ACCT 5301 Fall 2008

Exam #3, Form B

DIRECTIONS: Place your name, Form Letter, and Row Number in the Upper Right of your paper. Number
your paper from 1 to 16 down the left column.
MULTIPLE CHOICE (1 points each). Select the best response from among those listed.

1. Which of the following is a key consideration in selecting an allocation base?

a. The allocation base should have an indirect association with the cost objective.
b. The allocation base should be difficult to measure.
c. There should be logical or causal association between the allocation base and the incidence of costs.
d. The allocation base should be out of the control of management.
2. Which of the following cost categories would most likely use the number of employees as an allocation base?
a. Accounting b. Maintenance and repairs c. Personnel d. Purchasing
3. Deluxe Company has two service departments whose direct department costs are $15,000 and $25,000,
respectively, and two producing departments whose direct department costs are $200,000 and $150,000, respectively.
The combined total department costs for the producing departments after allocating the service departments are:
a. $350,000. b. $415,000. c. $390,000. d. $65,000.
4. When is the direct method of allocating service department costs most likely to provide a reasonably accurate cost
assignment?
a. When the number of departments providing services is sufficiently large.
b. When the total costs of each service department are widely different.
c. When departmental costs are blurred by substantial interdepartmental usage among service departments.
d. When all producing departments are using approximately the same percentage of services of each servicing
department.
5. Which of the sources listed below would a manager be LEAST likely to consider in deciding whether or not to
discontinue a given segment?
a. Direct segment costs
b. An evaluation of the importance of the segment to overall operations
c. The common costs allocated to the segment
d. Segment reports
6. Which of the following is a legitimate disadvantage of a 100%-of-variable-cost transfer pricing?
a. This price will not allow the selling division to make a long-run profit.
b. This price will discourage the purchasing division from buying internally.
c. At this price, if the selling division does not have excess capacity, the selling division will not wish
to sell anything to the outside market.
d. If the selling division has excess capacity, this transfer price will often lead the purchasing division
to act inconsistently with corporate goals.
7. A division that has a net loss and is expected to continue to have losses for the foreseeable future:
a. Should be abandoned if its division margin is negative.
b. Will increase net income for the company if the division is abandoned, only if all other divisions are showing profits.
c. Will increase net income for the company if the division is abandoned, only if corporate income is negative.
d. Will invariably increase net income for the company if the division is abandoned.
8. When an outside market exists for an intermediate product that is perfectly competitive, the ideal method of
transfer pricing is generally:
a. The one that creates the highest margin to the selling unit.
b. The price at which the product sells in the external market.
c. One that is higher than what the outside market is quoting.
d. Based on internal costs.

ACCT 5301 Fall 2008

Exam #3, Form B

9. When management directs attention only to those activities not proceeding according to plan, they are
engaging in:
a. Activity-based management
b. Organization-based management
c. Management by exception
d. Just-in-time management
10. Which of the following statements concerning zero-based budgeting is true?
a. Zero-based budgeting specifies that every line item must be rounded to the nearest thousand
dollar increment.
b. Zero-based budgeting specifies that every expenditure must be justified.
c. Zero-based budgeting is a variation of the incremental approach.
d. Zero-based budgeting is mainly used to assess research and development departments and
similar departments where the relationship between inputs and outputs is weakest.
11. Budgets based on the actual level of output, rather than the output originally budgeted, are called:
a. Activity budgets b. Flexible budgets c. Operating budgets
d. Static budgets
12. Generally, the first of the following budgets to be prepared is the:
a. Cash budget.
b. Operations budget.
c. Sales budget.
d. Purchases budget.
13. Relevant costs are best described as:
a. Future costs
b. Future costs that differ between competing decision alternatives
c. Opportunity costs
d. Out-of-pocket costs
14. The Syracuse Milling Company manufactures an intermediate product identified as W1. Variable
manufacturing costs per unit of W1 are as follows:
Direct materials
$ 2
Direct labor
$20
Variable manufacturing overhead
$10
Ithaca Tooling has offered to sell Syracuse Milling 10,000 units of W1 for $44 per unit. If Syracuse Milling accepts
the offer, $50,000 of fixed manufacturing overhead will be eliminated. Applying differential analysis to the situation,
Syracuse Milling should:
a. Buy W1; the savings is $20,000.
b. Buy W1; the savings is $50,000.
c. Make W1; the savings is $60,000.
d. Make W1; the savings is $70,000.
15. An ____________ cost is the net cash inflow that could be obtained if the resources committed to one action were
used in the most desirable other alternative.
a. Avoidable b. Contribution margin c. Outlay d. Opportunity
16. Elmira Corporation sells 2,000 units of product Y per day at $1.00 per unit. Elmira has the option of processing the
product further for additional costs of $500 per day to produce product Z, which sells for $1.30 per unit. If Elmira
processes product Y further to produce product Z, the company's net income will:
a. Decrease by $100 per day
d. Decrease by $500 per day
b. Increase by $100 per day
e. Increase by $600 per day
c. Increase by $500 per day

ACCT 5301 Fall 2008

Exam #3, Form B

EXERCISES: PLEASE SHOW YOUR CALCULATIONS ON YOUR WORKSHEET

Exercise A (6 points) Landis Company has the following sales forecasts for the selected three-month period in the
current year:
Month
Sales
April
$11,000
May
7,000
June
8,000
Seventy percent of sales are collected in the month of the sale, and the remaining balance is collected in the following
month.
Accounts Receivable balance (April 1)
$10,000
Cash balance (April 1)
5,000
Minimum cash balance is $5,000. Cash can be borrowed in $1,000 increments from the local bank (assume no interest
charges).
1. What is the expected balance in Accounts receivable for April 30 th?
2. Calculate the expected cash balance at the end of April, assuming that cash is received only from customers and
that $20,000 is paid out during April?

Exercise B (6 points) The Metal Can Company has 100,000 obsolete cans in inventory at a cost of $5,000. The cans
can be cut in half to make candle holders for $2,000. The candle holders can be sold for $3,000 in total. If the cans are
scrapped, they could be sold for $200. Which alternative should the Metal Can Company accept (the sale or the candle
holder alternative) and what is the relevant profit from the alternative?
Exercise C (6 points) Jackson Company has two service departments (S1 and S2) and two producing departments (P1
and P2). Department S1 costs are allocated first on the basis of number of employees, and Department S2 costs are
allocated next on the basis of space occupied expressed in square feet. Data on direct department costs, number of
employees, and space occupied are as follows:
Direct dept. costs
Number of employees
Space occupied

S1
$14,000
20
2,000

S2
$22,000
10
1,000

P1
$55,000
40
3,000

P2
$60,000
50
5,000

If Jackson uses the sequential (or step) method, what is the

1. Amount of S1 costs allocated to P2?
2. Amount of S2 costs allocated to P1?
Exercise D (6 points) Louisiana Mower Manufacturing Company has three divisions. Engine components are
transferred from Engine Components Division to Engine Assembly. Assembled engines are transferred from Engine
Assembly to the Mower Division. Costs for each division are given below. Mowers are sold on in a competitive
outside market for $250.
Division Name
Engine Components
Engine Assembly
Mower Division
Division
Division
Total variable costs other than
$40 per package
$10 per engine plus
$100 per mower plus transfer
transferred costs
of components
transfer
price paid to Assembly
price paid to Components
Total fixed costs for Division
$119,900
$61,200
$85,000
All transfers are made at 140% of variable cost. For 2008 Engine Components sends Engine Assembly 10,000
packages of engine components.
1. What is the transfer price per unit that Motor Assembly pays to Components for engine components?
2. What is the income before tax of the Engine Components Division for 2008?
SHORT ESSAYS (5 points each).
A. In this course, there were four aspects of company value that were emphasized (For a company to have value, it
must). Which aspects of value are affected when a company uses return on investment (ROI) as the sole measure of
performance for promotions, continued employment, and payment of bonuses? Describe how such a company may be
made more valuable over a two-year period by changing the performance measures and thus changing what the
bonuses are based on.

ACCT 5301 Fall 2008

Exam #3, Form B

B. Compare trade secret to copyright in protecting highly valuable customer information as to applicability, costs
and benefits.
C. The FastPrint Co. has two larger, very fast machines and five smaller, slower machines in their commercial copying
and printing business. The production overhead of $2,000,000 is allocated to work on the basis of 300% of direct labor.
Jobs for customers are priced at full cost (materials, labor, and overhead) plus 15% markup. The company president
noticed that the fast machines are always busy and the slow machines are used less than they used to be. Further, the
company has had losses for the past two years. In response, the president is considering phasing out the smaller,
slower machines. What is wrong with these circumstances?
D. Why is a plan and a budget more important in a circumstances that have more growth, uncertainty, and turmoil than
ones that have slow growth and very stable?
E. In the Atlantic City Casino case, the casino management submitted a proposal to senior management for a theme
park, some more rooms for the hotel, and floor space in the casino. Under the circumstances of the case, why would
this proposal likely get them fired?

Case (35 Points) The GRKI Co. makes cement in 32 plants in the USA and they also provide mixed concrete (a
mixture of cement with sand and crushed rock) to construction within 50 miles of each plant. GRKI has been in
business for over 60 years.
The primary raw materials in making cement are limestone and scrap metal. Since limestone is heavy, most
cement plants are built next to a limestone quarry. The product is made by crushing limestone and aluminum clay
(bauxite) with traces of other metals. The mix is heated to 2642 degrees Fahrenheit in a large rotating cylinder about
1/4th mile in length. At which point the limestone reacts with the clay, metals and oxygen to form a molten mixture,
which is called clinker when it cools. The clinker may be safely stored until needed. The clinker is ground into a gray
powder that is called cement, which is stable as long as there is no moisture, but starts reacting immediately with
moisture. The machinery in a cement plant is primarily computer operated with close tolerances on raw materials and
temperatures. The primary costs in making cement are materials, energy, a large plant, and some labor. Typical selling
prices are in the $70 to $110 per ton plus delivery charge. Total costs ranged from $65 to $100 depending on the costs
of fuel.
GRKI Co. recently formed a joint venture with ECO Co., a highly automated concrete plant operator. The joint
venture, called GRECO Co., was started in 2005 with a $10 million investment from each company and promised an
annual 20% return on average investment as very few workers were to be required to run each of the 20 automated
plants that were to be built. Cement was to be shipped from the GRKI plants as needed by GRECO. The price for
cement was to be full cost plus a 20% markup. GRECO Co. was to specialize in the lucrative road and bridge
construction business. This is a business in which the plants of GRKI also provide concrete. GRKI requires a 10%
after tax return on its investments.
During 2007, the first GRECO plant was completed and started operation. After the initial shake down in 2007,
the plant manager found the following statement of operations for 2008.
Revenue
$11,100,000
Less:
Materials cost
7,000,000
Fuel and utilities
800,000
Depreciation
1,500,000
Other expenses, including labor
and administration
1,300,000
Total Costs and Expenses
10,600,000
Income before Taxes
$500,000
Income Taxes
140,000
Net income

$360,000

The investment in GRECO is being depreciated over 12 years with a straight-line method and zero salvage value.
While Josh Rohr, the joint venture president, was pleased that the plant had made a profit, the income was insufficient
as the investment in the joint venture was $18 million in the first plant and new delivery trucks. About 90% of the
materials costs related to the cement. Josh knew that the plant had operated near capacity as there was a continuing
boom in the construction business and the market price of concrete was at historic highs. However, 2009 promised to
be a slower year with some major price declines. In discussions with Kendall Sneed, plant manager, he found that
several operational problems seemed to be occurring that had driven up the GRECO plant costs. The cement delivered
from the GRKI plants (from as far away as 150 miles even though there was a local GRKI plant) was not always the
best quality and about 15% had to be returned because of moisture spoilage and chemical properties. In some cases,
extra cement had to be added to the concrete mix to bring it up to very high bridge construction standards. There is
some worry in this because a portion of the concrete went into bridges where eventual failure could result in the loss of
life. GRKI plant managers stated that the problem was occurring in the GRECO plant with sloppy handling of the

ACCT 5301 Fall 2008

Exam #3, Form B

cement by the automated equipment. Mr. Sneed did not like the recent $118 per ton price ($90 cost plus $18 markup
and an average delivery charge of $10 per ton) arguing that he could do better on the open market given the quantities
he was purchasing. He believed that he could get better quality materials from local cement plants. Mr. Sneed was
also concerned that various mid-east wars were driving up the cost of fuel.
REQUIRED:
1. What is the average investment during 2008 in the GRECO plant assuming straight-line depreciation and zero
salvage value?
2. What was the rate of return on average investment for 2008?
3. Calculate the annual net income promised from the GRECO plant given the average investment from part (1.)
4. Assess the transfer policy and transfer pricing method applied by GRKI.
5. What are the primary sources of the operational issues with and profitability of the GRECO plant?
6. What are two ethical issues in this case?
7. Apply the framework of value generation given by the instructor throughout the course. What parts of the
framework apply and what parts do not apply in this case?
8. Develop two options for Mr. Rohr (joint venture president) to consider with at least one strength and one
weakness.
9. What would you recommend to Mr. Rohr and why?