School of Accountancy
The University of Waterloo
AFM 481
Mid-Term Examination
February 29, 2008
16:30 – 18:30
Important Instructions
*********************************************************************
1.
This examination booklet contains 13 pages including this
title page. There are also 7 pages of Excel results not
numbered. Please ensure that the booklet is complete.
2.
You are permitted to consult the course text when
completing this examination. Under no circumstances are
you permitted to consult any other materials. You may use
a calculator, but not a laptop.
3.
If you have a question please ask the proctor. Under no
circumstance is it acceptable for you to communicate with
another student for any reason.
4.
When you leave the examination you should hand in the
booklet in which you have answered the examination
questions. Do not hand in the examination questions or
your work booklet.
5.
Suggested Time and Grade Distribution on this Examination
a.
b.
c.
d.
e.
Question 1 – 30 minutes 25 points
Question 2 – 16 minutes 13 points
Question 3 – 14 minutes 12 points
Question 4 – 20 minutes 15 points
Question 5 – 40 minutes 35 points
Advanced Management Accounting
Midterm
February 29, 2008
Question One (30 minutes) 25 marks:
Suntharam Corp. plans to manufacture a new product that is subject to labour costs. The
new product will have materials cost of $250 per unit. The standard direct labour rate is
$15 per direct labour-hour. Variable overhead is applied at a rate of $10 per direct labour
hour. The first unit required a total of 200 hours. The second unit required a total of 140
hours. The company believes that these two observations will be sufficient to determine
the appropriate learning curve using the cumulative average time method. From
experience, the production manager believes that improvements in production time will
be limited to the first 32 units. A standard for production time will be determined based
on the average hours per unit for units 17 - 32.
Required:
(a) Calculate the standard for direct labour-hours that Suntharam should establish for
each unit of new product.
(b) After 32 units have been produced, Suntharam has to submit a bid on an
additional 100 units. A competitor has submitted a bid of $2,500 per unit. Would
Suntharam be likely to win the contract (i.e., come in with a lower bid)?
(c) Assume that the company will build the first 16 units in 2008 and the next 16
units in 2009, and uses a deferred learning cost account. What would the journal
entries be for the two years?
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Advanced Management Accounting
Midterm
February 29, 2008
(a) Assuming that the learning curve rate exists up to a cumulative output of 32 units,
the average direct labor hours to produce these 32 units can be calculated as
follows:
The labor required to produce 32 units is 2,839.712 hours (32 x 88.741), while the
required to produce units 17 - 32 is 1,169.296 (2839.712 - 1,670.416) or 73.081
hours per unit. Suntharam Company should set its standard for direct labor hours
at 73.081 hours per unit.
15 marks (see attached Excel solution)
(b) Assuming the direct labor hours standard is 73.081 hours, the manufacturing costs
per unit are as follows:
5 marks
Since our per unit cost is $2,077.03, we would be able to match or beat the
competitor's bid.
(c) Journal Entries:
Total hours for 16 units @ 104.40 (average for first 16 units) = 1,679.42 minus 16
units @ 88.74 (average for 32 units) = 250.76 hrs deferred
250.76 x $25.00 = $6,264.10
5 marks
Year 1
Deferred Learning Account
Direct Labour & Variable
Overhead expense
6,264.10
6,264.10
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Advanced Management Accounting
Midterm
February 29, 2008
Year 2
Direct Labour & Overhead
Expense
6,264.10
Deferred Learning Account
6,264.10
Question Two (16 minutes) 13 marks:
Hicken Corp. makes new video games. To keep customers happy, they must continually
produce new and exciting games. Each year, it makes between 6 and 10 new games that it
produces in batches. At the end of each year, the company destroys the master copy of all
existing games, so that product designers always come up with new games. The costs of
designing the games are product-level costs. The cost of computer chips, plastic and other
component materials are unit-level costs. The costs of setting up the production run are
batch-level costs. All other costs are facility-level costs. The accounting records indicated
the following costs for last year:
Production was for 15,000 units, for 7 new products, produced in 60 batches. For the
coming year, costs are expected to increase as follows: the unit-level costs are expected
to increase by 8 percent; the batch-level costs by 12 percent; the product-level costs by 10
percent; and the facility-level costs by 5 percent.
Required:
(a)
What are the costs per unit, per batch, and per product for last year?
4
Advanced Management Accounting
(b)
(c)
(d)
Midterm
February 29, 2008
What is the estimated cost per unit, per batch, and per product for the coming
year?
What are the estimated facility-level costs for this coming year?
If Hicken expects to produce 20,000 units for 9 new products in 80 batches this
coming year, what are Hicken's estimated total costs for the year?
Answer:
(a)
i. Cost per unit = $48,000/15,000 units = $3.20 per unit. (2 marks)
ii. Cost per batch = $12,000/60 batches = $200 per batch (2 marks)
iii. Cost per product = $42,000/7 products = $6,000 per product (2 marks)
(b) Cost per unit = $3.20 x 1.08 = $3.456
i. Cost per batch = $200 x 1.12 = $224 (2 marks)
ii. Cost per product = $6,000 x 1.10 = $6,600 (2 marks)
(c) Facility costs = $30,000 x 1.05 = $31,500 (2 marks)
(d) Estimated costs = ($3.456 x 20,000) + ($224 x 80) + ($6,600 x 9) + $31,500
facility costs =$177,940 (3 marks) max of 13
Question Three (14 minutes) 12 marks:
Choi Toy Manufacturing has recently performed an activity-based costing analysis of one
of its best-selling toys, the Sherry doll. The analysis shows the following estimated
monthly cost per 4,000 unit production run:
Required:
(a) Choi's management has a target return of 20% of monthly revenues. What total
revenue amount would justify the continued production of Sherry dolls without
reducing costs or reducing the 20 percent return on sales?
(b) Assuming that Choi's management feels that the market will not accept any
increase in the selling price of the Sherry doll. What percentage reduction in total
costs would be required to achieve the target return?
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Advanced Management Accounting
Midterm
February 29, 2008
(c) Choi's customer-service manager is a member of the company's cross-functional
team analyzing the Sherry doll cost information. If costs must be reduced to make
Choi's profit goal feasible, does it make sense to recommend that all areas of the
company find ways to reduce costs by reducing all resources by a stated
percentage amount? Why or why not?
Answer:
a)
4 marks
b)
4 marks
c) The company should perform a value analysis of the current resources. It may be
difficult or impossible to achieve the stated percentage reduction in certain areas, such as
unit-level resources. The company should identify non-value added activities to try to
achieve the target cost reduction. A full answer should expand on these principles.
4 marks .
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Advanced Management Accounting
Midterm
February 29, 2008
Question Four (20 minutes) 15 marks:
Part 1
David Lin and Sarah Cheng opened an ice cream manufacturing firm to satisfy their
classmates’ cravings for sweet during their second year at Waterloo. After completing a
thorough market analysis and developing a business plan, their company began operating
last year and had the following results:
Account
Production
Direct Material Used
$50,000
Direct Labour
$60,000
Variable MOH
$40,000
Fixed MOH
$90,000
Variable Selling and Admin Costs
$10,000
Fixed Selling and Admin Costs
$110,000
Total Costs
$360,000
Three hundred thousand cartons of ice cream were made. Two hundred and fifty
thousand cartons were sold for $1.50 per gallon to regional grocery store chains. The
remaining 50,000 were completed by year end, and were stored for sale the following
year.
REQUIRED:
(a) Using Variable costing, determine the:
i. Cost of goods sold
ii. Ending inventory
iii. The contribution margin
iv. The amount of operating expenses
v. Operating Income
(b) Using Absorption costing, determine
i. Cost of goods sold
ii. Ending inventory
iii. Gross margin
iv. Operating expenses
v. Operating Income
ANSWER:
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Advanced Management Accounting
Midterm
February 29, 2008
For both methods, production costs are split between cost of goods sold and finished
goods inventory However, when absorption costing is used, all pridcution costs are
included, while variable costing uses only unit-level and variable production costs.
250,000/300,000 are sold, and 50,000/300,000 remain as FGI
For variable costing, COGS is ($50,000 + 60,000 + 40,000)/300,000 units x 250,000
units sold = $125,000
For absorption costing, COGS is ($50,000 + 60,000 + 90,000)/300,000 units x 250,000
units sold = $200,000
FGI for variable costing is $150,000 – 125,000 = $25,000
FGI for absorption costing is $240,000 – 200,000 = $40,000
Item
Cost of goods sold
Ending FGI
Profit Measure
Operating Expenses
Operating Income
Variable Costing
Absorption Costing
1 mark
$125,000
1 mark
$200,000
1 mark $25,000
1 mark $40,000
Contribution Margin
Gross Margin
1 mark
$250,000
1 mark
$175,000
1 mark
$210,000
1 mark
$120,000
1 mark
$40,000
1 mark
$55,000
Max of 10 marks
Part 2
Ottila Corp began operations in 2004. At the end of the first year of operations, OC had
8,000 units in ending inventory. OC uses absorption costing for financial reporting
purposes and variable costing for management performance appraisals. The fixed
overhead cost per unit in 2004 was $6. In 2005, JC produced 28,000 units and sold
34,500 units. Total fixed overhead costs in 2004 and 2005 were $400,000 each year.
REQUIRED:
What is the difference in net profit between the annual statements and the management
performance report in 2005?
ANSWER: (5 marks)
Reversal of 2004 deferral
Set up new deferral in 2005
Change in income
8,000 x $6.00
($400,000/28,000)X(1,500)
($48,000)
$21,429
$26,571
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Advanced Management Accounting
Midterm
February 29, 2008
Question Five (40 minutes 35 marks)
You may detach and complete the sheet (page 8) but ensure you
put your name and ID number on it, and place it firmly in your
answer booklet. PS keep the rest of the examination!
Outscriber, Inc, is analyzing cost data from its software foundry in Mumbai, India. The
VP Finance has requested that the foundry reduce its operating overhead costs, and
consequently, you have been assigned to determine the appropriate cost driver
relationships. The costs are provided in the attached materials, and the data has been
collected over a 24 month period. The company’s reporting period is January to
December.
You know that the principal costs of operation are facility costs, and that the winter is
mild, with no heating or cooling required. In the summer time, it is blistering hot, and
while the air conditioning is running constantly, it is still very difficult to work. As a
result, the programmers tend to take their vacations during the months of May, June, July
and August.
You have requested that your staff analyst run a linear regression using direct labour
hours as the independent variable, and operating costs as the dependent variable. The
analyst has provided you with the attached print-out from Excel, and now you must make
a presentation to the VP Finance either accepting or rejecting the analysis that has been
done, providing a detailed explanation for each piece of evidence that you are presenting.
You remember a midterm test from your costing course that would provide reminders, so
you pull it out and fill it out as appropriate.
REQUIRED:
a) Complete the regression analysis sheet, providing your reasons for acceptance or
rejection.
b) If you see opportunity for improvement of the regression cost analysis, you
should suggest the improvement(s) during your presentation. What suggestions
do you have for improvement, and what additional information would you
request?
c) The VP Finance is very much into risk management so you also will provide her
with your 95% confidence interval for the operating costs for June of next year,
assuming that the level of activity is identical to June in year 2 of the data.
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Advanced Management Accounting
Midterm
February 29, 2008
d) During the presentation, the VP makes a statement that “multicollinearity exists
when the correlation between the dependent variable and the independent variable
is greater than 0.15.” Do you agree with her? What reasons do you give for your
answer?
e) The VP finance believes that the t statistic for the regression coefficient is
incorrect. Prove to him by two methods that the t statistic is indeed correct.
f) What possible sources of error could make your estimates incorrect?
10
Advanced Management Accounting
Criterion
Midterm
February 29, 2008
Y = a + b1X1
(direct labour hours)
Economic Plausibility
Seems economically plausible, since the number of hours worked
should have an influence on the supervision, utilities, etc. 2 marks
Goodness of Fit
Reasonable goodness of fit, since the R2 is 0.637 or 64%
Se is 21,767, and we have nothing to compare it with, but this doesn’t
seem unreasonable
The “t” statistics for the a & b coefficients are well above 2 3 marks
Significance of
Independent
Variables
The significance of F indicates that there is a low probability that the b’s
could be zero
The t statistic shows that there is a very low probability that the b could
be zero.
Therefore the independent variable is significant 3 marks
Linearity
A plot of the overhead against the direct labour hours indicates a
potentially linear relationship.
However the residual plot indicates some patterning, which might
indicate a non-linear function would plot better 2 marks
Homoscedasticity
The residuals show some patterns, and consequently, there does not
appear to be a high level of homoscedasticity.
2 marks
Multi-collinearity
Multi-collinearity does not apply, since this is a simple linear regression
with a single independent variable 2 marks
Serial Correlation
The plot of the overhead costs with the month of observation indicates
that there may be a relationship due to time 2 marks
Optional (other
comments)
Could use the DW to check for serial correlation.
Could use more observation points.
Parsimony – good to have a simple regression
Perhaps should try an additional variable to bring up the R2
Could use a dummy variable to model the summer months
Change the aspect ratio of the graphs for better understanding
Total for page 16 marks
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Advanced Management Accounting
Midterm
February 29, 2008
(a) suggestions for improvement
i. see the above comments see items in Optional 5 marks
(b) Y’ = a +bX + /- t(24 – 2, 0.025)x Se
205720 + 6515 X 18 +/- 2.074 x 21,767
205,720 + 117,270 +/- 45,145
278,295  322,990  368,135
4 marks
(c) the VP is wrong on two counts:
i. Multi-collinearity refers to the relationship between to independent
variables
ii. The appropriate measure is a correlation coefficient of 0.3
2 marks
(d) Two methods
i. b/Sb = 6514.79213 /1049.26 = 6.2088
ii. square root of F = sq rt of 38.5502 = 6.2088
2 x 2 = 4 marks
(e) Potential Errors to worry about:
i. the proper matching of cost and activity data to the appropriate period
ii. ensuring that cost data are measured in constant prices
iii. ensuring that the technology has stayed constant
iv. ensure that the data are free of clerical errors
v. ensuring that the periods all are free of non-representative events
(outliers)
vi. we’re working within the relevant range.
5 marks
Total for page 20
marks
Max of 35
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Advanced Management Accounting
Midterm
February 29, 2008
The n column gives the number of degrees of freedom. t-values are in the body of the table (find the first t-value
smaller than your measured t-value); the probability can be read off at the top of the table. A probability of less
than 0.05 is normally considered significant.
n
.25
.20
.15
.10
.05
.025
.02
.01
.005
.0025
.001
.0005
1
1.000
1.376
1.963
3.078
6.314
12.71
15.89
31.82
63.66
127.3
318.3
636.6
2
.816
1.061
1.386
1.886
2.920
4.303
4.849
6.965
9.925
14.09
22.33
31.60
3
.765
.978
1.250
1.638
2.353
3.182
3.482
4.541
5.841
7.453
10.21
12.92
4
.741
.941
1.190
1.533
2.132
2.776
2.999
3.747
4.604
5.598
7.173
8.610
5
.727
.920
1.156
1.476
2.015
2.571
2.757
3.365
4.032
4.773
5.893
6.869
6
.718
.906
1.134
1.440
1.943
2.447
2.612
3.143
3.707
4.317
5.208
5.959
7
.711
.896
1.119
1.415
1.895
2.365
2.517
2.998
3.499
4.029
4.785
5.408
8
.706
.889
1.108
1.397
1.860
2.306
2.449
2.896
3.355
3.833
4.501
5.041
9
.703
.883
1.100
1.383
1.833
2.262
2.398
2.821
3.250
3.690
4.297
4.781
10
.700
.879
1.093
1.372
1.812
2.228
2.359
2.764
3.169
3.581
4.144
4.587
11
.697
.876
1.088
1.363
1.796
2.201
2.328
2.718
3.106
3.497
4.025
4.437
12
.695
.873
1.083
1.356
1.782
2.179
2.303
2.681
3.055
3.428
3.930
4.318
13
.694
.870
1.079
1.350
1.771
2.160
2.282
2.650
3.012
3.372
3.852
4.221
14
.692
.868
1.076
1.345
1.761
2.145
2.264
2.624
2.977
3.326
3.787
4.140
15
.691
.866
1.074
1.341
1.753
2.131
2.249
2.602
2.947
3.286
3.733
4.073
16
.690
.865
1.071
1.337
1.746
2.120
2.235
2.583
2.921
3.252
3.686
4.015
17
.689
.863
1.069
1.333
1.740
2.110
2.224
2.567
2.898
3.222
3.646
3.965
18
.688
.862
1.067
1.330
1.734
2.101
2.214
2.552
2.878
3.197
3.611
3.922
19
.688
.861
1.066
1.328
1.729
2.093
2.205
2.539
2.861
3.174
3.579
3.883
20
.687
.860
1.064
1.325
1.725
2.086
2.197
2.528
2.845
3.153
3.552
3.850
21
.663.
.859
1.063
1.323
1.721
2.080
2.189
2.518
2.831
3.135
3.527
3.819
22
.686
.858
1.061
1.321
1.717
2.074
2.183
2.508
2.819
3.119
3.505
3.792
23
.685
.858
1.060
1.319
1.714
2.069
2.177
2.500
2.807
3.104
3.485
3.768
24
.685
.857
1.059
1.318
1.711
2.064
2.172
2.492
2.797
3.091
3.467
3.745
25
.684
.856
1.058
1.316
1.708
2.060
2.167
2.485
2.787
3.078
3.450
3.725
26
.684
.856
1.058
1.315
1.706
2.056
2.162
2.479
2.779
3.067
3.435
3.707
27
.684
.855
1.057
1.314
1.703
2.052
2.15
2.473
2.771
3.057
3.421
3.690
28
.683
.855
1.056
1.313
1.701
2.048
2.154
2.467
2.763
3.047
3.408
3.674
29
.683
.854
1.055
1.311
1.699
2.045
2.150
2.462
2.756
3.038
3.396
3.659
30
.683
.854
1.055
1.310
1.697
2.042
2.147
2.457
2.750
3.030
3.385
3.646
40
.681
.851
1.050
1.303
1.684
2.021
2.123
2.423
2.704
2.971
3.307
3.551
50
.679
.849
1.047
1.295
1.676
2.009
2.109
2.403
2.678
2.937
3.261
3.496
60
.679
.848
1.045
1.296
1.671
2.000
2.099
2.390
2.660
2.915
3.232
3.460
80
.678
.846
1.043
1.292
1.664
1.990
2.088
2.374
2.639
2.887
3.195
3.416
100
.677
.845
1.042
1.290
1.660
1.984
2.081
2.364
2.626
2.871
3.174
3.390
1000
.675
.842
1.037
1.282
1.646
1.962
2.056
2.330
2.581
2.813
3.098
3.300
inf.
.674
.841
1.036
1.282
1.64
1.960
2.054
2.326
2.576
2.807
3.091
3.291
13