Carnegie Mellon University
Graduate School of Industrial Administration
45-701 Managerial Accounting
Mid-term Exam (10 pages)
June 4, 2002
Name (please print)_______________________________ Score _________________
Part I. Multiple choices (32 points)
1. Which of the following is most likely to make use of Spruce Company’s managerial
A. The IRS
B. An individual contemplating an investment in Spruce Company
C. A company that is one of Spruce’s main competitors
D. The production manager of Spruce’s plant in Minnesota
2. A sunk cost is a cost
A. incurred in the past which is not relevant to present decisions
B. incurred in the current period which changes with changes in production activity
C. incurred in the previous period which remains constant even though production
D. which is estimated to occur in the current period
3. Which of the following statements regarding direct and indirect costs is true?
A. The amount of direct costs in a department is always less than the amount of
indirect costs in that department
B. A department with no variables costs will also have no direct costs
C. The distinction between direct and indirect costs depends on the cost object
D. If a cost is indirect to a department within a plant, it will also be indirect for the
plant as a whole.
4. Which of the following is a period cost?
A. Rent on an office building
B. Depreciation on factory equipment
C. Raw material cost
D. Wages paid to factory workers
5. Which of the following statements about cost of goods sold (COGS) is true?
A. COGS must be greater than or equal to ending Finished Goods Inventory
B. COGS must be less than or equal to the cost of goods available for sale
C. COGS must be greater than or equal to the cost of goods manufactured this period
D. COGS must be less than or equal to the cost of goods manufactured this period.
6. When actual overhead costs are incurred, they are debited to
A. Accounts Payable
B. Finished Goods Inventory
C. Work in Process Invertnory
D. Manufacturing Overhead
7. The reasons for using a predetermined rate to allocate overhead include the following
A. Product cost information is needed before the actual amount is known at the end
of the period
B. It avoids the random effects of fluctuations in the production process
C. It is simple
D. It always provides precise cost information
E. It provides information for better cost control
8. Timber Company uses a predetermined overhead rate of $6.00 per hour. If 60,000 hours
were worked this year the actual overall costs of $380,000 were incurred, how will cost
of goods sold be affected if the over-/under-application of overhead is closed to it?
A. It will be increased by $360,000
B. It will be decreased by $360,000
C. It will be increased by $20,000
D. It will be decreased by $20,000
9. In process costing, transferred-in costs are recorded with a journal entry that includes a
A. Raw materials
B. Manufacturing Overhead
C. Finished Goods
D. Work in Process
10. From a decision-making standpoint, the allocated cost should measure the
A. Sunk cost of the services provided
B. Variable component of manufacturing overhead
C. Opportunity cost of using a company resource
D. Product cost of the goods produced
11. A major problem with cost-plus contracts is that they
A. are not acceptable under GAAP
B. cause the supplier to take significant financial risks
C. require the supplier to use variable costing
D. create an incentive to allocate as much cost as possible
12. Which of the following allocations would not occur when the direct method is used in a
A. Personnel department costs allocated to the maintenance department.
B. Maintenance department costs allocated to the finishing department.
C. Assembly department costs allocated to Produce C.
D. All of these allocations could occur.
13. One of the advantages of allocating budgeted rather actual service department costs is
A. Managers are not motivated to evaluate the charges
B. Only one cost pool is necessary.
C. Service departments cannot pass on the costs of inefficiencies to others
D. This practice is acceptable under GAAP
14. The traditional approach to cost allocation
A. usually requires more cost pools than ABC
B. assumes that all overhead costs are proportional to production volume
C. attempts to identify the activities that cause costs
D. produces more accurate costs than any other method
15. Operating leverage is related to which of the following?
A. Manufacturing costs versus selling costs
B. Estimated cots versus actual costs
C. Total revenue versus total costs
D. Fixed costs versus variable costs
16. A firm switching to Just-in-Time production from traditional production will find that
the difference between variable costing and full costing becomes
A. more significant
B. less significant
Part II. Problems
1. (Process costing, 12 points) On July 1, JKL Corporation’s packaging department had
Work in Process inventory of 6,000 units that were 75% complete with respect to
materials and 30% complete with respect to conversion costs. The cost of these units was
$93,525 ($60,000 transferred-in from previous departments, $26,775 in materials, and
$6,750 in conversion). During July, 125,000 units were transferred into the department.
These units had accumulated costs in previous departments of $1,218,560. The packaging
department incurred costs of $756,225 for materials and $488,010 for conversion costs in
July and transferred 130,000 units out of the department. The 1,000 units remaining in
ending inventory are 50% complete with respect to materials and 20% complete with
respect to conversion costs.
1) (3 points) Calculate the cost per equivalent unit for transferred-in costs, materials
costs, and conversion costs.
2) (3 points) Calculate the costs of the units transferred out of the department.
3) (3 points) Calculate the cost of the ending inventory.
4) (3 points) Reconcile costs to be accounted for with costs accounted for.
2. (Cost allocation, 6 points) An insurance company has the following profitability analysis
of its services:
Life Insurance Auto Insurance Home Insurance
Revenues $5,000,000 $10,000,000 $3,000,000
Commissions (1,000,000) (2,000,000) (600,000)
Payments (3,000,000) (7,300,000) (2,000,000)
Fixed costs (500,000) (500,000) (500,000)
Profits $ 500,000 $ 200,000 ($ 100,000)
The fixed costs are distributed equally among the services and are not avoidable if one of
the services is dropped.
1) (3 points) What is the separate profitability of the remaining services if the service with
loss is dropped?
2) (3 points) Briefly discuss the effect if the company makes it a policy to always drop the
losers (any service with losses).
3. (Job-order costing and activity-based costing, 25 points) Jansen Motorboat Company
builds custom wooden motorboats and uses job-order costing system. The manager expects
$1,600,000 manufacturing overhead for the coming year. These overhead costs are nearly
all fixed. Traditionally the company applies overhead cost on the basis of labor hours.
Currently the company is considering adopting activity-based costing (ABC) upon
suggestions by a newly hired MBA from GSIA. Five activity centers have been identified
with the following estimates of costs and activities for the coming year:
Activity center Cost driver Estimated OH costs Expected activity
Labor related direct labor hours $ 600,000 80,000 hours
Customer ordering # of orders 100,000 200 orders
Machine setup # of setups 440,000 400 setups
Product testing # of tests 200,000 500 tests
General factory machine hours 260,000 13,000 hours
total estimated overhead costs $1,600,000
To maintain some minimum return, Jansen’s pricing strategy has been full cost plus 15%
markup. Last week the company received a request to quote the price on an order of a
specially designed boat. The customer is currently shopping around and will make the
decision after comparing the prices from different manufacturers. Jansen estimates some
cost data for the order as follows: direct materials $3,500
direct labor hours 150
direct labor rate $20/hour
machine hours 100
In addition, the machines need to be set up once and two tests are needed.
1) (5 points) What would be the quoted price under the traditional method of cost
2) (5 points) What would be the quoted price under ABC based on the expected activity
levels? (show the details of each cost category)
3) (5 points) The coming year is forecasted be an especially bad year. All the expected
activity levels given earlier are only at 80% of a normal year (e.g. although only 200
orders are expected, totally customer ordering cost of $100,000 would normally allow
handling 250 orders). What would be quoted price under ABC using normal activity
4) (5 points) Given the expected bad year with lots of excess capacity, what would be the
minimum price allowed if the 15% markup rule is relaxed?
6) (5 points) Which price would you recommend? Briefly discuss why.
4. (CVP Analysis and Variable Costing, 25 points) Cordless phones are the only product
that Rykor Electronics manufactures and sells. For the most recent year, 25,000 units were
produced and 20,000 were sold at $60 per unit. There was no beginning inventory. Variable
cost was $45 per unit. Total fixed expense was $330,000.
The compensation committee of the board is currently examining the performance of
management and needs several items before a conclusion is drawn.
1) (5 points) What is the net income of the company under full costing? Under variable
costing? Give the brief income statements.
2) (4 points) It’s mentioned in class that CVP analysis is consistent only with variable
costing. For CVP analysis, compute the company's CM ratio, and the degree of
operating leverage at the most recent year’s level of sales.
3) (5 points) What is the company's break-even point in both units and sales dollars?
4) (4 bonus points) Under full costing, could you calculate the break-even point given that
25,000 units were produced? Briefly explain the problem.
5) Assume that variable costing is used and cost behavior remains unchanged. If sales will
to increase by $400,000 next year, by how much will the company's net income
(a) (3 points) Use the CM ratio calculated in 2) to determine your answer.
(b) (3 points) Use the operating leverage calculated in 2) to determine your answer.
5) (5 points) As a member of the compensation committee, which net income number do
you think best reflect the management performance. Briefly describe why.
Bonus question (5 points):
Easter University prides itself on providing faculty and staff a competitive
compensation package. One aspect of this package is a faculty and staff child tuition benefit of
$4,000 per child per year for up to four years to offset the cost of a college education. The
faculty or staff member’s child can attend any college or university, including Eastern
University, and receive the tuition benefit. If a staff member has three children in college one
year, the staff member receives a $12,000 tuition benefit. This money is not taxed to the
individual staff or faculty.
Eastern University pays the benefit (directly to the university where the staff/faculty
member’s child is enrolled or reduces the amount of tuition owed by the faculty/staff if the
student is attending Eastern) and then charges this payment to a benefits account. This benefits
account is then allocated back to the various colleges and departments based on total salaries in
the college or department.
Evaluate the pros and cons of the present university accounting for tuition benefits.
What changes would you recommend making?