Labor$0.03 per screw

Variable overhead$0.02 per screw

Fixed overhead$1,400 per year

A potential supplier has offered to sell Blink the screws for $0.12 each. If the screws are purchased, 20% of the fixed overhead could be avoided. If Blink accepts the offer, it will be:

  1. $600worse off
  2. $800 better off
  3. $2,500 better off
  4. $320 worse off

25.Which of the following are relevant in deciding whether to accept or reject a special order?

a.The impact the order will have on existing business.

b.The price that will be charged on the special order.

c.The incremental cost of filling the special order.

d.All of the above.

Version1
1 / C
2 / B
3 / D
4 / A
5 / D
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10 / D
11 / A
12 / D
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15 / B
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26 / A