Number of questions Marks % Multiple Choice Questions 10 20

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1 ACF 232 Final Examination REVIEW November 30, 2017 Covering chapters 6, 7, and 11 Number of questions Marks % Multiple Choice Questions Problems 5 30 Essay problems 3 50 Total Topics of problems: Contrast Absorption to variable costing T/F and MC Product versus period costs within absorption or variable costing covered in chapter 6 T/F and MC Sales, Production, Materials Budgets and Purchase budget Cash budget chap. 7 problem below Standard costing, Variances, direct materials, direct labor and manufacturing overhead chap 8 problem below Return on investment, residual income, profitability index and ranking of investment projects. T/F and MC chapter 9 problem below Relevant costs T/F and MC Income statement, Balance sheet Decision making: Keep or drop, minimum price, Net Present Value I have added the problems below. What s in red are my comments to help you understand a problem.

2 Plan: Chapter 6 T/F and MC 1 to 29 Chapter 7 T/F and MC

3 Chapter 7 Cash Budgets Merchandise purchases Randall Company is a merchandising company that sells a single product. The company's inventories, production, and sales in units for the next three months have been forecasted as follows: (Sales) Units are sold for $12 each. One fourth of all sales are paid for in the month of sale and the balance are paid for in the following month. (25% collected same month 75% next month) Accounts receivable at September 30 totaled $450,000. (Use as Beginning AR for Oct.) (Cost of goods sold) Merchandise is purchased for $7 per unit. Half of the purchases are paid for in the month of the purchase and the remainder are paid for in the month following purchase. (Cash disbursements 50% same month 50% next month) Selling and administrative expenses are expected to total $120,000 each month. One half of these expenses will be paid in the month in which they are incurred and the balance will be paid in the following month. (Cash disbursements 50% same month 50% next month) There is no depreciation. Accounts payable at September 30 totaled $290,000. (Beginning A/P for October) Cash at September 30 totaled $80,000. A payment of $300,000 for purchase of equipment is scheduled for November, and a dividend of $200,000 is to be paid in December. Required: a. Prepare a schedule of expected cash collections for each of the months of October, November, and December. b. Prepare a schedule showing expected cash disbursements for

4 merchandise purchases and selling and administrative expenses for each of the months October, November, and December. c. Prepare a cash budget for each of the months October, November, and December. There is no minimum required ending cash balance. d. Prepare an Income statement for each month.

5 October November December d. Sales 720, , ,000 Cost of goods sold 420, , ,000 Gross margin 300, , ,000 Selling and Administration 120, , ,000 Net Operating Income 180, , ,000 Chapter 8 T/F and MC Chapter 8 MOH Variance Nixon corporation applies manufacturing overhead to products on the basis of standard labour hours. Budgeted and actual fixed manufacturing overhead costs for the most recent month appear below: Original Budget: $30,000 Actual Costs: $32,000 The company based its original budget on 3,000 labour-hours. The company actually worked 3,050 labour-hours during the month. The standard hours allowed for the actual output of the month totaled 3100 labour-hours. Required: Compute the overall fixed manufacturing overhead volume variance for the month. Answer: Volume variance = Budgeted fixed OH Fixed OH applied to work Budget POHR = Estimated total fixed MOH / Estimated total amount of allocation base $10 LH = 30,000/3,000 MOH Applied = $10 * 3100 LH = $31,000 MOH applied is based on standard hours allowed So the Volume variance = Budgeted fixed OH Fixed OH applied to work $1,000 F = $30,000 - $31,000 The difference between the MOH applied and the Actual MOH is adjusted at the end of the period as MOH over or under applied.

6 Chapter 9 T/F and MC EXERCISE 9 5 Cost-Volume-Profit Analysis and Return on Investment(ROI)[LO1] Images.com is a small Internet retailer of high-quality posters. The company has $800,000 in operating assets and fixed expenses of $160,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $5 million per year. The company's contribution margin ratio is 10%, which means that an additional dollar of sales results in additional contribution margin, and net operating income, of 10 cents. Required: 1.Complete the following table showing the relationship between sales and return on investment (ROI): What happens to the company's return on investment (ROI) as sales increase? Explain. Exercise 9-5 (20 minutes) 1. (b) (c) Net Average (a) Operating Operating ROI Sales Income* Assets (b) (c) $4,500,000 $290,000 $800, % $4,600,000 $300,000 $800, % $4,700,000 $310,000 $800, % $4,800,000 $320,000 $800, % $4,900,000 $330,000 $800, % $5,000,000 $340,000 $800, % *Sales Contribution Margin Ratio Fixed Expenses 2. The ROI increases by 1.25% for each $100,000 increase in sales. This happens because each $100,000 increase in sales brings in an additional profit of $10,000. When this additional profit is divided by the average operating assets of $800,000, the result is an increase in the company s ROI of 1.25%. Increase in sales... $100,000 (a) Contribution margin ratio... 10% (b) Increase in contribution margin and net operating income (a) (b)... $10,000 (c) Average operating assets... $800,000 (d) Increase in return on investment (c) (d) %

7 Chapter 10 Residual income A company has Net Operating Income of $25,000 and Average Operating Assets of $100,000 and a Required rate of return 20%. A new project is being considered for and investment of $20,000, the net operating income forecast increases by $3,000. Compute the residual income for the new project. Answer: For the new project Residual income = Net Operating Income (Average Operating Assets * Required Rate of Return) -1,000 = $3,000 ($20,000 * 20%) Go to Problem Excel

8 26. Chapter 10 Relevant costs Liffick Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,200 units of component VFG. Each unit of VFG requires 8 units of material C79 and 6 units of material X70. Data concerning these two materials follow: Material C79 is in use in many of the company's products and is routinely replenished. Material X70 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VFG? Answer: Materials requirements for C79: 6,200 units of VFG 8 units of C79 per unit of VFG = 49,600 units of C79 Materials requirements for X70: 6,200 units of VFG 6 units of X70 per unit of VFG = 37,200 units of X70 *37,200 units - 31,060 units = 6,140 units

9 Chapter 11 T/F and MC PROBLEM 11 12A Preference Ranking of Investment Projects [LO2] Yancey Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows: The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, which to accept second, and so forth. The company's investment funds are limited. Required: 1. Compute the project profitability index for each project. The formula for the project profitability index is: Net present value Project profitability index = Investment required The project profitability index for each project is: 2. Project A: $221,615 $800,000 = 0.28 Project B: $210,000 $675,000 = 0.31 Project C: $175,175 $500,000 = 0.35 Project D: $152,544 $700,000 = In order of preference, rank the four projects in terms of: a. Net present value. b. Project profitability index. c. Internal rate of return. Net Present Value Project Profitability Index Internal Rate of Return First preference... A C D Second preference... B B C Third preference... C A A Fourth preference... D D B

10 3. Which ranking do you prefer? Why? Which ranking is best depends on Yancey Company s opportunities for reinvesting funds as they are released from a project. The internal rate of return method assumes that released funds are reinvested at the internal rate of return. For example, funds released from project D would have to be reinvested in another project yielding a rate of return of 22%. It might be difficult to find another project yielding such a high rate of return. The project profitability index assumes that funds released from a project are reinvested at a rate of return that is equal to the discount rate, which in this case is only 10%. On balance, the project profitability index is generally regarded as being the most dependable method of ranking competing projects. The net present value is inferior to the project profitability index as a ranking device because it does not consider the amount of investment required.