PRACTICE TEST FOR FINAL EXAM
Question 1- -Chapter 16- Budgeting (18 Marks)
Part A
Discuss the following comment by the Manager of a small manufacturing
company:
“Budgeting is a waste of time. I’ve been running this business for fourty years. I
don’t need to plan”
Part B
ABC Manufacturing sells widgets for $6.00 each. The marketing department has
prepared the following second quarter sales forecast (in units) for 2009:
April
May
June
Total
15,000
23,000
20,000
58,000
Required: Prepare a sales budget for each month and the total for the quarter.
Include all column and row headings.
1
Question 2-Chapter 13-Introduction to Management Accounting (8 marks)
Presented below is a list of costs and expenses incurred in the factory by Eco
Systems Ltd, a manufacturer of eco-friendly, hybrid vehicles.
____ 1.
Property taxes on the factory land
____ 2.
Metal used in manufacturing
____ 3.
Cabinet maker's wages
____ 4.
Nails and glue used in production
____ 5.
Factory supervisors’ salaries
____ 6.
Depreciation on factory machines
____ 7.
Factory utilities
____ 8.
Carpeting for the vehicles
____ 9.
Property taxes on the factory building
____ 10.
Insurance on factory equipment
Required
Classify the above items into the following categories:
DM— Direct Materials
DL— Direct Labour
MO— Manufacturing Overhead
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Question 3 –Chapter 14-Cost Accounting Systems-Job costing (14 marks)
Wattle Ltd Manufactures make covers for outdoor spas. The company
specialises in 3 types of covers. They make 1/Weatherproof, 2/Plastic and
3/Hard top. They have estimated the following for 2009;

Expected Production
60,000 units

Expected Direct Labour Hours
30,000 hours

Expected Manufacturing Overhead
$120,000
Manufacturing overhead is allocated on the basis of direct labour hours. At the
end of 2009 the management of Wattle Ltd identified the following information.
Manufacturing Overhead was $180,000 and the Direct Labour hours for each spa
cover were are follows;
Direct Labour Hours

 Weatherproof Cover
 Plastic Cover
 Hardtop covers
15,000 hours
7,000 hours
5,000 hours
Required:
(a) What was the predetermined manufacturing overhead rate calculated at the
beginning of 2009 for Wattle Manufacturers?
(b) What was the actual manufacturing overhead rate for 2009?
(c) Outline the difference between the rates calculated in (a) and (b) above and
provide ONE reason for the difference.
(d) Determine the overhead to be allocated to the THREE products at the end of
2009.
3
Question 4 –Chapter 17-Capital Budgeting (16 marks)
Part A
‘Net Present Value (NPV) should not be used for analysing projects that have
strategic significance for the business, as this method cannot take strategic
factors into account.’
(i) Provide an example that has strategic significance for the business
(ii) Do you agree with the above statement?
Part B
Fresno Manufacturing Company specializes in the production of precision tools.
Management is in the process of selecting a new drill press. The press under
consideration will cost $92,000 plus necessary installation charges of $5,000.
Experience indicates that the press will last for five years and should have a
residual value at the end of that period of about $10,000. Expected annual cash
revenues from the press should average $45,000, and related cash operating
costs should be around $20,000. Management has decided on a minimum
desired before-tax rate of return of 10 percent.
Present value multipliers:
6 Percent 10 Percent
Present value of $1 at end of five years
.747
Present value of $1 received in each of the next4.212
five years
.621
3.791
12 Percent
.567
3.605
Required
a. Using before-tax information and the net present value method to evaluate this
capital investment, determine whether the company should purchase the drill
press. Support your answer.
b. If management has decided on a minimum desired before-tax rate of return of
12 percent, should the drill press be purchased? Show all computations to
support your answer.
4
Question 5-Chapter 17-Incremental Analysis (12 Marks)
Part A
Explain how the existence of spare production capacity can affect the choice of
whether to accept or reject a special order.
Part B
Northern Star Limited produces 10,000 units of Gadgets each year with
the following production costs.
Cost
Direct material
Direct labour
Variable manufacturing overhead costs
Electricity
Fixed manufacturing overhead costs
Factory space rental
Other manufacturing overhead
Amount ($)
2.00
0.50
0.20
20,000
30,000
Southern Star Limited, who is a reliable vendor of Northern Star Limited
has offered to supply the 10,000 units at a price of $4.
Required:
(i)
Assume that the capacity freed up from purchasing the 10,000 units
from Southern Star Limited is idle. Should Northern Star Limited
purchase the 10,000 units from Southern Star Limited?
(ii)
Assume that the capacity freed up from the purchase could be used
by the Northern Star to produce a different product, Badges. If
Northern Star was able to sell all the badges produced with the freed
up capacity for $60,000 at a cost of $45,000, would your answer
change from part (i) ?
5
Question 6-Chapter 15-Cost Volume Profit Analysis (16 Marks)
Part A
In a strategy meeting, the manufacturing director said, ‘if we raise the price of our
product, the company’s breakeven point will be lower. The finance director
responded by saying, ‘then we should raise the price. The company will be less
likely to incur a loss’. Do you agree with the manufacturing director? Give
reasons. Do you agree with the finance director? Explain your answer.
Part B
The Item Opener Company manufactures and sells three products, details of
which are as follows:
Unit selling price
Unit variable costs
Contribution margin
Ratio of sales
Can opener
$1.25
$0.75
$0.50
30%
Bottle opener
$2.00
$1.30
$0.70
40%
Corkscrew
$2.50
$1.75
$0.75
30%
Total annual fixed cost are $32,750
Required
a) Calculated break even point in units for each product
b) Calculate the sales required for each product if a desired after tax profit of
$6,000 is to be earned. Tax rate is $40%.
c) Prove your answer with an itemised income statement showing profit by
product and in total.
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Question 7-Chapter 14-Cost Accounting Systems-ABC (16 Marks)
Rolex Company manufactures two models of watches, the “Classic” and
“Modern”. The “Classic” model has been produced since 2005 and the “Modern”,
was introduced in early 2008. Rolex Company currently uses a traditional costing
system. Manufacturing overhead costs were estimated at 2,400,200 and were
allocated on the basis of machine hours.
The following cost information has been used as a basis for pricing decisions
over the past year.
Per-unit data
Direct materials
Direct labour hours
Machine hours
Units produced
Direct labour cost per hour
Machine usage cost per hour
Classic Modern
$105
$290
1.5
3.5
6
3
12,500
3,250
$12
$12
$16
$16
Rolex CEO, Harry Clarke, suggested that the company should concentrate its
marketing resources on the “Modern” and begin to phase out the “Classic”
model.Tony Martin, the new accountant,suggested that an activity based costing
analysis firrst be run to get a better picture of the true manufacturing cost.
The following data were collected:
Activity center
Cost driver
Soldering
Number of solder joints
Shipments
Number of shipments
Quality control
Number of inspections
Purchase orders
Number of orders
Machining
Machine hours
Machine set-ups
Number of set-ups
Total traceable costs
Activity
Soldering
Shipments
Quality control
Purchase orders
Machining
Machine setup
Number of Events
Classic
592,500
8,100
28,100
40,050
88,000
8,000
Traceable costs $
471,000
430,000
620,000
475,400
28,800
375,000
2,400,200
Modern
192,500
1,900
10,650
54,990
8,000
7,000
Total
785,000
10,000
38,750
95,040
96,000
15,000
Required:
(a) Calculate the manufacturing cost per unit for Classic and Modern under a
traditional costing system
(b) Calculate the manufacturing cost per unit for Classic and Modern under the
ABC system
(c) Explain the diffrences in manufacturing cost per unit calculated in part (a)
and part (b)
(d) How are non manufacturing costs treated under conventional costing
systems?Is this approach useful for management?
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Suggested solutions
Question 1
Part A
This comment is occasionally heard from people who have started and run their
own small business for a long period of time. These individuals have great
knowledge in their minds about running their business.They feel they do not need
to spend a great deal of time on the budget process, because they can
essentially run the business by gut feel. This approach can result in several
problems. First, if the person who is running the business is sick or absent, he or
she is not available to implement plans that could have been clarified by
a budget. Second, the purposes of budgeting are important to the effective
running of an organisation.Budgets facilitate communication and co-ordination,
are useful in resource allocation and help in evaluating performance and
providing incentives to employees. It is difficult to achieve these benefits without
a budgeting process.
Part B
ABC Manufacturing
Sales Budget
Quarter ending June 30, 2009
Estimated sales (units)
Sales price per unit
Total budgeted sales
April
15,000
$ 6.00
$90,000
May
23,000
$ 6.00
$138,000
June
20,000
$ 6.00
$120,000
Total
58,000
$ 6.00
$348,000
Question 2
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
MO
DM
DL
MO
MO
MO
MO
DM
MO
MO
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Question 3
(a) What was the predetermined manufacturing overhead rate calculated at the
beginning of 2009 for Capri Manufacturers.
Formula = Estimated O/H cost / estimated quantity of alloc bases
$120,000 / 30,000 hrs = $4 per hour (3 marks)
(b) What was the actual manufacturing overhead rate for 2009?
$180,000 / 27,000 hrs = $6.66 per hour (3 marks)
(c) Outline the difference between the rates calculated in (a) and (b) above and
provide ONE reason for the difference.
The rate difference is due to underestimation (2 marks)
Budget
O/H cost
Alloc Base
120,000
30,000
Actual
180,000
27,000
Diff
60,000
3000
(3marks)
(d) Determine the overhead to be allocated to the THREE products at the end of
2009.
Machine hours used on job x budgeted overhead rate (calculated in part
Weatherproof Cover = 15000 hrs x $6.66 = $99,900
Plastic Cover
= 7,000 hrs x $6.66 = $46,620
Hard Top Cover
= 5,000 hrs x $6.66 = $33,300
QUESTION 4
Part A
i) Any example for one of the following categories will be correct
–
–
–
–
–
–
–
–
1. Operational capital investment decisions
(eg factory buys a forklift)
2. Strategic capital investment decisions
(eg Hugo Boss new building offices in Richmond)
3.Investment decisions to comply with regulatory, safety, health and
environmental requirements
(eg equipment to minimise pollution
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ii)
NPV is still a valid method for evaluating projects of strategic significance.
However, attempts should be made to include seemingly ‘non-quantifiable’
factors into the analysis, or greater weight should be placed on strategic aspects
of the investment.
Note: You may give marks for any other logical explanations
a. Decision on purchase of drill press, using a 10 percent before-tax rate of return:
Purchase price of drill press
Installation costs
Desired before-tax rate of return
Cash flows from drill press
Useful life
Residual value
Present value of net cash inflow ($25,000  3.791)
Residual ($10,000  .621)
Total present value
Less purchase price of drill press ($92,000 + $5,000)
Positive (negative) net present value
$92,000
$5,000
10 percent
$25,000
5 years
$10,000
$ 94,775
6,210
$100,985
97,000
$ 3,985
The drill press will yield more than a 10 percent before-tax return, so an affirmative
decision should be made.
b. Decision on purchase of drill press, using a 12 percent before-tax rate of return:
Purchase price of drill press
Installation costs
Desired before-tax rate of return
$92,000
$5,000
12 percent
Cash flows from drill press
Useful life
Residual value
$25,000
5 years
$10,000
Present value of net cash inflow ($25,000  3.605)
Residual ($10,000  .567)
Total present value
Less purchase price of drill press
Positive (negative) net present value
$90,125
5,670
$95,795
97,000
($1,205)
The drill press should not be purchased because of the negative net present value.
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QUESTION 5
Part A
If a firm has spare production capacity, there is no opportunity cost to the
acceptance of a special order. On the other hand, if the firm is already
operating at capacity and there is no spare production capacity, the
opportunity cost associated with accepting a special order includes the
contribution margin foregone from the products that would have been
manufactured with the resources now devoted to the special order.
Answer-Part B
i) Total cost analysis
Make option ($)
Cost of purchase from Southern Star
Variable costs
Direct material
Direct Labour
Electricity
Buy option ($)
10,000x $4 = 40,000
2.00 x 10,000 = 20,000
0.50 x 10,000 = 5,000
0.20 x 10,000 = 2,000
Less: Fixed costs
Factory space rental
Other manufacturing overhead
20,000
30,000
77,000
20,000
30,000
90,000
It is cheaper to make internally. Northern Star Limited will save $13,000
($90,000-$77,000)
(6 Marks)
ii)
Make option ($)
Cost of purchase from Southern Star
Cost of making internally
Buy option ($)
90,000
77,000
Less:
Opportunity cost of producing badges
77,000
(60,000-45,000)=$15,000
75,000
Now it is cheaper to purchase from Southern Star. Northern Start can save
$2000 (77,000-75,000), if purchase from Southern Star.
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QUESTION 6
Part A
The manufacturing director is correct. A price increase results in a higher
unit contribution margin. An increase in the unit contribution margin causes
the break-even point to decline.
The financial director’s reasoning is flawed. Even though the break-even
point will be lower, the price increase will not necessarily reduce the
likelihood of a loss. Customers will probably be less likely to buy the product
at a higher price. Thus, the firm may be less likely to meet the lower breakeven point (at a high price) than the higher break-even point (at a low price).
Part B
Average CM=(30%0.5)+(40%x070)+(30%x0.75)=$0.655
BEP(units) = Fixed cost/Average contribution margin=32,750/0.655
=50,000 units
BEP (by product) = Can opener
Bottle opener
Corkscrew
50,000x0.3 =15,000
50,000x0.4 =20,000
50,000x0.3 =15,000
b) BEP Sales (Units) = Fixed cost + Target profit before tax
Weighted av.Contribution margin
=
32,750+10,000
0.655
= 65,267
SALES BY PRODUCT
Can opener
Bottle opener
Corkscrew
65,267x0.3 =19,580
65,267x0.4 =26,107
65,267x0.3 =19,580
c)
Can opener
($)
Sales
Less :Variable costs
Contribution margin
Less: Fixed cost
Profit before tax
Tax (@40%)
Net profit after tax
Ratio of sales
24,475
14,685
9,750
30%
PRODUCTS
Bottle
Corkscre
opener ($)
w
($)
52,214
48,950
33,939
34,265
18,275
14,685
40%
TOTAL
($)
125,639
82,889
42,750
32,750
10,000
4,000
6,000
30%
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Question 7-Answer
(a) Manufacturing cost per unit under traditional cost accounting
In the traditional cost accounting system, overhead is allocated to
products based on machine hours. The rate per hour is calculated as
follows:
Total estimated overhead
Estimated machine hours:
Classic (6.0 hours × 12500 units)
Regal (3.0 hours × 3250 units)
Total estimated machine hours
$2 400 200
75 000
9750
84 750
Estimated allocation rate per machine hour ($2 400 200/84750) =
$28.32
The total manufacturing cost per unit is the sum of per unit direct
material, direct labour, machine usage and allocated overhead as
follows:
Classic
Direct material
$105.00
Direct labour
1.5 DL hrs × $12
18.00
Machine usage 6 mach hrs × $16
96.00
Overhead 6 mach hrs × $28.32
169.92
Total
$388.92
Modern
$290.00
3.5 DL hrs × $12
42.00
3 mach hrs × $16
48.00
84.96
464.96
(b) Using the ABC system calculate the allocation rate for each of the ABC pools.
Soldering
Shipments
Quality control
Purchase orders
Machining
Machine set-ups
471,000
430,000
620,000
475,400
28,800
375,000
785,000
10,000
38,750
95,040
96,000
15,000
0.60
43.00
16.00
5.00
0.30
25.00
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Activity
Soldering
Shipments
Quality control
Purchase orders
Machining
Machine setup
Manuf O/H p/u
Direct Materials
Direct Labour
Machine Usage
Total Manufacturing
Cost p/u
(c)
592,500
8,100
28,100
40,050
88,000
8,000
0.60
43.00
16.00
5.00
0.30
25.00
(1.5*12)
(6*16)
Classic
$
355,500.00
348,300.00
449,600.00
200,250.00
26,400.00
200,000.00
192,500
1,900
10,650
54,990
8,000
7,000
Modern
$
115,500.00
81,700.00
170,400.00
274,950.00
2,400.00
175,000.00
0.60
43.00
16.00
5.00
0.30
25.00
1,580,050.00
819,950.00
Classic
126.40
105.00
18.00
96.00
Modern
252.29
290.00
42.00
48.00
(3.5 *12)
(3*16)
345.40
632.29
The conventional costing system allocates a lump sum of overhead based
only on machine hours, while the ABC system uses six cost pools to
allocate the overhead. Allocations using these cost pools and cost drivers
more accurately reflect the flow of resources.
(d) Over time, both upstream and downstream non-manufacturing costs have
grown and many of them, such as product design, development and advertising
costs, are related to particular products. Yet, conventional costing systems
usually expense all non-manufacturing costs in the period in which they are
incurred.
Ignoring these costs means that management has an incomplete picture of a
product’s costs. This may make it difficult for managers to decide which products
to produce and what prices to set.
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