COMPREHENSIVE EXAMINATION A(Chapters 1 - 4)

Problem A - I — Multiple Choice (20 points)Circle the one best answer.

1. Cost of goods manufactured during a period is obtained by taking the total manufacturing costs incurred during the period and adding and subtracting the following inventories:

Adding Subtractinga. Beginning finished goods inventory Ending finished goods inventoryb. Beginning work in process inventory Ending finished goods inventoryc. Beginning raw materials inventoryEnding work in process inventoryd. Beginning work in process inventory Ending work in process inventory

2. Cost of goods sold is equal toa. total manufacturing costs plus beginning work in process less ending work in process.b. cost of goods sold plus beginning work in process less ending work in process.c. total manufacturing costs plus ending work in process less beginning work in process.d. cost of goods manufactured plus beginning finished goods less ending finished goods.

3. Inventory accounts for a manufacturer consists ofa. direct materials, work in process, and finished goods.b. direct labor, work in process, and finished goods.c. manufacturing overhead, direct materials, and direct labor.d. work in process, direct labor, and manufacturing overhead.

4. In a process cost system, equivalent units of production are thea. work done on physical units expressed in fully completed units.b. units that are transferred to the next processing department.c. units completed and transferred to finished goods.d. units that are incomplete at the end of a period.

Use the following information for questions 5 and 6.

In the month of November, a department had 500 units in the beginning work in process inventory that were 60% complete. These units had $16,000 of materials cost and $12,000 of conversion costs. Materials are added at the beginning of the process and conversion costs are added uniformly throughout the process. During November, 10,000 units were completed and transferred to the finished goods inventory and there were 2,000 units that were 25% complete in the ending work in process inventory on November 30. During November, manufacturing costs charged to the department were: Materials $368,000; Conversion costs $408,000.

5. The cost assigned to the units transferred to finished goods during November wasa. $720,000.b. $724,000.c. $752,000.d. $716,000.

6. The cost assigned to the units in the ending work in process inventory on November 30 wasa. $144,000.b. $84,000.c. $64,000.d. $116,000.

7. An appropriate cost driver for ordering and receiving materials cost is thea. direct labor hours.b. machine hours.c. number of parts.d. number of purchase orders.

8. Benefits of activity-based costing include all of the following excepta. more accurate product costing.b. fewer cost pools used to assign overhead costs to products.c. enhanced control over overhead costs.d. better management decisions.

9. An example of a value-added activity in a manufacturing operation isa. machine repair.b. inventory control.c. engineering design.d. building maintenance.

10. Assigning manufacturing costs to work in process results in credits to all of the following accounts excepta. Factory Labor.b. Manufacturing Overhead.c. Raw Materials Inventory.d. Work in Process Inventory.

Problem A - II — Cost of Goods Manufactured and Sold (20 points)

Selected account balances of Heedy Manufacturing Company appear below for 2008:

Test Bank for ISV Managerial Accounting, Fourth Edition

Beginning of Year End of YearFinished Goods Inventory $25,000 $ 32,000Work In Process Inventory 30,000 35,000Raw Materials Inventory 46,000 26,000Sales 360,000Direct Labor 45,000Factory Supervisory Salaries 18,000Income Tax Expense 25,000Factory Insurance 12,000Raw Material Purchases 75,000Administrative Expenses 17,000Sales Returns and Allowances 15,000Factory Depreciation 22,000Indirect Labor 11,000Selling Expenses 35,000

InstructionsUsing the above information for Heedy Manufacturing Company, answer the following questions. Support your answers with clearly identified computations.

1. What was the amount of direct materials used in production?

2. What were the total manufacturing costs incurred?

3. What was the cost of goods manufactured?

4. What was the cost of goods sold?

5. What was the amount of net income?

Problem A - III — Job Order Cost Accounting (20 points)

Battle Manufacturing uses a job order cost accounting system. On October 1, the company has a balance in Work in Process Inventory of $5,500 and two jobs in process: Job No. 429, $3,000 and Job No. 430, $2,500. During October, a summary of source documents reveals the following:

For Materials Requisition Slips Labor Time TicketsJob No. 429 $ 3,500 $ 4,400Job No. 430 2,600 3,400Job No. 431 3,400 4,200Job No. 432 3,000 4,000General Use 1,000 1,500

$13,500 $17,500

Battle Manufacturing applies manufacturing overhead to jobs at an overhead rate of 70% of direct labor cost. Job No. 429 is completed during the month.

Instructions(a) Prepare summary journal entries to record the requisition slips, time tickets, the assignment of manufacturing overhead to

jobs, and the completion of Job No. 429. Show computations.

(b) Answer the following questions.

1. What is the balance in Work in Process Inventory at October 31?

2. If Battle Manufacturing incurred $8,000 of manufacturing overhead in addition to indirect materials and indirect labor, was overhead over- or underapplied in October and by how much?

Problem A - IV — Process Cost Accounting (25 points)

The Mixing Department of Cherry Manufacturing Company has the following production and manufacturing cost data for January.

Production: Beginning inventory 8,000 units that are 100% complete as to materials and 40% complete as to conversion costs; units started into production 27,000; ending inventory of 12,000 units 20% complete as to conversion costs.

Manufacturing Costs: Beginning work in process inventory of $40,000, comprised of $30,000 of materials and $10,000 of conversion costs. Materials added during the month, $110,000; labor and overhead applied during the month, $62,000 and $55,000, respectively.

Instructions(a) Compute the equivalent units of production for materials and conversion costs for the month of January.

(b) Compute the unit costs for materials and conversion costs.

(c) Determine the costs to be assigned to the units transferred out and ending work in process.

Problem A - V — Activity-Based Costing (15 points)

Tuttle Manufacturing Company manufactures two products: radiators and gas tanks. During June, 200 radiators and 400 gas tanks were produced and overhead costs of $66,000 were incurred. The following information related to overhead costs was available:

A - 2

Comprehensive Examination A

Activity Cost Driver Total CostMaterials handling Number of requisitions $28,000Machine setups Number of setups 18,000Quality inspections Number of inspections 20,000

The cost driver volume for each product was as follows:

Cost Driver Radiators Gas Tanks TotalNumber of requisitions 300 500 800Number of setups 140 220 360Number of inspections 200 300 500

Instructions(a) Compute the overhead rate for each activity.

(b) Assign the manufacturing overhead costs for June to the two products using activity-based costing.

Solutions — Comprehensive Examination A

Problem A - I — Solution

1. d 6. b2. d 7. d3. a 8. b4. a 9. c5. a 10. d

Problem A - II — Solution

1. Direct materialsRaw materials inventory, Jan. 1..................................................................................................................... $ 46,000Raw material purchases................................................................................................................................. 75,000Raw materials available for use..................................................................................................................... 121,000Raw materials inventory, Dec. 31.................................................................................................................. 26,000Direct materials used...................................................................................................................................... $ 95,000

2. Direct materials used.............................................................................................................. $ 95,000Direct labor............................................................................................................................ 45,000Manufacturing overhead

Factory supervisory salaries........................................................................................... $18,000Factory insurance........................................................................................................... 12,000Factory depreciation....................................................................................................... 22,000Indirect labor.................................................................................................................. 11,000 63,000Total manufacturing costs.............................................................................................. $203,000

3. Work in process inventory, Jan. 1.......................................................................................... $ 30,000Direct materials used.............................................................................................................. $95,000Direct labor............................................................................................................................ 45,000Manufacturing overhead........................................................................................................ 63,000 203,000Total work in process............................................................................................................. 233,000Work in process inventory, Dec. 31....................................................................................... 35,000Cost of goods manufactured.................................................................................................. $198,000

4. Finished goods inventory, Jan. 1............................................................................................ $ 25,000Cost of goods manufactured.................................................................................................. 198,000Cost of goods available for sale............................................................................................. 223,000Finished goods inventory, Dec. 31........................................................................................ 32,000Cost of goods sold.................................................................................................................. $191,000

5. Sales....................................................................................................................................... $360,000Less sales returns and allowances.......................................................................................... 15,000 $345,000Expenses

Cost of goods sold.......................................................................................................... 191,000Selling expenses............................................................................................................. 35,000Administrative expenses................................................................................................ 17,000Income tax expense........................................................................................................ 25,000 268,000

Net income............................................................................................................................. $ 77,000

Problem A - III — Solution

(a) Requisition slipsOct. 31 Work In Process Inventory........................................................................................ 12,500

Manufacturing Overhead........................................................................................... 1,000Raw Materials Inventory................................................................................ 13,500

Time ticketsWork in Process Inventory......................................................................................... 16,000

A - 3

Test Bank for ISV Managerial Accounting, Fourth Edition

Manufacturing Overhead........................................................................................... 1,500Factory Labor................................................................................................. 17,500

Assignment of overheadWork in Process Inventory ($16,000 × 70%)............................................................ 11,200

Manufacturing Overhead............................................................................... 11,200

Completion of Job 429Finished Goods Inventory.......................................................................................... 13,980

Work in Process Inventory............................................................................. 13,980($3,000 + $3,500 + $4,400 + $3,080)

(b) 1. Work in Process Inventory balance:October 1 balance $ 5,500Costs added in October 39,700

45,200Completed jobs 13,980October 31 balance $31,220

2. Under- or overapplied overhead:Overhead incurred ($1,000 + 1,500 + $8,000) $10,500Overhead applied 11,200Overhead overapplied $ 700

Problem A - IV — Solution

(a) Equivalent Units Physical Units Materials Conversion Costs

Transferred out 23,000* 23,000 23,000Work in process, January 31 12,000 12,000 2,400**

Total 35,000 35,000 25,400

*(8,000 + 27,000) – 12,000 **(12,000 × .20)

(b) Materials: [($30,000 + $110,000) ÷ 35,000].......................................................................................... $4Conversion Costs: [($10,000 + $62,000 + $55,000) ÷ 25,400] ............................................................ 5

$9(c) Costs accounted for

Transferred out (23,000 × $9) $207,000

Work in process, 1/31Materials (12,000 × $4) 48,000Conversion costs (2,400 × $5) 12,000 60,000

$267,000

Problem A - V — Solution

(a) The overhead rates are:

Activity Total Cost Total Driver Volume Overhead RateMaterials handling $28,000 800 $35Machine setups 18,000 360 50Quality inspections 20,000 500 40

(b) The assignment of the overhead costs to products is as follows:

Radiators Gas Tanks Cost Number Cost Number Cost Total CostRequisitions ($35) 300 $10,500 500 $17,500 $28,000Setups ($50) 140 7,000 220 11,000 18,000Inspections ($40) 200 8,000 300 12,000 20,000

Total costs (a) $25,500 $40,500 $66,000

Total units (b) 200 400

Cost per unit (a) ÷ (b) $127.50 $10

A - 4

C O M P R E H E N S I V E E X A M I N A T I O N BProblem B - I — Multiple Choice (22 points)

Circle the one best answer.

1. Juniper, Inc. sells a single product with a contribution margin of $12 per unit, fixed costs of $74,400, and sales for the current year of $100,000. How much is Juniper’s break-even point?a. 4,600 unitsb. $25,600c. 6,200 unitsd. 2,133 units

2. Homer Company’s variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost $22,000. If sales are expected to increase $40,000, by how much will the company’s net income increase?a. $28,000b. $6,000c. $12,000d. $10,000

3. A company has total fixed costs of $60,000 and a contribution margin ratio of 40%. The total variable costs incurred at the break-even level of activity would bea. $60,000.b. $150,000.c. $90,000.d. $24,000.

4. A company desires to earn target net income of $30,000 from the sale of its product. If the unit sales price is $15, unit variable cost is $9, and total fixed costs are $90,000, the number of units that the company must sell to earn its target net income isa. 8,000 units.b. 20,000 units.c. 16,000 units.d. 12,000 units.

5. A company has a policy of having sufficient direct materials inventory on hand at the end of each month equal to 20% of next month's budgeted production needs. The company has budgeted production of 15,000 units of product in June and 20,000 units in July. It takes 2 pounds of direct materials to produce one unit of product and 6,000 pounds of direct materials were on hand on May 31. How many pounds of direct materials should be purchased in the month of June?a. 28,000 poundsb. 30,000 poundsc. 38,000 poundsd. 32,000 pounds

6. A company has budgeted direct materials purchases of $100,000 in March and $160,000 in April. Past experience indicates that the company pays for 70% of its purchases in the month of purchase and the remaining 30% in the next month. During April, the following items were budgeted:

Wages Expense $50,000Purchase of office equipment 24,000Selling and Administrative Expenses 16,000Depreciation Expense 12,000

The budgeted cash disbursements for April area. $216,000.b. $142,000.c. $232,000.d. $244,000.

*7. Dustin Company sells its product for $40 per unit. During 2008, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $10, direct labor $6, and variable overhead $2. Fixed costs are: $480,000 manufacturing overhead, and $60,000 selling and administrative expenses. The per unit manufacturing cost under absorption costing isa. $16.b. $18.c. $26.d. $27.

8. Monroe Company manufactures a product with a unit variable cost of $42 and a unit sales price of $75. Fixed manufacturing costs were $80,000 when 10,000 units were produced and sold, equating to $8 per unit. The company has a one-time opportunity to sell an additional 1,000 units at $55 each in an international market which would not affect its present sales. The company has sufficient capacity to produce the additional units. How much is the relevant income effect of accepting the special order?a. $42,000b. $5,000c. $50,000d. $13,000

9. Beavers, Inc. is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $16, while the cost of assembling each unit is estimated at $17. Unassembled units can be sold for $55, while assembled units could be sold for $71 per unit. What decision should Beavers make?

Test Bank for Managerial Accounting, Fourth Edition

a. Sell before assembly, the company will save $1 per unit.b. Sell before assembly, the company will save $15 per unit.c. Process further, the company will save $1 per unit.d. Process further, the company will save $16 per unit.

Use the following information for questions 10 and 11.

At January 1, 2008, Smithfield, Inc. has beginning inventory of 3,000 surfboards. Smithfield estimates it will sell 14,000 units during the first quarter of 2008 with a 10% increase in sales each quarter. Smithfield’s policy is to maintain an ending inventory equal to 20% of the next quarter’s sales. Each surfboard costs $140 and is sold for $200.

10. How many units should Smithfield produce during the first quarter of 2008?a. 14,080b. 14,000c. 16,800d. 14,200

11. How much is budgeted sales revenue for the third quarter of 2008?a. $16,940b. $3,388,000c. $3,360,000d. $3,080,000

Problem B - II — Cost-Volume-Profit (24 points)

Reavis Company prepared the following income statement for 2008:

REAVIS COMPANYIncome Statement

For the Year Ended December 31, 2008———————————————————————————————————————————

Sales (20,000 units).................................................................................................................................... $500,000Variable expenses...................................................................................................................................... 300,000Contribution margin................................................................................................................................... 200,000Fixed expenses........................................................................................................................................... 120,000Net income................................................................................................................................................. $ 80,000

InstructionsAnswer the following independent questions and show computations to support your answers.1. What is the company’s break-even point in units?2. How many more units would the company have had to sell to earn net income of $100,000 in 2008?3. If the company expects a 25% increase in sales volume in 2009, what would be the expected net income in 2009?4. How much sales (in dollars) would the company have to generate in order to earn a target net income of $150,000 in 2009?

Problem B - III — Transfer Pricing (12 points)

Taner Company, a division of Douglas Cars, produces automotive batteries. Taner sells the batteries to its customers for $82 per unit. The variable cost per unit is $38, and fixed costs per unit are $16. Top management of Douglas Cars would like Taner to transfer 30,000 batteries to another division within the company at a price of $54. Taner has sufficient excess capacity to provide the 30,000 batteries to the other division.

Instructions(a) Compute the minimum transfer price that Taner should accept.(b) Assume Taner is operating at full capacity. Compute the minimum transfer price that Taner should accept.

Problem B - IV — Budgeting (18 points)

Grace Company has budgeted the following unit sales for the first quarter of 2009:

Units January 36,000February 54,000March 45,000

It takes two pounds of direct materials, which cost $6 per pound, to manufacture one unit of product. It is the company’s policy to have a finished goods inventory on hand at the end of each month equal to 20% of next month’s sales and to maintain a direct materials inventory at the end of the month equal to 30% of the next month’s production needs. The inventory levels at December 31, 2008, were in accordance with company policy.

InstructionsAnswer the following independent questions and show computations to support your answers.1. Calculate the number of units that should be scheduled for production in the month of February.2. What was the number of units in ending finished goods inventory at December 31, 2008?3. What was the number of units in ending direct materials inventory at December 31, 2008?4. What was the number of units and the dollar amount of direct materials purchases budgeted for the month of January?

B - 2

Comprehensive Examination B

Problem B - V — Contribution Margin (14 points)

Sports Company makes two products, footballs and baseballs. Additional information follows:

Footballs BaseballsUnits 4,000 2,500 Sales $60,000 $25,000Variable costs 36,000 7,000Fixed costs 9,000 9,000Net income $15,000 $ 9,000

Profit per unit $3.75 $3.60If Sports has unlimited demand for both products, which product should the company emphasize?

Problem B - VI — Incremental Analysis (10 points)

Knox Manufacturing incurs unit costs of $15 ($9 variable and $6 fixed) in making a subassembly part for its finished product. A supplier offers to make 10,000 of the assembly part at $11 per unit. If the offer is accepted, all variable costs and $1 of fixed costs per unit will be saved.

Instructions

(a) Prepare an analysis to show whether Knox Manufacturing should make or buy the assembly part.

(b) Would your answer be different if Knox Manufacturing could earn $25,000 of income with the facilities currently used to make the part?

Solutions — Comprehensive Examination BProblem B - I — Solution

1. c 7. c2. b 8. d3. c 9. a4. b 10. a5. d 11. b6. cProblem B - II — Solution

1. Unit contribution margin = $10 ($200,000 ÷ 20,000).Break-even point in units = 12,000 units ($120,000 ÷ $10).

2. Additional units to be sold = 2,000 units ($20,000 ÷ $10).

3. Contribution margin $250,000 ($200,000 × 1.25)Fixed expenses 120,000Expected net income $130,000

OR

Additional units: 20,000 × 25% = 5,000Additional CM: 5,000 × $10 = $50,000Additional net income: $80,000 + $50,000 = $130,000

4. Contribution margin ratio = 40% ($200,000 ÷ $500,000).Sales dollars necessary = $675,000 [($120,000 + $150,000) ÷ .4].

Problem B - III — Solution

(a) If Taner has excess capacity, then its opportunity cost is zero. In this case, the minimum transfer price is:

Minimum transfer price = $38 + $0 = $38.

(b) The minimum transfer price is equal to Taner’s variable cost plus its opportunity cost. In this case, the minimum transfer price is:

Minimum transfer price = $38 + ($82 – $38) = $82.Problem B - IV — Solution

1. Production BudgetFebruary

Units Budgeted unit sales 54,000Desired ending inventory in units 9,000 (20% × 45,000)Total required units 63,000Less beginning inventory in units 10,800 (20% × 54,000)Required production units 52,200

2. 7,200 units (36,000 × 20%)

3. Production Budget January

B - 3

Test Bank for Managerial Accounting, Fourth Edition

Budgeted unit sales 36,000Desired ending inventory in units 10,800 (20% × 54,000)Total required units 46,800Less beginning inventory in units 7,200 (20% × 36,000)Required production units 39,600Direct materials per unit × 2Raw materials inventory, Dec. 31 79,200 × 30% = 23,760 pounds

4. Direct MaterialsJanuary Budget Pounds needed for production 79,200Desired ending inventory

(52,200 × 2 = 104,400) × 30% 31,320Total materials required 110,520Less beginning inventory in units 23,760Direct materials purchases 86,760

× $6Total cost of direct materials purchases $520,560

Problem B - V — Solution

Contribution margin per unit:Footballs = ($60,000 – $36,000) ÷ 4,000 = $6Baseballs = ($25,000 – $7,000) ÷ 2,500 = $7.20

Sports Company should attempt to sell more baseballs due to the higher contribution margin per unit.

Problem B - VI — Solution

(a) Net Income Make Buy Increase/(Decrease)

Variable costs $ 90,000 $ -0- $ 90,000Fixed costs 60,000 50,000 10,000Purchase price 110,000 (110,000)

Total cost $150,000 $160,000 $ (10,000)

Knox Manufacturing should continue to make the assembly part because net income will be $10,000 less if the part is purchased.

(b) Yes, the answer now would be to buy the part. The $25,000 is the opportunity cost. In the above analysis, it should be added to the Make column. In such case, net income of $15,000 ($175,000 – $160,000) would be realized by buying the part.

B - 4

COMPREHENSIVE EXAMINATION C(Chapters 10 - 14)

Problem C - I — Multiple Choice (22 points)

Circle the one best answer.

1. Items from Tedder Company’s budget for March in which 2,100 units were produced and sold appear below:

Direct materials $12,000Indirect materials—variable 2,000Supervisor salaries 10,000Depreciation on factory equipment 8,000Direct labor 7,000Property taxes on factory 3,000

Total $42,000

At 2,200 units, how much are budgeted variable manufacturing costs?a. $22,000b. $43,000c. $21,000d. $19,905

2. A company developed the following per-unit standards for its product: 2 pounds of direct materials at $6 per pound. Last month, 2,000 pounds of direct materials were purchased for $11,400. The direct materials price variance for last month wasa. $11,400 favorable.b. $600 favorable.c. $300 favorable.d. $600 unfavorable.

3. The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month, 11,200 gallons of direct materials that actually cost $42,400 were used to produce 6,000 units of product. The direct materials quantity variance for last month wasa. $3,200 favorable.b. $2,400 favorable.c. $3,200 unfavorable.d. $5,600 unfavorable.

4. The per-unit standards for direct labor are 2 direct labor hours at $12 per hour. If in producing 2,400 units, the actual direct labor cost was $51,200 for 4,000 direct labor hours worked, the total direct labor variance isa. $1,920 unfavorable.b. $6,400 favorable.c. $4,000 unfavorable.d. $6,400 unfavorable.

5. The standard rate of pay is $5 per direct labor hour. If the actual direct labor payroll was $19,600 for 4,000 direct labor hours worked, the direct labor price (rate) variance isa. $800 unfavorable.b. $800 favorable.c. $1,000 unfavorable.d. $400 favorable.

6. The standard number of hours that should have been worked for output attained is 8,000 direct labor hours, and the actual number of hours worked was 8,400. If the direct labor price variance was $8,400 unfavorable, and the standard rate of pay was $18 per direct labor hour, what was the actual rate of pay for direct labor?a. $17.00 per direct labor hourb. $15.00 per direct labor hourc. $19.00 per direct labor hourd. $18.00 per direct labor hour

7. Which one of the following does not affect cash?a. Acquisition and retirement of bonds payableb. Write-off of an uncollectible accounts receivablec. Acquisition of treasury stockd. Payment of cash dividend

8. Erickson Company reported net income of $140,000 for 2008. The income statement also indicates that interest expense for 2008 was $50,000. Assuming an income tax rate of 30%, the number of times interest was earned for 2008 wasa. 4 times.b. 5 times.c. 3.8 times.d. 2.8 times.

9. During 2008, Thomas Company had an asset turnover ratio of 4 times with sales totaling $1,000,000. If net income was $80,000, Thomas Company's return on assets in 2008 wasa. 8%.b. 32%.c. 40%.d. 80%.

Test Bank for Managerial Accounting, Fourth Edition

10. Equipment was purchased for $72,000 and it is estimated to have a $12,000 salvage value at the end of its estimated 8-year life. The equipment is estimated to generate cash inflows of $10,000 each year and will be depreciated by using the straight-line method. The payback period on this investment isa. 6 years.b. 7.2 years.c. 4.8 years.d. 4.5 years.

11. Jensen Company purchased a new machine for $200,000 and will use the straight-line method of depreciation over 4 years with no salvage value. If the company's minimum annual rate of return is 10%, this investment must generate expected annual income ofa. $3,000.b. $10,000.c. $20,000.d. $50,000.

Problem C - II — Variance Analysis (12 points)

Camping Out Company manufactures down sleeping bags. Each sleeping bag requires 4 pounds of down and takes .3 hours of direct labor. The standard cost of the down used by Camping Out is $8 per pound, and the standard labor cost is $10 per hour. In November, Camping Out purchased 15,000 pounds of down for $120,750. During the year, the company manufactured 4,000 sleeping bags. Payroll reported a total of 1,480 direct labor hours at a cost of $14,060.

Instructions

(a) Compute the materials price and quantity variances and indicate whether the variances are favorable or unfavorable.

(b) Compute the labor price and quantity variances and indicate whether the variances are favorable or unfavorable.

Problem C - III — Capital Budgeting (16 points)

Easton Company is considering a capital investment of $500,000 in new equipment. It is expected to have a useful life of 10 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $35,000 and $85,000, respectively. Easton requires either a 10% cost of capital "hurdle" rate, or a payback period of 7 years.

InstructionsCompute the (a) cash payback period, (b) net present value, (c) internal rate of return (to the nearest percent), and (d) annual rate of return. Show all computations. State whether the project should be accepted or rejected for each of the four capital budgeting techniques.

Present Value of an Annuity of 1 (n)Periods 5% 6% 8% 9% 10% 11% 12% 15%

10 7.72173 7.36009 6.71008 6.41766 6.14457 5.88923 5.65022 5.01877

Problem C - IV — Flexible Overhead Budget (15 points)

Healey Company budgeted a level of activity of 20,000 machine hours to be worked each month in the Machining Department. At this level of activity, manufacturing overhead costs were budgeted as follows:

Variable manufacturing overheadIndirect materials $ 25,000Indirect labor 38,000Repairs 4,000Utilities 10,000

Fixed manufacturing overheadSupervisory salaries 20,000Property taxes 1,000Depreciation 12,000

Total manufacturing overhead $110,000

InstructionsThe actual manufacturing costs incurred for the month of March, when 24,000 machine hours were worked, are listed below on a partially completed budget report. Complete the budget report in a manner that would be most useful for evaluating the performance of the Machining Department manager for the month of March, 2008.

HEALEY COMPANYManufacturing Overhead Budget Report

Machining DepartmentFor the Month Ended March 31, 2008

DifferenceBudget at Actual at Favorable F

Unfavorable U

C - 2

Comprehensive Examination C

Variable manufacturing overheadIndirect materials $ $ 30,800 $Indirect labor 44,500Repairs 7,000Utilities 11,000

Total variable 93,300Fixed manufacturing overhead

Supervisory salaries 20,000Property taxes 1,000Depreciation 12,000

Total fixed 33,000Total costs $ $126,300 $

Problem C - V — Statement of Cash Flows (17 points)

The comparative balance sheet for Mott Company appears below:

MOTT COMPANYComparative Balance Sheet

Dec. 31, 2008 Dec. 31, 2007Assets

Cash.................................................................................................................................... $54,000 $12,000Accounts receivable........................................................................................................... 6,000 8,000Inventory............................................................................................................................11,000 7,000Prepaid expenses................................................................................................................ 2,000 3,000Building ............................................................................................................................20,000 20,000Accumulated depreciation—building................................................................................ (3,000) (2,000)

Total assets................................................................................................................. $90,000 $48,000

Liabilities and Stockholders' Equity

Accounts payable............................................................................................................... $ 1,000 $ 4,000Long-term note payable..................................................................................................... 13,000 14,000Common stock................................................................................................................... 33,000 18,000Retained earnings............................................................................................................... 43,000 12,000

Total liabilities and stockholders' equity................................................................... $90,000 $48,000

The income statement for the year is as follows:

MOTT COMPANYIncome Statement

For the Year Ended December 31, 2008

Sales (all on credit)............................................................................................................ $280,000Expenses and losses

Cost of goods sold...................................................................................................... $184,000Operating expenses, exclusive of depreciation.......................................................... 42,300Depreciation expense................................................................................................. 1,000Interest expense.......................................................................................................... 1,200Loss on sale of land.................................................................................................... 2,500Income taxes.............................................................................................................. 9,000

Total expenses and loss...................................................................................... 240,000Net income......................................................................................................................... $ 40,000

Cash dividends of $9,000 were paid during the year. Land costing $15,000 was acquired by the issuance of common stock. The property was subsequently sold for $12,500 cash.InstructionsPrepare a statement of cash flows for the year ended December 31, 2008 using the indirect method.

Problem C - VI —Ratios (18 points)

The financial information below was taken from the annual financial statements of Falls Company.

2008 2007 Current assets $280,000 $170,000Current liabilities 80,000 90,000Total assets 550,000 450,000Sales 760,000 600,000Cost of goods sold 525,000 510,000Inventory 100,000 110,000Receivables (net) 100,000 60,000Net income 57,000 48,000Common stockholders’ equity 330,000 270,000Total liabilities 220,000 180,000

InstructionsCalculate the following ratios for Falls Company for 2008.1. Current ratio.2. Average collection period of receivables in days.

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Test Bank for Managerial Accounting, Fourth Edition

3. Return on assets.4. Debt to total assets ratio.5. Inventory turnover.6. Return on common stockholders’ equity.7. Asset turnover.8. Profit margin.

Solutions — Comprehensive Examination C

Problem C - I — Solution

1. a 7. b2. b 8. b3. a 9. b4. b 10. b5. d 11. b6. cProblem C - II — Solution

Actual Quantity Actual Quantity Standard Quantity× Actual Price × Standard Price × Standard Price

15,000 × $8.05 = 15,000 × $8 = 16,000 × $8 =$120,750 $120,000 $128,000

Price Variance Quantity Variance$750 U $8,000 F

Total Materials Variance$7,250 F

b.

Actual Hours Actual Hours Standard Hours× Actual Rate × Standard Rate × Standard Rate

1,480 × $9.50 = 1,480 × $10 = 1,200 × $10 =$14,060 $14,800 $12,000

Price Variance Quantity Variance$740 F $2,800 U

Total Labor Variance$2,060 U

Problem C - III — Solution

(a) Cash payback period — $500,000 ÷ $85,000 = 5.88 years. Accept project.

(b) Net present value — ($85,000 × 6.14457) – $500,000 = $22,288. Accept project.

(c) Internal rate of return (to the nearest %) — $500,000 ÷ $85,000 = 5.88235, close to factor for 11% (5.88923). Accept project.

(d) Annual rate of return — $35,000 ÷ $250,000 = 14%. Accept project.Problem C - IV — Solution

HEALEY COMPANYManufacturing Overhead Budget Report

Machining DepartmentFor the Month Ended March 31, 2008

DifferenceBudget at Actual at Favorable F24,000 MH 24,000 MH Unfavorable U

Variable manufacturing overheadIndirect materials ($1.25) $ 30,000 $ 30,800 $ 800 UIndirect labor ($1.90) 45,600 44,500 1,100 FRepairs ($.20) 4,800 7,000 2,200 UUtilities ($.50) 12,000 11,000 1,000 F

Total variable 92,400 93,300 900 UFixed manufacturing overhead

Supervisory salaries 20,000 20,000Property taxes 1,000 1,000

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Comprehensive Examination C

Depreciation 12,000 12,000Total fixed 33,000 33,000 -0-

Total costs $125,400 $126,300 $ 900 U

Problem C - V — Solution

MOTT COMPANYStatement of Cash Flows

For the Year Ended December 31, 2008(Indirect Method)

Cash flows from operating activitiesNet income .................................................................................................................... $40,000Adjustments to reconcile net income to net cash provided byoperating activities:

Depreciation expense............................................................................................. $1,000Decrease in accounts receivable............................................................................ 2,000Increase in inventory.............................................................................................. (4,000)Decrease in prepaid expenses................................................................................ 1,000Decrease in accounts payable................................................................................ (3,000)Loss on sale of land................................................................................................ 2,500 (500)

Net cash provided by operating activities.................................................. 39,500Cash flows from investing activities

Proceeds from sale of land................................................................................................. 12,500Cash flows from financing activities

Payment of cash dividends................................................................................................. (9,000)Payment of long-term note................................................................................................. (1,000)

Net cash used by financing activities..................................................................... (10,000)Net increase in cash .................................................................................................................... 42,000Cash at beginning of period........................................................................................................... 12,000Cash at end of period .................................................................................................................... $54,000

Noncash financing and investing activitiesAcquired land through issuance of common stock ........................................................... $15,000

Problem C - VI — Solution

1. Current ratio: $280,000 ÷ $80,000 = 3.5:1.

$760,0002. Average collection period of receivables in days: ——————————— = 9.5

(100,000 + $60,000) ÷ 2365 ÷ 9.5 = 38.4 days.

$57,0003. Return on assets: ———————————— = 11.4%.

($550,000 + $450,000) ÷ 2

4. Debt to total assets ratio: $220,000 ÷ $550,000 = 40%.

$525,0005. Inventory turnover: ———————————— = 5.

($110,000 + $100,000) ÷ 2

$57,0006. Return on common stockholders’ equity: ———————————— = 19%

($270,000 + $330,000) ÷ 2

$760,0007. Asset turnover: ———————————— = 1.52

($450,000 + $550,000) ÷ 2

8. Profit margin: $57,000 ÷ $760,000 = 7.5%

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