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COURSE:

QUARTER:
TEST:

Accounting 505
DATE:XXXXXXXX
Summer 2006 Mid-module
Selected sample questions and study guidance.

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Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

Introduction, Cost Concepts and Terminology


1.

Management accounting
a. focuses on estimating future revenues, costs, and other measures to
forecast activities and their results.
b. provides information about the company as a whole.
c. reports information that has occurred in the past that is verifiable and reliable.
d. provides information that is generally available only on a quarterly or annual
basis.

2.

What is meant be a firms business strategy? How can management accounting


help in formulating such a strategy?
A firms business strategy is a formulated plan of action in which the objectives isi to
achieve the long-term profitability goals of a company.
Management accounting can help formulate strategy by providing information about a firms
sources of competitive advantage. Possibilities range from capitalizing on low-cost or
efficiency advantage relative to competitors so as to be able to charge lower prices, to
capitalizing on the ability to charge premium prices through providing distinctive features
that consumers value.

3.

What is meant by (a) a firms value chain, and (b) its supply chain? What is
management accountings function with respect to these chains?

A firms value chain is the sequence of business processes in which utility/usefulness is


added to a product or service in the eyes of the customer. For a manufacturing concern,
production is at the heart of the chain. Upstream links are R&D and design; downstream links are
distribution, marketing, and product support. Not all firms engage in all activities in the chain.
Some links are outsourced (e.g. Boeing manufacturing of 787) and some are vertically
integrated with other companies (e.g. use of distributors in the soft-drink industry.)
A firms supply chain is the flow of goods, services, and information from the firms
suppliers, through production, to the delivery of products and services to the firms customers.
The most significant function of management accounting with respect to these chains is
the providing of relevant cost information so that the links in which the firm actively participates
so that managers can make appropriate cost-benefit analyses of the options available to them.
With respect to the supply chain, management accounting plays an important role in the
integration of activities across companies in the chain.

Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

4.
Archambeau Products Company manufactures custom office furniture. Recently, the
company decided to develop a formal cost accounting system and classify all costs into three
categories. Categorize each of the following items as being appropriate for (1) direct cost
tracing to the finished furniture, (2) allocation of an indirect manufacturing cost to the
finished furniture, or (3) as a nonmanufacturing item i.e. a period cost. Additionally,
speculate as to the most likely behavior of this cost: variable, fixed, or mixed.

Item
Carpenters wages
Depreciation - office building
____F___
Glue for assembly
____V___
Lathe department supervisors
salary
____F___
Lathe depreciation
____F____
Lathe maintenance
____V*___
Lathe operator wages
____V____
Lumber
____V____
Metal brackets for drawers
____V____
Power for lathe dept.
Factory washroom supplies
____V____

Cost
Tracing
___X____
________

Cost
Allocation
________
________

Period
Cost
_________
___X____

________

____X____

________

________

____X___

________

________

____X____

________

________

____X____

________

___X____

________

________

___X_____ ________

________

________

____X____

________

________
________

___X____
____X____

________
________

Cost
Behavior
____V___

____M___

* Depends on process. If scheduled routinely, then there is a fixed component. However, it would be reasonable to
assume that the higher the production volume, the more maintenance would be needed. Answer could also
be M for mixed.

Job Costing
5.
(a) Describe the essential elements of the mechanics of a job costing system. Include,
but do not limit your description to, an explanation of how job cost sheets are used and their role
in keeping track of costs. (b) Under what circumstances would a company use a job-costing
rather than a process-costing system?
a.
In a job costing system, direct costs (materials and labor) are recorded on job
cost sheets (one for each job) on a daily basis as incurred/used. Overhead is applied
upon job completion based on a predetermined overhead application rate. Costs of
individual jobs are moved between inventories (WIP, FG, and COGS) as the jobs
move/sell. Summary entries to transfer total materials, labor, and overhead costs
applied into WIP from the appropriate accounts are made at the end of each month. Any
over/underapplied overhead is closed out periodically. [5 points]

Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

b.
Job costing is used when high-value, somewhat customized products are being
made, often to customer specification. It identifies the costs relating to each specific job
rather than relying on an averaging approach. [3 points]

Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

6.

Job-cost records for Boucher Company contained the following data:


Job No.
220
221
222
223
224

Date
Started
May 18
May 20
June 7
June 10
June 19

Date
Finished
June 12
June 19
July 5
June 28
July 16

Date
Sold
June 20
June 21
July 12
July 1
July 25

Total Cost
of Job
at June 30
$6,000
4,000
7,000
6,500
8,000

Required:
a.
Provide the journal entry to record cost of goods manufacture for June.
a.
Compute WIP inventory at June 30.
b.
Compute finished goods inventory at June 30.
c.
Compute cost of goods sold for June.
Solution:
a.
Goods completed and moved to finished goods during June were Jobs Nos.
220, 221, and 223. The total cost of these jobs is $16,500

b.
c.
d.
7.

Debit:
Finished goods
16,500
Credit:
Work in process
7,000 + $8,000 = $15,000
$6,500
$6,000 + $4,000 = $10,000

16,500

Petersons Plastic Products Company manufactures pipes and applies manufacturing


costs to production at a budgeted indirect-cost rate of $8 per direct labor-hour. The
following data are obtained from the accounting records for June 20x2:
Direct materials
Direct labor (8,000 hours @ $21/hour)
Indirect labor
Plant facility rent
Depreciation on plant machinery and equipment
Other indirect manufacturing costs
Sales commissions
Administrative expenses

$400,000
$168,000
$ 22,000
$ 10,000
$ 15,000
$ 12,000
$ 30,000
$ 40,000

Required:
a.
What actual amount of manufacturing overhead costs was incurred during June
20x2?
$59,000. See highlighted items in list above.
b.
What amount of manufacturing overhead was allocated to all jobs during June 20x2?
$64,000. (8,000 DL hours @ $8 per hour.)

c.

For June 20x2, was manufacturing overhead under-allocated or over-allocated?


Explain. MOH was over-allocated by $5,000 because $64,000 applied is greater than
the $59,000 MOH actually incurred.

Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

d.

What are some possible reasons for overhead allocated to be different from
overhead actually incurred?
Numerator error. Poor estimation of budgeted overhead for the coming period,
resulting in an application rate that was too high.
Denominator error: Actual labor hours incurred during the period was greater than
anticipated for planned production. In this scenario, the application rate of $8 per hour
might have been a reasonable estimation, but excess labor hours worked led to overapplication of overhead.

e.

Assume that the ratios of MOH in the ending balances of WIP, FG, and COGS were
10%, 20%, and 70% respectively. What approach would you recommend be taken
to clearing out the misallocation amount that you have identified in (c)? Why?

Adjust the entire $5,000 directly to Cost of Goods Sold. If the proration approach were
used, COGS would be reduced by 70% of the $5,000 (i.e. $3,500). This is only $1,500 less than the
direct adjustment amount and is not materially different. Additionally, the effect of proration on
both WIP and FG is not material because of the low amount of MOH remaining in those balances.
A cost-benefit position supports direct write-down.
If you believe that accuracy of reporting is of supreme importance, you would argue for
proration. However, you would need to justify this approach from a cost-benefit point of view.

Activity-based Costing
8.
(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.) (10 points)
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. [3 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. [3 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]

Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

9.
Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate
for allocating manufacturing overhead. The plant manager believes it is time to refine the
method of cost allocation and has the accounting department identify the primary production
activities which generate indirect costs and their cost drivers:
Activities
Materials handling
Assembly
Inspection

Cost driver
Number of parts
Labor hours
Time at inspection station

Allocation Rate
$2 per part
$20 per hour
$3 per minute

What is the total indirect manufacturing cost per remote control assuming an activitybased-costing method is used and a batch of 50 remote controls is produced? The batch
requires the assembly of 100 parts, the use of 6 direct manufacturing labor hours, and total
inspection time of 2.5 minutes.
Materials handling: 100 parts x $2 per part =
Assembly
6 hours x $20 per hour =
Inspection
2.5 mins. x $3 per min. =
Total indirect costs
Divided by 50 remotes

$200
120
7.50
$327.50 (+3 points)
$6.55 per remote (+3 points)

Process Costing
10.
Assume that direct materials are added at the start of the process. If there was no
beginning work-in-process inventory and no ending work-in-process inventory, under the
weighted-average process costing method, the number of equivalent units for direct materials
would be
a.
b.
c.
d.
e.

equal to the units started or transferred in.


equal to the units completed.
less than the units completed.
both (a) and (b).
none of the above.

11. The president of the Gulf Coast Refining Corporation wants to know why his golfing
partner, who is the chief financial officer of a large construction company, calculates his costs by
the job when his own corporation calculates costs by average units rather than by individual
barrel of oil.
Construction companies manufacture highly individualized products which have high value;
therefore, it is necessary to track costs relating to each individual job. This requires a job-order
system. Refining corporations, however, produce large quantities of like units of product from a
barrel of oil. There is no need for differentiation of costs relating to the different batches
produced. This calls for a processing costing system.

Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 12 through 15.


Injection Molding, Inc., manufactures plastic moldings for car seats. Its costing system utilizes
two cost categories, direct materials and conversion costs. Each product must pass through
Department A and Department B. Direct materials are added at the beginning of production.
Conversion costs are allocated evenly throughout production.

12.

Data for Department A for February 20x3 are:


Work in process, beginning inventory, 40% converted
Units started during February
Work in process, ending inventory, 30% converted

1,000 units
7,000 units
500 units

Costs for Department A for February 20x3 are:


Work in process, beginning inventory:
Direct materials
Conversion costs
Direct materials costs added during February
Conversion costs added during February

$100,000
$100,000
$1,000,000
$1,250,000

How many units were completed and transferred out of Department A during February?
7500. (1000 beginning inventory + 7000 units started 500 ending inventory)

13

What is the unit cost per equivalent unit in Department A?


Determine EU for materials and conversion:
Units completed
Ending inventory, complete as
to materials; 30% converted
WA Equivalent Units

Materials
7500

Conversion
7500

500
8000

150
7650

Materials cost per EU ($1,100,000/8000 units)


Conversion cost per EU $1,350,000/7650 units)
Total cost per EU
14.

Provide the journal entry to transfer the units finished and transferred to Dept. B at the end
of February.
WIP Department B
WIP Department A

15.

$137.50
176.47
$313.97

2,354,775
2,354,775

What was the balance of WIP of Dept. A at the end of February?

500 EU as to materials at $137.50/EU


150 EU as to conversion at $176.47/EU
Balance of WIP Dept. A end of Feb.

$68,750.00
26,480.50
$95,220.50

Note that the total of costs transferred out and ending WIP are not quite equal to total costs to be
accounted for of $2,450,000. The small difference is due to rounding of conversion cost per EU

Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

16.
Munir Hassan, controller, gathered data on overhead costs and direct labor-hours
over the past 12 months. List and discuss the different approaches Munir can use to estimate a
cost function for overhead costs using direct labor-hours as the cost driver. Include in your
discussion an assessment of the reliability and applicability of each approach.
The four approaches to cost estimation are:
1.
2.
3.
4.

Industrial engineering method


Conference method
Account analysis method
Quantitative analysis of cost relationships and behavior

The industrial engineering method, also called the work-measurement method,


estimates cost functions by analyzing the relationship between inputs and
outputs in physical term.s This method is quite reliable when applied to
measurement of easily traceable costs. It is applicable to cost estimation for new
projects.
The conference method estimates cost functions on the basis of analysis and
opinions about costs and their drivers gathered from various departments of an
organization (purchasing, process engineering, manufacturing, employee
relations, etc.). It is not a very reliable method since it incorporates judgmental
opinions. It is applicable to cost estimation for new projects.
The account analysis method estimates cost functions by classifying cost
accounts in the ledger as variable, fixed, or mixed with respect to the identified
cost driver. The reliability of this method is dependent on the experience and
expertise of the estimate in relation to this cost. It can be highly effective, but is
subject to individual judgment. It is applicable to estimation of continuing costs
which have a historical record.
Quantitative analysis of cost relationships and behavior are formal methods, such
as the high-low method or regression, to fit linear cost functions to past data
observations. Although these methods are generally the most reliable, some are
less reliable than others. The high-low method is quick and easy, but ignores all
but two data observations. Graph methods rely on subjective estimation for the
line of best fit. Least-squares regression is the most reliable method since it
takes into account all historical data observations. It is applicable in any cost
estimation where there are historical data observations.
Cost-Volume-Profit Analysis
17.

The Tessmer Company has fixed costs of $400,000 and variable costs are 75% of the
selling price. Its tax rate is 35%. If Tessmer plans to sell 500,000 units and wants to
realize an after-tax profit of $130,000, what must the unit selling price be? (Give your
answer in dollars and cents, please.)

Let X be unit selling price


500,000X 0.75(500,000X) 400,000 = 130,000/(1-.35)
125,000X = $200,000 + $400,000
X = $4.80
Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

18.

(CPA adapted) The strategy most likely to reduce the breakeven point would be to
a.
increase both the fixed costs and the contribution margin.
b.
decrease both the fixed costs and the contribution margin.
c.
decrease the fixed costs and increase the contribution margin.
d.
increase the fixed costs and decrease the contribution margin.

19.
Why is the cost-volume-profit decision model described as fragile? Identify and
describe two of the underlying assumptions that support your answer. (Please confine your
answer to the space provided.)
The CVP model is fragile because its underlying assumptions are simplistic and not
often actually realized.

Any two of the following items identified in Chapter 3 lecture notes. The
comments in parentheses address the reason for the fragility in the assumption.

Volume of units produced and sold is the only driver affecting changes in
revenue and costs. (Many activities have more than one driver.)

Total costs can be divided into fixed and variable components. (Some
costs are mixed and regardless of the analytical method used to separate
the fixed and variable components, such data are only estimates.)

All costs and revenues are linear,( but this is not always the case. It is,
therefore, critical that the analysis be confined to the range of activity and
time period over which the costs are linear.)

Unit SP, VC, and total fixed costs are known and constant. (This is not
always the case particularly the constant aspect of this assumption.)

Sales mix, if multi-product company, remains constant.(This is subject to


the whims of the consumer and sales mix can be widely different in
practice than what was estimated.)

Inventories are kept constant or at zero. (This is difficult to manage and


maintain, even in a just-in-time environment.)

There is a relevant range of volume within which the above assumptions


are valid .(Hopefully, this relevant range has been correctly estimated.)
20.
Northwestern Business College is planning to hold a fundraising banquet at one of the
local country clubs. It has two options for the banquet:
OPTION 1:

Crestview Country Club


a. Fixed rental cost of $1,000.
b. $12 per person for food.

OPTION 2:

Tallgrass Country Club


a. Fixed rental cost of $3,000.
b. A caterer who charges $8.00 per person for food.

In addition to the above costs, regardless of which site is selected, Northwestern expects to
incur $1,800 for administrative and marketing expenses. It also plans to hire a band, which will
cost another $800. Tickets are expected to be $30 per person. Local business supporters will
donate any other items required for the event.

Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

10

(a) At what number of ticket sales would Northwestern generate the same amount of profits,
regardless of which option it selects?
Contribution margin for Option 1 is $30 - $12 = $18; for Option 2 is $30 - $8 = $22 (Partial
credit of 1 point each is available if each CM is shown.)
Let X be the number of ticket sales at indifference point.
18X ($1,000 + $1,800 + $800) = 22X ($3,000 + $1,800 + $800)
18X $3,600 = 22X $ 5,600
X = 500 tickets
(Note that full credit is awarded if you used simply the fixed cost for each option in your
equation above. Since the other fixed costs are the same in either option, they are
essentially irrelevant, and the answer is the same in terms of tickets at indifference
point.)
(b) Which option has the lower level of risk? What is the disadvantage of this option? (Provide
calculations that will support your answer.)
The lower-risk option is Option 1, the one with the lower break-even point. Even though
its contribution margin per ticket is lower than that of Option 2, the lower total
fixed costs provide a break-even point at lower ticket sales. +2 points
Disadvantage is that, once the break-even point has been reached, the profit per ticket is
smaller than Option 2. +2 points
Contribution margins: Option 1 is 200 tickets ($3,600/$18). Option 2 is 255 tickets
($5,600/$22) +1 point to show calculation.
(Note that the total fixed costs must be used to determine actual break-even points. If
only the fixed costs for each option are used, the break-even points will be
incorrect.)
(c) Which option has more profit potential? What is the disadvantage of this option? Again,
please provide calculations to support your answer.
Option 2 has more profit potential. Once breakeven point is reached, profit is generated
at the rate of $22 per ticket as opposed to $18 per ticket for Option 1. +2 points
The disadvantage is that the break-even is higher, and so this option is more risky. +2
points
Calculation of break-even point for Option 2 needs to be presented either here or shown
in your response to (b) above. +2 point

Acctg 505 Cost Accounting Mid-Module Sample Questions and Study Guidance Widdison

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