# Chapter 2

```Mid-Term Exam #2
Summary
Only Material Covered
After Exam #1
Chapters 6, 7, 8, 13, 14,
15, 17, &amp; 18
April 5th 7-9 PM - FA 015
April 7th 7-9 PM - BU 223
2
Exam Overview
15 multiple choice problems
(Comparable to last exam fewer multiple choice
problems – more computations in short answer)
MAKE SURE YOU WORK
EFFICIENTLY ON EXAM
3
Cost Volume Profit ( break even, contribution margin ratio,
before tax income, margin of safety, weighted average
contribution margin, operating leverage, decision making
uncertainty, etc.)
Cost Estimation – (High-Low Method, Regression Analysis Interpretation of outputs, Forecast using outputs, and
Confidence intervals (Model and Coefficient)
Budgeting Process (Cash Budget, Purchases Budget,
Inventory etc.)
Performance Measurement - ROI, Residual Income,
EVA [Formula &amp; Interpretation, underinvestment
problem, measurement of assets (i.e., net book
value, replacement costs, intangibles.)]
Use this simplified EVA Formula*
EVA
=
After Tax
Income
{
Weighted-Average
Cost of Capital
X(
Average
Assets
)}
* This differs from in class problems which used ending assets.
Don’t need to know how to calculate WACC – I will provide
Flexible Budgeting
Variances, Journal Entries, and explanations
of Variances
– Purchase Price and Materials Quantity (Usage) Var.
– Labor Rate and Efficiency Var.
– Selling Price Var.
– Sales Volume (Quantity + Mix) Var. (Cont. Margin)
– Sales Quantity (Market Size + Market Share) Var.
(Cont. Margin)
Units Transfer Pricing (Decisions on buy
internally vs. externally &amp; Tax Effects)
Variable and Absorption Costing
Uncertainty Example
Probability
0.5
0.4
0.3
0.2
0.1
Projected Sales
Revenue
1 2 3 4 5
Cash Inflow (\$000,000)
Alternative
Example
20% - 1,000,000
80% - 500,000
EV= 600,000
Expected value
= (0.1*\$300,000) + (.2*\$350,000) + (.4*\$400,000) +
(0.2*\$450,000) + (0.1*\$500,000) = \$400,000
Material Variances - (AQ*AP-SQ*SP)
Price Variance AQ*(AP-SP) (AQ is purchases)
Usage Variance SP*(AQ-SQ) (AQ is actual usage)
AQ Purchase normally not equal to AQ Usage
Formula Sheet
I will provide 3 Exhibits
(one page – Front and back)
Exhibit 14-7
Exhibit 15-9
Exhibit 15-11
You will only be able to use the version that I
pass out in class (don’t bring your own)
Practice Exam
Questions are meant to give you practice with
exam questions, but will not be the same
questions with the numbers changed
The coverage on the practice exam is not meant
to be comprehensive.
You need to go back through notes, in class
problems, and homework to be successful.
Review Sessions
Saturday April 3rd BU 109 (1-3PM)
Tuesday April 6th (Regular Scheduled Class)
Primarily a question and answer session – We will
primarily go over practice exam in the review
session so you need to complete prior to class.
12
– Carhartt Boots Variable M/O
– Carhartt Boots Fixed M/O
Chapter 15 Sales Variance
– Transpacific Airlines
– Varner Performing Arts Center
Chapter 17 Variable &amp; Absorption Costing (below)
– Fitzpatrick Inc.
Waldorf Company has two sources of funds: long-term
debt with a market and book value of \$10 million issued
at an interest rate of 12%, and equity capital that has a
market value of \$8 million (book value of \$4 million).
Waldorf Company has profit centers in the following
locations with the following operating incomes, total
assets, and current liabilities. The cost of equity capital
is 12%, while the tax rate is 25%.
St. Louis
Cedar Rapids
Wichita
Operating
Income
\$ 960,000
\$1,200,000
\$2,040,000
Assets
\$ 4,000,000
\$ 8,000,000
\$12,000,000
What is Waldorf’s &amp; EVA&reg; for the St. Louis
Division assuming a WACC of 10.33%?
EVA&reg; for St. Louis
(\$960,000 x (1 – .25)) – [0.1033 x
(\$4,000,000)]
= \$720,000 – \$413,200
= \$306,800
Assume Waldorf had intangible assets with a
beginning after tax value of \$600,000 and an
ending after tax value of \$1,000,000. What
impact would this have on the EVA&reg; calculation?
16
EVA&reg; for St. Louis
(\$960,000 x (1 – .25))+400,000 –
[0.1033 x (\$4,000,000+800,000)]
= \$1,120,000 – \$495,840
= 624,160
Fitzpatrick Inc.
Fitzpatrick Inc. planned and manufactured 500,000
units of its single product in 2007, its first year of
operations. Variable manufacturing costs were \$40 per
unit of production. Planned fixed manufacturing costs
were \$1,200,000. Marketing and administrative costs
(all fixed) were \$500,000 in 2007. Fitzpatrick sold
450,000 units of products in 2007 at \$50 per unit.
1. Determine Fitzpatrick Inc.’s operating income using full
costing.
2. Determine Fitzpatrick Inc.’s operating income using variable
costing.
3. Reconcile the difference between the operating incomes in
requirements 1 and 2.
Full Costing
Sales (450,000 x \$50)
CGS (\$42.40/unit; \$40/unit):
Beginning Inventory
Goods Manufactured
Goods Available for Sale
Less: Ending Inventory
COGS
Gross Margin
Contributin Margin
Less: Fixed Mfg Costs
Variable
Fixed
Net Operating Income
Variable Costing
\$22,500,000
0
\$21,200,000
\$21,200,000
\$2,120,000
\$22,500,000
0
\$20,000,000
\$20,000,000
\$2,000,000
\$19,080,000
\$3,420,000
\$18,000,000
\$4,500,000
\$1,200,000
\$0
\$500,000
\$500,000
\$2,920,000
\$0
\$500,000
\$500,000
\$2,800,000
Part 3
Reconciling Difference in Operating Income Between Full and Variable Costing
Change in Inventory Units = 500,000 - 450,000 =
50,000 increase