Department of Accounting & Taxation

ACCT 331

Final Exam – Spring 2013

The case for the Final
Exam, Winnbrook Day Care Center, is contained below. Please read it carefully,
and please read all of the pages on
the exam before beginning to answer any of the questions. Then answer the
questions on the attached pages.

The exam is open book. You
may use whatever notes, books, and other materials you wish (exceptthose materials, including exam
responses, of other students taking
the exam).You must return the exam to Blackboard within four hours of
downloading it. Please remember that you are bound by the honor system. You may
not ask for assistance from any outside party including members of the class.
Please sign the statement below stating that you have not asked for nor
received any outside assistance.

Please put your name and
I.D. Number in the space below:

Name___________________________________ I.D. Number____________________

I
hereby state that I have completed the attached exam on my own without any
assistance from outsiders.

Signed__________________________________________________________________

You
may do scratch work on separate pages and outline your answers on separate
pages – in fact, I encourage you to do so. Once you are ready to write out your
answer, please confine it to the spaces
indicated, and please write legibly and succinctly. Do not use separate pages or
exceed the allotted space.

Winnbrook Day Care Center

In September, 2007, Cheryl
Johnson, manager of Winnbrook Day Care Center (Winnbrook), asked Edward
Landers, a recent graduate of a nearby business school, for advice. Mr.
Landers, seeing an opportunity to contribute to the community that had helped
support his extra-curricular activities while he attended college, agreed.

Background

Winnbrook Day Care Center
was located in Newtown, Indiana, and was owned by a local
corporation that wished to provide child care services to its employees. Until 2007,
the corporation’s policy had been that Winnbrook should operate on
approximately a breakeven basis: that is, the corporation did not intend to use
its own funds to finance the operation, nor did it expect its employees to pay
more than the center’s full cost for day care services. Winnbrook was one of
seven day care centers in Newtown
that had its own building. Many smaller centers were located in church
basements or private homes. In 2007, Winnbrook’s enrollment was 50 children,
all of whom were pre-school. They attended for the full day, while their
parents were at work, and took part in various activities. The center provided
them with lunch.

Winnbrook operated in a two-story
building located on a large lot. The corporation owned both the building and
the lot. The building was old and needed repair. According to a recent
inspection by the city fire marshal, it was in violation of the fire code
because, among other things, the second floor did not have two outside exits,
not all the exit doors opened outward, smoke detectors and emergency lighting
were missing, stairwells were not enclosed, and materials used in ceiling and
walls were substandard. The city’s Department of Child Services had indicated
that it would revoke Winnbrook’s license unless it either renovated the
building or constructed a new one.

A local contractor, estimating the
necessary repairs to the building would cost roughly $ 100,000, had recommended
that Winnbrook construct a new building on the same lot. The cost would be $
80,000, assuming that the parents would do much of the interior finishing on a
volunteer basis. The $ 80,000 figure included demolition and removal of the old
building after construction of the new one (the lot was large enough to
accommodate this approach). Following construction, Winnbrook’s capacity would
be 70 children.

Based on Ms. Johnson’s
recommendation, the corporation’s CFO had decided to construct a new building,
but she had indicated to Ms. Johnson that, beginning in 2008, the center should
earn a return of about 10% on the cost of the building and land. The land had
been purchased ten years earlier, along with the old building. The total cost
was $ 60,000 of which the land represented about one-third. Ms. Johnson had
agreed, and construction began in January, 2007. The building was scheduled for
occupancy in January, 2008 and had an economic life of twenty years.

FINANCIAL DATA

Most Winnbrook children were in
low-income families. In most cases, the corporation employed both parents. In 2006
and 2007, the center charged $ 35 per week, the lowest rates of any of the
seven centers, where rates were as high as $ 50 per week. Centers at the top of
the scale attracted children from higher-income families. Most centers,
including Winnbrook, operated at capacity.

For tax purposes, Winnbrook’s
accounting system was separate from the corporation’s. Ms. Johnson had prepared
an income statement for 2006. From bank deposits and checks, Mr. Landers, who
had taken some introductory accounting courses in college, was able to prepare
an estimated income statement for 2007. In addition, based on discussions with
Ms. Johnson, Mr. Landers had prepared a budget for 2008, assuming the new
building would be in use for the full year. The 2006 actual figures, Mr.
Lander’s estimates for 2007, and the 2008 budget are all shown in Exhibit 1.

In preparing the 2008 budget, Mr.
Landers made the following assumptions:

1. Winnbrook would charge a fee
of $ 50 per week.

2. Seventy (70) children would
enroll for forty (40) hours a week each.

3. There would be the
equivalent of 6.5 hourly employees at $ 5 per hour (the same wage rate as in 2007).
This was 2.5 FTEs (full-time equivalent employees) more than in 2007, and was
due to the planned increase in enrollment. In addition, Ms. Johnson planned to
hire a business manager (salaried) to keep Winnbrook’s expenses under control.
All employees worked 40 hours a week.

4. The center would be open the
equivalent of 48 weeks a year. This was because during two weeks of the year,
the corporation closed down and the employees were on vacation. In addition,
the corporation was closed for another ten days (two weeks equivalent) during
the year in conjunction with various national holidays, such as Labor Day,
Columbus Day, and Thanksgiving.

Exhibit 1. Financial Data

(Year Ending
December 31)

2006 (Actual) 2007(Estimated) 2008(Budget)

Revenue
(net of estimated bad debts) $ 70,000 $ 84,000 $
168,000

Expenses:

Salaried employees $ 20,000 $ 22,000 $ 44,000

Hourly employees 34,350 38,400 62,400

Food
4,198 12,000 16,800

Utilities 1,954 1,670 2,100

Interest (1) 413 6,400 6,000

Supplies (2) 6,350 7,200 10,080

Repairs & Maint. 124 544 1,000

Insurance 504 651 2,000

Depreciation (3)
1,108 826 4,000

Total expenses
69,001 89,691 148,380 Income (Loss)
$ 999 $
(5,691) $ 19,620

Notes:

(1) 2006
interest was for an automobile, which had been purchased on an installment
loan. 2007 interest was for the automobile and the mortgage. 2008 interest was
for the mortgage only, since the auto loan would be paid off by the end of 2007.

(2) Child-related
supplies, such as crayons, paper, paints, clay.

(3) Depreciation
in 2006 and 2007 was for the automobile; in 2008, it was for the new building
only.

Question 1 (15 points)

From the perspective of the corporation, what kind of responsibility center
is Winnbrook ? (no more than five words) (5 points)

Give
your reasoning. (no more than 100 words). (10 points)

______________________________________________________________________________________

Question 2 (10 points)

Use
variance analysis to explain the causes of the increase in revenue from 2007 to 2008.
Show your computations neatly, and clearly label the appropriate
variances.

Question 3 (20 points)

Using child-weeks as the appropriate measure of
volume (e.g., 1 child enrolled for 48 weeks = 48 child weeks), indicate whether
each item below is fixed (F), variable (V), or other (O), and explain your
reasoning. For variable items, your explanation should show the rate per child-week. Use Mr. Lander’s 2007 estimated amounts as
the basis for your computations.

F/V/O Explanation

1. Revenue

2. Salaried Employees

3. Hourly Employees

4. Food

5. Utilities

6. Interest

7. Supplies

8. Repairs

9. Insurance

10. Depreciation

Question 4 (5 points)

Use
your analysis in Question 3 to set up a flexible
budget formula for Winnbrook. Show your computations where necessary.

Question 5 (10 points)

How,
if at all, would a flexible budget be of use to Ms. Johnson in the management
of Winnbrook? (no more than 100 words)

________________________________________________________________________

Question 6 (10 points)

Ms.
Johnson’s budget for 2007 was based on an average attendance of 45 children per
week, and had budgeted food costs totaling $ 8,640 for the year. Mr. Lander’s
estimate of $ 12,000 was based on an average attendance of 50 children per
week. Prepare a variance analysis to explain the increase in food costs between
Ms. Johnson’s budget and Mr. Lander’s estimate.

Question 7 (5 points)

Prepare a brief (no more than 50 words) explanation to Ms.
Johnson of why Mr. Lander’s estimated food costs for 2007 differ from her
budget.

Question 8 (10 points)

As a consultant to the corporation, you have been asked
to recommend some non-financial information that Ms. Johnson and the
corporation could use to assess Winnbrook’s performance. List two items of
non-financial information, giving a very brief (no more than 50 words)
explanation for each of why you chose it.

Item
# 1:

Item # 2:

Question
9 (15 points)

Ms. Johnson has asked you for a
recommendation as to what is the best course of action for her to take in this
matter. Your answer should focus on
identifying problems that you see in the 2008 budget and recommending a course
of action to resolve the problem. (your answer should not exceed this page)