RSM 222 H1S MIDTERM EXAM, Winter 2011

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UNIVERSITY OF TORONTO

RSM 222 H1S

MIDTERM EXAM, Winter 2011

Section I: 9 Multiple Choice Questions (3 marks each, 27 marks in
total) :

Please
circle the single best answer for the multiple-choice questions.

1. Which of
the following items would be included as part of factory overhead in a microcomputer
manufacturer?

a. the cost
of memory chips

b. wage of
computer assemblers

c.
depreciation of computer assemblers

d. salary
of marketing director

e. all of
the above

2.
Inventoriable costs

a. include
only the prime costs of manufacturing a product.

b. include
only the conversion costs of manufacturing a product.

c. are
expensed when products become part of finished goods inventory.

d. are
regarded as assets before the products are sold.

e. None of
the above.

3. Once the
break-even point is reached

a. The
total contribution margin changes from negative to positive.

b. Net
income will increase by the unit contribution margin for each item sold.

c. Variable
costs will remain constant in total

d. The
contribution margin ratio begins to decrease

e. None of
the above

4. Miller
manufactures desks. During the most productive month of the year, 3,500 desks
are manufactured at a total cost of $84,400. In its slowest month, Miller makes
1,100 desks at a cost of $46,000. February is a regular month. Miller plans to
make 2,000 units. What is the total variable costs for Fabruary?

a. $60,400

b. $55,240

c. $48,230

d. $32,000

e. None of
the above.

5. Winsor
Inc. has planned to increase factory manager salary by 10%. If selling prices
and all other cost are held constant, the break-even point

a.
decreases at rate higher than 10%

b.
decreases at a rate lower than 10%.

c.
increases at rate higher than 10%

d.
increases at a rate lower than 10%.

e. None of
the above.

6. The
following information relates to Glow Ltd.

Sales
$125,000

Cost of
goods sold 56,000

Operating
expenses 25,500

Finished
goods, beginning inventory 15,000

Finished
goods, ending inventory 15,000

Direct
material 10,500

Direct labour
19,000

Overhead
25,000

What is
Glow’s cost of goods manufactured?

a. $29,500

b. $50,500

c. $54,500

d. $61,500

e. None of
the above

7. Activity
based costing may be used in which of the following scenarios?

a. For
selling and administrative expenses.

b. For
service related business.

c. Both a
and b.

d. Nether a
nor b.

8. The
process of choosing among competing alternatives is called

a.
Controlling

b. Decision
making

c. Planning

d.
Performance evaluation

e. None of
the above.

9. Which of
the following statement is true?

I. A cost
driver is a factor that causally affects costs.

II. A cost
hierarchy is a categorization of costs into different cost pools on the basis
of

the
different types of cost drivers or different degrees of difficulty in
determining

cause-and-effect
relationships.

a. Only I

b. Only II

c. Both I
and II

d. Neither
I nor II

Section II. Short Answer Questions (18 marks)

1. Ruth
Reed, divisional controller and certified management accountant, was upset by a
recent memo she received from the divisional manager, Paul Chesser. Ruth was
scheduled to present the division’s financial performance at headquarters in
one week. In the memo, Paul had given Ruth some instructions for this upcoming
report. In particular, she has been told to emphasize the significant
improvement in the division’s profits over last year. Ruth, however, didn’t
believe that there was any real underlying improvement in the division’s
performance and was reluctant to say otherwise. She knew that the increase in
profits was because of Paul’s conscious decision to produce for inventory.

Paul had
convinced his plant managers to produce more than they knew they could sell. Paul
argued that by doing so reported profits would jump. He pointed out two significant
benefits. First, by increasing profits, the division could exceed the minimum
level needed so that all the managers would qualify for the annual bonus.
Second, by meeting the budgeted profit level, the division would be better able
to compete for much needed capital. Ruth had objected but had been overruled.
The most persuasive counterargument was that the increase in inventory could be
liquidated in the coming year as the economy improved. However, Ruth considered
this event unlikely. Based on past experience, she believe that it would take
at least two years of improved market demand before the productive capacity of
the division was exceeded.

Answer the following questions:

a. (4
marks) Why does the profit increase when the division produces for more
inventory?

b. (4
marks) In chapter 1, ethical standards for management accountant were listed.
Identify any standards that apply in this situation. Based on this, discuss
what should Ruth do?

Should she
comply with the directive to emphasize the increase in profits? If not, what options
does she have?

2. DEF
company has the following cost data for 2010. The data is collected before the disposition
of under- or over-applied overhead.

Work in
Process Inventory $60,000

Finished
Goods Inventory $80,000

Cost of
Goods Sold $200,000

Actual
overhead $150,000

Applied
overhead $130,000

a. (2
marks) How much is the under-applied or overapplied overhead for 2010?

b. (4
marks) Assume that the amount is
significant, prepare the journal entry to dispose of the amount.

3. (4
marks) Provide two reasons why overhead might be under-applied/over-applied for
DEF company in 2010.

Section III. 4 Problems (55 Marks)

1. Job Costing (13 marks)

Orange Inc.
is a manufacturing firm that uses normal job-order costing. On January 1, the

beginning
of its fiscal year, the company had the following inventory balances: Raw
material

$ 20,000;
Work in process $25,000; Finished goods $30,000.

The company
applies overhead cost to jobs on the basis of machine-hours worked. For the

current
year, the company estimated that it would work 75,000 machine-hours and incur

$450,000 in
manufacturing overhead cost. The following transactions were recorded for the
year:

1. Raw
materials were purchased on account, $410,000.

2. Raw
materials were requisitioned for use in production, $380,000 ($360,000 direct

materials
and $20,000 indirect materials).

3. The
following costs were incurred for employee services: direct labor, $75,000;
indirect

labor,
$110,000; sales commissions, $90,000; and administrative salaries, $200,000.

4. Sales
travel costs were $17,000.

5. Utility
costs in the factory were $43,000.

6.
Advertising costs were $180,000

7.
Depreciation was recorded for the year, $350,000 (80% relates to factory
operations, and

20% relates
to selling and administrative activities).

8.
Insurance expired during the year, 10,000 (70% related to factory operations,
and the

remaining
30% relates to selling and administrative activities).

9.
Manufacturing overhead was applied to productions. Due to lower than expected

demand for
its products, the company worked 70,000 machine-hours during the year.

10. Goods
costing $880,000 to manufacture according to their job cost sheets were

completed
during the year

Required ( A – C):(Show your calculation using
T-Account)

A) (6 marks)
Determine the amount of over or under applied overhead for the year

B) (4
marks) Determine the ending inventory balance of work-in-process.

C) (3
marks) Determine the amount of Selling, General & Administrative Costs for
the year.

7

2. Process Costing (12 Marks)

Halifax
Salt company process salt and accounts for production using weighted average
process

costing
method. Direct material is added at the start of production but labor and
overhead costs

are
incurred evenly throughout. The following data pertain to operations for
February:

Beginning
WIP (75% complete) 8,000 kg

Started in
February 200,000 kg

Ending WIP
(25% complete) 20,000 kg

The cost
information is provided below:

Direct
material Conversion

Beginning
WIP $4,000 $2,282

Incurred in
February $48,000 $20,878

Required:

Calculate
the cost transferred out to finished goods inventory and the value of the
ending WIP.

3. Cost-Volume-Profit Analysis (15 marks)

The ABC
company produces two products. The marketing department expects that the
company

can sell
1,000 units of regular product and 1,100 units of luxury product each month.
The company provides the following information:

Regular
Luxury

Unit sales
price $210 $300

Unit
variable cost $110 $130

Monthly
fixed cost for FIVE machines used to manufacture both products is $150,000. It
takes 1

machine
hour to produce regular product and 2 hours to produce luxury product. Each
machine

has a
capacity of 600 hours/month.

a. What is
the maximum profit that the company can make in January?

(7 marks).

b. The
marketing department figured out in January that the customers are willing to
buy

luxury
product at price $350. Should the company revise its production plan in
February?

What would
be the profit with the new plan?

4. ABC Problem (15 Marks)

The River
Company manufactures a variety of prestige boardroom chairs. Its job-costing
system

uses an
activity based approach. There are two direct cost categories (direct materials
and direct

labour) and
three indirect cost pools. The cost pools represent the following three
activities.

Activities
Budgeted costs for

2011

Cost driver
used as

allocation
base

Cost
allocation rate

Materials
handling $200,000 Parts $0.25

Cutting
2,000,000 Parts 2.50

Assembly
2,000,000 Direct labour hours 25.00

Two styles
of chairs were produced in February, 2011, the executive char and the chairman
chair.

Their
quantities, direct material costs, and other data for February are as follows:

Units
produced Direct material

costs

Number of
parts Direct labour

hours

Executive
Chair 5,000 $600,000 100,000 7,500

Chairman
Chair 100 25,000 3,500 500

The
upstream activities to manufacturing (R&D and design) and downstream
activities

(marketing,
distribution, and customer serve) are analyzed, and the unit costs for these activities

are:

Upstream
Activities Downstream Activities

Executive
Chair $60 $110

Chairman
Chair 146 236

The direct
manufacturing labour rate is $20 per hour. Assume no beginning or ending
inventory.

Required:

1) Compute
the unit manufacturing costs of the executive chair and the chairman chair.

Executive
Chair Chairman Chair

2) The
company sells the executive chair at the price $500 and the chairman chair at
the price $1,200. What is the profit for the company in February?

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