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Accounting 2302 Name_________________________ Examination 2

N. Jacobs SS.# ________________________ Fall 2005

INSTRUCTIONS:

1. There are 108 points on this portion of your exam. You will have 75minutes to complete the exam. Plan your time accordingly.

2. There should be 8 pages in this exam (including this page). Count the pagesand notify the instructor if pages are missing.

3. Show your work on all problems where appropriate. Label all amounts notgiven in the problem. Also, label your answers! Partial credit will be givenonly where these requirements are met.

4. Neatness counts! Sloppy, illegible answers are wrong answers! Use of

pencil and eraser is highly recommended.

6. This examination is meant to be an individual effort. Any sharing of answers(giving or receiving) will result immediate disciplinary action.

7. Good luck!

_______ Multiple Choice (60 points)

_______ Problem 1: Cost Volume Profit Analysis (16 points)

_______ Problem 2: Activity-Based Costing (17 points)

_______ Problem 3: High/Low Method (15 points)

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Multiple Choice (4 points )

1. Contribution margin can be defined as:Garrison 7.22 d *

a. the amount of sales revenue necessary to cover variable costs.b. sales revenue minus fixed costs.c. the amount of sales revenue necessary to cover fixed and variable costs.d. sales revenue minus variable costs.

2. The break-even point in unit sales increases when variable expenses:Garrison9 6.26 a

a. increase and the selling price remains unchanged.b. decrease and the selling price remains unchanged.c. decrease and the selling price increases.d. remain unchanged and the selling price increases.

3. The break-even volume in units is found by dividing total fixed expenses by:Garrison 7.25 d *

a. the contribution margin ratio.b. the variable expenses per unit.c. the sales price per unit.d. the contribution margin per unit.

4. Setting up equipment is an example of a:Garrison9 testbank 8.18 b

a. Unit-level activity.b. Batch-level activity.c. Product-level activity.d. Organization-sustaining activity.

5. Which of the following would be classified as a product-level activity?Garrison testbank da. Machine setup for a batch of a standard product.b. Cafeteria facilities available to and used by all employees.c. Human resource management.d. Advertising a product.

6. Unit-level activities arise as a result of the total volume of production and areperformed each time a unit is produced.

G9 8.6 a.

a. Trueb. Falsec. Neither d. Both

7. Activity-based costing uses a number of activity cost pools, each of which isallocated to products on the basis of direct labor-hours.G9 8.5a

a. False

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b. Truec. Neither d. Both

8. A company incurs $1,200,000 of overhead each year in three departments,Processing, Packaging, and Testing. The company performs 800 processingtransactions, 200,000 packaging transactions, and 2,000 tests per year inproducing 400,000 drums of Oil and 600,000 drums of Sludge. The followingdata are available:

Department Expected use of Driver CostProcessing 800 $500,000Packaging 200,000 500,000Testing 2,000 200,000

Production information for Oil is as follows:Department Expected use of Driver Processing 300

Packaging 120,000Testing 1,600

Compute the amount of overhead assigned to Oil.Weygandt TB 4.78

a. $600,000b. $647,500c. $552,500d. $460,000

9. A company incurs $1,200,000 of overhead each year in three departments,

Processing, Packaging, and Testing. The company performs 800 processingtransactions, 200,000 packaging transactions, and 2,000 tests per year inproducing 400,000 drums of Oil and 600,000 drums of Sludge. The followingdata are available:

Department Expected use of Driver CostProcessing 800 $500,000Packaging 200,000 500,000Testing 2,000 200,000

Production information for Sludge is as follows:

Department Expected use of Driver Processing 500Packaging 80,000Testing 400

Compute the amount of overhead assigned to Sludge.Weygandt TB 4.79

a. $600,000

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b. $552,500c. $647,500d. $460,000

10. Sleep-Tight manufactures mattresses for the hotel industry. It has twoproducts, Downy and Firm and total overhead of $474,000. The companyplans to manufacture 400 Downy mattresses and 100 Firm mattresses thisyear. In manufacturing the mattresses, the company must perform 600material moves for the Downy and 400 for the Firm; it processes 900 purchaseorders for the Downy and 700 for the Firm; and the companys employees work1,400 direct labor hours on the Downy product and 3,400 on the Firm. Sleep-Tights total material handling costs are $300,000 and its total purchasing costsare $174,000. Under a traditional costing approach based on direct laborhours, how much overhead would be assigned to the Downy product?

Weygandt TB 4.80a. $138,250b. $335,750c. $237,000

d. $277,875

11. Which stages of the management decision-making process below is in a propersequence?

Weygandt 6.46a. Evaluate possible courses of action, Make decisionb. Review the actual impact of the decision, Determine possible courses of

actionc. Assign responsibility for the decision, Identify the problemd. Make a decision, Assign responsibility

12. Which one of the following is nonfinancial information that management mightevaluate in making a decision?

Weygandt 6.50 da. Opportunity costs of a decisionb. Contribution marginc. The effect on profit of a decisiond. The corporate profile in the community

13. Which one of the following is an alternative name for incremental analysis?Weygandt 6. 51 d

a. Managerial analysis

b. Cost analysisc. Contribution margin analysisd. Differential analysis

14. Which of the following describes one aspect of incremental analysis?Weygandt 6.52 b

a. Both costs and revenues that stay the same between alternate courses ofaction will be analyzed.

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b. Both costs and revenues that differ between alternate courses of action willbe analyzed.

c. All costs and revenues, regardless if they that stay the same or differ betweenalternate courses of action, will be analyzed.

d. Only costs relating to the decisions at hand are analyzed.

15. When is incremental analysis most useful?Weygandt 6.53 d

a. After a decision has been made to determine its effectivenessb. In choosing between capital budgeting methodsc. In evaluating the profitability of a companyd. In developing relevant information for management decisions

16. Who generates the data used in incremental analysis?Weygandt 6.54 ca. Market analysts and engineersb. Engineers and accountantsc. Market analysts, engineers, and accountants

d. Only the accountants

17. Which one of the following is a true statement about incremental analysis?Weygandt 6.55 d

a. It is another name for capital budgeting.b. It is the same as CVP analysis.c. It is used primarily for long-term planning.d. It focuses on decisions that involve a choice among alternative courses of

action.

18. For which of the following decisions is incremental analysis not appropriate?

Weygandt 6.56 ba. Elimination of an unprofitable segmentb. Determining cost behaviorc. A make or buy decisiond. An allocation of limited resource decision

19. For which of the following is incremental analysis appropriate?Weygandt 6.57 a

a. Acceptance of a special order and a make or buy decisionb. A retain or replace equipment decision and CVP analysisc. A sell or process further decision and allocation of indirect costs

d. Elimination of an unprofitable segment and allocation of indirect costs

20. What is a relevant range of activity?Weygandt 6.58 c

a. The geographical locations in which the company operatesb. The activity level at which profits are maximizedc. The levels of activity over which the company expects to operated. The level of activity in which all costs are constant

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Problem 1: Cost Volume Profit Analysis (16 points)G9 6.124The following is Alsatia Corporation's contribution format income statement for lastmonth:

Sales .............. ......... $1,400,000Less variable expenses . ..... 900,000Contribution margin ......... 500,000Less fixed expenses ......... 300,000Net income .................. $ 200,000

The company has no beginning or ending inventories and produced and sold 10,000units during the month.

Required: SHOW YOUR WORK TO RECEIVE CREDIT!!

a. What is the company's contribution margin ratio?

b. What is the company's break-even in units?

c. If sales increase by 100 units, by how much should net income increase?

d. How many units would the company have to sell to attain target profits of $225,000?

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Problem 2: Activity-based Costing (17 points)

Ex. 87

All Wood Corporation manufactures dining chairs and tables. The following informationis available:

Dining Chairs Tables Total CostMachine setups 200 600 $32,000

Inspections 250 500 $54,000Labor hours 2,600 2,400

All Wood is considering switching from one overhead rate based on labor hours toactivity-based costing.

Instructions

Perform the following analyses for these two components of overhead:

a. Compute total machine setups and inspection costs assigned to each product, using

a single overhead rate.

b. Compute total machine setups and inspection costs assigned to each product, usingactivity-based costing.

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Exam 1 SolutionsProblem 3: High/Low Method ( 15 points)

Johnson Company has provided the following data for the first five months of the year:

Machine Hours Lubrication CostJanuary .... 120 $ 750February ... 160 $ 800March ...... 200 $ 870April ...... 150 $ 790May ........ 170 $ 840

a. Using the high-low method of analysis, the estimated variablelubrication cost per machine hour is closest to:

Answer: $1.50 per unit

vc = 870-750

200-120

b. Using the high-low method of analysis, the estimated monthly fixedcomponent of lubrication cost is closest to:

Answer: $570

Total cost == (vc per unit * units) + FC

c. If the determined level of activity is 175 machine hours, calculate the total cost forthese number of machine hours.

Answer:

Total Cost = (vc per unit * units) + FC= ($1.50 * 175 units) +570= $832.50

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Solution 87 (812 min.)a. Single overhead rate

($32,000 + $54,000) 5,000 = $17.20 per labor hour

Dining chairs: 2,600 $17.20 = $44,720Tables: 2,400 x $17.20 = 41,280

$86,000

b. Activity-based costingMachine setups: $32,000 800 = $40 per setup

Inspections: $54,000 750 = $72 per inspection

Dining chairs: (200 $40) + (250 $72) = $26,000Tables: (600 $40) + (500 $72) = 60,000

$ 86,000

c. The use of activity-based costing resulted in the allocation of less cost to dining

chairs and more cost to tables. The change in cost allocation reflects a moreaccurate allocation based on cause and effect.

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