COURSE:

Accounting 505

QUARTER:
TEST:

Summer 2006
Mid-Module Examination B

DATE:July 28, 2006

10 a.m. 12 noon

NAME:

(Please print)

__SOLUTION_______

Note: In all questions where there was potential flow-through error, that was
allowed for and full credit was given for doing the right thing with a number that
had been computed incorrectly in a previous question part.

All questions are to be answered in the spaces provided.

Where calculations are needed to arrive at a solution, you are advised to show enough
work so I can understand how you arrived at your answer. Partial credit is available on
some computational questions. However, unless your work is shown, it is not possible to
determine if partial credit points are appropriate.

Do not make any unsupported assumptions. However, if you feel the need to make
an assumption, please state it clearly.

Please confine your work to the examination paper.

You have approximately 120 minutes to complete this test. In the interests of maximizing
your grade, I recommend you skim through the entire exam before you start to answer
any question so you can plan your strategy.

If you need clarification (e.g. definition of words, unclear instructions, unclear problem)
during the test, raise your hand and I will come to you and provide clarification where
appropriate and allowable. I will not re-teach any point.

Space has been provided below each question for your response. Write complete
answers. For example, if asked to identify and explain, a list of items with no
explanations is not a complete answer.

Point values for each question are indicated in parentheses at the end of each
question.

There are 9 pages (including this title page) on this examination. Count your pages and
confirm that you have a complete package and that no pages are duplicated or missing.

By signing below you certify that the answers provided on this exam are the result of
your own legitimate efforts.

___________________________________
Your Name -- Signature

Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

Page 1 of 9

BUDGET YOUR TIME WISELY! GOOD LUCK!

Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

Page 2 of 9

Part I.
1.

Introduction, Cost Concepts and Terminology. (Chapters 1, 2, and 10)

Which of the following statements is true? [3]

A good managerial cost accounting system is narrowly focused on a continuous reduction of
costs.
b.
The key to a companys success is always to be the low cost producer in a particular industry.
c.
Cost accounting measures and reports short-term long-term, financial and non-financial
information.
d.
Managerial accounting reports information that has occurred in the past that is verifiable and
reliable.

a.

2.

Senior management is responsible for strategic planning. Identify and briefly describe the three
major roles of the management accountant in the strategic planning process. [6]

Problem-solving comprehensive analysis to determine alternatives. What is the best

alternative?
Score-keeping accumulating data and reporting reliable results. How are we doing?
Attention-direction directing and focusing managements attention on SWOT factors and
prioritizing action. (Strengths, Weaknesses, Opportunities and Threats.)
(Note: This question was widely answered in different ways. Six point were awarded if the
answer addressed the above issues. Four points if similar but reasonable answers. Three points if
different but captured some aspects of what management accounting is about. Two points if an attempt at
a response that has some merit.)
3.

Which of the following statements about customer value is not true? [3]
The value of a companys customers is reported on a corporations balance sheet.
Creating value for customers is an important part of planning and implementing strategy.
How our product or service delivers customer value should be determined as part of our
companys strategy formulation.
d.
It is possible to simultaneously lower cost and increase customer value.
a.
b.
c.

Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

Page 3 of 9

4.
Applied Materials, headquartered in San Jose, California, is the worlds largest manufacturer of the highly specialized equipment used by
microchip manufacturers such as Intel and Motorola. For each of the costs incurred by Applied Materials identified below, indicate to which
classification/s the cost would most likely belong. Note that costs can be classified in more than one way. The first item has been completed as
an example. [8]
Attachability
Product
Period

Traceability
Direct
Indirect

Variable

Behavior
Fixed

Mixed

Production supervisors salary.

X
X
X
Straight-line depreciation on assembly plant equipment.
X
X
X
Wages of machinists in the assembly plant.
X
X
X
Payroll for sales personnel. (Base monthly pay plus commission
X
X
based on sales generated.)
Depreciation on corporate jet. (Activity method is used based on
X
X
frequency of take-offs and landings
Cost of electricity used in corporate headquarters building.
X
X1
Some lights are left on all the time for security purposes.
Cost of electricity to power the equipment in the assembly plant.
X
X
X2
Gold components incorporated into the equipment being
X
X
X
manufactured.
Salaries of office personnel.
X
X
Note: Period costs are not classified as to direct or indirect; only product costs are. However, I did not deduct if you did classify them
because I did not indicate in the instructions for you not to do that.
5.

Refer to the column indicated mixed cost in the previous section, and answer the following questions:
(a)

What is the formula (i.e. the equation) that represents this type of cost behavior? [2]
Y = a + bX

(b)

Which is the theoretically best method for analyzing a mixed cost, and what specific information is obtained from such analysis? [4]
Least-squares regression analysis is the best method
Information obtained: total fixed costs, variable cost per unit, and strength (significance) of relationship between cost driver (X)
and total cost (Y).

If some lights are left on all the time, then there is a minimum level of cost incurred regardless of activity; this is a fixed cost portion. Additional cost will be
incurred as more lights and other power is used when the building is in use. Thus this is a mixed cost.
2
I accepted mixed cost for this answer IF you stated the assumption that there was a fixed cost charged by the electricity company. If you did not state that
assumption, the appropriate response was variable cost.
Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

Page 4 of 9

Part 2.
5.

Cost-Volume-Profit Analysis (Chapter 3)

Marsha Granberry is going to sell novelty Christmas tree lights for $15 a box. The lights cost Marsha $4 a
unit, but any unsold lights can be returned for a full refund. She is planning to rent a booth at the
upcoming Happy Holidays Convention, which offers three fee options:
1. paying a fixed fee of $800,
2. paying a $400 fee plus 10% of revenues made at the convention, or
3. paying 25% of revenues made at the convention.

Which of the following statements is false? [3]

a.
One of the options will allow Marsha to break even, even if she doesn't sell any lights.
b.
Operating income will be the greatest for Option 3, regardless of sales level.
c.
Her decision will determine the risk she faces.
d.
Contribution margin will vary, depending upon the option chosen.
6.

In a company with high operating leverage [3]

a.
total fixed costs are low and variable costs per unit are high.
b.
there is a higher possibility of net income than in a lower-leveraged firm during economically difficult
times.
c.
less risk is assumed than in a lower leveraged firm.
d.
small changes in sales volume result in large changes in net income.

7.

Goodfellows, Inc., sells a single product. The company's most recent income statement at 5,000 units of
sales is given below.
Sales
Less variable expenses
Contribution margin
Less fixed expenses
Pretax income
Taxes (at 35%)
Net income

$275,000
(123,750)
151,250
(90,000)
$ 61,250
21,438
$ 39,812

Please answer the following questions. Give answers to the nearest whole dollar where appropriate.
a.

Contribution margin ratio is

________55 % [2]

$151,250 cm -:- $275,000 sales

b.

Breakeven point in total sales dollars is

$ 163,636________ [2]

$90,000 fixed costs -:- 55% contribution margin ratio

c.

If sales increase by $40,000, pretax income will increase to

$ 83,250_________ [2]

$40,000 x 55% = $22,000 increase in pretax income. (Since there is no increase in fixed costs, the CM
relating to the sales increase will drop down to the bottom line.)
$61,250 + $22,0003
c.
To achieve $60,000 in net income, sales in units must be
_______________ [3]
{$90,000 + ($60,000 -:- 65%)} -:- $30.25 per unit (CM per unit)
Or divide by 55% to get target sales in dollars then divide by $55 unit selling price.
3

Several responses used different approaches. In each instance, working was checked and allowance for rounding
differences was made in the grading.
Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

Page 5 of 9

Part 3. Job Order Costing. (Chapter 4)

8
(CPA adapted) Flintsone Manufacturing, Inc. uses a job order cost system. The company applies
manufacturing overhead to jobs using a predetermined overhead rate based on machine hours. On July 28, Job
#225 was completed. It was shipped to the customer on July 31. The selling price was $22,500, allowing a
gross profit of $4,750 to be realized on that item.
The job cost sheet for Job #225 showed direct materials cost of $5,000 and direct labor cost of $6,000.
A notation indicated that overhead was applied to the job based on 50 machine hours used in the manufacturing
process.
(a)

What was the total manufacturing cost for Job #225? [2]
Selling price of $22.500 less cogs = gross profit of $4,750
Therefore, manufacturing cost of job was $17,750

(b)

What was the overhead application rate per machine hour being used during the month of July? [3]
$17,750 - $5,000 materials - $6,000 labor = $6,750 total overhead applied to Job 225
$6,750 -:- 50 machine hours = $135/machine hour

9.
Abernathy Company uses a job-order costing system to record its manufacturing operations. It applies
manufacturing overhead using a predetermined budgeted rate. Any material amount of under- or over-applied
overhead is accounted for at the end of each month using a proration approach based on ending balances in
WIP, Finished Goods, and Cost of Goods Sold. The following journal entry was made on March 31 to close the
Manufacturing Overhead account:
Work in Process
Finished Goods
Cost of Goods Sold
Manufacturing Overhead
(a)

1,800
3,600
18,600
24,000

Was overhead under- or over-applied during March? [2]

Under-applied. . (Since MOH is beginning credited, there must have been a debit balance after
overhead was applied.)
(b)

Speculate as to what reasons could cause overhead to be over- or underapplied? Be specific. [3]

Since overhead is applied based on a predetermined overhead application rate, that rate was not equal
to actual overhead rate because of estimation errors about the numerator (overhead to be incurred)
and/or about the denominator (application base driver units to be incurred). Noteyou needed to
address the potential for error in both the numerator and the denominator to receive full credit for this
question.

Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

Page 6 of 9

Part 4. Activity-Based Costing. (Chapter 5)

10.
(a) How is an Activity Based Costing (ABC) system different from a traditional costing system? (b)
What is a significant advantage it provides over a traditional system? (c) Give an example of a management
decision that can be enhanced by the use of activity-based costing information. (d) Identify two difficulties
associated with ABC. (Note there are 4 parts to this question for you to address see highlighting. Please be
sure you address all parts in your answer, but limit your answer to the space provided.) [8]
a.
ABC sorts overhead into individual, homogeneous cost pools that relate to several activities
undertaken to manufacture a product or provide a service. The cost pool dollars are allocated to cost
objects based on their relative consumption of the underlying driver of each cost pool. In a traditional
system, all indirect costs are accumulated in a single cost pool, and only one cost base is used for
allocation. This cost base was generally a labor or materials number, which bore no relationship to the
overhead. [2 points]
b.
ABC allocates indirect costs on more of a cause-and-effect basis, allowing management to
determine the true costs being consumed by the cost objects. [2 points]
c.
Examples could include pricing decisions; product-mix decisions; determination of elimination
of activities (evaluation), planning decisions.. [2 points]
d.
Difficulties: Requires identifying and analyzing a large amount of data. Needs a sophisticated
information system. It is costly to implement and manage. [ 1 point each disadvantage, total 2 points]
Part 5.

Process Costing (Chapter 17)

11.Which of the following is not a characteristic of a process costing system? [3]

a.
The focus is on continually producing like units.
b.
Costs are accumulated by department.
c.
Upon completion, all units in a batch have precisely the same amount of materials, labor, and
overhead cost in them.
d.
These systems are more likely to be used for attaching costs to products that have a high unit
value.

Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

Page 7 of 9

12. Wilson Manufacturing uses the weighted-average method to compute equivalent units in its processing
cost system. The Forming Department is the first of a two-stage production process. The following
information concerns the departments conversion costs for May
Beginning inventory
Units started in May
Ending inventory
a.

Number of Units
1,000, 40% converted
8,000
4,000, 75% converted

Conversion Costs
$5,200
$72,800 added in May

What is the conversion cost per equivalent unit for the month of May? [4]

Compute equivalent units for conversion:

Units in beginning inventory, 100% work assumed this period
Units started and finished
Ending inventory units, 4,000 x 75% conversion added
EU for conversion costs

1,000
4,000
3,000
8,000

Total conversion costs of $78,000/8,000 EU = $9.50 per unit

b.
If materials cost per equivalent unit was $2.50 for the month of May, what would be the journal entry to
transfer total processing costs relating to units transferred from the Forming to the Finishing Department at the
end of May? [4]
5,000 units were completed and transferred from Forming to Finishing at $12.25 per unit ($9.75 for
conversion + $2.50 for materials.) Total cost transferred, $61,250
WIP Finishing Department
WIP Forming Department

61,250

Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

61,250

Page 8 of 9

Part 6.
13.

Decision Analysis.

(Chapters 11 and 21)

All of the following statements relating to decision analysis are true, except [3]
a.
Regardless of any existing constraining resource, to maximize profits managers should produce
more of the product with the greatest contribution margin per unit.
b.
When replacing an old machine with a new machine, the sales value of the old machine is relevant
to the decision, but the book value of the old machine is not relevant.
c.
A cost may be relevant for one decision, but not relevant for a different decision.
d.
In a make-or-buy decision, when there are alternative uses for capacity, the opportunity cost relating
to that capacity is relevant.

14.
Silver Lake Cabinets has been approached by Ms. Jenny Zhang, not a regular customer, to fulfill a large
one-time-only special order for a product similar to one offered to regular customers. The following per unit data
apply for sales to regular customers:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total manufacturing costs
Markup (60%)
Unit selling price

$100
125
60
75
360
216
$576

Silver Lake Cabinets has excess capacity available to meet this special order. Ms. Zhang wants the
cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit.
a.
Considering only quantitative factors, what is the minimum price that Silver Lake Cabinets could
accept for this one-time-only special order? [3]
Sum of incremental costs. $100 + $30 direct materials + $125 direct labor +$60 variable manufacturing
overhead = $315. Fixed costs are not relevant because (a) we assume that Silver Lake is
planning to recover it all through its regular sales, and (b) you were not told that Silver Lake
was considering acquiring additional capacity.
b.

How would your quantitative analysis differ if Silver Lake had limited capacity available? [4]

You would need to add opportunity cost related to the contribution margin of regular sales forfeited to
the incremental manufacturing costs. Note that some of you calculated an amount here. However,
strictly speaking, since you did not know how many regular sales were to be forfeited, nor did you know
how many units Ms Zhang ordered, you could not work out a specific opportunity cost per unit. Those
that did the calculation assumed a one-to-one relationship between forfeited sales and special order
sales.
c.
What are other (i.e. qualitative) issues that Silver Lake Cabinets should consider before making a
decision as to whether or not to accept this one-time-only special order? (Bullet-point format is preferred in
your answer.) [6]
I accepted any two of the following:
How the regular sales/market would be affected.
Whether Ms. Zhang would sell to the same market and undercut our prices.
Whether this was really a one-time order, or was there a long-term potential issue.
If there was limited capacity, whether or not to expanded and incur additional fixed costs.
(The issues of employee morale and intellectual property rights do not really apply here. They relate to
outsourcing decisions, which this was not.)

Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

Page 9 of 9

15.

In using the net present value method in capital budgeting analysis, only projects with a zero or positive
net present value are acceptable because [3]
a.
the return from these projects equals or exceeds the required rate of return.
b.
the return from these projects equals or exceeds the internal rate of return.
c.
the return from these projects equals or exceeds the accrual accounting rate of return.
d.
a zero or positive net present value on a particular project guarantees company profitability.

16.

Cabins and Ignoble Bookstore wants to buy a new coding machine to help control book inventories. The
machine under consideration costs $38,000 and requires working capital of $4,000. Its estimated useful
life is eight years after which it will have a salvage value of $2,000. Recovery of working capital will be
$4,000 at the end of its useful life. Annual cash savings from the use of the machine will be $7,000.

(a)
If Cabins and Ignoble has a required minimum rate of return of 10% on projects of similar type and risk,
would this project be acceptable? Why? Support your answer with an appropriate NPV computation. [5]
NO. The project is not acceptable because it generates a return less than the required 10%
NPV calculation

Inflows *:

PVOA, 8 periods, 10%, 7,000 x 5.335 $37,345

PVLS, 8 periods, 10%, 6,000 x 0.467
2,802
Total PV of inflows
$40,147
PV of outflows Cost of $38,00 + WC of $4,000
NPV of investment project

42,000
$(1,853)

(b)
Without calculating it, comment on the internal rate of return of this project compared with the required
rate of return, and justify your comment. [3]
The IRR is less than the RRR. We know this because the NPV is negative.

Acctg 505 Mid-Module Examination B. Widdison, Summer 2006

Page 10 of 9