ACTG 2P12

Fall 2010
Exam 1 Name:

DIRECTIONS:

1. Turn off all cell phones, pagers, beepers, and computers.

2. You may use a calculator and a dictionary/translator. No cell phones, notes, books, or
references of any type.

3. Put your name on each page of the exam.

4. In answering the problems, DO NOT write on the back of any page; use only the front of
the page on which the problem is presented. Any work on the back of any page will NOT
be graded.

5. Neatness is critical; if I cannot read or find an answer I will not grade that problem.

GOOD LUCK!

Problem 1 12 marks
Problem 2 17 marks
Problem 3 19 marks
Problem 4 29 marks
Problem 5 23 marks

TOTAL 100 points

Page 1
ACTG 2P12
Fall 2010
Exam 1 Name:

Problem One (12 marks)

Both financial and managerial accounting are concerned with the economic events of an
enterprise. Similarities between financial and managerial accounting do exist, but they do have a
different focus. Briefly distinguish between financial and managerial accounting as they relate to
(1) the primary users, (2) the type and frequency of reports, (3) the purpose of reports, and (4) the
content of reports.

Short Answer Essay (I asked for a chart but these are the points I was looking for)
Financial accounting is primarily concerned with external users such as stockholders and
creditors, while the primary users of managerial accounting are those within the company
(internal users) such as officers, managers, supervisors, etc. Quarterly and annual
classified financial statements are the end product of financial accounting. Internal reports,
prepared as often as needed are the result of managerial accounting. The financial
statements produced by financial accounting are general-purpose reports which are highly
aggregated, pertain to the enterprise as a whole, and are constrained by generally accepted
accounting principles. The internal reports prepared by management accountants are
special purpose reports which are detailed, pertain to subunits of the enterprise, and may
contain any information relevant to the decision at hand.

Page 2
ACTG 2P12
Fall 2010
Exam 1 Name:

Problem Two (17 marks)

The following costs and inventory data were taken from the accounts of Winsto Company for 2009:

Inventories: January 1, 2009 December 31, 2009

Raw materials $8,000 $ 7,000
Work in process 15,000 13,000
Finished goods 16,000 12,000

Costs incurred:
Raw materials purchases $88,000
Direct labour 42,000
Factory rent 8,000
Factory utilities 2,000
Indirect materials 4,000
Indirect labour 6,000
Selling expenses 5,000
Administrative expenses 12,000

Instructions
a. Prepare a schedule of Cost of Goods Manufactured for Winsto Company for the year ended
December 31, 2009 in good form.
b. Prepare the Cost of Goods Sold section of the Income Statement for Winsto Company for the
year ended December 31, 2009 in good form.

Solution
Winsto Company
Schedule of Cost of Goods Manufactured
Year Ending December 31, 2009
Work in process beginning $15,000
Direct materials
Raw materials inventory beginning $ 8,000
Raw materials purchases 88,000
Raw materials available for use 96,000
Raw materials inventory ending 7,000
Direct materials used $89,000
Direct labour 42,000
Manufacturing overhead 20,000
Total manufacturing costs 151,000
Total cost of work in process 166,000
Less: Work in Process ending 13,000
Cost of goods manufactured $153,000

Page 3
ACTG 2P12
Fall 2010
Exam 1 Name:

Winsto Company

Partial Income Statement

Year Ending December 31, 2009
Finished goods inventory, January 1 $ 16,000
Cost of goods manufactured 153,000
Cost of goods available for sale 169,000
Finished goods inventory, December 12,000
31
Cost of goods sold $157,000

Page 4
ACTG 2P12
Fall 2010
Exam 1 Name:

Problem Three (19 marks)

Seats On Chairs (SOC) manufactures funky chairs. SOC has identified various activity centers to
which overhead costs are assigned. The cost pools for these centers and their selected cost
drivers for 2009 are as follows:

Activity Centers Cost Pools Cost Drivers

Utilities $278,000 machine hours
Scheduling and set-up $260,000 set-ups
Materials handling $640,000 pounds of materials
Total overhead $1,178,000

SOC’s products and other operating statistics follow:

Products
Metaz Chair Yak Chair Latko Chair
Direct costs $80,000 $80,000 $90,000 (Note: these are DIRECT
costs)
Machine hours 30,000 10,000 20,000
Number of set-ups 130 380 270
Pounds of materials 500,000 300,000 800,000
Number of units produced 40,000 20,000 60,000
Direct labour hours 40,000 20,000 60,000

Instructions
1. Determine unit product costs using traditional costing, using direct labour hours as the
driver.
1. Traditional Costing:
Pre-determined overhead rate: Total overhead: $1,178,000 = $9.82 per DLH
Total direct labour hours 120,000

Unit Costs: Metaz Chair Yak Chair Latko Chair

Direct costs (given) $80,000 $80,000 $90,000
Overhead ($9.82 x
individual DLH per chair type) $392,664 $196,332 $588,996
Total Product Costs (A): $472,664 $276,332 $678,996
# units produced (B): 40,000 20,000 60,000
Cost per unit (A) / (B): $11.82 $13.82 $11.32

Page 5
ACTG 2P12
Fall 2010
Exam 1 Name:

2. Determine unit product costs using the ABC method, using the indicated cost drivers for
each product.

2. Activity Based Costing:

Activity Centers Cost Pools Selected Cost Drivers Activity

Rate__
Utilities $278,000 60,000 machine hours
$4.63/mach hr
Scheduling and set-up $260,000 780 set-ups $333.33/set-up
Materials handling $640,000 1,600,000 lbs of materials $0.40/lb
Total overhead $1,178,000

Unit Costs: Metaz Chair Yak Chair Latko Chair

Direct costs (given) $80,000 $80,000 $90,000
Overhead
Utilities: ($4.63 x # machine
hours used per chair type) $138,900 $46,300 $92,600
Scheduling and set-up
($333.33 x # set-ups) $43,333 $126,666 $90,000
Materials handling ($0.40/lb
x # lbs moved per chair type)$200,000 $120,000 $320,000
Total Product Costs (A): $462,233 $372,967 $592,600
# units produced (B): 40,000 20,000 60,000
Cost per unit (A) / (B): $11.55 $18.65 $9.88

3. Prior to installing an ABC system, Seats on Chairs (SOC) had been pricing its products on the
basis of traditional costing using direct labour hours to allocate total overhead. Because the
firm operates in a competitive environment, it sets prices on only a 20% mark-up on cost.
(e.g., if cost = $10.50; then markup = $10.50 x .2 = $2.10; and selling price = $10.50 + $2.10 =
$12.60)

a. Determine selling prices using conventional costing and ABC costing.

Prices Using Traditional Costing:

Unit Costs: Metaz Chair Yak Chair Latko Chair

Cost per unit (from above): $11.82 $13.82 $11.32
Mark-up on cost (20%) $ 2.36 $ 2.76 $ 2.26
Selling price $14.18 $16.58 $13.58

Prices Using ABC:

Unit Costs: Metaz Chair Yak Chair Latko Chair

Cost per unit (from above): $11.55 $18.65 $9.88
Mark-up on cost (20%) $ 2.31 $ 3.73 $1.98

Page 6
ACTG 2P12
Fall 2010
Exam 1 Name:

Selling price $13.86 $22.38 $11.86

b. Comment on the results.

SOC produces 60,000 units of the Latko chair and therefore sells the most units of Latko as
well. A change from traditional costing to ABC reduces the selling price of Latko, making it
even more favourable to the buying public. In contrast, the least popular chair, the Yak
model increases in price as a result of the switch to ABC. Since ABC best allocates the cost
of the resources used per model, it might signal to management that since the Yak is more
expensive to produce but not as popular with the public, it may need to reconsider offering
this model.

Page 7
ACTG 2P12
Fall 2010
Exam 1 Name:

Page 8
ACTG 2P12
Fall 2010
Exam 1 Name:

Problem Four (29 marks)

Conan Company produces sporting equipment. In 2009, the first year of operations, Conan
produced 25,000 units and sold 18,000 units. In 2010, the production and sales results were
exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per
unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $540,000, and
fixed administrative expenses were $200,000.

Instructions

(a) Calculate net income under variable costing for each year.

2009: [18,000 X ($100 – $40 – $8)] – ($540,000 + $200,000) = $196,000

2010: [25,000 X ($100 – $40 – $8)] – ($540,000 + $200,000) = $560,000

(b) Calculate net income under absorption costing for each year.

2009: [18,000 X ($100 – $40 – $21.60)] – [$200,000 + (18,000 X $8) = $347,200

2010: {(25,000 X $100) – [7,000 X ($40 + $21.60)] – [18,000 X ($40 + $30)]} – [$200,000 +
(25,000 X $8)] = $408,800

(c) Reconcile the differences each year in income from operations under the two costing
approaches.

2009 variable costing income $196,000

Fixed manufacturing costs deferred at 12/31/05
under absorption costing (7,000 X $21.60) 151,200
2009 absorption costing income $347,200

2010 variable costing income $560,000

2009 fixed manufacturing costs expensed in 2010
under absorption costing (7,000 X $21.60) (151,200)
2009 absorption costing income $ 408,800

(d) Would throughput costing net income be greater or less than variable costing net income in
2009? In 2010?

2009: throughput costing net income would be less than variable costing net income
2010: throughput costing net income could be greater than variable costing net income

Page 9
ACTG 2P12
Fall 2010
Exam 1 Name:

Problem Five (21 marks)

Madrigal Theatre Company is interested in estimating fixed and variable costs. The following data
are available:

Cost No. of Tickets Sold

January $180,000 18,000
February $212,000 21,000
March $232,000 25,000
April $239,000 27,000
May $231,000 27,500
June $208,000 21,500
July $199,000 20,000
August $165,000 15,000
September $212,000 22,500
October $217,000 24,000
November $230,000 28,000
December $255,000 30,000

Required:
1. Use the high-low method to estimate fixed cost per month and variable costs per ticket
sold. Write the cost equation.
2.
The highest level of activity is sales of 30,000 tickets with cost of $255,000. The lowest level
of activity is sales of 15,000 tickets with cost of $165,000.

($255,000 − $165,000) ÷ (30,000 − 15,000) = $6 of variable cost per ticket sold.

$255,000 – ($6 × 30,000) = $75,000 per month of fixed cost.

Thus, Cost = $75,000 + ($6 × No. of tickets sold).

2. Comment on the graph of costs and tickets sold.

Approximately linear
Relevant range is 15000 - 30000

Page 10
ACTG 2P12
Fall 2010
Exam 1 Name:

Cost

$300,000

$250,000

$200,000

$150,000 Cost

$100,000

$50,000

$0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Tickets Sold

3. Below is the regression output for the above dataset. Write the cost formula that would be used
for predicting total cost based on this output. Is this linear equation a good fit with the data –
explain. Comment on the reliability of the coefficients.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.969931196
R Square 0.940766525
Adjusted R Square 0.934843177
Standard Error 6438.290601
Observations 12

ANOVA
df SS MS F
Regression 1 6583484141 6583484141 158.8234564
Residual 10 414515858.7 41451585.87
Total 11 6998000000

Coefficients Standard Error t Stat P-value

Intercept 87216.40156 10308.46022 8.460662375 7.18726E-06
X Variable 1 5.486236784 0.435328626 12.60251786 1.84052E-07

Page 11
ACTG 2P12
Fall 2010
Exam 1 Name:

Total cost = $87216 + ($5.486/ticket sold x # tickets sold)

Good fit – adjusted R2 = .9348 – explains 93.48% of the variance in the cost

Both t-stats are greater than 2

Both p-values are less than .01
Therefore, we are confident that the coefficients are not = 0

Page 12