Managerial Accounting – Final Exam

Spring 2008

Name: __________________________

Pledge: ____________________________

On my honor I have neither given or received help on this exam. I understand that any violation of the
University Honor Policy will result in an automatic zero on this exam, and that I will be subject to all
sanctions available under the University's Honor Policy.

Part I - Multiple Guess (140 points)

Record your name and student number on the scantron form. Select the best answer and record your choice on
the scantron form.

Part II – Problems (135 points)

Required: You must complete problems 1-4.

Your Choice: Complete one problem from questions 5-7. Draw an X through the two questions you skip. If
you complete more than one of the three questions I will only grade question #5.
1. Luella Corporation prepares its statement of cash flows using the indirect method. Which of the following
would be added to net income in the operating activities section of the statement?

A.
B.
C.
D.

2. Which of the following should be classified as an investing activity on a statement of cash flows?
A. cash received from the sale of office equipment that was sold at a loss.
B. cash used to purchase a long-term investment in bonds of another corporation.
C. cash received from the issuance of Iguato Corporation common stock.
D. both A and B above
E. All of these

3. Three potential investment projects (A, B, and C) at Nit Corporation all require the same initial investment,
have the same useful life (3 years), and have no expected salvage value. Expected net cash inflows from these
three projects each year is as follows:

What can be determined from the information provided above?

A. the net present value of project C will be the highest.
B. the internal rate of return of projects A and C cannot be computed.
C. the net present value and the internal rate of return will be the same for all three projects.
D. both A and B above.

4. Which of the following statements is false?

I. For capital budgeting decisions, the net present value method is superior to the simple rate of return
method.
II. When using the payback method, any cash flows for a project that occur after the payback period are not
considered in computing the payback period for that project.
III. The present value of a given future cash flow will increase as the discount rate decreases.

A. Statement I
B. Statement II
C. Statement III.
D. Exactly two of the statements.
E. None of the statements is false.
5. (Ignore income taxes in this problem.) How much would you have to invest today in the bank at an interest
rate of 8% to have an annuity of $4,800 per year for 7 years, with nothing left in the bank at the end of the 7
years? Select the amount below that is closest to your answer.
A. $33,600
B. $2,798
C. $24,989
D. $31,111

6. Which of the following statements is true?

I. Sunk costs and future costs that do not differ between the alternatives are not relevant in a decision.
II. A future cost that does not vary among alternatives under consideration is irrelevant.
III. Opportunity costs represent economic benefits that are forgone as a result of pursuing some course of
action.

A. Statement I
B. Statement II
C. Statement III.
D. Exactly two of the statements.
E. All three statements are true.

7. Consider the following statements:

I. A division's net operating income, after deducting both traceable and allocated common corporate costs, is
negative.
II. The division's avoidable fixed costs exceed its contribution margin.
III. The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution
margin.

Which of the above statements give an economic reason for eliminating the division?
A. Only I
B. Only II
C. Only III
D. Only I and II
E. None of the above.

8. 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 additional item sold.
C. variable expenses will remain constant in total.
D. the contribution margin ratio begins to decrease.
E. none of the above.
9. The Jabba Company manufactures the "Snack Buster" which consists of a wooden snack chip bowl with an
attached porcelain dip bowl. Which of the following would be relevant in Jabba's decision to make the dip
bowls or buy them from an outside supplier?

A.
B.
C.
D.

10. Which of the following statements is true?

I. A responsibility center is a business segment whose manager has control over costs, revenues, or
investments in operating assets.
II. A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit
data.
III. The use of return on investment (ROI) as a performance measure may lead managers to reject a project
that would be favorable for the company as a whole.

A. Statement I
B. Statement II
C. Statement III.
D. Only two of the statements are true.
E. All three statements are true.

11. Mike Corporation uses residual income to evaluate the performance of its divisions. The company's
minimum required rate of return is 14%. In January, the Commercial Products Division had average operating
assets of $970,000 and net operating income of $143,700. What was the Commercial Products Division's
residual income in January?
A. $7,900
B. -$20,118
C. $20,118
D. -$7,900

12. Which of the following statements is false?

I. In a flexible budget, when the activity declines, the variable cost per unit also declines.
II. The higher the denominator activity level used to compute the predetermined overhead rate, the higher the
predetermined overhead rate.
III. If the denominator level of activity is more than the standard hours allowed for the output of the period,
then the volume variance is unfavorable, indicating an under utilization of available facilities.

A. Statement I
B. Statement II
C. Statement III.
D. Exactly two of the statements.
E. All of the statements are false.
13. The variance that is most useful in assessing the performance of the purchasing department manager is:
A. the materials quantity variance.
B. the materials price variance.
C. the labor rate variance.
D. the labor efficiency variance.

14. All of the following statements are correct when referring to process costing except:
A. Process costing would be appropriate for a jeweler who makes custom jewelry to order.
B. A process costing system has the same basic purposes as a job-order costing system.
C. Units produced are indistinguishable from each other.
D. Costs are accumulated by department.

15. During a recent lengthy strike at Morell Manufacturing Company, management replaced striking assembly
line workers with office workers. The assembly line workers were being paid $18 per hour while the office
workers are only paid $10 per hour. What is the most likely effect on the labor variances in the first month of
this strike?

A.
B.
C.
D.

16. Which of the following statements is true?

I. Ideal standards do not allow for machine breakdowns and other normal inefficiencies.
II. The standard price per unit for direct materials should reflect the final, delivered cost of the materials, net
of any discounts taken.
III. The standard quantity or standard hours allowed refers to the amount of the input that should have been
used to produce the actual output of the period.

A. Statement I
B. Statement II
C. Statement III.
D. Only two of the statements are true.
E. All three statements are true.

17. Which of the following statements is true?

I. The direct materials to be purchased for a period can be obtained by subtracting the desired ending
inventory of direct materials from the total direct materials needed for the period.
II. The usual starting point in budgeting is to make a forecast of net income.
III. In a production budget, if the number of units in finished goods inventory at the end of the period is less
than the number of units in finished goods inventory at the beginning of the period, then the expected
number of units sold is greater than the number of units to be produced during the period.

A. Statement I
B. Statement II
C. Statement III.
D. Only two of the statements are true.
E. All three statements are true.

18. The completion of goods is recorded as a decrease in the work in process inventory account when using:

A.
B.
C.
D.

19. Which of the following statements is true?

I. In a process costing system, the costs of one processing department become part of the costs of the next
processing department.
II. The units in beginning work in process inventory plus the units started into production must equal the
units transferred out of the department plus the units in ending work in process inventory.
III. Process costing is employed in industries that produce basically homogeneous products such as bricks,
flour, or cement but would not be appropriate for assembly-type operations such as those that manufacture
computers.

A. Statement I
B. Statement II
C. Statement III.
D. Only two of the statements are true.
E. All three statements are true.

20. If company A has a higher degree of operating leverage than company B, then:
A. the company A has higher variable expenses.
B. the company A's profits are more sensitive to percentage changes in sales.
C. the company A is more profitable.
D. the company A is less risky.
E. none of the above.

21. Which of the following statements is false?

I. Process costing is used where many different products are produced each period to customer
specifications.
II. When a company changes from a traditional costing system to an activity-based costing system, the unit
product costs of high-volume products typically change more than the unit product costs of low-volume
products.
III. Activity-based costing uses a number of activity cost pools, each of which is allocated to products on the
basis of direct labor-hours.

A. Statement I
B. Statement II
C. Statement III.
D. Exactly two of the statements.
E. All of the statements are false.
22. Which of the following would probably be the most accurate measure of activity to use for allocating the
costs associated with a factory's purchasing department?
A. Machine-hours
B. Direct labor-hours
C. Number of orders processed
D. Cost of materials purchased

23. In activity-based costing, unit product costs computed for external financial reports do NOT include:
A. direct materials.
B. direct labor.
C. manufacturing overhead.
D. selling costs.

24. Which of the following statements is correct concerning job-order costing?

A. Job-order costing would be appropriate for a textbook publisher.
B. All the costs appearing on a job cost sheet are actual costs.
C. Indirect materials are charged to a specific job.
D. Job-order costing is mainly used in firms with homogeneous products such as oil refineries.

25. Which of the following types of firms typically would use process costing rather than job-order costing?
A. A small appliance repair shop.
B. A manufacturer of commercial passenger aircraft.
C. A specialty equipment manufacturer.
D. A breakfast cereal manufacturer.

26. In a job-order costing system, the application of manufacturing overhead would be recorded as a debit to:
A. Manufacturing Overhead inventory.
B. Finished Goods inventory.
C. Work in Process inventory.
D. Cost of Goods Sold.

27. How would the following costs be classified (product or period) under variable costing at a retail clothing
store?

A.
B.
C.
D.
28. In a job-order costing system, the cost of a completed but unsold job is:
A. closed to Cost of Goods Sold.
B. part of the Work in Process inventory balance.
C. adjusted to exclude any applied overhead.
D. part of the Finished Goods inventory balance.

29. If overhead is underapplied, then:

A. actual overhead cost is less than estimated overhead cost.
B. the amount of overhead cost applied to Work in Process is less than the actual overhead cost incurred.
C. the predetermined overhead rate is too high.
D. the Manufacturing Overhead account will have a credit balance at the end of the year.

30. If both the fixed and variable expenses associated with a product decrease, what will be the effect on the
contribution margin ratio and the break-even point, respectively?

A.
B.
C.
D.

31. Which of the following is true regarding the contribution margin ratio of a single product company?
A. As fixed expenses decrease, the contribution margin ratio increases.
B. The contribution margin ratio multiplied by the selling price per unit equals the contribution margin
per unit.
C. The contribution margin ratio will decline as unit sales decline.
D. The contribution margin ratio equals the selling price per unit less the variable expense ratio.

32. If a company is operating at the break-even point:

A. its contribution margin will be equal to its variable expenses.
B. its margin of safety will be equal to zero.
C. its fixed expenses will be equal to its variable expenses.
D. its selling price will be equal to its variable expense per unit.

33. Which of the following strategies could be used to reduce the break-even point?

A.
B.
C.
D.

34. Which costs will change with an increase in activity within the relevant range?
A. Unit fixed cost and total fixed cost
B. Unit variable cost and total variable cost
C. Unit fixed cost and total variable cost
D. Unit fixed cost and unit variable cost
35. Which of the following would usually be considered a discretionary fixed cost for a soft drink bottling
company?
A. the cost of advertising its products
B. the cost of fire insurance on its factory building
C. depreciation on its manufacturing equipment
D. both a and b above
Part II – Problems

You must complete problems 1-4, and then one of the remaining problems.

REQUIRED
1. (Ignore income taxes in this problem.) Joanette, Inc., is considering the purchase of a machine that would
cost $240,000 and would last for 5 years, at the end of which, the machine would have a salvage value of
$48,000. The machine would reduce labor and other costs by $62,000 per year. Additional working capital of
$7,000 would be needed immediately, all of which would be recovered at the end of 5 years. The company
requires a minimum return of 17% on all investment projects. (25 points)

Required: Determine the net present value of the project. Should we accept the project? Show your work!
REQUIRED
2. May Corporation's balance sheet and income statement appear below:

Required: Prepare a cash flow statement using the indirect method. (25 points)
REQUIRED
3. Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one of its
products. Data concerning the unit production costs of the B345 gasket follow: (25 points)

An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires. If Kirsten
Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed manufacturing overhead
costs could be avoided.

Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to
expand production of another product that would yield an additional contribution margin of $10,000 annually.
What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345
gaskets?

____________
REQUIRED
4. Spencer Company's most recent monthly income statement is given below:

Sales $60,000
Cost of goods sold 30,000
Gross profit 30,000
Selling & admin. expenses
Fixed 18,000
Variable 15,000
Net operating income ($ 3,000)

The company sells its only product for $10 per unit. There were no beginning or ending inventories. (30 points)

a. What level of sales (in dollars) is required to earn a target profit of $5,000? _________

b. What are total variable expenses at the break-even point? ____________

c. What is the company's contribution margin ratio? ____________

d. If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what would be the
company's expected net operating income?
____________
Your Choice
5. The Lopez Company uses standard costing its manufacturing plant for auto-parts. The standard cost of
a particular auto-part, based on a denominator level of 4,000 output units per year, budgeted variable
overhead of $192,000, and budgeted fixed overhead of $360,000 is as follows:

Input per unit

Direct materials 3 lbs. at $5 per lb.
Direct labor 5 hrs. at $15 per hour
Variable overhead 6 machine hours
Fixed overhead 6 machine hours

There was no beginning or ending raw materials inventory, actual production was 4,200 units, and actual
costs were as follows.

Actual Total Cost

Direct materials 13,460 lbs $66,836
Direct labor 21,500 hours $344,000
Variable overhead 28,400 hours $245,000
Fixed overhead 28,400 hours $365,000

Calculate the following variances. Be sure to indicate favorable or unfavorable! (30 points)

Materials Price Variance: ___________________

Materials Quantity Variance: ___________________

Direct Labor Efficiency Variance: ___________________

Direct Labor Rate Variance: ___________________

Variable OH Spending Variance: ___________________

Variable OH Efficiency Variance: ___________________

Fixed OH Volume Variance: ___________________

Fixed OH Budget Variance: ___________________

Your Choice
6. Cabell Company manufactures two products, Product C and Product D. The company estimated it would incur
$99,590 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on
the basis of direct labor-hours. Data concerning the current period's operations appear below: (30 Points)

Required:

a. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each
product for the current year.

POHR: ___________

Cost of Product C: ____________

Cost of Product D: ____________

b. The company is considering using an activity-based costing system to compute unit product costs for external
financial reports instead of its traditional system based on direct labor-hours. The activity-based costing system
would use three activity cost pools. Data relating to these activities for the current period are given below:

Determine the unit product cost of each product for the current period using the activity-based costing approach.

Cost of Product C: ____________

Cost of Product D: ____________

a. The expected total direct labor hours during the period are computed as follows:

Using these hours as a base, the predetermined overhead using direct labor hours would be:

Estimated overhead cost, $99,590 Estimated direct labor hours, 2,020 = $49.30 per DLH

Using this overhead rate, the unit product costs are:

b. The overhead rates for each activity center are as follows:

The overhead cost charged to each product is:

Overhead cost per unit:

Product C: $40,460 2,600 units = $15.56 per unit
Product D: $59,130 1,200 units = $49.28 per unit

Using activity based costing, the unit product cost of each product would be:
Your Choice
7. Baba Company is a manufacturing firm that uses job-order costing. The company's inventory balances were
as follows at the beginning and end of the year:

• The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the
beginning of the year, the company estimated that it would work 40,000 machine-hours and incur $200,000
in manufacturing overhead cost.
The following transactions were recorded for the year:
• Raw materials were purchased, $412,000.
• Raw materials were requisitioned for use in production, $409,000 $(362,000 direct and $47,000 indirect).
• The following employee costs were incurred: direct labor, $324,000; indirect labor, $57,000; and
administrative salaries, $129,000.
• Selling costs, $135,000.
• Factory utility costs, $22,000.
• Depreciation for the year was $102,000 of which $94,000 is related to factory operations and $8,000 is
related to selling, general, and administrative activities.
• Manufacturing overhead was applied to jobs. The actual level of activity for the year was 44,000 machine-
hours.
• Sales for the year totaled $1,198,000.
• The company closes any underapplied or overapplied overhead to Cost of Goods Sold.

Required: (30 points)

a. Compute the total manufacturing overhead. _____________

b. Compute the cost of goods manufactured. _____________

c. Compute the gross profit _____________

d. Compute operating income _____________

e. Was the overhead underapplied or overapplied? By how much? ____________