WARNING! The following is my interpretation of Dr. Chalos’ “Accounting 326: Sample Exam Questions”. Do not substitute this document in place of his “Sample Exam Questions”, which can be accessed at http://www.uic.edu/~pchalos/sampleexamacc326.html . If you have any questions about his data, please direct your questions to him at [email protected] . This release is not endorsed by Dr. Chalos.

Here is the citation:

Peter Chalos. “Accounting 2: Sample Exam Questions”. www.uic.edu/~pchalos/sampleexamacc326.html . Retrieved 14 Feb. 2001.

SAMPLE EXAM QUESTIONS

By Peter Chalos, Ph.D.

Edited by Dave Anderson

Questions with proposed answers: 1, 3, 15, 17, 18, 27

Questions guessed at: 2b

WARNING! Unless otherwise noted, these proposed answers are not confirmed to be correct.

Some proposed answers are on an Excel spreadsheet, which needs to be opened only once.

QUESTION 1

The Fullerton Company uses perpetual inventories and a normal cost system. Balances from selected accounts were:

BALANCES BALANCES

DECEMBER 31, 19-1 DECEMBER 31, 19-2

Factory department overhead $56,000

Finished goods $50,000 40,000

Cost of goods sold 180,000

Raw materials ? 20,000

Factory overhead applied at 60% of direct-labor cost 72,000

Work in process ? 130,000

The cost of direct materials requisitioned for production during 19-2 was $100,000. The cost of direct materials purchased during 19-2 was $90,000.

Required:

Before considering any year-end adjustments for overapplied or underapplied overhead, using T-accounts for raw materials, work in process, finished goods, and cost of goods sold compute:

Raw materials, December 31, 19-1 Proposed answer[DA1] Work[DA2]

Work in process, December 31, 19-1 Proposed answer[DA3]

QUESTION 2

Oxford Engineering manufactures small engines. The engines are sold to manufactures who install them in products such as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier who wishes to supply the starter assembly used in these engines at $4.00 a unit.

The starter assembly is currently manufactured in Division 3 of Oxford Engineering. The costs relating to Division 3 for the last twelve months were as follows:

Direct materials $200,000

Direct labor 150,000

Overhead 400,000

Total $750,000

Over the past twelve-month period, Division 3 manufactured 150,000 engines; the average cost for the starter assembly is computed as $5 ($750,000/150,000).

Further analysis of overhead revealed the following information. Of the total overhead reported, only 25% is considered variable. Of the fixed costs, $150,000 is an allocation of general factory overhead that would remain unchanged if production of the starter assembly is abandoned. A further $100,000 of the fixed overhead is avoidable if self-manufacture of the starter assembly is discontinued. The balance of the current fixed overhead, $50,000, is the division manager’s salary. If self-manufacture of the starter assembly is disconnected, the manager of Division 3 will be transferred to Division 2 at the same salary. This will allow the company to save $40,000 that otherwise would be paid to attract an outsider to this position.

List the relevant costs for this decision.

Without prejudice to your answer in 1, assuming the firm did go outside, how many starter units would need to be purchased to make the manager indifferent between inside manufacturing and outside purchase? Wild guess[DA4]

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QUESTION 3

Pigs-in-space use standard costing and has the following budgeted revenue for January, its first month of production:

Sales (80,000 metal boxes at $15 each) $1,200,000

Assume for each metal box, standards are as follows. (Variable costs include material, labor and variable overhead):

Material: 10 lbs. @20 c per lb. = $2.00

Labor: 1.5 hrs. @ $6 per hr. = $9.00

O.H. (applied on the basis of standard direct labor hours):

Budget = $80,000 per month + $.20 per hour.

Budgeted production for January = 100,000 metal boxes.

Monthly standard direct labor hours used to compute standard overhead rates = 150,000 hours.

Budgeted marketing & administrative costs = $120,000 per month + 5% of budgeted sales dollars.

Actual . . . . Material:

Purchases = 1,100,000 lbs. for $211,000

Requisitioned for production = 1,100,000 lbs.

Labor: 140,000 hrs. @ $6.10

O.H. Fixed = $85,000

Variable = $22,000

Actual production = 90,000 metal boxes started and finished.

Actual sales = 85,000 metal boxes

Actual sales price = $14.50 each

Actual marketing and administrative costs = $195,000, of which $124,000 is fixed.

Assume all production variances are expensed in the month incurred.

Prepare the actual, flexible and master budgets according to the enclosed format, on variable costing basis.

Flexible Master

Actual Budget Budget

View Question 3's proposed answer on Excel.

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QUESTION 4

Budgeting and Variance Analysis:

Pigs-in-Space, has the following budgeted income statement (prepared using variable costing) for January, its first month of production:

Sales (80,000 metal boxes at $15 each) $1,200,000

COGS: Variable Costs 904,000

Fixed Costs 80,000

Marketing & Administrative 180,000

Operating Profit $ 36,000

Assume for each metal box, standards are as follows. (Variable costs include material, labor and variable overhead):

Material: 10 lbs. @ 20c per lb. = $2.00

Labor: 1.5 hrs. @ $6 per hr. = $9.00

O.H. (applied on the basis of standard hours):

Budget = $80,000/month + $.20/hour

Budget production for January = 100,000 metal boxes.

Monthly standard direct labor hours used to compute standard overhead rates = 150,000 hours.

Budgeted marketing & administrative costs = $120,000 per month + 5% of budgeted sales dollars.

Actual . . . .Material:

Purchases = 1,100,000 lbs. For $211,000

Requisitioned for production = 1,100,000 lbs.

Labor: 140,000 hrs. @ $6.10

O.H. Fixed = $85,000

Variable = $22,000

Actual production = 90,000 metal boxes started and finished.

Actual sales = 85,000 metal boxes

Actual sales price = $14.50 each

Actual sales marketing and administrative costs = $195,000, of which $124,000 is fixed.

Assume all production variances are expensed in the month incurred.

Prepare an analysis of budgeted vs. actual profit using the format shown on page 2.

Show all budgets and required variances.

Prepare this analysis on a variable costing basis.

Prepare an analysis of variable manufacturing variances in as much detail as posible, and provide the answers on page 3.

Prepare an analysis of the required fixed manufacturing cost variances and provide the answers on page 4.

Net Mft. Flexible Activity Master

Actual Variances Budget Variances Budget

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QUESTION 5

Armando Corporation manufactures a product with the following standard costs:

Direct materials: 20 yards at $1.35 per yard $27

Direct labor: 4 hours at $9 per hour 36

Factory overhead applied at five-sixths of direct labor dollars.

Ratio of variable costs to fixed costs: 2 to 1 30

Total standard cost per unit of output: $93

Standard are based on normal monthly production involving 2, 400 direct labor-hours.

The following information pertains to the month of July:

Direct materials purchased: 18,000 yards at $1.38 per yard $24,840

(any price variance written off when purchased)

Direct materials used: 9,500 yards

Direct labor: 2,100 hours at $9.15 per hour $19,215

Actual factory overhead $16,650

Five hundred units of the product were actually produced in July and transferred to Finished Goods Inventory.

Using the enclosed T Accounts, show the flow of all standard costs and variances.

Materials Accounts Payable Inventory Work in Process

Accrued Payroll Materials Materials

Accounts Price Variance Efficiency

Variance

Labor

Labor Efficiency

Price Variance Variance

Overhead Variable Fixed

(Actual) Overhead Applied Overhead Applied

Total Var. Overhead Production

Overhead Efficiency Volume

Price Variance Variance Variance

Finished Goods

QUESTION 6

The president of XLTD is puzzled. "Sales for 1984 are up from 1983, but profits are down. Why?" The following information is available to you:

1983 1984 Increase (Decrease)

Sales: units 80,000 120,000

revenue $2,000,000 $3,000,000 $ 1,000,000

Cost of goods sold 1,000,000 2,050,000 1,050,000

$1,000,000 $ 950,000 $ (50,000)

Marketing and administrative

costs (all fixed) 480,000 480,000 -0-

Profits $ 520,000 $ 470,000 $ (50,000)

Investigation provides the following facts:

The company operates a normal, full absorption cost accounting system.

Under/overapplied manufacturing overhead is shown in the above financial statements as part of "cost of goods sold."

Manufacturing overhead is all fixed.

Fixed manufacturing costs, based on an estimated (normal) volume of 100,000 units are $10 per unit in both 1983 and 1984.

Variable manufacturing costs are $5 per unit in both 1983 and 1984.

Production levels in 1983 were 120,000 units.

As in preceding years, sales fell short of anticipation and year-end inventories rose by 40,000 units.

Management decided to cut inventory levels to 50,000 units in 1984 and reduced production levels to 75,000 units in that year.

By December 31, 1984, inventory was at the 50,000-unit level.

It is expected that in 1985 sales will equal production at 125,000 units.

Required:

With supporting computations, explain to the president the reasons for the change in profits between 1983 and 1984. Be specific (i.e., no B.S.).

If expectations are realized in 1985 and assuming no changes from 1984 in total fixed cost, unit price, what profit will be reported by the company’s accounting systems?

In other words, what is the income number under normal full absorption. By how much will that profit differ from a variable costing based income statement? Show all calculations.

QUESTION 7

The following are AA Company’s unit costs of making and selling a given item at a level of 30,000 units per month:

Manufacturing:

Direct materials $10.00

Direct labor 12.00

Variable indirect cost 8.00

Fixed indirect cost 5.00

Selling and other:

Variable 1.00

Fixed 10.00

The following situations refer only to the data given above. Unless stated otherwise, assume a regular selling price of $71.00.

Full capacity is 480,000 units per year (40,000 per month). (Ignore income taxes)

In presenting an inventory of 5,000 items on the balance sheet, the unit cost conventionally to be used is:

A cost contract with the government for 10,000 units of product in March calls for the reimbursement of all manufacturing costs including a pro rata (proportionate) share of fixed manufacturing costs (using actual full absorption costing), plus a fixed fee for $100,000. This production would be added to the regular production of 30,000 units per month. There will be no variable selling costs for any units sold to the government. All other cost behavior patterns implied in the problem are assumed to be correct.

Should the government order be accepted?

What is the impact on March profits if it is accepted?

Assume the same facts as in (b) above (including the fee of $100,000) except the government wants 20,000 units delivered in March (partial orders are not accepted). After reviewing production schedules and sales commitments, AA company has decided it would have to cut back on 10,000 units to its regular customers in March. The sale of these 10,000 units would be foregone and could not be recovered in any other month. However, the loss of these 10,000 units would not affect the sale of any other units at any other time.

Should the government order for 20,000 units in March be accepted?

What would be the impact on march profits if it is?

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QUESTION 8

Assume the following facts for the Cash Cow Company:

Actual Budget

Sales Units 40,000

Production Units 50,000

Direct Labor Hours 5,100 3,500

Fixed Manufacturing Overhead $73,000 $70,000

Standard Costs

Variable Manufacturing Costs: Actual Per Unit of Output

Materials Purchased 200K pounds

at $1.20 per

pd=$240,000 ---

Materials Used 140,000 pds 2 pds at $1.00

per pd = $2.00

Labor 5,100 hrs at .10 hrs at $12

$14 per hr per hr = $1.20

= $71,400

Variable Overhead $26,000 .10 DLH

at $5 per hr = $.50

Fixed overhead is applied based on direct labor hours. There were no beginning inventories and no ending work-in-process inventory.

Neither variance nor overhead adjustments are prorated. Materials price variance is computed at time of purchase.

REQUIRED:

Show the flow of manufacturing costs through the enclosed accounts under standard, full absorption costing. Overhead is applied based on standard direct labor hours.

ACCOUNTS PAYABLE RAW MATERIAL WAGES PAYABLE

RAW MATERIAL RAW MATERIAL LABOR RATE

PRICE VARIANCE EFFICIENCY VARIANCE VARIANCE

LABOR EFFICIENCY OVERHEAD VARIABLE OVERHEAD FIXED

VARIANCE

PRICE VARIANCE EFFICIENCY VARIANCE PRICE VARIANCE

VARIABLE OH VARIABLE O.H. FIXED O.H.

VOLUME VARIANCE WORK IN PROCESS FINISHED GOODS COGS FIXED O.H.

Data for Question 9 and 10:

Makeshift Inc. produced 1500 makeshifts and sold 1200.

Actual production costs were:

Direct materials. . . . . . . . . . . . . 16,000 lbs purchased at $21

14,000 lbs used

Direct labor . . . . . . . . . . . . . . 3,100 hours at $21

Manufacturing overhead . . . . . $270,000

Selling and administration . . . . $440,000

Revenue . . . . . . . . . . . . . . . . . .$1,176,000

There is no beginning or ending work in process.

Overhead is applied as follows:

$20 per direct labor hour for variable,

and $80 per direct labor hour for fixed, based on estimated production of 1250 makeshifts.

Standard costs per makeshift are:

Raw material: 10 lbs at $20 each

Labor: 2 hours at $20 per hour

Variable O.H.: $20 per direct labor hour

Fixed O.H.: $80 per direct labor hour

Actual fixed overhead was $190,000.

Actual variable overhead was $80,000.

Actual fixed selling and administration was $360,000 and variable selling and administration was $80,000.

Budgeted sales volume was 1300 makeshifts.

Budgeted selling and administrative expenses were $350,00 fixed and $50 variable per makeshift.

Budgeted sales price was $1,000.

Raw material variances are recognized when purchases are made. All production variances are written off during the period.

QUESTION 9

Use the above data to answer each of the following questions.

(A) In contribution format, calculate the net income for:

I. the master budget

II. the flexible budget

III. the actual results

Show all computations but do not include any sales or production variances

(B) Calculate all price and usage variances pertinent to raw material, labor and variable overhead only.

QUESTION 10

Use the same data to answer each of the following:

(A) Using T Accounts, trace all costs through all inventory accounts to cost of goods sold under:

I normal full absorption costing

II normal variable costing

(B) Do income statements for:

I normal full absorption costing

II normal variable costing

( C) Reconcile the above income numbers by arithmetically and logically showing the reason for the difference.

QUESTION 11

Ex Co. uses variable costing and has a net income in 1983 of $20,000. Had standard full costing been used, the net income would have been $15,000. The beginning finished goods was 3,000 units. Its cost under variable costing was $54,000. By full absorption principles, its cost would have been $60,000. The standard material cost is $10 a unit and labor is $5 a unit.

1. How many units are in ending finished goods? Assume there is no work in process.

2. What amount of overhead is included in the cost of the ending finished goods inventory under variable costing?

QUESTION 12

ATCO Company purchased Dexter Company three years ago. Prior to the acquisition, Dexter manufactured and sold electronic products to many different customers. Since becoming a division of ATCO, Dexter now manufactures only electronic components for products made by ATCO’s Macon Division.

ATCO’s corporate management gives the Dexter Division management a considerable amount of authority in running the division’s operations. However, corporate management retains authority for decisions regarding capital investments, price setting of all products, and the quantity of each product to be produced by the Dexter Division.

ATCO has formal performance evaluation program for the management of all of its divisions. The performance evaluation program relies heavily on each division’s return on investment. The income statement of Dexter Division provides the basis for the evaluation of Dexter’s divisional management.

ATCO COMPANY

Dexter Division

Income Statement

For the Year Ended October 31

(in thousands)

Sales revenue $ 4,000

Costs and expenses:

Product costs:

Direct materials $ 500

Direct labor 1,100

Factory overhead 1,300

Total 2,900

Less: Increase in inventory 350 2,500

Engineering and research 120

Shipping and receiving 240

Division administration:

Manager’s office 210

Cost accounting 40

Personnel 82 332

Corporate costs:

Computer 48

General services 230 278

Total costs and expenses 3,520

Division operating profit $ 480

Net plant investment $1,600

Return on investment 30%

The financial statements for the divisions are prepared by the corporate accounting staff. The corporate general services costs are allocated on the basis of sales-dollars, and the computer department’s actual costs are apportioned among the divisions on the basis of use. The net division investment includes division fixed assets at net book value (cost less depreciation), division inventory, and corporate working capital apportioned to the divistions on the basis of sales-dollars.

a. Evaluate the financial performance reporting for the Dexter Division.

Based on your response to requirement (a), recommend appropriate revisions of the financial information and reports used to evaluate the performance of Dexter’s divisional management. If revisions are not necessary, explain why revisions are not needed.

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QUESTION 13

Mariposa Recreational Products Corporation produces skateboards for street use. As a result of recent promotion of the sport, the company is considering expanding its facilities to increase production and sales by 35,000 units per year. The expansion will require an immediate outlay of $740,000 for the specialized equipment required for skateboard assembly. The company estimates the useful life of the project will be seven years. The company uses straight line depreciation for book purposes but will depreciate for tax purposes as follows:

year 1. $140,000;

year 2, $240,000;

and year 3-5, $120,000 per year.

Once the equipment is installed, it has no salvage value. The equipment will qualify for an investment tax credit of $74,000 in its first year.

The project requires an estimated cash and accounts receivable balance of approximately $80,000, which will be liquidated at cost at the end of the project life. The project will also require $37,000 in working inventory and safety stock. These inventories will also be liquidated at cost at the end of last year of the project life.

The assembled skateboards sell for $29 wholesale each. The cost of materials for unassembled skateboards is $17 per kit, including shipping. In addition to the $17 cost of the unassembled parts, there is a cost of $6.50 per kit for assembly labor, power, and other variable overhead. All variable overhead is included in the $6.50 charge, and all such variable overhead requires current cash outlays.

The general fixed overhead of the factory and equipment amounts to $162,857 including the book depreciation on the new equipment. Except for the equipment depreciation, all of these fixed overhead items require current cast outlays.

A 12 percent rate is applicable for investment evaluation purposes. This discount rate represents .893 in Year 1; ,797 Year 2; .712 Year 3; .636 Year 4; 567 Year 5; .507 Year 6; .452 Year 7. The tax rate applicable to the project income is 40 percent.

Prepare a schedule showing the net present value for the project with supporting details.

QUESTION 14

You are the cost accountant in a division that has recently introduced robotic equipment in a production process. In point form enumerate:

1. How some cost pools might have to be redefined?

How cost allocation and product costing might be affected?

How cost control measures might need to be redefined?

QUESTON 15

XYZ uses full absorption/normal costing, It had the following costs during June:

June 1 June 30

Direct Materials Inventory Proposed answer[DA5] ? $52,000

Work in Process Inventory Proposed answer[DA6] ? 364,000

Finished Goods Inventory $130,000 104,000

Direct Labor 312,000

Manufacturing Overhead – Actual 145,600

Overapplied Manufacturing Overhead 41,600

Direct Material Purchases 234,000

Cost of Goods sold before Overapplied Correction 468,000

Direct Material Requisitions 260,000

With T Accounts, show all cost flows for June. See cost flows on Excel.

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QUESTION 16

ABC uses FIFO process costing. Materials are added at the start of the process. Direct labor and manufacturing overhead costs are incurred evenly through processing. On January 1, there were 5,000 units in process with the following costs:

Direct Material $ 50,000

Direct Labor 40,000

Manufacturing Overhead 10,000

During January, 45,000 units were started in process. The following costs were incurred in January:

Direct Material $450,000

Direct Labor 420,000

Manufacturing overhead 105,000

During January 40,000 units were completed. The units in ending inventory were 60% complete.

Calculate the equivalent units for direct material, direct labor and manufacturing overhead.

Compute the amount of costs allocated to units completed during January and to units incomplete.

QUESTION 17

The Aaron Company uses a predetermined overhead rate in applying overhead to production orders on a labor-cost basis for Department A and on a machine-hour basis for Department B. At the beginning of 19x1, the company made the following predictions:

DEPT. A DEPT. B

Direct-labor cost $128,000 $ 35,000

Factory overhead 144,000 150,000

Direct-labor hours 16,000 5,000

Machine-hours 1,000 20,000

1. What is the predetermined overhead rate that should be used in Department A? Proposed answer [DA7] In Department B? Proposed answer[DA8]

2. During the month of January, the cost sheet for production order No. 200 shows the following:

DEPT. A DEPT. B

Materials requisitioned $ 20 $ 40

Direct-labor cost $ 32 $ 21

Direct-labor hours 4 3

Machine-hours 1 13

What is the total overhead cost of production order No. 200? Proposed answer[DA9]

3. Assuming that Job No. 200 consisted of 20 units of product, what is the unit cost of Job No. 200? Proposed answer[DA10]

4. At the end of 19x1, it was found that actual factory-overhead costs amounted to $160,000 in Department A and $138,000 in Department B. Give the overapplied or underapplied overhead amount for each department and for the factory as a whole. Assume that total actual direct-labor costs and machine-hours confirmed with the original predictions. Proposed answer [DA11]

5. Assume the same facts as in requirement 4 regarding actual factory overhead. Suppose that the actual direct-labor cost was $148,000 in Department A and the actual machine-hours were 18,000 in Department B. Compute the overapplied overhead amount for each department and for the factory as a whole. Proposed answer[DA12] and work[DA13]

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QUESTION 18

Baehr Co. uses normal job costing. Overhead is budgeted for the year and is based on direct labor hours for application to individual jobs. The budget for 1987-88 is as follows:

Direct labor hours 120,000

Variable O.H. costs $390,000

Fixed O.H. costs 216,000

Total O.H. $606,000

The following is for November 1987. Jobs 77-50 and 77-51 were completed in November.

November 1 Inventories:

Direct materials and supplies $ 10,000

Work in Process (Job 77-50) 54,000

Finished Goods 112,500

Raw material purchases 135,000

Supplies purchases 15,000

Material and supply requisitions:

Job 77-50 45,000

Job 77-51 37,000

Job 77-52 25,000

Supplies 12,000

Factory direct labor hours:

Job 77-50 3,500 DLH

Job 77-51 3,000 DLH

Job 77-52 2,000 DLH

Labor costs:

Direct labor $51,000

Indirect labor (4,000 hours) 15,000

Supervisory 6,000

Building costs:

Factory $6,500

Sales offices 1,500

Administrative offices 1,000

Factory equipment costs:

Power $4,000

Repairs 1,500

Depreciation 1,500

Other 1,000

Required:

1. The O.H rate used to apply O.H. to jobs is: Proposed answer[DA14]

2. The most common method of closing an over- or under-applied O.H. account is to: Proposed answer[DA15]

3. The theoretically correct method of closing an over- or under-applied O.H. account is to: Proposed answer[DA16]

4. part 4, use a D.L. Rate for O.H. of $4.50. The total cost of Job 77-50 is: Proposed answer[DA17] and work[DA18]

5. Actual factory O.H. incurred in November was: Proposed answer[DA19]

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QUESTION 19

A firm has two products. Product 1 is manufactured entirely in Department X. Product 2 is manufactured entirely in Department Y. To produce these two products, the firm has two service departments—A (materials handling) and B (power generating). Work done in A and B follows:

User Total

Source A B X Y . . . . . . . . Units

A - 20 50 30 100

B 50 - 10 40 100

Each work unit for A represents a D.L.H. of handling time. Each work unit for B represents a K.W. H. of power. The costs of the Service Departments are as follows:

A B

Variable labor and material $ 7,000 $1,000

Supervision 1,000 1,000

Depreciation 2,000 2,000

10,000 4,000

(+power) (+handling)

1. What are the allocations of A and B to X and Y using the step down method? Begin with Department A.

2. What are the allocations of A and B to X and Y using the reciprocal method?

3. Which method is preferable? Why?

QUESTION 20

The Barnes Company makes small measuring devices for industrial companies. Several of its products are relatively standard, including a pressure gauge, modal YZ-361. The firm uses actual job costing. At the end of each month a clerk divides total factory overhead incurred by total labor hours. He then multiplies the overhead rate per labor hour by the number of hours on each job to determine overhead cost for the job.

The firm produced a lot of 50 units of YZ-361 in April, and another in July. The materials and labor for each 50-unit batch appear below.

April July

Order Order

Materials $680 $705

Direct labor at $8 per hour $760 $736

Total factory overhead and direct labor hours were as follows:

April July

Total factory overhead $162,360 $152,440

Total direct labor hours 12,300 9,200

Required

a. Determine the total cost of each of the two batches of YZ-361. Round O.H. rate to two decimals.

b. Suppose now that the firm uses normal costing, with a predetermined overhead rate based on the following budgeted figures:

total annual budgeted overhead = $1,560,000 + $2.50 per direct labor hour,

total budgeted direct labor hours = 120,000

The firm’s chief cost accountant expects fixed overhead to be incurred about equally in each month, at $130,000. Direct labor hours fluctuate from month to month.

Required

1. Determine the total costs of each of the two jobs using normal costing.

2. Determine the amounts of overapplied or underapplied overhead for April and for July.

3. Choose the costing method you prefer and give 3 reasons why you do.

QUESTION 21

Department A is the first stage of production. The following data relate to May.

Materials Conversion cost

Beginning work in process $ 4,000 $ 3,000

Current period costs 20,000 16,000

Units completed 90,000

Units in ending work-in-process inventory 10,000

Materials go into process at the beginning of the production cycle. The ending inventory was 50% complete as to conversion costs. The firm uses the weighted average method.

Required

1. Determine the cost of the ending inventory of work in process.

2. Determine the cost of goods transferred to the next department.

QUESTION 22

Alpha Company is making plans for the introduction of a new product that it will sell for $6 a unit. The following estimates have been made for manufacturing costs on 100,000 units to be produced the first year:

Direct materials $50,000

Direct labor 40,000 (the labor rate is $4 an hour x 10,000 hours)

Manufacturing overhead cost have not yet been estimated for the new product, but monthly data on total production and overhead costs for the past 24 months have been analyzed using simple linear regression. The following results were derived from the simple regression and will provide the basis for overhead cost estimates for the new product.

------------------------------------------------------------------------------------------------------------------------------------------------

Simple Regression Analysis Results

Dependent variable-Factory overhead costs

Independent variable-Direct labor hours

Computed values:

Intercept $40,000

Coefficient of independent variable 2.10

Coefficient of correlation 0.953

R2 0.908

a. What percentage of the variation in overhead costs is explained by the independent variable?

b. The total overhead cost for an estimated activity level of 20,000 direct labor-hours would be:

c. What is the expected contribution margin per unit to be earned during the first year on 100,000 units of the new product? (Assume all marketing and administrative costs are fixed.)

d. What is the total manufacturing cost equation implied by these results, where x refers to units produced?

QUESTION 23

Last year’s sales of Blockbuster Video were $2,400,000, fixed costs were $800,000 and variable costs were $1,200,000.

a. At what level of sales revenue will the store break even?

b. If sales revenue increase by 15% but price, variable cost and fixed cost remain the same, by how much will profit increased?

c. Ignoring the sales increase in b, assume fixed costs decrease by 20%. How much will profit increase?

d. Ignoring the facts in b and c, if variable costs decrease by 10%, by how much will profit increase?

QUESTION 24

Costs of quality analysis, quality measures. Ontario Industries manufactures two types of refrigerators, Olivia Solta. Information on each refrigerator follows:

Olivia Solta

Units manufactured and sold 10,000 units 5,000 units

Selling price $2,000 $1,500

Variable costs per unit $1,200 $800

Hours spent on design engineering 6,000 1,000

Testing and inspection hours per unit 1 0.5

Percentage of units reworked in plant 5% 10%

Rework costs per refrigerator $500 $400

Percentage of units repaired at customer site 4% 8%

Repair costs per refrigerator $600 $450

Estimated lost sales from poor quality ____ 300 units

The labor rates per hour for various activities follow:

Design $75 per hour

Testing and inspection $40 per hour

Required

1. Calculate the costs of quality for Olivia and Solta classified into prevention, appraisal, internal failure, and

external failure categories.

2. For each type of refrigerator, calculate the ratio of each cost of quality item as a percentage of sales.

3. Compare and comment on the costs of quality for Olivia and Solta.

4. Give two examples of nonfinancial quality measures that Ontario Industries could monitor as part of a total

quality control effort.

QUESTION 25

a. Hartwell Company distributes service department overhead costs directly to producting departments without allocation to the other service departments. Information for Janurary appears below. Determine the amounts of service department costs that Hartwell would allocate to each producing department.

Maintenance Utilities

Overhead costs incurred $18,700 $9,000

Services provided to:

Maintenance department --- 10%

Utilities department 20% --

A 40% 30%

B 40% 60%

b. Repeat item 1 assuming that Hartwell elects to use the step-down method, first allocating the costs of the utilities department.

c. Write the equations necessary to allocate the service department costs using the reciprocal method and determine the amounts of service department cost allocated to each producing department.

QUESTION 26

The Cutting Department is the first stage of Mark Company’s production process. Conversion costs for the department were 80 percent complete for the beginning inventory and 50 percent complete for the ending inventory. Mark uses the FIFO method. Other data appear below.

Conversion

Units Costs

Beginning work-in-process inventory 25,000 $22,000

Units started and costs incurred

during the period 135,000 $143,000

Units completed and sent to next

department 100,000

a. Determine the equivalent cost per unit.

b. Ignoring part 1 results, if the equivalent cost per unit was $1.50, determine the conversion cost in the ending work in process and transfers out.

QUESTION 27

Alton Company manufactures various types of furniture. The following data relate to jobs worked on in August.

Job Number HG-11 WS-14 CF-32

Balance August 1 $21,000 $0 $0

Materials added in August $12,400 9,850 4,670

August direct labor $12,800 13,200 21,700

The company applies overhead at $1.50 per direct labor dollar.

Actual overhead in August was $65,800.

Job HG-11 was completed and sold for $115,500.

Job WS-14 was completed but not shipped,

and job CF-32 was incomplete.

Determine the ending inventories of work-in-process and of finished goods. Proposed answer[DA20]

Determine the amount of overapplied or underapplied overhead. Proposed answer[DA21]

Prepare an income statement for August. Selling and administrative expenses were $33,500. The company treats any overapplied or underapplied overhead as an adjustment to normal cost of sales.

View question 27’s work on Excel.

Prepare summary journal entries for total debits to work in process, total transfers to finished goods and cost of goods sold.

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QUESTION 28

Able Processing Company provides the following information:

All other

Service Service Production Production

Dept. 1 Dept. 2 Dept. A Depts. Overhead

costs before allocation $4,000 $5,100 $8,000 $38,000

Proportions of service

furnished by Dept. 1 - - 30% 25% 45%

Proportions of service

furnished by Dept. 2 10% - - 20% 70%

Use the direct method to allocate costs and to determine the total overhead of Department A after allocation. Do the same for "other production departments."

Use the step-down method to allocate costs and to determine the total overhead of Department A and "other production departments" after allocation. Begin with Dept. 1.

Set up the equations for solving the allocations, using the reciprocal method, but do not solve these equations. Discuss the advantages of this method.

QUESTION 29

A firm uses actual costs in a weighted average process costing system. In Department 1, the direct materials are added at the beginning of processing and conversion costs are considered to be added evenly throughout the process. Given the following information for May:

Units

Beginning Work in Process ($620 conversion cost) 100 (60%)*

Completed and transferred out 3,000

Ending inventory of Work in Process 200 (50%)*

Equivalent unit cost for conversion $10 unit

Degree of completion

Direct material cost has been omitted to simplify the problem.

Required:

1. How many units were started in May in Department 1?

2. How many equivalent units were used in determining the unit cost for conversion?

3. What is the total dollar amount of the conversion cost of the ending work in Process?

4. What is the total dollar amount of the conversion cost being transferred out of Department 1?

5. What is the total amount of conversion cost charged to Department 1 during May?

6. Assume the firm was using FIFO. How many equivalent units would have been used to determine the unit cost for conversion?

7. Assume the firm was using FIFO. What is the total amount of conversion cost charged to Department 1 in May ?

QUESTION 30

Chalos, Inc. had the following activity:

Sales $980,000

Direct labor hours 24,000

Cost of materials used on jobs 150,000

Direct labor cost at $10/hr 240,000

Factory overhead costs 276,000

Selling and administrative expenses 160,000

Chalos had no beginning inventories. At year-end, jobs that were in ending inventories had the following:

Direct labor hours 2,800

Direct labor cost $28,000

Material cost $18,000

Required:

1. Prepare an income statement for 19x7, assuming that Chalos uses actual costing and allocates overhead

based on direct labor hours.

2. Prepare an income statement for 19x7, assuming that Chalos uses normal costing. The predetermined overhead rate is based on 25,000 expected direct labor hours and $275,000 budgeted overhead cost. Show any overapplied or underapplied overhead solely as an adjustment to normal cost of goods sold.

3. Reconcile the Actual and Normal Net Incomes with their inventories.