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					                               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
       accounting information?
       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
              activity changes
       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.




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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
      except
      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
      credit to
      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




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12.   Which of the following allocations would not occur when the direct method is used in a
      manufacturing company?
      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
      C.      unaffected
      D.      unpredictable




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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.

Required:
    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.




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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.

Required:
   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).




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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.

Required:
   1) (5 points) What would be the quoted price under the traditional method of cost
      allocation?




   2) (5 points) What would be the quoted price under ABC based on the expected activity
      levels? (show the details of each cost category)




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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
   levels.




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.




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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.

Required:
   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?




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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
   increase?
   (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.




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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?




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