BUSI 2083: Introduction to Financial Accounting
BUSI 2083: Introduction to Financial Accounting
unit exercises
Table of Contents
TOC h z t "YU H-1,1,YU H-2,2,YU H-4,3" Part two: Unit Exercises PAGEREF _Toc128658488 h 2Unit 1 Exercises PAGEREF _Toc128658489 h 3Unit 2 Exercises PAGEREF _Toc128658490 h 7Unit 3 Exercises PAGEREF _Toc128658491 h 11Unit 4 Exercises PAGEREF _Toc128658492 h 14Unit 5 Exercises PAGEREF _Toc128658493 h 17Unit 7 Exercises PAGEREF _Toc128658494 h 20Unit 8 Exercises PAGEREF _Toc128658495 h 24Unit 9 Exercises PAGEREF _Toc128658496 h 27Unit 10 Exercises PAGEREF _Toc128658497 h 31
Part two: Unit ExercisesWeight 27% (each for 3%) of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 1-5, and 7-10
Brief Description
Each week (except for Unit 6 and Unit 11 during major tests), students will submit an exercise that will consist of several questions related to that weeks unit. The purpose of these exercises are for students to understand and solidify introductory financial accounting course concepts and techniques. Finished exercises are to be submitted online by the appropriate date for each unit.
Submission Instructions
Late Submission Policy
This assignment is subject to the Late Submission penalty policy, namely 5% per day for three days.
This page will close and will not allow further submissions after this Late Submission period has expired.
In the event of an emergency situation preventing you from submitting within this time frame, special permission must be obtained from your instructor. Documentation substantiating emergency is required. In such a circumstance, if the extension is granted, the professor will reopen the submission function for you on an individual basis.
Please do not email your submissions to your professor, either before or after the due date; all coursework should be submitted through the online course (Moodle).
Unit 1 Exercises Weight 3% of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 1
Objectives [ULO 1.1, 1.2, 1.3, 1.4, 1.5]
Evaluation and Feedback
Unit 1 will be marked out of 100 points. The following scale indicates the criteria students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated Grade Points
Question 1 Identifying product and period cost /28
Question 2 Identify the type of cost /24
Question 3 Computing the Cost of Goods Manufactured /21
Question 4 Fill in the unknown amounts /27
Total Grade /100
Exercise Questions
Question 1.1(Total: 28 marks)
Disco Dance Electronics Corporation manufactures a portable music player designed for middle age customers. The following list represents some of the different types of costs incurred in the manufacture of these music players:
1) The plant manager's salary.2) The cost of heating the plant.3) The cost of heating executive offices.4) The cost of printed circuit boards used in the music plyers.5) Depreciation on office equipment used in the executive offices.6) Depreciation on production equipment used in the plant.7) Wages of janitorial personnel who clean the plant.8) The cost of insurance on the plant building.9) The cost of electricity to light the plant.10) The cost of electricity to power plant equipment.11) The cost of maintaining and repairing equipment in the plant.12) The cost of printing promotional materials for trade shows.13) The cost of solder used in assembling the music players.14) The cost of telephone service for the executive offices.
Required:
Classify each of the items above as product (inventoriable) cost or period (noninventoriable) costs for the purpose of preparing external financial statements.
Question 1.2(Total: 24 marks)
Mr. Gadget has developed a new device that is so exciting he is considering quitting his job to produce and market it on a large-scale basis. Mr. Gadget will rent a garage for $300 per month for production purposes. Utilities will cost $40 per month. Mr. Gadget has already taken an industrial design course at the local community college to help prepare for this venture. The course cost $300. Mr. Gadget will rent production equipment at a monthly cost of $800. He estimates the material cost will be $5 per unit, and the labour cost will be $3 per unit. He will hire workers and spend his time promoting the product. To do this, he will quit his job, which pays $3,000 per month. Advertising and promotion will cost $900 per month.
Required:
Complete the chart below by placing an "X" under each heading that helps to identify the cost involved. You can place an "X" under more than one heading for a single cost: for example, a cost may be a sunk cost, an overhead cost, and a product cost; you would place an "X" under each of these headings opposite the cost.
*Betweenthealternativesofgoingintobusinesstomakethedeviceornotgoingintobusinesstomakethedeviceandcontinuewithhisjob.Seecolumnheading"DifferentialCost".
Opportunity Cost Sunk Cost Variable Cost Fixed Cost Mfg. Overhead Product Cost Selling Cost Differential Cost
Garage rent Utilities Cost of the industrial design course Equipment rented Material cost Labour cost Present salary Advertising
Question 1.3(Total: 21 marks)
Lake Company recorded the following data for the month of January 2023:
Inventories January 1, 2023 January 31, 2023
Direct Material $24,000 $23,000
Work in Process 18,000 15,000
Finished Goods 22,000 27,000
AdditionalData:
Net Sales Revenue $325,000
Direct Labour Costs 40,000
Indirect Labour Costs 45,000
Sales Commissions 15,000
Administrative Expenses 18,000
Direct Materials Purchased during January 30,000
Depreciation, factory 10,000
Factory Maintenance and Supplies 8,000
Utilities, (80% factory, 20% office) 25,000
General Office Salaries 12,000
Required:
Compute the amount of direct materials used in January.
List and total the Manufacturing Overhead costs for the month of January.
Compute the Cost of Goods Manufactured.
Hint:ItmaybehelpfultoprepareaCostofGoodsManufacturedstatementinroughformbutitisnotrequired.YoumayuseshortformsinyouranswersforDM,DLetc.
Question 1.4(Total: 27 marks)
The accounts for a manufacturing company for an accounting period are listed below.
Sales $39,000
Cost of goods sold ?
Cost of goods manufactured ?
Purchases of direct materials $11,000
Direct labour $5,000
Finished goods inventory, beginning $5,000
Work in process, beginning $800
Work in process, ending $3,000
Gross margin $11,700
Finished goods inventory, ending ?
Accounts payable, beginning $4,000
Accounts payable, ending $2,800
Direct materials inventory, beginning $1,000
Direct materials inventory, ending $3,000
Direct materials used ?
Indirect labour $2,000
Indirect materials used $4,000
Utilities expense, factory $3,000
Depreciation on factory equipment $7,000
Required:
Find the unknown amounts indicated by question marks.
Unit 2 Exercises Weight 3% of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 2
Objectives [ULO 2.1, 2.2, 2.3, 2.4, 2.5]
Evaluation and Feedback
Unit 2 will be marked in its entirety out of 100. The following scale indicates the criteria students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated % of Final Grade
Question 1 Identify costs related to a job /24
Question 2 Calculating costs, over/under applied overhead and journal entries /46
Question 3 Identify costs related to a job /30
Total /100
Exercise Questions
Question 2.1(Total: 24 marks)
Spicy P, Inc., uses a job-order costing system. Costs going through the company's work-in-process account during June are listed below. Manufacturing overhead is applied to production using a predetermined overhead rate based on direct labour cost.
Work in process
Balance 0 $95,000 transferred out
Direct materials $20,000
Direct labour 30,000
Manufacturing overhead 60,000
Balance $15,000
Only Job 101 was still in process at the end of the month. This job had been charged with $3,000 in direct materials cost.Required:
Complete the following for Job 101:
Direct materials $3,000
Direct labour
Manufacturing overhead
Total cost at June 30
Determine the total amount of materials cost charged to completed jobs during the month.
Question 2.2(Total: 46 marks)
Raptor Company reported the following actual costs data for the year:
Purchase of raw materials (all direct) $200,000
Direct labour (average hourly rate of $25) 400,000
Manufacturing overhead costs 100,000
Change in inventories:
Increase in raw materials $25,000
Increase in work in process 16,000
Increase in finished goods 30,000
Raptor Company used a predetermined overhead rate based on direct labour hours. Estimated annual manufacturing overhead cost and direct labour hours were $150,000 and 20,000, respectively.
Required:
What was the pre-determined manufacturing overhead rate?
Calculate the cost of goods manufactured.
What was the cost of goods sold before adjusting for any under or overapplied overhead?
By how much was manufacturing overhead cost under or overapplied?
Prepare a summary journal entry to close any under or overapplied manufacturing overhead cost to cost of goods sold. Is such an entry appropriate in this situation? Why or why not?
Analyze the under or overapplied manufacturing overhead costs calculated in part 3 above into two separate components: amount due to incorrect estimate of the annual manufacturing overhead costs and an amount due to incorrect estimate of the annual direct labour cost.
Question 2.3(Total: 30 marks)
James Bond, Inc., has a job-order costing system. The company uses predetermined overhead rates in applying manufacturing overhead cost to individual jobs. The predetermined overhead rate in Department A is based on machine hours, and the rate in Department B is based on direct materials cost. At the beginning of the most recent year, the company's management made the following estimates for the year:
Department
A B
Machine-hours 80,000 20,000
Direct labour-hours 30,000 60,000
Direct materials cost $240,250 $300,000
Direct labour cost $270,000 $570,000
Manufacturing overhead cost $420,000 $705,000
Job 007 entered into production on June 1stand was completed on July 12th. The company's cost records show the following information about the job:
Department
A B
Machine-hours 450 75
Direct labour-hours 70 140
Direct materials cost $1,000 $1,100
Direct labour cost $700 $900
At the end of the year, the records of James Bond, Inc. showed the following actual cost and operating data for all jobs worked on during the year:
Department
A B
Machine-hours 75,000 35,000
Direct labour-hours 30,000 70,000
Direct materials cost $160,000 $290,000
Manufacturing overhead cost $390,000 $705,000
Required:
Compute the predetermined overhead rates for Department A and Department B
Compute the total overhead cost applied to Job 007.
Compute the amount of underapplied or overapplied overhead in each department at the end of the current year.
Unit 3 Exercises Weight 3% of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 3
Objectives [ULO 3.1, 3.2, 3.3, 3.4, 3.5]
Evaluation and Feedback
Unit 3 will be marked in its entirety out of 100. The following scale indicates the criteria students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated % of Final Grade
Question 1 Identify activity type /20
Question 2 Prepare the first-stage allocation of overhead /27
Question 3 Calculate cost per unit using activity-based-costing /53
Total /100
Exercise Questions
Question 3.1(Total: 20 marks)
White Wizard Company makes golf equipment for retailers around the world. Below you will find a number of activities and cost at White Wizard Company.
Required:
Please list the activity as either, Batch, Unit, Facility, or Organization-sustaining.
Activity Level
1) Factory utilities 2) A steering wheel is installed in a golf cart. 3) Machine set-up. 4) Completed golf carts are individually tested on the companys test track. 5) Molding and sanding each unit of product 6) An outside lawyer draws up a new generic sales contract for the company, limiting Go Pros liability in case of accidents that involve its golf carts. 7) Electricity is used to heat and light the factory and the administrative offices. 8) A golf cart is painted. cost hierarchy often used to implement ABC, with the exception of 9) Research and development 10) The companys engineer modifies the design of a model to eliminate a potential safety problem. Question 3.2(Total: 27 marks)
Perfect Flooring installs oak and other hardwood floors in homes and businesses. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity-based costing system:
Overhead Costs: Production overhead $190,000
Office expense 140,000
Total $330,000
Distribution of resource consumption:
Activity Cost Pools
Installing Floors Job Support Other Total
Production overhead 40% 40% 20% 100%
Office expenses 10% 60% 30% 100%
The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The amount of activity for the year is as follows:
Activity Cost Pool Annual Activity
Installing floors 200 squares
Job support 160 jobs
Other Not applicable
A "square" is a measure of area that is roughly equivalent to 1,000 square metres.Required:
Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below:
Installing Floors Job Support Other Total
Production overhead
Office expense
Total
Compute the activity rates (i.e., cost per unit of activity) for the Installing Floors and Job Support activity cost pools by filling in the table below:
Installing Floors Job Support
Production overhead
Office expense
Total
Compute the overhead cost, according to the activity-based costing system, of a job that involves installing 3.4 squares.
Question 3.3(Total: 53 marks)
Lightsaber, Inc. manufactures two models of high-pressure steam valves, the BB7 model and the BB8 model. Budgeted manufacturing overhead cost and operating data regarding production and sales of 2,000 units of the BB7 model and 8,000 units of the BB8 model for 2023 follow:
Budgeted Level for Cost Driver
Activity Cost Pool Budgeted Overhead Costs Cost Driver BB7 BB8 Total
Machine setups $800,000 Number of setups 150 100 250
Vendor negotiation 200,000 Number of parts 800 200 1,000
Assembly 400,000 Direct labour hours 4,000 36,000 40,000
$1,400,000
Required:
Identifyandbriefly explain each of the three cost drivers as either unit-level or batch-level or product-level or organization-sustaining level.
Calculate the budgeted manufacturing overhead cost for each unit of the two models, using only one unit-level cost driver.
Calculate the budgeted manufacturing overhead cost for each unit of the two models, using the activity-based-costing (ABC) method.
Assume Lightsaber, Inc. will use only the unit-level driver. Compared to the ABC method, by how much (in terms of total allocated/applied manufacturing overhead cost), if any, will the total output of each model be either under-costed or over-costed?
Is the result obtained in part (4) above consistent with your expectations? Explain.
Unit 4 Exercises Weight 3% of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 4
Objectives [4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7]
Evaluation and Feedback
Unit 4 will be marked in its entirety out of 100. The following scale indicates the criteria students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated % of Final Grade
Question 1 Prepare a schedule for various costs /12
Question 2 Prepare a contribution format Income Statement /16
Question 3 Estimating costs /33
Question 4 Prepare a companys contribution margin ration, break-even, changes in operating income, margin of safety and degree of operating leverage /39
Total /100
Exercise Questions
Question 4.1(Total: 12 marks)
The following information summarizes the company's cost structure
Variable cost per unit $2.20
Fixed cost per unit 6.10
Total cost per unit 8.30
Units produced and sold 58,000
Assume that all of the activity levels mentioned in this problem are within the relevant range.
Prepare a schedule showing predictions for the following items at the 50,000 unit level of activity:
Required:
Total variable cost.
Total fixed cost.
Variable cost per unit.
Fixed cost per unit.
Question 4.2(Total: 16 marks)
The following is Starfish Corporation's contribution format income statement for December 2023:
Sales $1,000,000
Less: Variable expenses 300,000
Contribution margin 800,000
Less: Fixed expenses 400,000
Before-tax profits $400,000
The company had no beginning or ending inventories. Thecompanyproducedandsold10,000unitsin December 2023.
Required:
Assuming no change in either the cost structure or the average selling price, prepare a contribution format income statement for January, 2024 assuming production and sales of 7,500 units for Starfish Corporation.
Question 4.3(Total: 33 marks)
Diamond Company's total overhead costs at various levels of activity are presented below:
Machine hours Total overhead costs
March 60,000 $216,800
April 50,000 194,000
May 70,000 239,600
June 80,000 262,400
Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance. At the 50,000-machine-hour level of activity, these costs are presented below:
Utilities (V) $54,000
Supervisory salaries (F) 62,000
Maintenance (M) 78,000
Total overhead costs $194,000
V = Variable, F = Fixed, M = MixedThe company wants to break down the maintenance cost into its basic variable and fixed cost elements.
Required:
Estimate the maintenance cost for June.
Use the high-low method to estimate the cost formula for maintenance cost.
Estimate the total overhead cost at an activity level of 55,000 machine hours, using the separate estimates you obtained for its components.
Question 4.4(Total: 39 marks)
The following is Silver Corporation's contribution format income statement for last month:
Sales $1,400,000
Less: variable expenses 800,000
Contribution margin 600,000
Less: fixed expenses 400,000
Operating income $200,000
The company has no beginning or ending inventories and produced and sold 20,000 units during the month.
Required:
What is the company's contribution margin ratio?
What is the company's break-even in units?
If sales increase by 100 units, by how much should operating income increase?
How many units would the company have to sell to attain target operating income of $225,000?
What is the company's margin of safety in dollars?
What is the company's degree of operating leverage?
Unit 5 ExercisesWeight 3% of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 5
Objectives [ULO 5.1, 5.2, 5.3, 5.4, 5.5]
Evaluation and Feedback
Unit 5 will be marked in its entirety out of 100. The following scale indicates the criteria students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated % of Final Grade
Question 1 Determine service department cost allocation /24
Question 2 Calculating break-even /20
Question 3 Identify unit costs using variable costing, absorption costing. Prepare Income Statements under each method and reconcile. /56
Total /100
Exercise Questions
Question 5.1(Total: 24 marks)
Micro Brew Manufacturing Company has two Service Departments-Custodial Services and Maintenance-and three Production Departments-Brewing, Bottling, and Packaging. Micro Brew allocates the cost of Custodial Services on the basis of square metres and Maintenance on the basis of labour hours. Budgeted operating data for the year just completed follow:
Service Departments Operating Departments
Custodial Maintenance Brewing Bottling Packaging
Budgeted costs before allocation $18,000 $8,000 $80,000 $50,000 $90,000
Square metres 1,000 10,000 5,000 22,000 13,000
Labour-hours - - 4,000 8,000 8,000
Required:
Prepare a schedule, which allocates Service Department costs to the Production Departments by the direct method.
Prepare a schedule, which allocates Service Department costs to the Production Departments by the step-down method, allocating Custodial Services first.
Question 5.2(Total: 20 marks)
Thor Company manufactures one product that is sold for $80 per unit. The following information pertains to the companys first year of operations in which it produced 40,000 units and sold 35,000 units.
Variable costs per unit: Manufacturing: Direct materials $24
Direct labour $14
Variable manufacturing overhead $2
Variable selling and administrative $4
Fixed costs per year: Fixed manufacturing overhead $800,000
Fixed selling and administrative expenses $496,000
Required:
What is the companys break-even point in unit sales? Is it above or below the actual sales volume?
Question 5.3(Total: 56 marks)
Loki Company, which has only one product, has provided the following data concerning its most recent month of operations:
Selling price $95
Units in beginning inventory 100
Units produced 6,220
Units sold 5,720
Units in ending inventory 600
Variable costs per unit:
Direct materials $42
Direct labour $27
Variable manufacturing overhead $1
Variable selling and administrative $6
Fixed costs:
Fixed manufacturing overhead $62,220
Fixed selling and administrative $38,000
The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.
Required:
What is the unit product cost for the month under variable costing?
What is the unit product cost for the month under absorption costing?
Prepare an income statement for the month using the contribution format and the variable costing method.
Prepare an income statement for the month using the absorption costing method.
Reconcile the variable costing and absorption costing operating incomes for the month.
Unit 7 ExercisesWeight 3% of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 7
Objectives [ULO 7.1, 7.2, 7.3, 7.4, 7.5]
Evaluation and Feedback
Unit 7 will be marked in its entirety out of 100. The following scale indicates the criteria students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated % of Final Grade
Question 1 Fill in the missing amounts /24
Question 2 Prepare a cash disbursement and cash receipt schedule /24
Question 3 Calculate EOQ, annual inventory under EOQ, current inventory cost and re-order point /23
Question 4 Calculate the estimated sales, expected cash collections and product quantity /27
Total /100
Exercise Questions
Question 7.1(Total: 24 marks)
A cash budget, by quarter, is given below for a retail company (000 omitted). The company requires a minimum cash balance of $5,000 to start each quarter.
Required:
Fill in the missing amounts in the table that follows:
Quarter
1 2
Cash balance, beginning $6 $?
Add collections from customers ? ?
Total cash available 71 ?
Less disbursements: Purchase of inventory 35 45
Selling and administrative expenses ? 30
Equipment purchases 8 8
Dividends 2 2
Total disbursements ? 85
Excess (deficiency) of cash available over disbursements (2) ?
Financing: Borrowings ? 15
Repayments* - -
Total financing ? ?
Cash balance, ending $? $?
*For this exercise, assume there will be no interest on any borrowings.
Question 7.2(Total: 24 marks)
Tiki Company has projected sales and production in units for the second quarter of the coming year as follows:
April May June
Sales 50,000 40,000 60,000
Production 60,000 50,000 50,000
Cash-related production costs are budgeted at $5 per unit produced. Of these production costs, 40% are paid in the month in which they are incurred and the balance in the following month. Selling and administrative expenses will amount to $100,000 per month. The accounts payable balance on March 31 totals $190,000, which will be paid in April.All units are sold on account for $14 each. Cash collections from sales are budgeted at 60% in the month of sale, 30% in the month following the month of sale, and the remaining 10% in the second month following the month of sale. Accounts receivable on April 1 totaled $500,000 ($90,000 from February's sales and the remainder from March).
Required:
Prepare a schedule for each month showing budgeted cash disbursements for Tiki Company.
Prepare a schedule for each month showing budgeted cash receipts for Tiki Company.
Question 7.3(Total: 23 marks)
Halifax Souvenir Company currently orders 500 units four times each year. Each order costs $12 and each unit costs $1.20 per year to carry. On average, it takes 5 days to receive an order from the supplier. The company operates 250 days per year.
Required:
What is the EOQ?
Calculate total annual inventory cost under EOQ.
What is the current inventory cost?
What is the re-order point?
Question 7.4(Total: 27 marks)
Sun Company manufacturers beach umbrellas. The company is preparing detailed budgets for the third quarter and has assembled the following information to assist in the budget preparation:
The Marketing Department has estimated sales as follows for the remainder of the year (in units):
July 30,000
August 70,000
September 50,000
October 20,000
November 10,000
December 10,000
The selling price of the umbrellas is $12 each.
All sales are on account. Based on past experience, sales are expected to be collected in the following pattern:
30% In the month of sale
65% In the month following sale
5% uncollectable
Sales for June were $300,000
The company maintains finished goods inventories equal to 15% of the following months sales. This requirement will be met at the end of June.
Each beach umbrella requires 1 meter of Gilden, a material that is sometimes hard to acquire. Therefore, the company requires that the ending inventory of Gilden be equal to 50% of the following months production needs. The inventory of Gildwn on hand at the beginning of the quarter is 18,000 meters.
Gilden costs $3.20 per meter. One-half of a months purchases of Gilden is paid for in the month of purchase; the remainder is paid for in the following month. The accounts payable on July 1 for purchases of Gilden during June will be $76,000.
Required:
Calculate the estimated sales, by month and in total, for the third quarter.
Calculate the expected cash collections, by month and in total, for the third quarter.
Calculate the estimated quantity of beach umbrellas that need to be produced in July, August, September and October.
Unit 8 ExercisesWeight 3% of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 8
Objectives [ULO 8.1, 8.2, 8.3, 8.4, 8.5, 8.6, 8.7]
Evaluation and Feedback
Unit 8 will be marked in its entirety out of 100. The following scale indicates the criteria students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated % of Final Grade
Question 1 Calculating variances /18
Question 2 Calculating variances /34
Question 3 Compute margin, turnover, return on investments and residual income /24
Question 4 Prepare a segmented Income Statement /24
Total /100
Exercise Questions
Question 8.1(Total: 18 marks)
The following materials standards have been established for product Wand:
Standard quantity per unit of output 10.0 kilograms
Standard price $16.20 per kilograms
The following data pertains to operations concerning product Wand for the last month:
Actual materials purchased 7,300 kilograms
Actual cost of materials purchased $120,000
Actual materials used in production 7,122 kilograms
Actual output 740 units
Required:
What is the materials price variance for the month?
What is the materials quantity variance for the month?
Question 8.2(Total: 34 marks)
Hogwarts Company uses a standard cost system. Manufacturing overhead is applied to units of product on the basis of direct labour hours. The company's total budgeted variable and fixed manufacturing overhead costs at the denominator level of activity are $20,000 for variable overhead and $30,000 for fixed overhead. The predetermined overhead rate, including both fixed and variable components, is $2.00 per direct labour hour. The standards call for two direct labour hours per unit of output produced. Last year, the company produced 12,000 units of product and worked 20,000 direct labour hours. Actual costs were $22,380 for variable overhead and $31,300 for fixed overhead.
Required:
What is the denominator level of activity?
What were the standard hours allowed for the output last year?
What was the variable overhead spending variance?
What was the variable overhead efficiency variance?
What was the fixed overhead budget variance?
What was the fixed overhead volume variance?
Question 8.3(Total: 24 marks)
Financial data for Snape Company for last year appears below:
Snape Company
Statements of Financial Position
Beginning Balance Ending Balance
Assets:
Cash $58,000 $78,000
Accounts receivable 28,000 27,000
Inventory 36,000 40,000
Plant and equipment (net) 123,000 113,000
Investment in Potter Company 82,000 102,000
Land (underdeveloped) 170,000 170,000
Total assets $497,000 $530,000
Liabilities and owners' equity:
Accounts payable $57,000 $70,000
Long-term debt 270,000 270,000
Owners' equity 170,000 190,000
Total liabilities and owners' equity $497,000 $530,000
Snape Company
Income Statement
Sales $413,000
Less operating expenses 352,000
Net operating income 61,000
Less interest and taxes:
Interest expense $30,000
Tax expense 13,000 43,000
Operating Income $18,000
The company paid dividends of $2,000 last year. The "Investment in Potter Company" on the statement of financial position represents an investment in the stock of another company.
Required:
Compute the company's margin, turnover, and return on investment for last year.
The Board of Directors of Snape Company have set a minimum required return of 20%. What was the company's residual income last year?
Question 8.4(Total: 24 marks)
Hermione Corporation produces and markets two types of electronic calculators: Model 11 and Model 12. The following data were gathered on activities last month:
Model 11 Model 12
Sales in units 6,000 4,000
Selling price per unit $50 $100
Variable production costs per unit $12 $28
Traceable fixed production costs $100,000 $150,000
Variable selling expenses per unit $6 $7
Traceable fixed selling expenses $5,000 $7,500
Allocated division administrative expenses $57,000 $67,000
Required:
Prepare a segmented income statement in the contribution format for last month, showing both "Amount" and "Percent" columns for the company as a whole and for each model.
Refer to the original data and, if necessary, the results of the segmented income statement prepared in part (1) above. Calculate the total break-even sales (in units) for last month, assuming that none of the fixed production costs and fixed selling expenses is traceable. Allocate the total break-even sales between the two models.
Unit 9 Exercises Weight 3% of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 9
Objectives [ULO 9.1, 9.2, 9.3, 9.4, 9.5]
Evaluation and Feedback
Unit 9 will be marked in its entirety out of 100. The following scale indicates the criteria students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated % of Final Grade
Question 1 Determine make or buy decisions /27
Question 2 Identify products that should be processed beyond the split-off point /20
Question 3 Identify production requirements /35
Question 4 Determine make or buy decisions /18
Total /100
Exercise Questions
Question 9.1(Total: 27 marks)
Wild Oats Company makes 30,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:
Direct Materials Direct Labour $24.00
Variable Manufacturing Overhead $13.00
Fixed Manufacturing Overhead $4.00
Unit Product Cost $12.20
$53.20
An outside supplier has offered to sell the company all the parts that Wild Oats needs for $50.00 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $45,000 per year. If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $5.60 of the fixed manufacturing overhead cost that is being applied to the part would continue, even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.
Required:
How much of the unit product cost of $53.20 is relevant in the decision of whether to make or buy the part?
What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?
What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 30,000 units required each year?
Question 9.2(Total: 20 marks)
Guasman Company produces products R, J, and C from a joint production process. Each product may be sold at the split-off point or be processed further. Joint production costs of $92,000 per year are allocated to the products based on the relative number of units produced. Data for Guasman's operations for the current year are as follows:
Units Allocated Joint Sales Value
Product Produced Production Cost At Split-off
R 8,000 $32,000 $76,000
J 10,000 40,000 71,000
C 5,000 20,000 48,000
Product R can be processed beyond the split-off point for an additional cost of $26,000 and can then be sold for $105,000. Product J can be processed beyond the split-off point for an additional cost of $38,000 and can then be sold for $117,000. Product C can be processed beyond the split-off point for an additional cost of $12,000 and can then be sold for $57,000.
Required:
Which products should be processed beyond the split-off point?
Question 9.3(Total: 35 marks)
Guerrero Company makes three products in a single facility. These products have the following unit product costs:
Products
A B C
Direct materials $10.90 $15.80 $8.00
Direct labour 12.50 12.60 9.90
Variable manufacturing overhead 2.40 1.20 1.40
Fixed manufacturing overhead 11.60 7.20 7.80
Unit product cost $37.40 $36.80 $27.10
Additional data concerning these products are listed below.
Products
A B C
Mixing minutes per unit 2.00 1.00 0.50
Selling price per unit $55.80 $54.60 $43.10
Variable selling cost per unit $2.10 $1.40 $1.90
Monthly demand in units 2,000 1,000 3,000
The mixing machines are potentially a constraint in the production facility. A total of 5,900 minutes are available per month on these machines.Direct labour is a variable cost in this company.
Required:
How many minutes of mixing machine time would be required to satisfy demand for all four products?
How much of each product should be produced, rounded to the nearest whole unit, to maximize operating income
Up to how much should the company be willing to pay, rounded to the nearest whole cent, for one additional minute of mixing machine time if the company has made the best use of the existing mixing machine capacity?
Question 9.4(Total: 18 marks)
Manoah Company makes 4,000 units per year of a part called an axial tap for use in one of its products. Data concerning the unit production costs of the axial tap follow:
Direct Materials $35
Direct Labour $10
Variable Manufacturing Overhead $8
Fixed Manufacturing Overhead $20
Total Manufacturing Cost per Unit $73
An outside supplier has offered to sell Manoah Company all of the axial taps it requires. If Manoah Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labour is a variable cost.
Required:
Assume Manoah Company has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each, should Manoah Company accept the offer? Fully support your answer with appropriate calculations.
Assume that Manoah Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Manoah Company should be willing to pay the outside supplier for axial taps?
Unit 10 Exercises Weight 3% of the final grade
Due no later than 11:00 p.m. on Sunday of Unit 10
Objectives [ULO 10.1, 10.2, 10.3, 10.4, 1.0.5]
Evaluation and Feedback
Unit 10 will be marked in its entirety out of 100. The following scale indicates the criteria students are to adhere to, and their relative weights to the assignment overall.
Activity/Competencies Demonstrated % of Final Grade
Question 1 Calculate net present value /27
Question 2 Calculate net present value, internal rate of return, payback period and simple rate of return /27
Question 3 Compute a projects profitability index and rank project preferences /16
Question 4 Compute CCA, NPV, IROR /30
Total /100
Exercise Questions
Question 10.1(Total: 27 marks)
Bowser Company's required rate of return is 14%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently. (Ignore income taxes in this problem.)
Required:
Machine A will cost $20,000 and will have a useful life of 15 years. Its salvage value will be $1,800, and cost savings are projected at $4,000 per year. Calculate the machine's net present value.
How much should Bowser Company be willing to pay for Machine B if the machine promises annual cash inflows of $6,000 per year for eight years?
Machine C has a projected life of ten years. What is the machine's internal rate of return if it costs $40,000 and will save 7,000 annually in cash operating costs? Would you recommend to Bowser Company to purchase Machine C? Explain.
Question 10.2(Total: 27 marks)
Shooting Star, Inc. is considering a project that would have an eight -year life and would require a $2,000,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net income each year as follows:
Sales $2,000,000
Less:Variable Expenses $1,600,000
Contribution Margin $400,000
Less:Fixed Expenses $200,000
Net Income $200,000
All of the above items, except for depreciation of $200,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company's required rate of return is 10%. (Ignore income taxes in this problem.)
Required:
What is the project's net present value?
What is the project's internal rate of return?
What is the project's payback period?
What is the project's simple rate of return?
Question 10.3(Total: 16 marks)
Information on four potential projects is given below:
Projects
A B C D
Investment required $(350,000) $(390,000) $(450,000) $(480,000)
Present value of cash inflows 535,000 590,000 670,000 730,000
Net present value $185,000 200,000 $220,000 $250,000
Ignore income taxes
Required:
Compute the project profitability index for each project.
Rank the projects in terms of preference.
Question 10.4(Total: 30 marks)
Elf on a Shelf Company bought a new computer-assisted design (CAD) software for $10,000,000 at the beginning of Year 1. The software has a useful life of 3 years and will save the company annual cash operating expenses of $4,000,000 in each of those 3 years. The software will have a zero net salvage value at the end of 3 years. It belongs to Class 12 with a capital cost allowance (CCA) rate of 100%. With special permission from the Canada Revenue Agency, the half-year CCA rule has been waived for the company to permit a maximum 100% CCA deduction for Year 1. The company's income tax rate and after-tax cost of capital are 40% and 12%, respectively.
Required:
Calculate the maximum total CCA tax shied available to the company.
Calculate the present value of the annual cash savings in operating expenses.
Calculate the net present value (NPV) of the investment.
Was the internal rate of return (IROR) greater than or less than the company's after-tax cost of capital of 12%? (Note: Do NOT try to calculate the implied actual internal rate or return.)
By how much must the annual savings in operating expenses be increased or decreased to make the investment just worthwhile, that is, either zero NPV or 12% IROR?
