(Final solutions in the last page) PART A

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1 MANAGEMENT ACCOUNTING Spring semester 2011/2012 Mid-term test DATE: April 11, 2012 LENGTH: 1h 20 m Procedures: The test is composed of Parts A and B; The questions must be answered in the following stapled sheets, which must not be separated; You can use the back of each sheet for rough draft. For each wrong answer to multiple choice questions, 1/3 of the corresponding mark will be deducted with a minimum of zero for the overall mark of QII, as well as for QIII b), QIV c) and d) (Final solutions in the last page) PART A QUESTION I (3 marks) The most simplistic costing system is likely to result in inaccurate indirect cost assignments and report inaccurate costs Which costing system is the above sentence referring to? Define it and say if you agree with the above sentence and why. Be explicit. QUESTION II Multiple choice Note: if you choose more than one alternative per question, or if your answer is not clearly understandable, it will not be marked. Also, only your final answer (letter chosen) will be marked. 1) (3m) XYZ Co provides a single service to its customers. For next year, the company expects to sell units at a selling price of 15 per unit. How much may sales decrease before a loss is incurred for an expected margin of safety of 15% (if needed round your calculations to the nearest units)? Página 1 de 5

2 a units b units c units d units Answer: 2) (3m) Zandy Beverage Company plans to eliminate a branch that has a contribution margin of ,00 and fixed costs of ,00. Of the fixed costs, ,00 cannot be eliminated. The effect of eliminating this branch on net income would be a(n) a. decrease of ,00. b. increase of ,00. c. decrease of ,00. d. increase of ,00. e. None of the above Answer: PART B QUESTION III The Office Company manufactures desks for designers. Concerning the month of January the following information is known: A. Profit & Loss Account of the company using full costing based on practical capacity B. Movements of inventories Cost of ( ) Gross Profit Under-recovery Non manufacturing costs ( ) Earnings Before Taxes (EBT) Opening stocks Production Method for inventory valuation 0 Units Units Units LIFO C. Non-manufacturing fixed costs: D. The difference in EBT between variable costing and total full costing is a) (2,5m) Prepare, by showing your supporting calculations, the Profit & Loss Account using total full costing. Página 2 de 5

3 b) (1,5m) If the unit contribution margin is 22 and the quantities sold units, the profit by the variable costing will be: a. Different from the profit using the total full costing b. The same if the company used the full costing based on practical capacity c d. None of the previous ones Answer 1 : Briefly justify your answer QUESTION IV The Blue Engine Company manufactures two goods, J1 and J2. Some information is provided below. J1 J2 Annual production (Quantities) Direct material costs per unit Direct Labor hours per unit 1 1 Machine hours per unit 1/10 1/10 Purchase orders per year Machine setups per year 6 4 Direct labor cost per unit Although the company is currently using Direct Labor hours to allocate overheads costs to products, a consultant has recommended Based Costing (ABC) based on the activities and cost s below: Annual cost Cost 1. Purchasing & receiving Number of purchase orders 2. Machining, power & maintenance Number of machine hours 3. Materials planning & handling Value of the materials 4. Machine set-up Number of machines set-ups TOTAL a) (1 mark) Calculate the COGM per unit of J1 using the current cost accumulation system. Show your supporting calculations. b) (3 marks) If the company had used ABC, what would have been the total overhead costs allocated to J1? Show your supporting calculations and explain your result with the one presented in the previous question. 1 Note: if to answer this b) question you choose more than one alternative, or if your answer is not clearly understandable, it will not be marked. Página 3 de 5

4 c) (1,5m) Now, just consider activity 1, i.e., Purchasing & receiving costs. The current allocation method based on direct labor hours a. Accurately allocates these costs to J1. b. Overstates the allocation to J1 by 700. c. Understates the allocation to J1 by 700. d. Overstates the allocation to J1 by 500. e. Understates the allocation to J1 by 500. Answer 2 : d) (1,5m) ABC will probably provide the greatest benefits for organizations that adopt a. Process costing. b. Job costing. c. Variable costing. d. For other costing system different from the above ones. Answer 3 : 2 Note: if more than one alternative to answer this question is chosen, or if the answer is not clearly understandable, it will not be marked. Also, only letter chosen will be marked. 3 Note: if you choose more than one alternative to answer this question, or if your answer is not clearly understandable, it will not be marked. Also, only your final answer (letter chosen) will be marked. Página 4 de 5

5 Final solution of some questions QUESTION II Multiple choice 1) c 2) c QIII a) P&L Account using Full Costing Cost of ( ) Gross Profit Under-recovery of overheads 0 Non manufacturing costs ( ) Earnings Before Taxes (EBT) b) b a) DM = DL = MO = (900 Lh/1.000Lh x ) = b) QIV Annual cost rate 1. Purchasing & receiving orders Machining, power & maintenance mh Materials planning & handling ,02 4. Machine set-up TOTAL J1 overheads 1. Purchasing & receiving orders 2. Machining, power & maintenance mh 3. Materials planning & handling Machine set-up TOTAL Página 5 de 5

6 Solution: QI Traditional costing system - single or blanket overhead rate (SOR) This means that all indirect costs or overheads incurred by the organization are assigned to/accumulated in only one cost center and are, after, assigned to products/services by dividing them by only one cost allocation base which is volume-based. The student must agree in general with this sentence as the cause of many overheads is not necessarily the volume of production but other non-volume factors which means that more than one cost center must be identified to accumulate the overheads, as well as cause-and-effect allocations bases. There is, however, one situation where this single overhead rate (SOR) is justified and it is when all products or other cost objects consume departmental overheads in approximately the same proportions. QII 1) c MS = ( BEP)/ = 15%; BEP = units; = units QII 2) c Lost Contribution Margin Avoidable fixed costs ( 75,000-55,000) Effect of eliminating branch on net income QIII a) Closing stock = units Difference in EBT between TFC and VC = ; MFC per unit = /2.000 units = 15 /unit;; MFC = 15 x units = ;; under-recovery of OV in FCPC = 13,5/ 135 = 10%; COGM per unit FCPC = /7.000 units = 58,5 /unit;; VMC per unit= 58,5 - (90% x 15 ) = 45 ;; COGM TFC = 45 x units = ;; COGM per unit in TFC = 540/9= 60 ;; COGS = 60 x units Cost of ( ) Gross Profit Under-recovery 0 Non manufacturing costs ( ) Earnings Before Taxes (EBT) Note: if you choose more than one alternative to answer this question, or if your answer is not clearly understandable, it will not be marked. Also, only your final answer (letter chosen) will be marked. Página 4 de 5

7 b) correct answer b, as production is = to sales; as such, all MFC are registered in the P&L despite de costing system used QIV a) DM = DL = MO = (900 Lh/1.000Lh x ) = b) Annual cost rate 1. Purchasing & receiving orders Machining, power & maintenance mh Materials planning & handling ,02 4. Machine set-up TOTAL J1 overheads 1. Purchasing & receiving orders 2. Machining, power & maintenance mh 3. Materials planning & handling Machine set-up TOTAL c) correct answer b As based on DLh the cost of Purchasing & receiving to J1 is = 900/1.000 x = d) correct answer b Página 5 de 5