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ACCTBA3 T1 2013-2014 / Kenneth Drexel S.

Bihis 1
ACCTBA3 COMPREHENSIVE REVIEWER
Fundamentals of Accounting Part III
ACCTBA3 V24, T1 2013-2014
Kenneth Drexel S. Bihis, CPA


UNIT I. INTRODUCTION TO MANAGEMENT ACCOUNTING
1. Which of the following persons would occupy a line position in a department store?
I. Sales manager
II. Manager, furniture department
III. Manager, advertising department
IV. Manager, personnel department
A. Only I
B. Only I and II
C. Only I, II, III
D. I, II, III, IV
2. The controller occupies:
A. a line position.
B. a staff position.
C. neither a line nor a staff position, since the accounting department must be independent.
D. both a line and a staff position.

3. Decentralization refers to:
A. reporting for the company as a whole.
B. focusing reporting on parts of the company.
C. the delegation of decision-making authority throughout an organization.
D. differences in organizations.

4. _________________ is an example of a staff position.
A. Sales manager for a manufacturer
B. President of a merchandising company
C. Store manager for Best Buy
D. Human resource manager for a community college

5. Which of the following is NOT one of the three major customer value propositions discussed
in the text?
A. customer intimacy
B. operational excellence
C. zero defects
D. product leadership


6. Dorra Corporation manufactures lawnmowers in five work stations. Dorra's weekly demand is
5,000 mowers but Dorra can only produce 4,200. According to the theory of constraints, to
increase production output Dorra would benefit the most by concentrating improvement efforts
on the:
A. first work station.
B. last work station.
C. fastest work station.
D. slowest work station.

7. The management function of directing and motivating is:
A. providing a framework for management to have criteria to terminate employees when needed.
B. requiring a department to have perfect quality control.
C. coordinating a company's diverse activities and human resources to produce a smooth-running
operation.
D. developing a complex performance ranking system to give a few high performers extra
bonuses.
ACCTBA3 T1 2013-2014 / Kenneth Drexel S. Bihis 2
UNIT II. COST CONCEPTS AND CLASSIFICATIONS
Period costs Costs that are not directly necessary in the manufacturing business.
Product costs relates to the costs that are directly necessary in the manufacturing business.
Cost Item
Product Costs Period Costs Cost Behavior
DM DL MOH SE AE V F
Direct materials used X X
Indirect materials used X X
Direct labor X X
Indirect labor X X
Depreciation of factory equipment X X
Depreciation of office equipment X X
Utilities of corporate headquarters X X
Rent of production facility X X
Sales and commissions expense X X
Advertising expense

X X
Wages of production workers X X
Salaries of office employees X X

PROBLEM 1: IRONMAN Company presents the following accounts for its 2
nd
year of
operations this 2011:

Selling expenses 140,000
Raw materials inventory, January 1 90,000
Raw materials inventory, December 31 60,000
Utilities, factory 36,000
Direct labor cost 150,000
Depreciation, factory 162,000
Purchases of raw materials 750,000
Indirect materials used 20,000
Sales 2,500,000
Insurance, factory 40,000
Supplies, factory 15,000
Administrative expenses 270,000
Indirect labor 10,000
Maintenance, factory 87,000
Work in process inventory, January 1 180,000
Work in process inventory, December 31 100,000
Finished goods inventory, January 1 260,000
Finished goods inventory, December 31 210,000

Additional information:
a) Manufacturing overhead applied is 150% of direct labor cost.
b) The difference between the applied and actual overhead is buried down to Cost of goods
sold only.

Prepare the following:
1) Cost of Goods Manufactured
2) Adjusted Cost of Goods Sold
3) Income Statement

Pro-Forma Solution:
Raw materials, January 1 90,000
Purchase of materials 750,000
Raw materials, December 31 (60,000)
Less: Indirect materials (20,000)
Direct materials used 760,000
Direct labor 150,000
Manufacturing overhead (applied) [150% x ] 225,000
Manufacturing costs 1,135,000
Work in process, January 1 180,000
ACCTBA3 T1 2013-2014 / Kenneth Drexel S. Bihis 3
Work in process, December 31 (100,000)
Cost of goods manufactured 1,215,000

Cost of goods manufactured 1,215,000
Finished goods, January 1 260,000
Cost of goods manufactured available for sale 1,475,000
Finished goods, December 31 (210,000)
Unadjusted cost of goods sold 1,265,000
Add/Less: Under/overapplied overhead* 145,000
Adjusted cost of goods sold 1,410,000

Actual overhead costs:
[1] Utilities, factory
[2] Depreciation, factory
[3] Indirect materials used
[4] Indirect labor
[5] Insurance, factory
[6] Maintenance, factory
[7] Supplies, factory
Total 370,000



Actual manufacturing costs 370,000
Applied manufacturing costs 225,000
Over/Underapplied 145,000*


Sales 2,500,000
Adjusted Cost of Goods Sold 1,410,000
Gross Profit 1,090,000

Selling and Administrative expenses:
Selling expenses (140,000)
Administrative (270,000)


Net income
410,000


Net income: P 680,000

UNIT III. COST SYSTEMS

PROBLEM 2: RIFF-OFF INC. has provided the following data for the month of October. There
were no beginning inventories; consequently, the direct materials, direct labor and manufacturing
overhead applied listed below are all for the current month.

Work in
Process
Finished
Goods
Cost of Goods
Sold
Direct materials 6,320 15,860 80,080
Direct labor 5,450 15,250 77,000
Manufacturing overhead 5,840 10,950 56,210
17,610 42,060 213,290

Manufacturing overhead for the month was underapplied by P8,000.

The company allocates any over/underapplied overhead among work in process, finished goods
and cost of goods sold at the end of the month on the basis of the overhead applied during the
month in those accounts.


ACCTBA3 T1 2013-2014 / Kenneth Drexel S. Bihis 4
Allocation % Overhead
Work in process 5,840 8% 640
Finished goods 10,950 15% 1200
Cost of goods sold 56210 77% 6160
73000 8,000
PROBLEM 3: BOOM CORPORATION used a predetermined overhead rate during the year just
completed of P3.50 per direct labor-hour, based on an estimate of 22,000 direct labor-hours to be
worked during the year. Actual manufacturing overhead cost during the year were P30,200.
Direct labor cost totaled P18,000 with a labor rate of P5.00 per DL-hour.

How much is the over/underapplied?

Actual MOH P 30,200
Applied MOH (P3.50 x 3,600 hours) P 12,600

Underapplied by P 17,600


UNIT IV. COST BEHAVIOR
PROBLEM 4: Baaca Corporation has provided the following production and total cost data for
two levels of monthly production volume.
Production volume 6,000 units 7,000 units
Direct materials P 340,200 P 396,900
Direct labor P 81,000 P 94,500
Manufacturing overhead P 100,320 P 101,500

Pro-forma solution: (Change in cost / Change in activity)


Variable manufacturing overhead per unit:

Answer: P 1.18

Fixed manufacturing overhead:

Answer: P 93,240

Cost equation:

Y = 93,240 + 1.18X

PROBLEM 5: I SAW THE SIGN COMPANY's activity for the last six months is as follows:

Machine
Hours
Electrical
Cost
July 2,000 2,560
August 3,000 2,230
September 2,400 1,750
October 1,800 1,520
November 1,800 1,450
December 2,100 1,600
ACCTBA3 T1 2013-2014 / Kenneth Drexel S. Bihis 5
Assume that estimated machine hours for the next month will be 1,960 hours.*


HIGH-LOW RULE:
CHOOSE THE ONE WITH THE HIGHEST/LOWEST ACTIVITY (X)
IN CASE OF TIE, CHOOSE THE ONE WITH THE HIGHEST/LOWEST COST (Y)


Pro-forma solution: (Change in cost / Change in activity)


Variable manufacturing overhead per unit:

Answer: P 0.65

Fixed manufacturing overhead:

Answer: P 280

Cost equation:

Y = 280 + 0.65X

UNIT V: CVP ANALYSIS

PROBLEM 6: SPHERES ENTERPRISES INC. produces toy cars whose selling price is P200
per unit and whose variable cost per unit is P68. The companys fixed monthly fixed expense is
P514,800. The company is currently selling at 5,000 units.

1. What is the break-even point in units and in pesos? 3,900 units; P 780,000
2. What is the margin of safety in pesos and in %? P 220,000; 22%
3. Assume a target profit of P45,000, how many units should it sell? 4,241 units


CVP FORMULA:

BREAK-EVEN POINT (SALES) = FIXED EXPENSES/CM %
BREAK-EVEN POINT (UNIT) = FIXED EXPENSES/CM per unit

TARGET SALES POINT (SALES) = (FIXED EXPENSES + TARGET PROFIT)/CM %
TARGET SALES POINT (UNIT) = (FIXED EXPENSES + TARGET PROFIT)/CM per unit

MARGIN OF SAFETY = ACTUAL SALES BEP SALES
MARGIN OF SAFETY % = MARGIN OF SAFETY/ACTUAL SALES

DEGREE OF OPERATING LEVERAGE = CONTRIBUTION MARGIN/NET INCOME

Solution:














ACCTBA3 T1 2013-2014 / Kenneth Drexel S. Bihis 6
PROBLEM 6: SUITS CO. produces and sells two products. Data concerning those products for
the most recent month appear below:

Product
Pearson
Product
Hardman
Sales 27,000 22,000
Variable expenses 10,260 9,340

Fixed expenses for both products is P10,000 in total.

CM Pearson CM Hardman CM Total
Sales 100% 27000 100% 22000 100% 49000
Variable expenses 38% 10260 42.45% 9340 40% 19600
Contribution margin 62% 16740 57.55% 12660 60% 29,400
Fixed expenses 10,000
Net income 19,400

Break-even Sales Mix 55.10% Break-even sales: 44.90% 16,666.67

Pearson 9,183.67
Hardman 7,482.99


PROBLEM 7. WONDER COMPANY provided its functional/traditional income statement for
its 2013 operations.

WONDER COMPANY
Income Statement
For the Year Ended December 31, 2013

Sales 1,200,000
Cost of goods sold (540,000)
Gross margin 660,000
Selling expenses (340,000)
Administrative expenses (120,000)
Total net income 200,000

The companys selling expenses is 65% fixed while administrative expenses is one-third
variable.

Prepare a contribution format income statement:

WONDER COMPANY
Contribution Format - Income Statement
For the Year Ended December 31, 2013

Sales 1,200,000
Variable expenses (699,000)
Contribution margin 501,000
Fixed expenses 301,000
Total net income 200,000

Variable expenses = 540,000 + (35% x 340,000) + (1/3 x 120,000) = 699,000
Fixed expenses = (65% x 340,000) + (2/3 x 120,000) = 301,000










ACCTBA3 T1 2013-2014 / Kenneth Drexel S. Bihis 7
UNIT VI: STANDARD COSTING

PROBLEM 8: Lido Company's standard and actual costs per unit for the most recent period,
during which 400 units were actually produced, are given below:

Materials:
Standard cost is 2 feet which costs P1.50 per foot. Actual cost incurred is P1,344 at P1.60.
Assume production is equal to purchases.

Labor:
The standard for the company was to use 1.5 hours at P6.00 per hour. Actual labor costs is P3,640
at P6.50 per hour.

Variable overhead
Standard for VOH is 1.5 hours at P3.40 per hour. Actual VOH is P1,736.

Required:

From the foregoing information, compute the all the variances. Show whether the variance is
favorable (F) or unfavorable (U):


MATERIAL VARIANCES

AQAP 840 x 1.60

AQSP 840 x 1.50

SQSP 800 x 1.50


LABOR VARIANCES
AHAR 560 x 6.50

AHSR 560 x 6.00

SHSR 600 x 6.00


VARIABLE OVERHEAD VARIANCES
AHAR 560 x 3.1

AHSR 560 x 3.4

SHSR 600 x 3.4




PROBLEM 9. DREAM TEAM CO. uses a standard cost system. Information for raw
materials for Product M-11 for the month of October follows:

Standard price per pound of raw materials P 1.60
Actual purchase price per pound of raw materials P 1.55
Actual quantity of raw materials purchased 2,000 pounds
Actual Actual quantity of raw materials used 1,900 pounds
Xxxxc Standard quantity allowed for production 1,800 pounds





ACCTBA3 T1 2013-2014 / Kenneth Drexel S. Bihis 8
MATERIAL VARIANCES

AQAP 2,000 x 1.55

AQSP- Purchased 2,000 x 1.60

AQSP - Used 1,900 x 1.60

SQSP 1,800 x 1.60


UNIT VII: RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

PROBLEM 10. In January, the Universal Solutions Division of ZIMA CORPORATION
had average operating assets of P520,000 and net operating income of P97,600. The company
uses residual income, with a minimum required rate of return of 18%, to evaluate the
performance of its divisions.

1. What is the Return on Investment? 18.77%
2. What is the residual income? P 4,000


ROI/RESIDUAL INCOME FORMULA:
ROI = MARGIN X TURNOVER
MARGIN = NET INC/ SALES
TURNOVER = SALES/AVE. ASSETS
RESIDUAL INCOME: ACTUAL INCOME ( AVE. ASSETS X MIN. REQ RETURN)


PROBLEM 11: Kulp Corporation has two major business segments-East and West. In July, the
East business segment had sales revenues of P900,000, variable expenses of P441,000, and
traceable fixed expenses of P171,000. During the same month, the West business segment had
sales revenues of P450,000, variable expenses of P234,000, and traceable fixed expenses of
P45,000. There was a common fixed expenses totaled P321,000.

Compute for the segment margin of East and West and compute for their total net income.

East West Total
Sales 900,000 450,000 1,350,000
Variable expenses 441,000 234,000 675,000
Contribution margin 459,000 216,000 675,000
Traceable expenses 171,000 45,000 216,000
Segment margin 288,000 171,000 459,000
Common fixed costs - - 321,000
Net income 138,000


PROBLEM 12: Division A of Harkin Company has the capacity for making 3,000 motors per
month and regularly sells 1,950 motors each month to outside customers at a contribution margin
of P62 per motor. The variable cost per motor is P35.70. Division B can buy the motors at P60.00
from an outside supplier. Division B of Harkin Company would like to obtain 1,400 motors each
month from Division A.

Lowest acceptable price: Variable Cost + Opportunity Cost or Lost Sales

Answer: P 51.20 (35.70 + (350 x 60/ 1400 units) = P51.20)

Highest acceptable price: Market Price

Answer: P 60.00




ACCTBA3 T1 2013-2014 / Kenneth Drexel S. Bihis 9
Lost Sales Computation:

Total capacity 3,000
Total demand from Division B 1,400
Remaining units for regular customers 1,600

Demand from regular customers 1,950
Remaining units for regular customers 1,600
Lost customers 350


UNIT VIII: RELEVANT COSTING

PROBLEM 13. The management of DLSU SYSTEMS owns two segments, Animo.Sys and
MLS. Data from the company's segment contribution income statement follows:

Animo.Sys MLS
Sales P 800,000 P 900,000
Variable expenses P 440,000 P 650,000
Fixed manufacturing expenses P 248,000 P 312,000
Fixed selling expenses P 184,000 P 201,000

All fixed expenses of the company are fully allocated to products in the company's
accounting system. Further investigation has revealed that P201,000 of the fixed
manufacturing expenses and P156,000 of the fixed selling and administrative expenses of the
Animo.Sys segment are avoidable if the Animo.Sys is discontinued.

Lost Contribution Margin (360,000)
Avoidable Costs 357,000
Opportunity Costs 0
Net benefit/disadvantage (3,000)

Decision: Continue Animo.Sys

PROBLEM 14: Creelman Company makes four products in a single facility. Data concerning
these products appear below:

A B C D
Selling price 25.30 28 23.10 27.50
VOH per unit 13.20 13 9.30 11.00
Variable selling cost 1.50 2.20 3.40 2.70
Milling machine min. 1.90 2.70 2.10 2.60
Monthly demand 4000 1000 1000 1000

The milling machines are potentially the constraint in the production facility. A total of 13,000
minutes are available per month on these machines.

Rank the following products in accordance with the highest contribution margin per constrained
resource.

A B C D
Contribution margin 10.60 12.80 10.40 13.80
Milling machine min. 1.90 2.70 2.10 2.60
CM per constrained
resource
5.5 4.74 4.95 5.31
Ranking 1
st
4
th
3rd 2nd


PROBLEM 15: Manning Co. manufactures and sells trophies for winners of athletic and other
events. Its manufacturing plant has the capacity to produce 18,000 trophies each month; current
monthly production is 15,300 trophies. The company normally charges P141 per trophy. Cost
data for the current level of production are shown below:

Variable costs:
Direct materials 948,600
ACCTBA3 T1 2013-2014 / Kenneth Drexel S. Bihis 10
Direct labor 290,700
Selling and administrative - 41,310

Fixed costs:
Selling 579,870
Administrative 134,640

The company has just received a special one-time order for 900 trophies at P73 each. For this
particular order, no variable selling and administrative costs would be incurred. This order would
also have no effect on fixed costs.

Incremental revenue
(73 x 900 units) 65,700

Incremental costs
(81* x 900 units) 72,900
------------------------
Incremental profit (7,200)

Decision: Reject

*948600+290700 /15300 = 81*

PROBLEM 16: Rowena Corporation manufactures laser printers. Rowena currently
manufactures the 32,000 imaging drums that it uses in its printers. The annual costs to
manufacture these 32,000 drums are as follows:

Variable manufacturing cost P736,000, P23 per drum
Fixed manufacturing cost 2,080,000, P65 per drum

Hardware Solutions, Inc. has offered to provide Rowena with all of its imaging drum needs for
P72 per drum. If Rowena accepts this offer, 70% of the fixed manufacturing cost above could be
totally eliminated. Also, Rowena will be able to use the freed up space to generate P240,000 of
income each year in the production of alternative products.

Cost to make:
Variable costs 736,000
Avoidable costs(70% x 2080,000) 1,456,000
Opportunity costs 240,000
Cost to make 2,432,000

Cost to buy (32,000 x 72) 2,304,000

Decision: Buy


PROBLEM 17. CEEDEE CO. produces products X, Y and Z from a single raw material input
in a joint production process. Budgeted date for the next month is as follows:

X Y Z
Units produced (c) 1,500 2,000 3,000
Per unit sales value at split-off (a) P 19 P 21 P 24
Added processing costs per unit (d) P7.00 P7.50 P7.00
Per unit sales value if processed further (b) P 29 P 29 P 30

The cost of the joint raw material input is P 149,000. Which of the products should be sell as is or
processed further?

X Y Z
Units 1,500 2,000 3,000
Incremental revenue ( [b-a] x c) 15,000 16,000 18,000
Incremental cost (d x c) 10,500 15,000 21,000
Incremental profit 4,500 1,000 (3,000)
Decision Process Process Sell