Sample final exam questions

1.

The following data were extracted from records of Balmhurst Mfg.

for 2007. Balmhurst applies overhead on the basis of machine
hours.
Estimated overhead cost
$800,000
Actual overhead cost
795,000
Estimated machine hours
40,000
Estimated production in units
80,000
Actual machine hours
38,000
Actual production
81,000
a.

How much overhead was applied to production if

Balmhurst used a normal costing system for 2007?
POR = $800,000 40,000 = $20 per machine hour
Applied OH = 38,000 X $20 = $760,000

b.

How much overhead was applied to production if

Balmhurst used a standard costing system for 2007?
POR = $20 per machine hour
= $20 X SH; and
SH = 81,000 X .5 = 40,500
= $20 X 40,500 = $810,000

2.

The direct labor rate variance for Boston Technical

Applications for March was $17,600 (favorable). For this period
of time, the company worked 4,000 actual hours at a total cost of
$160,000. Standard hours allowed for the period were 3,750. What
was the standard labor rate per hour for the period?
AH(SR - AR) = $17,600
4,000(SR - $40) = $17,600
4,000(SR) - $160,000 = $17,600
4,000(SR) = $177,600
SR = $44.40

3.

Johnson Controls uses a standard cost system and applies overhead

on the basis of machine hours. At standard, 5 machine hours are
required to make a unit of product. For a given month, the
variable overhead efficiency variance was $3,000 UF. For this
month the standard variable overhead rate was $12 per machine hour
and actual machine hours worked were 15,000. How many units did
the company make during this month?
SR(SH - AH) = -$3,000
$12(SH - 15,000) = -$3,000
$12(SH) - $180,000 = -$3,000
$12(SH) = $177,000
SH = 14,750
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Units produced = SH 5
units produced = 14,750 5 = 2,950
4.

Elsa Manufacturings annual production costs can be described

by the following cost equation: Y = $3,000,000 + $25X;
where Y is total production costs and X is units of production.
Elsa manufactures about 30,000 units of its single product each
year.
Given only the preceding information, what kind of accounting
tools would likely be most useful in managing Elsas production
costs? Explain.
At 30,000 units, total costs = $3,000,000 + $25(30,000)
= $3,750,000
Thus, 80% ($3,000,000/$3,750,000) of the costs are fixed at
current operating levels relative to production volume.
If 80% of the costs are fixed, cost management techniques must be
suitable for the control of fixed, rather than variable, costs.
Of the cost management techniques we have discussed, activitybased costing, or more specifically, activity-based management may
be very helpful. By thinking of the fixed costs as long-term
variable costs, we can set about the task of finding the cost
drivers of these fixed costs. Obviously, these costs are driven
by activities above the unit volume level - batch,
product/process, or organizational. Further, by identifying which
of these activities are nonvalue-adding, we can work to reduce the
level of such activities and, thereby, reduce costs. Activity
analysis may be used in conjunction with ABM to reduce the level
of nonvalue-adding fixed costs.
The capital budget is another useful tool for managing fixed
costs. Because many fixed costs are related to investments, the
commitment to incur fixed costs is made in the capital budget. By
carefully screening and analyzing in the capital budgeting process
proposed new investments, we can weigh on a cost/benefit basis our
decisions to increase investments and fixed costs.
Standard costing can be used to help manage fixed costs. The
fixed overhead volume variance will capture any cost deviations
between the budgeted amount and the actual amount. The volume
variance will provide information about capacity management. By
monitoring capacity usage and keeping the volume high, the fixed
cost per unit is minimized.

5.

Many managers believe that if they do not spend all amounts in

their budgets during a period, they will lose allocations in
future periods and will receive little or no recognition for cost
2

savings. The Institute of Management Accountants surveyed its

members and received the following responses regarding the
incentives to come in under budget:
Percent of respondents
Management encourages me to spend entire budget.
17%
If I dont spend my entire budget, next years
budget will be smaller.
33%
I would not be recognized for ending my budget
period with a positive balance.
30%
If I ended the budget period with a significant
balance, I would be considered a poor budget
estimator.
20%
Total
100%
If in your firm you were charged with the task of changing the
dysfunctional budgeting behaviors mentioned above, what measures
would you take to address the problem?
The problem is that managers are playing games with their budgets
because the managers incentives have been improperly linked to
the budgets.
The problems arise because the budgets alone are used to
control organizational segments. The simplest solution is to
complement the budget with other performance measurements,
especially nonfinancial performance measurements. By using other
performance measures, a managers underspending or overspending can
be better understood. The objective is to be able to understand
what was accomplished because of the budgetary expenditures.
Another suggestion is to decompose the overall budget into
individual line items. By comparing spending on a line item by
line item basis, any differences between budgeted and actual
spending can be better interpreted. For example, underspending on
maintenance may be interpreted negatively (and overspending
interpreted positively), but underspending on quality failure
costs would be interpreted positively.
The important point to be made is that spending the exact
budgeted amounts (no over- or underspending) is not likely to be
the optimal pattern in all circumstances. Managers should have
the autonomy to underspend or overspend if the goals of the
organization would be better served by doing so. They will be
willing to underspend or overspend only if such acts will not be
interpreted negatively.
6.

The following data were taken from cost records of Ellyfield Corp.
for its first month of operations. The firm uses a standard
costing system.
Standard cost for material: 3 lbs. @ $4 = $12 per unit
Actual materials purchased: (28,000 lbs.) $109,200
Actual materials used: 27,900 lbs.
Actual units produced: 9,000
a.
Assuming Ellyfield Corp. recognizes the DM price
variance based on the quantity of materials used, record the
purchase of materials.
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Direct materials
$109,200
Accounts payable (cash)
b.

$109,200

Do you believe Ellyfield uses a JIT system?

or why not?

Why

The company may indeed use JIT. The strongest evidence that
we have is the fact that the company purchased a quantity of
material (28,000 pounds) that very closely matches the
quantity of material used in production (27,900).
c.

What was the amount of the material quantity

variance?
SQ = 9,000 X 3 = 27,000 pounds
MQV = $4(27,000 - 27,900) = $3,600 UF

7.

For January 2008, X-Mar Mfg. recorded a favorable direct labor

yield variance of $20,000 and an unfavorable direct labor mix
variance of $12,000. Explain to your friend, a naive marketing
major, the likely cause of this pattern of variances.
Apparently, the production manager increased the proportion of
higher-skilled workers in the labor mix. This change had the
effect of decreasing the total time required to produce the
achieved level of output (as reflected in the favorable yield
variance). However, as a consequence of the increased proportion
of higher skilled (higher paid) workers, the average rate paid per
hour for labor increased. This is reflected in the unfavorable
labor mix variance. Even so, the change made by the production
manager was effective because the net result was an $8,000
favorable direct labor efficiency variance.

8.

In an environment in which job order costing is used, explain

where in the flow of product costs, one would find the total cost
of jobs completed during a period.
The total cost of jobs completed during a period could be found
either as the total credits to the work in process control
account, or the total debits to the finished goods inventory
control account (assuming a finished goods inventory account is
maintained; otherwise, the total debits to cost of goods sold
would show the cost of goods completed during the period).

9.

How can one tell, by an examination of the accounting records,

whether a good estimate to develop a predetermined overhead rate
was made of the overhead cost to be incurred during
a period?
The most direct evidence would be the extent to which overhead was
over- or underapplied for the period. If applied overhead is very
close to the actual amount, it can be assumed that a good estimate
was made.

10.

How could target costing be used in the development of a new

product to increase manufacturing cycle efficiency (MCE)?
Manufacturing cycle efficiency is the ratio of value adding time
to total time. This ratio can be increased by eliminating
nonvalue adding time. Because target costing is based on the
consumers valuation of a product or service, target costing can
be a tool to identify nonvalueadding activities. By eliminating
nonvalue adding activities, costs will be reduced and the
likelihood of realizing the target profit amount will be
increased; and, MCE will be increased as a result.

11.

Daunita Weitz manages the marketing department at Minnesota Lighting Company.

Daunita is evaluated based on her ability to meet budgeted revenues. For May
2008, Daunita's revenue budget was as follows:
Budgeted unit margin per unit
Unit sales
Floor lamps
$ 60
1,600
Hanging lamps
32
2,150
Ceiling fixtures
40
4,200
The actual sales generated by Ms. Weitz's marketing department in May were as
follows:
Actual margin per unit
Total margin in dollars
Floor lamps
$62
$ 93,000
Hanging lamps
35
78,750
Ceiling fixtures 41
172,200
For May 2008, compute the sales price, mix, and volume variance. Please assume
there were no cost variances incurred for the period.

Floor lamps
Hanging
lamps
Ceiling
fixtures

Actual sales
9300
0
7875
0
1722
00
3439
50

AQ * AM * SP
9000
0
7200
0
1680
00
3300
00

Unit margin

sales
mix
5

AQ*SM*SP
9600
0
6880
0
1680
00
3328
00

Budgeted
sales

sales volume

96000
68800
168000
332800

varianc
e
$13,95
0F

12.

varian
ce
$2,80
0U

varian
ce
$0

Travel Division of C. M. Smith Enterprises reflected the following income

statement for the year just ended:
Sales
$800,000
Variable expenses
400,000
Contribution margin
$400,000
Direct fixed expenses 250,000
Segment income
$150,000
Travel Division began the year with $900,000 in (gross) assets and ended the
year with $1,100,000 in (gross) assets. C. M. Smith Enterprises enjoyed an
overall 16% ROI for the year for the entire company. The firm rewards division
managers who have the highest returns on investment (based on gross book value)
by granting year-end bonuses to them.
Travel Division's managers are studying expansion into a new product line
that would be expected to yield the following results annually: sales,
$200,000; variable expenses, $100,000; and direct fixed expenses, $50,000.
a. What was Travel Division's ROI for the past year?
$150,000/[($900,000+1,100,000)/2] = 15%
b. How much could Travel Division pay for the investment in the new product
line without adversely affecting its ROI?
($200,000-$100,000-$50,000)/.15 = $333,333

13.

Eastern Mfg. Co. employs a standard costing system and applies overhead to
products using machine hours (at standard,5 machine hours are expended to
produce one unit). For 2008, the company expected to produce 2,000 units and
incur costs of $500,000 for manufacturing overhead ($200,000, fixed; $300,000
variable). At year's end, it was determined that the company had applied
overhead of $525,000. Actual overhead cost incurred was $510,000 ($190,000 of
which was for fixed overhead). Compute the company's volume variance.
The predetermined fixed overhad rate = $200,000/2,000 = $100 per unit
The predetermined variable overhead rate = $300,000/2,000 = $150/unit
Actual units = $525,000/($100+$150) = 2,100 units
Volume variance = $100(2,100 2,000) = $10,000 Favorable

14.

A company is considering development of a new product. It is estimated by

company management that the new product could be sold for $10 per unit.
Estimated variable costs would amount to $5 per unit and fixed costs would
amount to $50,000 annually. If management is evaluated based on residual
income and the minimum required return is 10%, how many units must the firm
expect to sell before it will invest the required $500,000 in the new product
line?
X = minimum number of units to be sold:
$10X - $5X - $50,000 = $500,000 * .10
X = 20,000 units

15.

The standard direct labor cost for a month's output of widgets at the Widget
Factory was $35,000. This amount is based on actual production of 7,000
widgets and 3,500 direct labor hours. The actual direct labor hourly rate was
$7.35. The direct labor efficiency variance was $3,000 unfavorable. Compute
the direct labor rate variance and determine the total actual cost of direct
labor for the month.
SC = $35,000
SC = SR * SH
$35,000 = 3,500 * $10
AH = SH + $3,000/$10
AH = 3,500 + 300 = 3,800
DLRV = 3,800(SR - AR)
= 3,800($10 - $7.35) = $10,070 F
AC = AH*AR
= 3,800 * $7.35 = $27,930

16.

One of the most famous cases in cost accounting involves a restaurateur named
Joe. The story of Joe follows.
Once upon a time Joe, a restaurateur, was approached at his business by a
peanut salesman. The peanut salesman informed Joe that he could make some
additional money for the restaurant if he would set up a peanut rack at the end
of his lunch counter near the cash register. The peanut rack would occupy only
1 square foot of counter space (out of the total of 60 square feet) and the
salesman informed Joe that he could buy the peanuts for 60 cents per bag and
sell them for $1, thus, netting 40 cents for each bag sold. To get into the
peanut business, the only required expense, other than the cost of the peanut
inventory, is the cost of a peanut rack, $250. The salesman told Joe that he
could expect to sell 40 bags of peanuts per week; over a year this would amount
to some 2,080 bags. Thus, the salesman argued, the cost of the peanut rack
would be recouped very quickly and thereafter the only cost of the peanut sales
would be the cost of peanuts.
Based on the information from the peanut salesman, Joe decided to acquire the
peanut rack and a supply of peanuts - 40 bags. Soon thereafter, Joe's
accountant stopped by and noticed the new peanut rack. He asked Joe what was
up with the peanuts and Joe reiterated the conversation with the peanut
salesman. This conversation caused the accountant to pull out a scratch pad
(columnar of course) and soon he had written down the following observations:
1.Prior to adding the peanut business, the lunch counter generated $150,000 of
annual sales and $90,000 of Cost of Goods Sold.
2.Other annual operating costs of the restaurant - $60,000 (includes such costs
as rent, advertising, electricity, and Joe's salary).
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Soon the accountant, carrying his scratch pad, approached Joe at the counter.
He told Joe to look at the following analysis that he had done on the scratch
pad:
Peanut sales*
40 * 52 * $1
$2,080
Cost of peanuts 40 * 52 * $.60
1,248
Gross margin
$ 832
Other costs 1/60 * $60,000
1,000
Expected annual loss on peanut sales
$ 168
With a tone of self-righteous indignation, the accountant explained to Joe that
he should have been consulted before Joe made a move of such a significant
magnitude. Had he been aware that Joe was considering such a ridiculous
investment, he could have snuffed the idea before it burned Joe.
"You see, Joe," the accountant said, "any product you sell must bear its
fair share of the costs of operating this business. And, that cost is $1,000
per square foot of counter space for your business. You should consult with me
on these types of decisions. That's what I get paid for. You can't afford to
be in the peanut business."
Through tear-filled eyes Joe tried to explain to
the accountant, "but, but, but, I just wanted to make a little extra money for
my restaurant; 40 cents a bag."
[Adapted from: Roy C. Skinner, "Beware an Accounting Confidence Trick,"
Management Accounting, June 1994, pp. 48-49.]
Assume that you are Joe's confidant and regular customer, and that you feel
compelled to help Joe understand the true economics of the peanut vending
business. Prepare for Joe, in words that the restaurateur will comprehend, an
analysis of the peanut vending business. Be sure to address in your discussion
the views of both the peanut salesman and the accountant. Make a
recommendation as to whether Joe should be in the peanut vending business.

No solution provided.