The University of the South Pacific Faculty of Business and Economics School of Accounting and Finance USP LIBRARY AF102 [On-campus] INTRODUCTION TO ACCOUNTING & FINANCIAL, MANAGEMENT PART 2 SEMESTER 2 2006 FINAL EXAMINATION INSTRUCTIONS TO CANDIDATES ‘© Read the paper carefully. «sThere are four sections on this paper. Note the choice in Section Band C. «Time Allowed: 3 hours plus 10 minutes reading time. «Answer all questions on the answer book provided. Multiple Choice questions to be answered on the multiple choice grid provided. «Start each question on a new page. «Answers NOT numbered will receive a zero mark «Silent non-programmable calculators allowed but not supplied OUTLINE OF PAPER. "A | Ten Multiple Choice Questions [Q1-10] _| - All Compulsory B *Fhree Short Answer Questions | - jqu-13_ | -Do any two i 7 7 Cc Four Short Problem Solving ~ fqid.a7 _| Questions - Do any three 45 a1 D ‘One Comprehensive Question jo 1s)_|-Compulsory 25 45 TOTAL 100 180Part A Multiple Choice -Compulsory 10 Marks Circle the one best answer on Answer grid provided. Each question is worth 1 mark Question 1 Which one of the following transactions does not affect cash? eeiscquisition and retirement of bonds payable f Welteoff of an uncollectible accounts receivable C. Acquisition of treasury stock 1D. Payment of cash dividend Question 2 tp responsibility center that incurs costs (and expenses) and generates revenues is classified as a(n) ‘A. cost center. B. revenue center. C. profit center. —D. investment center. Question 3 ‘The most useful measure for evaluating @ manager's performance in controlling revenues and costs in a profit center is ‘A. contribution margin. B. contribution net income. C. contribution gross profit. D. controllable margin. Question 4 Rertncome under absorption costing is higher than net income under variable costing when: units produced exceed units sold. ‘units produced equal units sold. * (pnts produced are less than units sold. regardless ofthe relationship between units produced and units sold. pOpP Use the following inforiation for questions 5 and 6. -Thorton Company estimates its sales at 80,000 unis, in the first quarter and that sales will snerease by 8,000 units each quarter over the yar They have, and desire, a 25% ending dnventory of finished goods. Each unit sefls for $25. 40% of the sales are for cash. 70% of the peat customers pay within the quarter. The Temainder is received in the quarter following sale. Question 5 Cash collections for the third quarter are budgeted at A. $1,356,000. B. $1,968,000. C. $2,364,000. D. $2,736,000.Question 6 Preduction in units for the third quartet should be budgeted at A. 98,000. B. 92,000. CC. 122,000. D. 96,000. Question 7 Under the absorption cost approach, all of the following are included in the cost base except A. direct materials. B. fixed manufacturing overhead. . selling and administrative cost D. variable manufacturing overhead. estion 8 Which of the following statements about overhead variances is false? A, Standard hours allowed are used in calculating the controllable variance. B. Standard hours allowed are used in calculating the volume variance. Cc. The controllable variance pertains ‘solely to fixed costs. D. The total overhead variance pertains to ‘poth variable and fixed costs. Use the following table for questions 9 and 10. Present Value of an Annuity of 1 8%_ 9% 10% 917 Ow 1.759 1.736 2.531 2487 Question 9 'A company has a minimum required rate of retum of 9% and is considering jnvesting in @ project that costs $140,000 and is expected to generate cash inflows of $56,000 at the end of each year for three years. The ‘net present value of this project is A. $141,736. B. $28,000. C. $14,174. D. $1,736. Question 10 ’\ company has a minimum required rate of return of 8% and is considering investing in 8 project that costs $68,337 ig expected to generate cash inflows of $27,000 each yeat for three years. The approximate ormel rate of return on this project is A. 8%. C. 10%. D. less than the required 8%.Part B Short Discussion Questions 20 marks ‘Attempt any two of the three- Each question is worth 10 marks Question 11 How does the system of responsibility reporting Work? What occurs at each level? Ts Paanagement by exception possible oie esponsibility Teporting system? Explain. (10 marks} Budgeting can be an important management tool if implemented properly. Identify several positive results when budgets of resed properly. Since budgets affect ‘people, identify several egative aspect if budgets are Rot implemented properly. (10 marks} m3, Sam Stanton is on the capital budgeting committee for his company Canton Tile. Ed Rhodes amy engineer for the firm. Ed expres ‘hig disappointment to Sam that project that was given to him to review before 8 Ganission looks extremely good on PART ‘{ really hoped that he cost projections wouldn't pan out,” be tells his friend. "The technology used in this is pie in the sky Kind of stufl. There are © "aundred things that could go TONE: ‘But the figures are very convincing. J haven't sent it on ‘yet, though I probably should.” you can keep it if it's really that ‘bad," assures Sam. "Anyway, YO" can probably get it shot out of the water pretty casily, and not have the £uy who submitted it mad at you for not fuming it in. Just fix the numbers, if you figure, for instance, that a cost is only 50% likely to ‘be that low, then double it. We do it all the time, informally. Best of all, the rank and file don't get to come to those sessions. Your engineering genius: need never know. He'll just think someone else's project was even. better than his.” Required: Ttyho are the stakeholders in this situation? 3, sit ethical to adjust the figures * compensate for risk? Explain. 3. Isit ethical to change the proposal before submitting i? Explain. (10 marks}Part C Short Problem Solving Questions Marks 45, ‘Attempt any three questions of the four. Fach question is worth 15 marks Question 14 Part A Macks Bikes. manufactures a basic road bicycle. Production and sales data for the most recent year are as follows (no beginning inventory): Variable production costs Fixed production costs Variable selling & administrative costs Fixed selling & administrative costs Selling price Production Sales Required 390 per bike $450,000 $22 per bike $500,000 $200 pet bike 20,000 bikes 17,000 bikes (a) Prepare a prief income statement using variable costing (7 marks). (b) Compute the amount to be reported for inventory in the year end variable costing balance sheet. (1 marks) Question 14 Part B ‘Trail King manufactures mountain bikes. Its sales mix and contribution margin information per unit is shown as follows: Sales mix Destroyer 15% Voyager 60% Rebel 25% Tthas fixed costs of $5,440,000. Required Contribution margin $120 $ 60 $ 40 Compute the number of each type of bike hat the company would need to sell in order fo break-even under this product mix (7 marks). {Total 15 marks}Question 15 Ducker Company has developed the following standard costs for its product for 2006: DUCKER COMPANY Standard Cost Card Product A Cost Blement Standard Quantity * Standard Price * Standard Cost Direct materials 2 kilogram 36 siz Direct labor 1.5 hours 16 24 Manufacturing overhead 1-5 ours 8 12 $48 ‘The company expected to produce 30,000 units of Product A in 2006 and work 90,000 direct labor hours. ‘Actual results for 2006 are as follows: “31,000 units of Product A were produced. Actual direct labor costs were $759,000 for 46,000 direct labor bours worked. | Actual direct materials purchased and used during the year cost $352,800 for 63.000 kilogram. «Actual variable overhead incurred was §155,000 and actual fixed overhead incurred was $205,000. Required Compute the following variances showing all computations to support Your answers. Indicate whether the variances are favorable or unfavorable. (2) Direct materials quantity variance. (by Total direet labor variance. (© Direot labor quantity varianee- (a) Direot materials price variance: (@) Total overhead variance. [B marks cach] {Total 15 marks}Question 16 Schiling Corp. is thinking about opening & paseball camp in Florida. In order to start the camp, the company would need f° purchase land, build five baseball fields, and a dormitory- type sleeping and dining facility to house 100 players. Each year the camp would be run for 10 sessions of 1 week each. The company would hire college baseball players as coaches. “The eamp attendees would be baseball players 26° 12-18. Property values in Florida have enjoyed a steady increase in value. Itis expected that after using the facility for 20 years, oiling can sell the property for more than st was originally purchased for. ‘The following amounts have been estimated: Cost of land $ 600,000 Cost to build dorm and dining facility 2,100,000 ‘Annual cash inflows assuming 100 players and 10 weeks 2,520,000 ‘Annual cash outflows 2,250,000 Fstimated useful life 20 years Salvage value 3,900,000 Discount rate 10% Present value of an annuity of $1 854 present value of $1 0.149 Required (a) Caloulate the net present valve of the project. (5 marks) (b) To gauge the sensitivity of the project to these estimates, assume that if only 80 campers attend each week, revenues will be §2,085,000 and expenses will be ST 875,000. What is the net present value using these ahemative estimates? Discuss your findings. (5 marks) (© Assuming the original facts, what ss the net present value if the project is actually riskier than first assumed, and a 12% diseount raie jg more appropriate? The present value of $1 at 12% is 0.104 and the present value of an annuity of $1 is 7.469. 6 marks) [Total 15 marks}Question 17 Savanna Company is considering two capital investment proposals. Relevant data on each project are as follows: ProjectRed Project Blue Capital investment $400,000 $560,000 ‘Annual net income 30,000 50,000 Estimated useful life 8 years 8 years Depreciation is computed by the straight-line method with no salvage value, Savanna requires an 8% rate of return on all new investments. The present value of SI for 8 periods at 8% is 0.540 and the present value of an annuity of $1 for 8 periods is 5.747 Required (2) Compute the cash payback period for each project. (4 marks) (6) Compute the net present value for each project. (4 marks) (©) Compute the annual rate of return for each project. (4 marks) (a) Which project should Savanna select? (3 marks) [Total 15 marks}PartC Comprehensive Question - Compulsory Marks 25 Question 18 03 Small Company needs your help in preparing budgets for the first four months of 2006. “The company's controller has provided you with the following information and assumptions: 1. The April 1, 2006 cash balance is expected to be $1 1,000. >, All sales are on account, Credit sales are collected over a three-month period—-50 percent in the month of sale, 35 percent in the month following sale, and 15 percent in the second month following sale. Budgeted sales for January, February and March are $80,000, $100,000 and $90,000, respectively. April and May sales are budgeted at $110,000 and $115,000 respectively. 3. The unit selling price is $10.00 44. Ending finished goods inventory is 5% of next month's sales. 5. Marketable securities are expected to be sold for $25,000 during the month of April. 6. The controller estimates that direct materials totaling $44,000 will be purchased during Apri. Sixty percent of a month’s Taw materials purchases are paid in the month of purchase with the remaining 40 pereent paid in the following month. Accounts payable for March purchases total $9,000, which will be paid in April. 7. During April, direct labor costs are estimated to be $19,000. §, Mamufacturing overhead is estimated to be 40 percent of direct labor costs, Further, the controller estimates that approximately 10 percent of the manufacturing overhead is depreciation on the factory building and equipment 9. Selling and administrative expenses are budgeted at $22,000 for April. Of this amount, $7,000 is for depreciation. 10. Daring April, OF Small Company plans to buy a new delivery van costing $25,000. The company will pay cash for the van. 11, OF Small Company owes $35,000 in income tax. which must be paid in April.12. OJ Small Company must maintain a minimum cash balance of $10,000. To bolster the cash position as needed, an open line of credit is available from the bank. Required: Prepare the following: 1 2. Sales budget for each month of the first quarter of 2006. (2 marks) Production budget for February 2006. (2 marks) A schedule of cash collections for April 2006. (3 marks) ‘A schedule of cash payments for raw materials for April 2006. (2 marks) A cash budget for the month of April 2006. Indicate in the financing section any borrowing that will be necessary during the month. (15 marks) . A schedule showing the Accounts Receivable balance as at 30 April 2006. (1 Mark) [SHOW ALL WORKINGS ‘TO SUPPORT YOUR DERIVED VALUES} END OF PAPER