BUSI 2083: Introduction to Managerial Accounting unit excercises

BUSI 2083: Introduction to Managerial Accounting

unit excercises

Table of Contents

Unit Exercise Questions. 2

Unit 1. 2

Unit 2. 4

Unit 3. 6

Unit 4. 9

Unit 5. 11

Unit 6. 13

Unit 7. 15

Unit 8. 17

Unit 9. 20

Unit 10. 23

Unit Exercise Questions

Unit 1

Question 1                                                                                                           (Total: 18 marks)

The following information was taken from the accounting records of Dunbar Mifflin Company in 2018.

Beginning of 2018            Ending of 2018

Direct materials inventory                                         135,000                 83,000

Work-in-process inventory                                       185,000                 154,000

Finished-goods inventory                                         255,000                 216,000

Purchases of direct materials                                                                                   270,000

Direct manufacturing labor                                                                                       225,000

Indirect manufacturing labor                                                                                   103,000

Plant insurance                                                                                                              11,000

Depreciation-plant, building, and equipment                                                   48,000

Plant utilities                                                                                                                   29,500

Repairs and maintenance-plant                                                                              13,500

Equipment leasing costs                                                                                            66,800

Marketing, distribution, and customer-service costs                                     129,500

General and administrative costs                                                                           72,500

Required:

1. Prepare a schedule of cost of goods manufactured.

Question 2                                                                                                           (Total: 38 marks)

Following are the account balances for the DC Company in 2018:

Beginning of 2018            Ending of 2018

Direct materials inventory                         26,500                                   27,000

Work-in-process inventory                       30,500                                   28,400

Finished-goods inventory                         16,500                                   22,100

Purchases of direct materials                                                                   79,000

Direct manufacturing labor                                                                       24,500

Indirect manufacturing labor                                                                   18,600

Plant insurance                                                                                              7,900

Depreciation-plant, building, and equipment                                   11,800

Repairs and maintenance-plant                                                              3,500

Marketing, distribution, and customer-service costs                     87,900

General and administrative costs                                                           26,500

Required:

1. Prepare a schedule for the cost of goods manufactured for 2018.
2. Revenues for 2018 was $425,000. Prepare the income statement for 2018.

Question 3                                                                                                           (Total: 30 marks)

Identify if the following costs are “product” or “period” costs:

Question 4                                                                                                           (Total: 14 marks)

The Trump International Hotel & Tower is a five-star hotel located in downtown Toronto. The hotel’s operations vice president would like to replace the hotel’s legacy computer terminals at the registration desk with attractive state-of-the-art flat-panel displays. The new displays would take less space, consume less power than the old computer terminals, and provide additional security, since they can be viewed only from a restrictive angle. The new computer displays would not require any new wiring. However, the hotel’s chef believes the funds would be better spent on a new bulk freezer for the kitchen.

Required:

1. Classify each item as a differential cost, an opportunity cost, or a sunk cost in the decision to replace the old computer terminals with new flat-panel displays. If none of the categories apply for a particular item, select “None”.

Unit 2

Question 1                                                                                                           (Total: 36 marks)

The following costs are attributed to the Gandalf and Company:

Gandalf and Company used a 120% predetermined overhead rate based on direct labour cost.

Required:

1. Calculate the cost of goods manufactured.
2. What was the cost of goods sold before adjusting for any under or over applied overhead?
3. By how much was manufacturing overhead cost under or over applied?
4. Prepare a summary journal entry to close any under or over applied manufacturing overhead cost to cost of goods sold. Is such an entry appropriate in this situation? Why or why not?

Question 2                                                                                                           (Total: 20 marks)

The weighted-average method is used by the Cardiff and Company. Below you will find information provided by the Heating department for the month of March:

Required:

Cardiff and Company using the weighted-average method, all materials at the first process:

1. The equivalent units (EUs) of production for materials.
2. The cost per equivalent unit for conversion.
3. The total cost assigned to units transferred out of the Heating Department during March.
4. The cost assigned to work-in-process inventory as of March 31.

Question 3                                                                                                           (Total: 30 marks)

Paddle Place manufactures paddles and tables. In December, the two production departments had budgeted allocation bases of 3,100 machine-hours in Paddle and 6,900 direct manufacturing labor-hours in Table. The budgeted manufacturing overheads for the month were $51,200 and $56,900, respectively. For Project X, the actual costs incurred in the two departments were as follows:

Project X incurred 900 machine-hours in Paddle and 200 manufacturing labor-hours in Table. The company uses a budgeted overhead rate for applying overhead to production.

Required:

1. Determine the budgeted manufacturing overhead rate for each department.
2. Prepare the journal entries for Paddle department.
3. What is the total cost of Project X?

Question 4                                                                                                           (Total: 14 marks)

Identify the following situations as “job-order costing” or “process costing”?

Unit 3

Question 1                                                                                                           (Total: 20 marks)

For its overhead costs, the wholesale distributor Janz Company uses activity-based costing. In terms of the company’s annual overhead costs and its activity-based costing system the following data has been provided:

Distribution of Resource Consumption:

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs. Shown below is the amount of activity for the year:

Required:

Compute the activity rates for the Filling Orders and Product Support activity cost pools

Question 2                                                                                                           (Total: 30 marks)

Lojay Company produces custom covers for the air conditioning units of homes and businesses. For its overhead costs the company uses an activity-based costing system. The following data has been provided by the Lojay company regarding its annual overhead costs and its activity cost pools:

Distribution of Resource Consumption:

The “Other” activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The amount of activity for the year is as follows:

Required:

1. Prepare the first-stage allocation of overhead costs to the activity cost pools
2. Compute the activity rates for the Making Covers and Job Support activity cost pools
3. Prepare a revenue report where making 50 yards of covers and DM and DL cost of $950, and revenue is $2,500

Question 3                                                                                                           (Total: 30 marks)

Tuggs Corporation manufactures two products, Racket and Table. Table, having been developed as an attempt to enter a market closely related to that of Racket, has been recently created. Of the two products Table is the more complex one thus requiring two and a half hours of direct labour time per unit to manufacture, compared to one hour of direct labour time for Racket. Table is produced on an automated production line.

On the basis of direct labour hours Overhead is currently assigned to the products. The company

estimated it would incur $364,000 in manufacturing overhead costs and produce 4,900 units of Table and 22,100 units of Racket during the current year. Unit costs for materials and direct labour are as follows:

Required:

1. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year.
2. The company’s overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

Determine the unit product cost of each product for the current year using the data above and an activity-based costing approach.

Question 4                                                                                                           (Total: 20 marks)

Gandalf and Company makes Golf Equipment for the retailers around the world.  Below you will find a number of activities and cost at Gandalf Corporation. Please list the activity as either, “Batch”, “Unit”, “Product” or “Organization-sustaining”.

Unit 4

Question 1                                                                                                           (Total: 26 marks)

Dundar Mifflin manufactures and sells three products: X, Y, and Z. Annual fixed costs are $515,250 and data about the three products follow for 2017.

Required:

1. Determine the breakeven point
2. The management expects sales to increase by 9% in 2018. What is the expected operating income in 2018?

Question 2                                                                                                           (Total: 24 marks)

Dundar Mifflin makes electronic product for the RCMP. The following data is for the first six months:

Required:

1. Use the high-low method to estimate the cost formula
2. Estimate the total overhead cost at an activity level of 48,000 machine hours, using the separate estimates you obtained for its components.

Question 3                                                                                                           (Total: 30 marks)

Costco has recently started to take the customer orders over the web site.  Following is the past data for first six month:

Required:

1. Using the high-low method, estimate the variable cost per Web site hit and the monthly fixed costs.
2. Determine the cost equation to estimate the customer Web site expenses for Costco Online.
3. If Costco expects 9,500 Web site hits for July, what are their anticipated costs for July?

Question 4                                                                                                           (Total: 20 marks)

Gandalf and Company makes table tennis equipment for the retailers around the world. Below is listed a number of activities and cost at Gandalf Corporation. Please list the activities as one of the following: fixed, mixed, contribution, cost behavior, variable, curvilinear, account analysis, regression analysis.

Unit 5

Question 1                                                                                                           (Total: 40 marks)

Stark and Company would like to evaluate one of the product lines that they sell to the defense department. Every month the Stark and Company produce an identical number of units, although the sales in units differ from month to month.

Required:

1. Under variable costing, identify the unit product cost for the month.
2. What is the unit product cost for the month under absorption costing?
3. Prepare an income statement for the month using the contribution format and the variable costing method.
4. Prepare an income statement for the month using the absorption costing method.

Question 2                                                                                                           (Total: 12 marks)

The following information pertains to Death Star Corporation for a period:

Required:

1. Assume the unit standard costs data for the beginning and ending inventories remained constant during the period. What was the total standard cost of the ending inventory under absorption costing?

Question 3

DC-Marvel would like to evaluate one of the product lines that they sell to defense department. Every month the company produces an identical number of units, although the sales in units differ from month to month.

Required:

Compute the Contribution Margin.

Compute the Operating Income under Variable Costing.

Prepare a reconciliation from your Operating Income under Variable Costing to Operating Income under Absorption Costing. Show the differences between each method.

Question 4                                                                                                           (Total: 18 marks)

Stark and Company’s has following cost data:

Required:

2. Determine the total prevention costs?
3. Determine total appraisal costs?
4. Determine the total internal failure costs?

Unit 6

Question 1                                                                                                           (Total: 30 marks)

For the second quarter of the following year Cloaks Company has projected sales and production in units as follows:

Cash-related production costs are budgeted at $7 per unit produced. Of these production costs, 35% are paid in the month in which they are incurred and the balance in the next month. $95,000 per month will account for Selling and administrative expenses. On January 31 the accounts payable balance totals $185,000, which will be paid in February.

All units are sold on account for $13 each. Cash collections from sales are budgeted at 55% in the month of sale, 25% in the month following the month of sale, and the remaining 20% in the second month following the month of sale. On January 1 accounts receivable totaled $500,000 ($90,000 from November’s sales and the remaining from December).

Required:

1. Prepare a schedule for each month showing budgeted cash disbursements for Cloaks Company.
2. Prepare a schedule for each month showing budgeted cash receipts for Cloaks Company.

Question 2                                                                                                           (Total: 36 marks)

A merchandising firm by the name of Star Wars Enterprises, had an inventory of 42,000 units on March 31, and it had accounts receivable totaling $83,500. Sales, in units, have been budgeted as follows for the next four months:

To be enforced in April, Star Wars board of directors has established a policy that states that the inventory at the end of each month should contain 35% of the units required for the following month’s budgeted sales. $2.5 is the selling price per unit. One-Quarter of sales are paid for by customers in the month of the sale; the balance is collected in the following month.

Required:

1. Prepare a merchandise purchases budget showing how many units should be purchased for

each of the months April, May, and June.

2. Prepare a schedule of expected cash collections for each of the months April, May, and June.

Question 3                                                                                                           (Total: 24 marks)

Fonsey Corporation, a merchandising company, has provided the following budget data:

Collections from customers are normally 65% in the month of sale, 22% in the month following the sale, and 11% in the second month following the sale. It is expected that the balance be uncollectible. Fonsey pays for purchases in the month following the purchase. Cash disbursements for expenses other than merchandise purchases are expected to be $13,300 for May. Fonsey’s cash balance on May 1 was $21,500.

Required:

1. Compute the expected cash collections during May.
2. Compute the expected cash balance on May 31.

Question 4

Five years ago, Phil Coulson left his position at a large company to start Coulson Spy Solutions Co. (CSS), a software design and tracking company. CSS’s first product was a unique software package that seamlessly integrates networked PCs. Robust sales of this initial product permitted the company to begin development of other software products and to hire additional personnel. The staff at CSS quickly grew from three people working out of Phil’s basement to more than 70 individuals working in leased spaces at an industrial park. Continued growth led Coulson to hire seasoned marketing, distribution, and production managers and an experienced accountant.

Recently, Coulson decided that the company had become too large to run on an informal basis and that a formalized planning and control program centered around a budget was necessary. Coulson asked the accountant, Maria Hill, to work with him in developing the initial budget for CSS.

Coulson forecasted sales revenues based on his projections for both the market growth for the initial software and successful completion of new products. Hill used this data to construct the master budget for the company, which she then broke down into departmental budgets. Coulson and Hill met a number of times over a three-week period to hammer out the details of the budgets.

When Coulson and Hill were satisfied with their work, the various departmental budgets were distributed to the department managers with a cover letter explaining CSS’s new budgeting system. The letter requested everyone’s assistance in working together to achieve the budget objectives. Several of the department managers were displeased with how the budgeting process was undertaken. In discussing the situation among themselves, they felt that some of the budget projections were overly optimistic and not realistically attainable.

Required:

1. How does the budgeting process Coulson and Hill used at CSS differ from recommended practice?
2. What are the behavioural implications of the way Coulson and Hill went about preparing the master budget?

Unit 7

Question 1                                                                                                           (Total: 20 marks)

When analyzing the total variable overhead cost variance into both spending and efficiency variances, it is often assumed that direct labour hours is the sole cost driver.

Required:

1. Explain if direct labour costs could ever be a better cost driver of variable overhead costs than direct labour hours.
2. How is the standard variable overhead rate different from the standard labour rate in variance analysis? Please explain.

Question 2                                                                                                           (Total: 14 marks)

CLAW Corporation is a manufacturer of industrial equipment, located in Toronto, Ontario. CLAW has a standard costing system based on direct labour hours (DLHs) as the measure of activity. Data from the company’s flexible budget for manufacturing overhead are given below:

The following data pertains to operations for the most recent period:

Required:

1. What was the total predetermined overhead rate?
2. How much overhead was applied to products during the period?

Question 3                                                                                                           (Total: 30 marks)

For the Win (FTW) Corporation uses a standard costing system in the creation of awards and trophies. The Manufacturing overhead costs are applied to products on the basis of machine time.

Required:

1. Unfortunately, due to accounting glitches in FTW’s software, several numbers and labels have been omitted from the analysis of fixed overhead below. Supply the missing numbers and labels to help FTW out:

2. Next, assume that 6 minutes of machine time is standard per unit of production. How many units were actually produced in the situation above?
3. Once again, assume that 6 minutes of machine time is standard per unit of production. How many units of production were assumed when the predetermined application rate for fixed overhead was established?

Question 4

Orville Company’s standard and actual costs per unit are provided below for the most recent period. During this time period 400 units were actually produced.

For simplicity, assume there was no inventory of materials at the beginning or end of the period.

Required:

Given the information above, compute the following variances. Also indicate if the variances are favorable or unfavorable.

1. Materials price variance
2. Materials quantity variance
3. Direct labour rate variance
4. Direct labour efficiency variance
5. Variable overhead spending variance
6. Variable overhead efficiency variance

Unit 8

Question 1                                                                                                           (Total: 20 marks)

Best Brew Manufacturing Company has two Service Departments-Custodial Services and Maintenance-and three Production Departments-Brewing, Bottling, and Packaging. Best Brew allocates the cost of Custodial Services on the basis of square metres and Maintenance on the basis of labour hours. Budgeted operating data for the year just completed follow:

Required:

1. Prepare a schedule, which allocates Service Department costs to the Production Departments by the direct method.
2. Prepare a schedule, which allocates Service Department costs to the Production Departments by the step-down method, allocating Custodial Services first.

Question 2                                                                                                           (Total: 40 marks)

Tabulation Corporation manufactures and sells two types of electronic calculators: EL-520 W and EL-620 T. The following data was gathered from last month’s activities:

EL-520 W              EL-620 T

Sales in units                                                                                   5,000                     3,000

Selling price per unit                                                                    $50                         $100

Variable production costs per unit                                         $10                         $26

Traceable fixed production costs                                           $100,000              $150,000

Variable selling expenses per unit                                         $5                           $6

Traceable fixed selling expenses                                            $5,000                   $7,500

Allocated division administrative expenses                       $50,000 $60,000

Required:

1. Prepare a segmented income statement in the contribution format for last month, showing both “Amount” and “Percent” columns for the company as a whole and for each model.
2. Why might it be very difficult to calculate separate break-even sales for each model?
3. Refer to the original data and, if necessary, the results of the segmented income statement prepared in part (1) above. Calculate the total break-even sales (in both units AND dollars) for last month, assuming that none of the fixed production costs and fixed selling expenses is traceable. Allocate the total break-even sales between the two models.
4. Again, refer to the original data and, if necessary, the results of the segmented income statement prepared in part (1) above. Calculate the total break-even sales (in both units AND dollars) for last month, assuming that the “allocated” amounts of the company’s administrative expenses are actually traceable. Allocate the total break-even sales between the two models.
5. How reasonable are the total break-even sales numbers calculated in parts (3) and (4) given the actual results for last month?

Question 3                                                                                                           (Total: 20 marks)

The following data is provided on behalf of Mittens Incorporated for last year appear below:

The “Investment in Scarf Company” on the statement of financial position represents an investment in the stock of another company.

Required:

1. Compute the company’s margin, turnover, and return on investment for last year.
2. The Board of Directors of Mittens Company have set a minimum required return of 15%. What was the company’s residual income last year?

Question 4                                                                                                           (Total: 20 marks)

Heisenberg Corporation has a Moldings Division that does molding work of various types. The company’s Machine Products Division has asked the Moldings Division to provide it with 20,000 special moldings each year on a continuing basis. The special moldings would require $10 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier of $29 per unit for the moldings.

In order to have time and space to produce the new moldings, the Moldings Division would have to cut back production of another molding: the Blue4, which it presently is producing. The Blue4 sells for $30 per unit, and requires $12 per unit in variable production costs. Boxing and shipping costs of the Blue4 are $4 per unit. Boxing and shipping costs for the new special molding would be only $1 per unit. The company is now producing and selling 100,000 units of the Blue4 each year. Production and sales of this molding would drop by 20% if the new molding is produced.

Required:

1. What is the range of transfer prices within which both the divisions’ profits would increase as a result of agreeing to the transfer of 20,000 moldings per year from the Moldings Division to the Machine Products Division?
2. Is it in the best interests of Heisenberg Corporation for this transfer to take place? Explain.

Unit 9

Question 1                                                                                                           (Total: 27 marks)

PEI Lighthouse Company makes 20,000 units per year of a specialty light used by lighthouses all around the world. The unit product cost of this part is computed as follows:

An outside supplier has offered to sell the company the part that PEI Lighthouse Company needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $44,000 per year.

If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost that is being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company’s remaining products.

Required:

1. How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?
2. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
3. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year?

Question 2                                                                                                           (Total: 26 marks)

Cavendish Cheese Company makes three products within their single facility. Data concerning these products follow:

The mixing machines are potentially a constraint in the production facility. A total of 25,800 minutes are available per month on these machines.

Direct labour is a variable cost in this company.

Required:

1. How many minutes of mixing machine time would be required to satisfy demand for all three products?
2. How much of each product should be produced, rounded to the nearest whole unit, to maximize operating income?
3. Up to how much should the company be willing to pay, rounded to the nearest whole cent, for one additional minute of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Question 3                                                                                                           (Total: 21 marks)

Green Gables Company makes a product that has the following costs:

The company uses the absorption costing approach to cost-plus pricing. The pricing calculations are based on budgeted production and sales of 48,000 units per year.

The company has invested $360,000 in this product and expects a return on investment of 15%.

Required:

1. Compute the markup on absorption cost.
2. Compute the target selling price of the product using the absorption costing approach.

Question 4                                                                                                           (Total: 26 marks)

Cows Creamery Company makes two products from a common input. Joint processing costs up to the split-off point total $42,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

Required:

1. What is the net monetary advantage (disadvantage) of processing Gooey Mooey beyond the split-off point?
2. What is the net monetary advantage (disadvantage) of processing Wowie Cowie beyond the split-off point?
3. What is the minimum amount the company should accept for Gooey Mooey if it is to be sold at the split-off point?
4. What is the minimum amount the company should accept for Wowie Cowie if it is to be sold at the split-off point?

Unit 10

When solving NPV questions, you may use excel, a calculator, the equation method or the following table. All methods are acceptable for solving these types of problems.

Question 1                                                                                                           (Total: 15 marks)

Takhini Hot Springs Company has an old machine that is fully depreciated but has a current salvage value of $5,000. The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are:

Required:

1. What is the payback period on the new equipment?
2. What is the simple rate of return on the new equipment?

Question 2                                                                                                           (Total: 30 marks)

Grey Mountain Summit Company is considering starting a small catering business in Whitehorse. The company would need to purchase a delivery van and equipment costing $125,000 to operate the business and another $60,000 for inventories and other working capital needs. Rent for the building to be used by the business will be $35,000 per year. Bree, a Business student at YU and part time employee at Grey Mountain, indicates that the annual cash inflow from the business will amount to $120,000. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. Bree wants to operate the catering business for only six years. She estimates that the equipment could be sold at that time for 4% of its original cost. Bree uses a 16% discount rate. (Ignore income taxes in this problem.)

Required:

1. Would you advise Bree to make this investment? Use Net Present Value and Profitability analysis to support your decision.

Question 3:                                                                                                                        (Total: 10 marks)

Carcross Company is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its six-year useful life. The machine will cost $83,150 and has no salvage value. The machine has a 20% internal rate of return. (Ignore income taxes in this problem.)

Required:

1. What is the annual cost savings promised by the machine?

Question 4                                                                                                           (Total: 45 marks)

Consider each of the following situations independently.

1. Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment. Compute the present value of the cash inflows for each investment using a 20% discount rate.

2. At the end of three years, when you graduate from college, your father has promised to give you a used car that will cost $22,000. What lump sum must he invest now to have the $22,000 at the end of three years if he can invest money at
   1. 5%
   2. 8%

3. Mark has just won the grand prize on the Wheel ‘n’ Deal quiz show. He has a choice between (a) receiving $400,000 immediately and (b) receiving $60,000 per year for eight years plus a lump sum of $150,000 at the end of the eight-year period. If Mark can get a return of 10% on his investments, which option would you recommend that he accept? (Use present value analysis, and show all computations.)

4. You have just learned that you are a beneficiary in the will of your late Aunt Susan. The executrix of her estate has given you three options as to how you may receive your inheritance:
   1. You may receive $50,000 immediately.
   2. You may receive $80,000 at the end of six years.
   3. You may receive $12,000 at the end of each year for six years (a total of $72,000).

If you can invest money at a 12% return, which option would you prefer?