School of Accountancy The University of Waterloo AFM 481 Final Examination Tuesday, April 10, 2007 12:30 – 15:00 PAC 9 Important Instructions ********************************************************************* 1. This examination booklet contains 5 pages including this title page. Please ensure that it is complete. 2. You are allowed to consult the course text when completing this examination. You may not consult any other materials for any reason. Only non-programmable, non-communicating calculators may be used. You may not listen to or use any communicating or receiving hardware such as a cellular telephone, a Blackberry, or an iPod. 3. If you have a question please ask one of the examination proctors. It is unacceptable 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 Suggested Point Time Allocation 37 Minutes 25 30 Minutes 20 37 Minutes 25 23 Minutes 15 23 Minutes 15 150 Minutes 100 1 April 10, 2007 AFM 481 Final Examination Question One (25 marks) Rogers Corporation has two production departments, Assembly and Finishing and three service departments, Personnel, Maintenance and Cafeteria. Data relevant to Rogers are: Dept Personnel Direct Cost Personnel $500,000 Maintenance 420,000 Cafeteria 200,000 Finishing 150,000 Assembly 380,000 Maintenance Cafeteria 0.10 0.16 0.16 0.20 Assembly Finishing 0.70 0.20 0.80 0.20 0.24 0.24 Assembly and Finishing work on two jobs during the month: Job 100 and 101. Costs are allocated to jobs based on machine hours in assembly and labor hours in Finishing. The machine and labor hours worked in each department are as follows: Assembly Finishing Job 100 Labor Hours Machine Hours 200 1,000 800 200 Job 101 Labor Hours Machine Hours 100 500 900 100 Required: (a) Assuming Rogers uses the sequential method of cost allocation, what sequence would you use to allocate the service department costs and why? (b) Determine the amount of service department costs to be allocated to Jobs 100 and 101. Rogers allocates service department costs to production departments using the direct-method of allocation. (c) Would reciprocal allocations provide a superior result in this case? Why or why not? Question Two (20 marks) Rivera Salad Dressing had 16,000 units (one unit equals one case) in beginning inventory, 30% complete with respect to both materials and to conversion costs. During November, 34,000 units were transferred out, 1,000 were spoiled and 9,000 remained in ending inventory. The spoiled units were 50% complete for conversion costs and 100% complete for materials. The ending work-in-process was 70% complete for conversion 2 April 10, 2007 AFM 481 Final Examination costs and 60% complete as to direct materials. Rivera accounts for spoiled units separately and does not spread their cost over good units produced. Assume that spoilage came proportionately from current and prior work. Required: Prepare a report showing the equivalent units for November, assuming the company separately identifies spoiled units and uses FIFO. Question Three (25 marks) Barry Corporation manufactures large kitchen appliances. The following represents financial information for the firm for two years: Sales 2004 $7,840,000 2005 $7,040,000 Costs: Direct Labour Direct Materials Process Inspection Scrap Quality Training Warranty repairs Testing equipment Resolving customer complaints Rework Sales Commissions Factory Overhead Preventive maintenance General Administrative Expenses Material Inspection Field Testing $1,200,000 2,000,000 52,800 57,600 610,000 140,000 230,000 89,000 544,000 100,000 450,000 440,000 200,000 210,000 300,000 $1,300,000 2,000,000 60,000 60,200 440,000 150,000 230,000 108,400 390,000 95,000 500,000 304,000 205,000 150,000 400,000 Total costs $6,623,400 $6,392,600 Required: (a) Identify and classify poor quality costs into costs of prevention (P), appraisal(A), internal failure(I) or external failure (E) activities. (b) Prepare a cost of quality report of 2005, showing comparative costs for 2004, with a particular emphasis on providing useful information to senior management.. (c) Based upon the report you have prepared, comment on the company’s strategic plan for quality control over the two year period. 3 April 10, 2007 AFM 481 Final Examination Question Four (15 marks) A rather large candy company is attempting to determine the profitability of each of their customers. They are applying activity based costing methods to their overhead costs for marketing administrative, collection and customer service cost. Determine the amount of overhead allocated to the customers below using activity based costing to allocate the overhead. The Overhead costs and related cost drivers are as follows: Cost Pool Delivery Costs Expected Annual Cost $500,000 Telephone Ordering Costs $100,000 Catalogue Costs $300,000 General & Administrative $800,000 Marketing Management Promotions $700,000 $600,000 Advertising $400,000 Nbr of miles driven Nbr of minutes spent With customer Nbr of Catalogues Distributed Cost of Goods Sold Sales Dollars Nbr of samples distributed Nbr of coupons Redeemed Cost Driver Nbr of miles driven Nbr of minutes spent with customer Expected Level of Cost Driver 1,000,000 miles 1,000,000 minutes 75,000 Catalogues Customer X 100 750 Nbr of Catalogues Distributed Cost of Goods Sold Sales Dollars Nbr of samples distributed Nbr of coupons Redeemed Customer Y 200 800 100 750 400 $500,000 $1,500,000 100 $50,000 $150,000 200 $300,000 $900,000 150 5 150 3 $8,000,000 $21,000,000 50,000 samples 2,000 coupons Customer Z 75 300 4 April 10, 2007 AFM 481 Sales and Cost of Goods Sold are: Customer X Final Examination Customer Y Customer Z Sales Dollars $1,500,000 $150,000 $900,000 Cost of Goods Sold $ 500,000 $ 50,000 $300,000 Required: 1) Compute the amount of overhead allocated to Customers X, Y, and Z 2) Compute the profitability of Customers X, Y, and Z ( Show your work.) Question Five (15 marks) LinLee CO. produces a product that uses three different materials. The standards are Direct Material A B C Yield Standard Mix Standard Price Standard Cost 1,000 600 400 $3.00 $6.00 $4.50 $3,000 3,600 1,800 $8,400 9,000 units During January, the following actual production information was available: Direct Material A B C Actual Mix 12,000 3,000 5,000 Actual Price $3.10 $5.90 $4.70 Yield 63,000 units Required: (a) Calculate the material quantity, mix and yield variances. (b) Based on the actual mix numbers and standard prices, above, what does it seem as if the company was trying to do and did it succeed? (c) What is the material price variance? Answer: (a) Mix variance 5 April 10, 2007 AFM 481 Material AM SM A B C 12,000 3,000 5,000 10,000 6,000 4,000 Mix variance Final Examination AM-SM 2,000 (3,000 ) 1,000 SP $3.00 $6.00 $4.50 SP(AM-SM) $ 6,000 ($18,000 ) $ 4,500 ($ 7,500) favorable Yield variance (90,000-63,000)($8,400/9,000) = $25,200 unfavorable Quantity variance: ($7,500)+$25,200 = $17,700 unfavorable (b) The actual numbers show a shift away from material B, the most expensive materials, to A and C. It led to a favorable mix variance but at the expense of the yield as well as the overall quantity variance. As a result, the strategy has failed. (c) Material Price Variance (SP-AP)*AQ ($3-3.10)*12000 ($6-5.90)*3,000 ($4.50-4.70)*5000 Total Price Variance Result $1,200 U $300 F $1000 U $1,900 U 6