121_MT2_SP_2004_KEY

ACCOUANTACY 121 Midterm Exam #2 March 23, 2004 Name: ANSWER KEY

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Test Score: Part I _____/30 Part II ___/60 Part III _____/10 Test Total: ________/100 Part I: 30 points – two points each. Answer each question as indicated and put your answer on the Scantron. I would also recommend that you put your answer on the exam as well. Choose what you think is the best answer. If you think a question is unclear, put a comment on the exam under or next to the question. Read each question slowly and carefully. True is A, and False is B on the Scantron. Circle your answer on the exam if you want to record you answer there as well as on the Scantron.

READ EACH QUESTION CAREFULLY AS THE WORDING MAY BE VERY SPECIFIC. 1. Direct costs are allocated to the cost object using a cost-allocation method.

a. True

b. False – DIRECT COST ARE TRACED, NOT ALLOCATED. 2. Manufacturing overhead costs are allocated to individual job-cost records with the use of indirect-

cost rates.

a. True – FROM COST POOL THEN ALLOCATE THE COSTS TO THE COST OBJECTS

b. False

3. In a costing system

a. cost tracing allocates indirect costs.

b. cost allocation assigns direct costs.

c. a cost-allocation base can be either financial or non-financial. LIKE LABOR HOURS d. a cost object should be a product and not a service nor a geographic territory

e. none of the above

4. Job costing

a. can only be used in manufacturing.

b. records the flow of costs for each job. – SEE GLOSSARY c. allocates an equal amount of cost to each unit made during a time period.

d. is commonly used when each unit of output is identical.

e. none of the above

5. During an accounting period, a portion of the job costs are computed on an ongoing basis by the use of

a. actual allocation rates.

b. budgeted indirect-cost rates.

c. over-allocated indirect-cost rates.

d. under-allocated indirect-cost rates

e. either a. or b. BUDGET OR ACTUAL, BUT BUDGET IS MOST COMMON

ACCOUNTANCY 121 Midterm Exam #2 - KEY March 23, 2004

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6. The purpose of the equivalent-unit computation is

a. to convert completed units into the amount of partially completed output units that could be made with that quantity of input.

b. to assist the business in determining ending inventory.

c. to convert partially completed units into the amount of completed output units that could be made with that quantity of input.

d. both (b) and (c).

7. If there was no beginning work in process and no ending work in process under the weighted-average process costing method, the number of equivalent units for direct materials, if direct materials were added at the start of the process, would be

a. equal to the units started or transferred in.

b. equal to the units completed. UNITS IN EQUAL UNITS OUT c. less than the units completed.

d. both (a) and (b).

e. none of the statements are correct

8. The essential difference between the weight-average method of process costing and the FIFO method of process costing is the accounting for beginning work-in-process.

a. True SEE PAGES 593 AND 596 b. False

9. As with the break-even quantity, the operating leverage value is a constant as long as the price, variable costs and fixed costs do not change.

a. True

b. False – OPERATING LEVEAGE VARIES WITH Q 10. That fixed cost and variable costs can be separated and that prices do not change are the only

assumptions used in breakeven analysis.

a. True

b. False – ALSO ASUME THE COST FUNCTION IS LINEAR 11. The unit contribution margin multiplied by the quantity sold equal profit.

a. True

b. False – NEED TO DEDUCT FIXED COST TO GET PROFIT 12. The high-low method of cost estimation will be influenced by all the sample values, just like

regression analysis.

a. True

b. False – ONLY USE THE HIGH AND THE LOW VALUES


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13. At the split-off point we can identify the total costs allocated to the joint products at that point and the quantities of joint products.

a. True - SEE GLOSSARY b. False

14. To do the reciprocal method of cost allocation we need to:

a. Separate fixed and variable costs

b. Have n equations for n unknowns – THAT IS HOW WE SOLVE SIMULTANEOUS EQUATIONS – This is the best answer but gave credit for the others as well – check you exams to make sure I did this.

c. Use actual data only

d. Both a. and b. are true e. All are true

15. Cost estimation methods include:

a. Regression analysis

b. The conference method

c. Work measurement

d. Both a. and b.

e. Answers a. b. and c. – SEE TEXT Part II: Problems – 15 points each for total of 60 points. On the next four pages you will find the problems for this exam. You will need to do each of them. Show your work for all calculations. Put your answers in the space provided.


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Problem #1 – Job Costing – 15 points. Jana Manufacturing uses departmental cost driver rates to allocate manufacturing overhead costs to products. Manufacturing overhead costs are allocated on the basis of machine-hours in the Machining Department and on the basis of direct labor-hours in the Assembly Department. At the beginning of 2003, the following estimates were provided for the coming year: Machining Assembly Direct labor-hours 30,000 60,000 Machine-hours 80,000 20,000 Direct labor cost $500,000 $900,000 Manufacturing overhead costs $420,000 $240,000 The accounting records of the company show the following data for Job #316 which was completed Machining Assembly Direct labor-hours 120 70 Machine-hours 60 5 Direct material cost $300 $200 Direct labor cost $100 $400 For Jana Manufacturing, what is the annual budgeted manufacturing overhead cost-allocation rate for the Machining Department? $420,000/80,000mh = $5.25/mh What total amount of manufacturing overhead costs will be allocated to Job #316? $595 Need Assembly overhead rate: $240,000/60,000 = $4.00/dlh Overhead Cost = Overhead (60mh x $5.25 plus 70 dlh x$4.00) So $315 plus $280 = $595 What are the total manufacturing costs of Job #316? $1,595 Total Cost = DM ($300 + $200) and DL ($100 + $400) and Overhead (60mh x $5.25 plus 70 dlh x$4.00) So $500 plus $500 plus $315 plus $280 = $1,595 If the actual machine hours used for the year was 21,500 and the manufacturing overhead incurred was $260,000. Was the manufacturing over- or under-applied and by how much?


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Problem #2 – Process Costing – 15 points. The Hill Chair Company is a manufacturer of standard recliner chairs. During February, the firm's Assembly Department started production of 75,000 chairs. During the month, the firm completed 80,000 chairs, and transferred them to the Finishing Department. The firm ended the month with 10,000 chairs in ending inventory. There were 15,000 chairs in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The weighted-average method of process costing is used by the company. Beginning work in process was 30% complete as to conversion costs, while ending work in process was 80% complete as to conversion costs. Additional information is as follows: Beginning inventory: Direct materials $24,000 Conversion costs $35,000 Manufacturing costs added during the accounting period: Direct materials $168,000 Conversion costs $278,000 The key to this problem is balancing out the units: Direct Materials Conversion Costs Units in: Units Cost Units Cost WIP 15,000 $24,000 $35,000 Units started 75,000 $168,000 $278,000 Total in 90,000 $192,000 $313,000 Units out Completed 80,000 80,000 80,000 WIP 10,000 10,000 @ 100% 10,000 @ 80% 90,000 Equiv. Units 10,000 8,000 Total EU’s 90,000 90,000 88,000 Cost per Equiv. U\nit $2.13 $3.57 Required: o get this you need to reduce the 75,000 units started by the 10,000 units in ending WIP How many of the units that were started during February were completed during February? 65,000

What were the equivalent units for conversion costs during February? 88,000

What is the amount of direct materials cost assigned to ending work-in-process inventory at the end of February? 10,000 EU’s x $2.13 = $21,300 or $21,333 – rounding

What is the amount of conversion cost assigned to ending work-in-process inventory at the end of February? 8,000 EU’s x $3.57 = $28,560 or $28,455 - rounding

What is the cost of the goods transferred out during February? 80,000 x ($2.13 + $3.57) = $456,000


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Problem #3 – Breakeven Analysis

Gilley, Inc., sells a single product. The company's most recent income statement is given below. Sales (4,000 units) $120,000/4,000 units = Price = $30 Less variable expenses (68,000)/4,000 units = VC per unit = $17.00 Contribution margin 52,000 Less fixed expenses (40,000) Net income $ 12,000 Required: a. Contribution margin per unit is Price – VC =$30 - $17 $ _$13____ per unit b. If sales are doubled to $240,000, total variable costs will equal - it will just double as well $ 136,000 c. If sales are doubled to $240,000, total fixed costs will equal – stays the same $ 40,000 d. If 10 more units are sold, profits will increase by 10 x $13 $ 130 e. Compute how many units must be sold to break even. # ~3,077 QBE = FC/CM = 40,000 units/$13 per unit ≈ 3,077 f. Compute how many units must be sold to achieve profits of $20,000. # 4,616 There are a couple of ways to do this. Since we know breakeven quantity in e. above, just

divide the $20,000 by the contribution margin to get the additional quantity and add to the 3,077:

$20,000/$13 = ~ 1,539 so 4,616 or ($40,000 + $20,000)/$13 ≈ 4,616 units


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Problem #4 – Cost Allocation Gotham University offers only high-tech graduate-level programs. Gotham has two principal operating departments, Engineering and Computer Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $350,000, while the Enrollment Services budget is $950,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department.

Required: Prepare a schedule (use the table below), which allocates service department costs using the step-

down method with the sequence of allocation based on F&T Maintenance first then Enrollment Services next. Compute the total amount of support costs allocated to each of the two principal operating departments, Engineering and Computer Sciences.

You want to allocate F & T Maintenance first, then Enrollment Services.

F&T Maintenance Enrollment Service Engineering Computer Science

$350,000 $950,000

Base 5,000/8,000 = 62.5% 1,000/8,000 = 12.5% 2,000/8,000 = 25%

($350,000) $218,750 $43,750 $87,500

subtotal $950,000 + $218,750 = $1,168,750

Base 24,000/60,000 = 40% 36,000/60,000 = 60%

($1,168,750) $467,500 $701,250

Total Amount Of Support Costs Allocated $511,250 $788,750

Check: $511,250 plus $788,750 must equal ~ #350,000 plus $950,000 = $1,300,000

Services Provided: (Annually) Operating Departments Service Departments

Allocation Bases

Service Dept.

Budgets EngineeringComputer Sciences

F&T Maintenance

Enrollment Service

F&T Maintenance (in hours)

$350,000 1,000 2,000 Zero 5,000

Enrollment Service (in credit hrs)

$950,000

24,000 36,000 2,000 Zero

The 8,000 comes from 1,000 + 2,000 + 5,000


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Part III – Essay – 10 Points (7 content, 3 format) Freddie’s company has mostly fixed costs and Valerie’s company has mostly variable costs. Which company has the greater risk of a net loss? Explain why A graph may help. Freddie Freddie’s loss region is larger than Valerie’s (the difference between the revenue line and the total cost line) Valerie Freddie’s company has the greater risk of a net loss. The reason is that Freddie cost structure of mostly fixed costs so that when sales fall he will continue to have to cover his higher fixed costs. Valerie on the other hand has mostly variable costs. So, when sales fall her lower fixed cost will not have the larger effect on her income as is the case for Freddie. This is an example of the concept we learned in class regarding operating leverage: the effect of cost structure (fixed and variable cost mix) on profit. For example, lets say both Freddie and Valerie are at their respective breakeven points. OK. Now let say sales fall by 100 units. We can do the math but the concept is the same. Valerie’s cost structure allows her to not incur her variable costs. Freddie on the other hand is stuck with his fixed cost and his only savings is his smaller variable costs. So he is at a greater risk of a net loss.

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