SAMPLE QUESTIONS
QUESTIONS 1-2:
McMahon Company would like to institute an activity-based costing system to price products. The
company's Purchasing Department incurs costs of $550,000 per year and has six employees. Purchasing
has determined the three major activities that occur during the year.
Activity
Issuing purchase orders
Reviewing receiving reports
Making phone calls
Allocation
Measure
# of purchase orders
# of receiving reports
# of phone calls
# of
People
1
2
3
Total
Cost
$150,000
$175,000
$225,000
During the year, 50,000 phone calls were made in the department; 15,000 purchase orders were issued;
and 10,000 shipments were received. Product A required 200 phone calls, 150 receiving reports, and 50
purchase orders. Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders.
1.
Determine purchasing department cost per unit of product A, if 1,500 units of
Product A and 3,000 units of Product B were manufactured during the year.
2.
Determine purchasing department cost per unit of product B, if 1,500 units of
Product A and 3,000 units of Product B were manufactured during the year.
QUESTIONS 3-4:
Erin Sacks, CPA, J.D., provides accounting and tax services to her clients. In 2010, she charged $175 per
hour for accounting and $200 per hour for tax services. Erin estimates the following costs for the year
2011.
Office supplies, advertising and miscellaneous
Computer fees
Secretary's salary
Rent
$ 32,000
48,000
50,000
36,000
$166,000
Operating profits declined last year and Ms. Sacks has decided to use activity based costing (ABC)
procedures to evaluate her hourly fees. She has gathered the following information from last year's
records:
Activity Levels
Activity
Office Supplies
Computer fees
Secretary's salary
Rent
Cost Driver
Hours billed
Computer hour used
Number of clients
Types of services offered
Accounting
1,000
250
32
1
Tax Services
1,000
750
168
1
Required:
3. Erin wants her hourly fees for the Accounting services to be 150% of their activity-based costs.
What is the fee per hour for this service that Erin must charge?
4. Erin wants her hourly fees for the Tax services to be 200% of their activity-based costs. What is
the fee per hour for this service that Erin must charge?
5.
Executive Images Corporation produces two types of wooden bookends: plain and hand-carved.
The following information about the production process is available:
Number produced
Machine hours
Inspection hours
Revenues
Direct costs
Plain
120,000
95,000
7,000
$4,800,000
$3,800,000
Hand-Carved
75,000
25,000
35,000
$4,400,000
$3,100,000
Total factory overhead is $1,200,000. Of this overhead, $500,000 is related to utilities (cost driver =
machine hours) and the remainder is related to quality control (cost driver = inspection hours).
If the Corporation uses ABC allocation method, what is the profit per unit of “Plain” bookend? Per unit of
“Hand-Carved” bookend?
Q6: Value Pro produces and sells a single product. Information on its costs follow:
Variable costs:
SG&A
Production
$2 per unit
$4 per unit
Fixed costs:
SG&A
Production
$12,000 per year
$15,000 per year
In the upcoming year, Value Pro estimates that it will produce and sell 4,000 units. The variable costs per
unit and the total fixed costs are expected to be the same as in the current year. However, it anticipates a
sales price of $16 per unit. What is Value Pro's projected margin of safety (in dollars) for the coming
year?
Q 7. Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single product.
Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by management. The
company projects its income tax rate at 40 percent. What is the maximum amount that Meixner can
expend for variable costs per unit and still meet its profit objective if the sales price per unit is estimated
at $6?
SOLUTIONS
Q1-2. ANS:
$150,000/15,000 = $10 per purchase order
$175,000/10,000 = $17.50 per receiving report
$225,000/50,000 = $4.50 per phone call
Product A
50 purchase orders  $10
100 purchase orders  $10
150 receiving reports  $17.50
400 receiving reports  $17.50
200 phone calls  $4.50
350 phone calls  $4.50
Total cost
$
Product B
500
$1,000
2,625
7,000
900
1,575
$9,575
$4,025
Product A= $4,025/1,500 = $2.68 per unit
Product B= $9,575/3,000 = $3.19 per unit
Q 3-4
Answer:
Allocation rates:
Office supplies
Computer fees
Secretary
Rent
Total Cost Allocated
Total cost
Cost
Driver
32,000
2,000
48,000
1,000
50,000
200
36,000
2
b)
Total Cost
Hours Billed
Cost Per Hour
Markup
Billing Rate
Tax Services
$112,000
1,000
112
2
$224
Rate per unit
of cost driver
$16 per hour
$48 per hour
$250 per client
$18,000 per service
Accounting
$16,000
12,000
8,000
18,000
$54,000
Tax
Total
$16,000
36,000
42,000
18,000
$112,000
$32,000
48,000
50,000
36,000
$166,000
Accounting
$54,000
1,000
54
1.5
$ 81 Per Hour
Per hour
Q 5 .ANS:
Total FOH
Utilities
Quality Control
$
1,200,000
500,000
700,000
Plain
Units Produced
b)Overhead allocated by activity bases
Direct Costs
Overhead
Utilities (allocated by machine hours)
Quality costs (allocated by insp hours)
$
Hand-Carved
120,000
75,000
3,800,000
$ 3,100,000
395,833
116,667
104,167
583,333
Total Production Costs
$
4,312,500
$ 3,787,500
Revenues
less Production Costs
$
4,800,000
4,312,500
$ 4,400,000
3,787,500
Gross Profit
Gross Profit per Unit
$
487,500
$4.06
$
612,500
$8.17
Q 6: Value Pro produces and sells a single product. Information on its costs follow:
Variable costs:
SG&A
$2 per unit
Production
$4 per unit
Fixed costs:
SG&A
$12,000 per year
Production
$15,000 per year
In the upcoming year, Value Pro estimates that it will produce and sell 4,000 units. The variable
costs per unit and the total fixed costs are expected to be the same as in the current year.
However, it anticipates a sales price of $16 per unit. What is Value Pro's projected margin of
safety (in dollars) for the coming year?
Profit at 4,000 units
Gross Sales = $16 * 4,000 units = $64,000
Contribution Margin = $(16 - 6) = $10/unit
Breakeven
10*x - $27,000 = $0  x=2,700 units
Break Even Sales = 2,700*16=$43,200
$(64,000 - 43,200) = $20,800
Q 7. Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single
product. Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the maximum
amount that Meixner can expend for variable costs per unit and still meet its profit objective if
the sales price per unit is estimated at $6?
Before Tax Income: $75,000 / 0.60 = $125,000
Fixed Costs:
250,000
Contribution Margin:
$375,000
Projected Sales
less: Contribution Margin
Variable Costs
$375,000 / 125,000 units
$750,000
375,000
$375,000
$3/unit