Section A

Multiple-Choice Questions (20 marks) Section A consists of 20 multiple-choice questions, each worth 1 mark. Indicate the best response for each of the following questions. 1. Honda Heaven produces and sells an auto part for $20.00 per unit. Direct materials are $8.00 per unit, while direct manufacturing labour averages $1.50 per unit. Variable overhead is $0.50 per unit and fixed overhead is $250,000.00 per year. Administrative expenses, all fixed, run $90,000.00 per year, with sales commissions of $2.00 per part. Production is 100,000 parts per year. This year, 75,000 parts were sold. What is the inventory cost per part using variable costing? a. b. c. d. $10.00 $12.00 $14.50 $16.50

e. $9.50 Use the information below to answer Questions 2 and 3: Jones Cleaners manufactures dish soap. The following information has been provided about the inventories, production, and sales volumes for dish soap for January and February. Jones Cleaners uses standard costing for manufacturing, marketing, and administrative costs. January February Beginning inventory 0 ? Production 2,000 3,000 Sales 1,750 3,250 Other information: Selling price $ 5.00 Standard variable manufacturing cost/unit $ 1.00 Standard variable market/admin. cost/unit $ 0.50 Standard fixed manufacturing overhead $4,000 cost/month Standard fixed market/admin. cost/month $2,000 There were no beginning or ending inventories of materials or work-in-process. 2. What is the value of Februarys beginning inventory under absorption costing? a. $750

b. $700 c. $250 d. $500 e. none of the above 3. What would Jones Cleaners operating income (loss) be for January and February, respectively, using the variable costing approach? a. b. c. d. $(125) and $5,125 $125 and $5,375 $(125) and $(5,375) $125 and $5,125

e. none of the above 4. Cady Machine Shop used 15,000 machine-hours during January. It takes 0.90 machine-hours to produce one unit; 15,000 units were produced during the month. Budgeted production included 12,000 units, using 10,800 machine-hours. Budgeted variable manufacturing overhead costs per output unit is $22.50. What is the variable overhead efficiency variance for Cady? a. b. c. d. $16,875 $16,875 $37,000 $37,500 favourable unfavourable favourable unfavourable

e. $37,500 favourable 5. Which of the following is incorrect concerning variable versus absorption costing? a. The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory and fixed manufacturing costs in opening inventory. b. The absorption costing income statement does not need to differentiate between variable and fixed costs. c. The variable costing income statement classifies costs by cost behaviour. d. The absorption costing income statement classifies costs primarily by business function. e. The difference in operating income between the two approaches is captured by the difference between fixed manufacturing costs in ending inventory and variable manufacturing costs in ending

inventory. 6. Comics Plus has a current production level of 200,000 comics per month. Unit costs at this level are as follows: Direct materials $0.125 Direct labour 0.200 Variable overhead 0.075 Fixed overhead 0.100 Marketing - Fixed 0.100 Marketing/distribution 0.200 Variable Current monthly sales are 180,000 units. Printers Ltd. has contacted Comics Plus about purchasing 15,000 units at $1.00 each. Current sales would not be affected by the special order, and variable marketing/ distributing costs would not be incurred on the special order. What is Comics Plus' change in profits using the contribution margin format if the order is accepted? a. b. c. d. $9,000 increase $2,000 increase $2,000 decrease $11,000 increase

e. $9,000 decrease 7. First Image has a plant capacity of 80,000 units per month. Unit costs at capacity are as follows: Direct materials $2.00 Direct labour 3.00 Variable overhead 1.50 Fixed overhead 1.50 Marketing - Fixed 3.50 Marketing/distribution 1.80 Variable Current monthly sales are 78,000 units at $12.60 each. Computer Output Management has contacted First Image about purchasing 2,000 units at $12.00 each. Current sales would not be affected by the special order. What is First Image's change in profits if the order is accepted? a. $8,600 increase b. $7,400 increase

c. $16,600 increase d. $11,000 decrease e. $19,600 increase 8. For Consumer Lumber, what would be the total difference between operating incomes under absorption costing and variable costing? Beginning fixed manufacturing overhead in inventory $47,500 Fixed manufacturing overhead in production $37,500 Ending fixed manufacturing overhead in inventory $12,500 Beginning variable manufacturing overhead in $ 5,000 inventory Variable manufacturing overhead in production $25,000 Ending variable manufacturing overhead in inventory $ 7,500 a. $2,500 b. $35,000 c. $25,000 d. $20,000 e. $1,500 9. Day Star collected the following information: Cost to buy one unit $48 Production costs per unit: Direct materials $22 Direct labour $16 Variable overhead $2 Total fixed overhead $360,000 Day Star can sell 25,000 units per year at $80 each. The company also has an offer from a subsidiary to rent its plant facilities for $2,000,000. The fixed overhead will be incurred in each alternative, but there will be a savings of $150,000 in the fixed costs under the renting alternative. Based on the above information only, should Day Star make or buy the product or rent its facilities out? a. b. c. d. buy make rent the facilities to the subsidiary either make or rent

e. either make or buy 10.When considering a project that will require production using otherwise idle resources, which of the following is true? a. Only the variable costs of the project are relevant. b. In the short run, even if revenue is less than the total costs of

production, the project could help the company's overall operating income. c. The project should not be undertaken if total revenue from the project is less than the total costs of production. d. Only financial factors should be considered. e. Avoidable fixed costs are irrelevant. 11.Two finished products, A and B, are sold for $16 a unit and $24 a unit, respectively. Each product can also be sold at the splitoff point. Product A can be sold for $10 and Product B, for $8. Joint costs for the two products totalled $8,000 for January for 600 units of A and 500 units of B. What are the respective joint costs assigned to each unit of Products A and B if the sales value at splitoff method is used? a. b. c. d. $8.00 $5.92 $6.40 $6.40 and and and and $9.10 $8.88 $14.40 $9.10

e. $8.00 and $6.40 12.The distinction between absorption costing and variable costing is most important for which type of industry? a. b. c. d. manufacturing educational retail marketing

e. service Use the information below to answer Questions 13 and 14: Action Mopeds manufactures mopeds. The following information pertains to the company's normal operations per month: Output units 15,000 mopeds Machine-hours 4,000 hours Direct manufacturing labour-hours 5,000 hours Direct manufacturing labour per hour $24 Direct materials per unit $200 Variable manufacturing overhead costs $322,500 Fixed manufacturing overhead costs $1,200,000 Marketing and distribution costs $1,125,000

Research and development costs $900,000 13.What is the unit cost when establishing a long-run price for mopeds? a. b. c. d. $444.50 $470.00 $325.48 $309.50

e. $460.50 14.What is the unit cost for establishing a minimum bid on a one-time-only special order of 1,000 units from an overseas city, if all cost relationships remain the same except for a one-time set-up charge of $40,000? a. b. c. d. $260.50 $209.50 $269.50 $309.50

e. $444.50 15.Taylor Stadium is evaluating ticket prices for its baseball games. Studies have shown that Monday and Tuesday ballgames average fewer than half the fans of games on other days. The following information pertains to the stadium's normal operations per season: Average fans per game 5,000 fans Average fans per Monday/Tuesday game 2,000 fans Stadium operating hours per season 300 hours Stadium capacity 7,000 seats Variable operating costs per hour $2,000 Fixed overhead costs per year for all events $450,000 Marketing costs per season for baseball $212,500 Customer service costs per season for baseball $25,000 The stadium is open for 5 hours on each day a game is played. The stadium is available for some type of use 300 days a year. All employees work by the hour except for the administrators. In addition, only one game is played per day and each fan would have only one ticket per game. What is the unit cost when establishing a long-run price for ballgames, assuming all tickets are priced the same? a. $2.20 b. $85.73 c. $4.30

d. $91.00 e. $3.09 16.Office Supply House purchases 4,160 reams of paper per year, ordered in lots of 80 reams per week at $150 per ream. The vendor covers all shipping costs. Office Supply House is not required to inspect the shipment upon entry. Office Supply House earns 20% on its cash investments. The purchase order lead time is two weeks. The following cost data are available: Relevant ordering costs per purchase order $53.75 Relevant insurance, materials handling, breakage, $4.25 and so on, per year What is the economic-order quantity? a. b. c. d. 324 100 114 235 reams reams reams reams

e. 110 reams 17.Boone Hobbies, a wholesaler, has a sales budget for next month of $600,000. Cost of units sold is expected to be 40 percent of sales. All units are paid for in the month following purchase. The beginning inventory of units is $20,000, and an ending amount of $24,000 is desired. Beginning accounts payable are $152,000. The cost of goods sold for next month is expected to be a. b. c. d. $240,000. $360,000. $225,000. $264,000.

e. $244,000. 18.A Canadian company has subsidiaries in France, England, Canada, and the US. The company is somewhat vertically integrated, in that the Canadian subsidiary sells some of its output to the US subsidiary, which further processes the material. If the market is fully competitive, which transfer price would maximize the corporation's overall income? a. distress price b. market-based price c. either market-based or full-cost price

d. full cost no markup e. negotiated price 19.Which of the following is false concerning profit centres and cost centres? a. A profit centre can exist within a centralized organization. b. If a profit centre exists within a centralized organization, there cannot be any cost centres in the organization. c. A cost centre can exist within a decentralized organization. d. A profit centre can exist within a decentralized organization. e. A cost centre can exist within a centralized organization. 20.Boyd Tool Company is a tool manufacturer. Production capacity is 3,000 units per month; however, the firm is considering alternative ways to increase capacity to 3,500 units per month. One of the alternatives involves purchasing new equipment. In this alternative, there are two choices: Machine A will provide increased capacity of 4,000 units per month, with a unit cost of $14 at capacity; Machine B will increase capacity to 3,600 units per month with a unit cost of $15 at capacity. Both machines are adequate since Boyd does not intend to go beyond the 3,500 units per month level for the foreseeable future. Relevant information for this decision includes which of the following? a. whether other costs will change solely due to a capacity increase b. the difference in unit cost of production between the two machines at their capacity levels c. Boyds planned capacity utilization d. excess capacity of either machine e. the difference in unit cost of production between the two machines at Boyds planned capacity levels

Section B
Problems and Critical-Thinking Problem Section B consists of five problems, worth 75 marks total, and a criticalthinking problem, worth 5 marks. Work must be shown to receive full marks. Question 21 (18 marks)

Ewing Company planned to be in operation for three years. During the first year, it made 60,000 units but had no sales. The following expenses were incurred: Variable Manufacturing Expenses Fixed Manufacturing Overhead Fixed Selling and Administrative Expenses $120,000 or $2 per unit $90,000 $0

In the second year, it produced an additional 50,000 units, sold 80,000 units
for $400,000, and incurred the following expenses: Variable Manufacturing Expenses Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses $100,000 or $2 per unit $75,000 $20,000 $30,000

In the third year, it sold the remainder of the inventory for $160,000, had no manufacturing expenses and went out of business. The expenses for year three were as follows: Variable Manufacturing Expenses Fixed Manufacturing Overhead Variable Selling and Administrative Expenses Fixed Selling and Administrative Expenses Required:
a. Prepare an income statement for each of the three years using

$0 $0 $10,000 $25,000

absorption costing. (9 marks) b. Prepare an income statement for each of the three years using variable costing. (9 marks) Question 22 (23 marks)

Under a contract with the provincial government, ChemLabs Inc. analyzes the chemical and bacterial composition of well water in various municipalities in the interior of British Columbia. The contract price is $25.20 per test performed. The normal volume is 10,000 tests per month. Each test requires two testing kits, which are $3.80 each at standard price. Direct labour to perform the test is 10 minutes at $22.80 per hour. At normal volume, the overhead costs are as follows: Variable overhead costs: Indirect labour Utilities Labour-related costs Laboratory maintenance Fixed overhead costs: Supervisor Amortization Base utilities Insurance Total overhead $18,000 4,000 15,000 11,000 $48,000 30,000 28,000 9,000 2,000 69,000 $117,000

Overhead is allocated on the basis of direct labour-hours. During May 2008, 9,000 tests were performed. The records show the following actual costs and production data: Activity Number of test kits purchased Number of test kits used Direct labour Total overhead costs: Variable Fixed 19,000 18,500 1,623 hours Actual Cost $70,300 $37,646 $45,000 $68,500

Test kits are kept in inventory at standard cost. At the end of May, no tests were in process. Required:

a. Prepare a flexible overhead budget based on 80% of normal volume.

(5 marks) b. Calculate the standard cost for a water test. (5 marks) c. Calculate the direct materials price and quantity variances and the direct labour rate and efficiency variances for May 2008, indicating whether they are favourable or unfavourable. (7 marks) d. Calculate the laboratory variable overhead variances for the month, indicating whether they are favourable or unfavourable. (6 marks) Question 23 (16 marks)

Berg and Sons Ltd. build custom-made pleasure boats that range in price from $10,000 to $250,000. For the past 30 years, Mr. Berg Sr. has determined the selling price of each boat by estimating the cost of material, labour, and a prorated portion of overhead, and adding 20% to the estimated costs. For example, a recent price quotation was determined as follows: Direct materials Direct labour Overhead Plus 20% Selling price $50,000 80,000 20,000 $150,000 30,000 $180,000

The overhead figure was determined by estimating total overhead for the year and allocating it at 25% of direct labour costs. If a customer rejected the price and business was slow, Mr. Berg Sr. might be willing to reduce his markup to as little as 5% over estimated costs. Thus, average markup for the year was estimated at 15%. Mr. Berg Jr. has just completed a managerial accounting course which dealt with pricing, and he believes that the firm could use some of the techniques discussed in the course. The course emphasized the contribution margin approach to pricing and Mr. Berg Jr. feels that such an approach would be helpful in determining an appropriate price for their boats. Total overhead, which includes selling and administrative expenses for the year, has been estimated at $1,500,000, of which $900,000 is fixed and the remainder is variable in direct proportion to direct labour.

Required:
a. Assume the customer rejected the $180,000 quotation and also

rejected a $157,500 (5% markup) quotation during a slack period. The customer countered with a $150,000 offer. (12 marks) i. What is the minimum selling price Mr. Berg Sr. could have quoted without reducing or increasing company net income? ii. What is the difference in company net income for the year between accepting and rejecting the customers offer? b. Identify and briefly explain one advantage and one disadvantage of the contribution approach to pricing compared to the approach previously used by I. Berg and Sons, Ltd. (4 marks) Question 24 (10 marks) The Doran Company prepared the following Revenue Budget: Month March April May June July Budgeted Sales $250,000 265,000 225,000 272,500 262,500

In addition, the gross profit rate is 40 percent and the desired inventory level is 30 percent of next month's cost of goods sold. Required: Using purchases in a merchandising company in place of Cost of Goods Manufactured, prepare a Purchases Budget for April through June. Question 25 (8 marks) John Hatelak is a sales representative for a manufacturing equipment company. He is trying to decide for which clients he should spend his time working. John has 172 hours available each month to spend with his clients. The following information is the potential sales data related to each type of customer:: Large Medium Small CustomersCustomersCustomers

Number of customers Average sale per customer Commission (% of sales $) Average time per customer Required:

20 $6,000 10% 6

100 $2,000 7% 4

160 $1,200 5% 3

What should be his client mix in order to maximize his sales commissions? Question 26 (5 marks) Read the following scenario and answer the question below it. The Assembly division of Canadian Car Company has offered to purchase 90,000 batteries from the Electrical division for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows: Direct materials Direct manufacturing labour Variable factory overhead Fixed manufacturing overhead Total $40 20 12 40 $112

The Electrical division has been selling 250,000 batteries per year to outside buyers at $136 each. Capacity is 350,000 batteries per year. The Assembly division has been buying batteries from outside sources for $130 each. a. Should the Electrical division manager accept the offer? Explain. b. From the companys perspective, will the internal sales be of any benefit? Explain. <>