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ACCT 505 Final Exam 2

1. (TCO F) Wahr Corporation bases its predetermined overhead rate on the estimated labor hours for the upcoming year. At the beginning of the most recently completed year, the company estimated the labor hours for the upcoming year at 32,000. The estimated variable manufacturing overhead was $7.17 per labor hour and the estimated total fixed manufacturing overhead was $584,320. The actual labor hours for the year turned out to be 33,300.

Required:

Compute the company’s predetermined overhead rate for the recently completed year. (Points : 25)

2. (TCO C) Enciso Corporation is preparing its cash budget for November. The budgeted beginning cash balance is $31,000. Budgeted cash receipts total $135,000 and budgeted cash disbursements total $141,000. The desired ending cash balance is $50,000. The company can borrow up to $100,000 at any time from a local bank, with interest not due until the following month.

Required:

1. (TCO C) The following overhead data are for a department of a large company.

Actual costs Static
Incurred budget

Activity level (in units) 360 340

Variable costs:
Indirect materials                     $4,182                           $4,148
Electricity                               $2,536                           $2,414
Fixed costs:
Administration                          $6,540                           $6,500
Rent                                        $6,310                           $6,400

Required: Construct a flexible budget performance report that would be useful in assessing how well costs were controlled in this department.

(Points : 30)

2. (TCO D) Mr. Earl Pearl, accountant for Margie Knall, Inc. has prepared the following product-line income data:

PRODUCT

Total A B C

Sales…………………………………………$ 100,000……..$50,000………$20,000………..$30,000

Variable expenses………………………… 60,000……….30,000…………10,000………….20,000

Contribution margin……………………….. .40,000……….20,000…………10,000………….10,000

Fixed expenses:

Rent…………………………………………. .5,000………..2,500…………..1,000……………1,500

Depreciation………………………………. 6,000………..3,000…………..1,200…………….1,800

Utilities………………………………………4,000………..2,000……………..500…………….1,500

Supervisors’ salaries………………….. 5,000………. 1,500……………..500…………….3,000

Maintenance………………………………3,000………..1,500………………600………………900

Administrative expenses……………. 10,000………..3,000……………..2,000…………..5,000

Total fixed expenses…………………… 33,000……….13,500……………5,800………….13,700

Net operating income…………………… $7,000……….$6,500………….$4,200…………($3,700)

The additional information below is available.

· The factory rent of $1,500 assigned to Product C is avoidable if the product is dropped.

· The company’s total depreciation would not be affected by dropping C.

· Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.

· All supervisors’ salaries are avoidable.

· If Product C is discontinued, the maintenance department will be able to reduce monthly expenses from $3,000 to $2,000.

· Elimination of Product C will make it possible to cut two persons from the administrative staff. Currently, their combined salaries total $2,000.

Required: Prepare an analysis showing whether Product C should be eliminated. Articulate your findings.

(Points : 30)

3. (TCO E) The following absorption costing income statement and additional data are available from the accounting records of Bernon Co. for the month ended May 31, 2007. During the accounting period, 17,000 units were manufactured and sold at a price of $60 per unit. There were no beginning inventories.

Bernon Co. Absorption Costing Income Statement for the Month Ended May 31, 2007
Sales (17,000 @ $60)	$1,020,000
Cost of goods sold	612,000
Gross profit	$ 408,000
Selling and administrative expenses	66,000
Income from operations	$ 342,000

Additional Information:

Cost	Total Cost	Number of Units	Unit Cost
Manufacturing costs:
Variable	$442,000	17,000	$26
Fixed	170,000	17,000	10
Total	$612,000		$36

Selling and administrative expenses:
Variable ($2 per unit sold)			$34,000
Fixed			32,000
Total			$66,000

Required: Prepare a new income statement for the year using variable costing. Comment on the differences, if any, between the absorption costing and the variable costing income statements.

(Points : 30)

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4. (TCO A) The following data (in thousands of dollars) have been taken from the accounting records of Karmana Corporation for the just-completed year.
Sales ………………………………………………………$950
Raw materials inventory, beginning …………………$10
Raw materials inventory, ending …………………….$30
Purchases of raw materials ………………………….$120
Direct labor ………………………………………………$180
Manufacturing overhead ……………………………..$230
Administrative expenses ……………………………..$100
Selling expenses ………………………………………..$140
Work-in-process inventory, beginning ………………$70
Work-in-process inventory, ending ………………….$40
Finished goods inventory, beginning ………………$100
Finished goods inventory, ending ……………………$80Use these data to prepare (in thousands of dollars) a schedule of Cost of Goods Manufactured and a Schedule of Cost of Goods Sold for the year. In addition, elaborate on the relationship between these schedules as they relate to the flow of product costs in a manufacturing company. (Points : 25)

1. (TCO F) Maverick Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below.

Work in process, beginning:

Units in beginning work-in-process inventory 400

Materials costs $6,900

Conversion costs $2,500

Percent complete for materials 80%

Percent complete for conversion 15%

Units started into production during the month 6,000

Units transferred to the next department during the month 5,600

Materials costs added during the month $112,500

Conversion costs added during the month $210,300

Ending work in process:

Units in ending work-in-process inventory 800

Percentage complete for materials 70%

Percentage complete for conversion 30%

Required: Calculate the equivalent units for materials for the month in the first processing department.

(Points : 25)

2. (TCO B) Heckaman Corporation produces and sells a single product. Data concerning that product appear below.

Selling price per unit	$230.00
Variable expense per unit	$112.70
Fixed expense per month	$239,292

Required:

Determine the monthly break-even in unit sales. Show your work! (Points : 25)

3. (TCO G) – (Ignore income taxes in this problem.) Axillar Beauty Products Corporation is considering the production of a new conditioning shampoo that will require the purchase of new mixing machinery. The machinery will cost $375,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $50,000 at the end of 10 years. The machinery will also need a $35,000 overhaul at the end of Year 6. A $40,000 increase in working capital will be needed for this investment project. The working capital will be released at the end of the 10 years. The new shampoo is expected to generate net cash inflows of $85,000 per year for each of the 10 years. Axillar’s discount rate is 16%.

Required:

a. What is the net present value of this investment opportunity?

b. Based on your answer to (a) above, should Axillar go ahead with the new conditioning shampoo?

(Points : 35)

(TCO G) (Ignore income taxes in this problem.) Five years ago, the City of Paranoya spent $30,000 to purchase a computerized radar system called W.A.S.T.E. (Watching Aliens Sent To Earth). Recently, a sales rep from W.A.S.T.E. Radar Company told the city manager about a new and improved radar system that can be purchased for $50,000. The rep also told the manager that the company would give the city $10,000 in trade on the old system. The new system will last 10 years. The old system will also last that long but only if a $4,000 upgrade is done in 5 years. The manager assembled the following information to use in the decision regarding which system is more desirable:

	Old System	New System
Cost of radar system…………………..	$30,000	$50,000
Current salvage value………………….	$10,000	–
Salvage value in 10 years……………..	$5,000	$8,000
Annual operating costs………………..	$34,000	$29,000
Upgrade required in 5 years…………	$4,000	–
Discount rate……………………………..	14%	14%

Required:

What is the City of Paranoya’s net present value for the decision described above? Use the total cost approach.
Should the City of Paranoya purchase the new system or keep the old system?

(TCO G) (Ignore income taxes in this problem.) Five years ago, the City of Paranoya spent $30,000 to purchase a computerized radar system called W.A.S.T.E. (Watching Aliens Sent To Earth). Recently, a sales rep from W.A.S.T.E. Radar Company told the city manager about a new and improved radar system that can be purchased for $50,000. The rep also told the manager that the company would give the city $10,000 in trade on the old system. The new system will last 10 years. The old system will also last that long but only if a $4,000 upgrade is done in 5 years. The manager assembled the following information to use in the decision regarding which system is more desirable:

	Old System	New System
Cost of radar system…………………..	$30,000	$50,000
Current salvage value………………….	$10,000	–
Salvage value in 10 years……………..	$5,000	$8,000
Annual operating costs………………..	$34,000	$29,000
Upgrade required in 5 years…………	$4,000	–
Discount rate……………………………..	14%	14%

Required:

What is the City of Paranoya’s net present value for the decision described above? Use the total cost approach.
Should the City of Paranoya purchase the new system or keep the old system?

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ACCT 505 Final Exam 2

ACCT 505 Final Exam 2

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