Accounting Tools for Business Decision Making, 6th Edition test bank by Ace Test Banks

Managerial Accounting Tools for Business Decision Making, 6th Edition By

Weygandt, Kimmel, Kieso

Achievement Test 1: Chapters 1-2 Managerial Accounting, 6e

Name _________________________ Instructor ______________________ Section # _______ Date _________

Part

III

Total

Points

100

Score

PART I — MULTIPLE CHOICE (30 points) Instructions: Designate the best answer for each of the following questions. ____

1. A debit balance in the Manufacturing Overhead account at the end of an interim month means that a. the balance should be reported as an asset in the monthly balance sheet. b. corrective action by management is necessary. c. overhead has been underapplied. d. cost of goods sold should be credited on the monthly income statement.

____

2. In a job order cost system, which of the following accounts is not a control account? a. Raw Materials Inventory b. Factory Labor c. Finished Goods Inventory d. Manufacturing Overhead

____

3. In the current assets section of the balance sheet, in which order are manufacturing inventories listed? a. Raw materials, work in process, finished goods b. Finished goods, work in process, raw materials c. Work in process, finished goods, raw materials d. Finished goods, raw materials, work in process

____

4. Which one of the following costs is a component of both manufacturing overhead and total manufacturing costs? a. Direct labor b. Direct materials c. Selling and administrative costs d. Factory utilities

____

5. Manufacturing costs are typically classified as a. product costs or period costs. b. direct materials or direct labor. c. direct materials, direct labor, or manufacturing overhead. d. direct materials, direct labor, or selling and administrative.

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Test Bank for Managerial Accounting, Sixth Edition

The following data should be used for questions 6–9: Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process, January 1 Work in process, December 31 Finished goods, January 1 Finished goods, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Selling and administrative expenses

$ 12,000 16,000 5,000 8,000 17,000 12,000 118,000 165,000 64,000 12,000 18,000 220,000

____

6. How much is the cost of the direct materials used? a. $118,000 b. $114,000 c. $122,000 d. $130,000

____

7. Assume your answer to question 6 above is $130,000. How much are total manufacturing costs? a. $389,000 b. $393,000 c. $295,000 d. $609,000

____

8. Assume your answer to question 7 above is $400,000. How much is cost of goods manufactured? a. $400,000 b. $389,000 c. $397,000 d. $403,000

____

9. Assume your answer to question 8 above is $420,000. How much is cost of goods sold? a. $420,000 b. $408,000 c. $295,000 d. $425,000

____ 10. The formula for computing a predetermined overhead rate is a. estimated annual overhead costs ÷ estimated annual operating activity. b. estimated annual overhead costs ÷ actual annual operating activity. c. actual annual overhead costs ÷ actual annual operating activity. d. actual annual overhead costs ÷ estimated annual operating activity. ____ 11. Which one of the following is an example of a period cost? a. Maintenance on factory machines b. Wages of factory workers c. Salesmen's commissions d. Depreciation on the factory building

Achievement Test 1

AT1- 3

____ 12. When production costs are debited to Work in Process Inventory, which accounts will be credited? a. Raw Materials Inventory, Factory Labor, and Finished Goods Inventory b. Manufacturing Overhead, Factory Labor, and Cost of Goods Sold c. Raw Materials Inventory, Factory Labor, and Manufacturing Overhead b. Accounts Payable, Factory Wages Payable, and Accumulated Depreciation ____ 13. What are the functions of management in an organization? a. Planning, controlling, and decision making b. Planning, directing, and controlling c. Directing, controlling, and decision making d. Directing, planning, and decision making ____ 14. Which one of the following is not one of the major activities of managerial accounting? a. Providing a basis for controlling costs by comparing actual results with planned objectives b. Preparing financial statements designed primarily for stockholders and creditors c. Preparing internal reports for management d. Determining the behavior of costs as activity levels change ____ 15. Which of the following would most likely use a job order cost system? a. Cement manufacturer b. Cat food manufacturer c. Specialty printing company d. Automobile manufacturer

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Test Bank for Managerial Accounting, Sixth Edition

PART II — CLASSIFICATION OF COSTS AND EXPENSES (20 points) Instructions: Classify the following manufacturing costs and expenses by using the following code letters: A. B. C. D.

Direct materials cost Direct labor cost Manufacturing overhead cost Period cost

Wood You Manufacturing Company incurs the following costs and expenses in making furniture: ____

1. Insurance on delivery equipment

____

2. Oak and cherry wood used in desks and chairs

____

3. Lubricants, rosin, and polishing compounds used in manufacturing

____

4. Advertising in trade magazines

____

5. Rent on leased factory machinery

____

6. Wages of assembly line workers

____

7. Salesperson's commissions

____

8. Insurance on factory machines

____

9. Depreciation on factory machinery

____ 10. Wages of factory janitors

Achievement Test 1

AT1- 5

PART III—DETERMINE WORK IN PROCESS AND FINISHED GOODS BALANCES (22 points) Hanover Manufacturing begins operations on April 1. Information from job cost sheets shows the following: Manufacturing Costs Assigned (non-cumulative) Job April May June 15 $10,200 16 5,100 $6,400 18 3,600 5,900 $4,000 19 7,300 7,400 20 3,100 Job 15 was completed in April. Job 16 was completed in May. Job 18 was completed in June. Each job was sold in the month following completion. Instructions: Determine the following amounts: 1. Work in process inventory, April 30

$_______________

2. Finished goods inventory, April 30

$_______________

3. Work in process inventory, May 31

$_______________

4. Finished goods inventory, May 31

$_______________

5. Work in process inventory, June 30

$_______________

6. Finished goods inventory, June 30

$_______________

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Test Bank for Managerial Accounting, Sixth Edition

PART IV — JOB ORDER COST ACCOUNTING ENTRIES (28 points) The ledger accounts of CynaWood Cabinet Company are presented below, with an identification number for each. Instructions: Prepare appropriate job order cost system entries to record the data/events given below. Place the appropriate identification number(s) in the debit and credit columns provided and the dollar amount in the adjoining column. 1. Cash 9. Accumulated Depreciation 2. Accounts Receivable 10. Sales 3. Raw Materials Inventory 11. Depreciation Expense 4. Work in Process Inventory 12. Factory Labor 5. Finished Goods Inventory 13. Wages Expense 6. Manufacturing Overhead 14. Cost of Goods Sold 7. Accounts Payable 15. Other Accounts 8. Factory Wages Payable —————————————————————————————————————————— Account(s) Account(s) Dollar Entry Information Debited Credited Amount —————————————————————————————————————————— 1. Purchased raw materials on account—$96,000 —————————————————————————————————————————— 2. Incurred factory labor—$75,000 —————————————————————————————————————————— 3. Charged direct labor to job X43—$68,000 —————————————————————————————————————————— 4. Charged direct materials to job X43—$82,000 —————————————————————————————————————————— 5. Incurred manufacturing overhead on account— $38,000 —————————————————————————————————————————— 6. Recorded the remaining factory labor as indirect labor —————————————————————————————————————————— 7. Recognized depreciation on factory equipment— $11,000 —————————————————————————————————————————— 8. Charged overhead to job X43 at 80% of direct labor cost —————————————————————————————————————————— 9. Recorded completion of job X43 —————————————————————————————————————————— 10. Recorded cost of sales for job X43 —————————————————————————————————————————— 11. Recorded revenue from sale of job X43 on account— $330,000 —————————————————————————————————————————— 12. Assume total actual overhead was $560,000 and total applied overhead was $547,000 for the year. Record the entry to close the manufacturing overhead account.

Achievement Test 1

AT1- 7

Solutions — Achievement Test 1: Chapters 1-2 PART I — MULTIPLE CHOICE (30 points) 1. 2. 3. 4. 5.

C B B D C

6. 7. 8. 9. 10.

B A C D A

11. 12. 13. 14. 15.

C C B B C

PART II — CLASSIFICATION OF COSTS AND EXPENSES (20 points) 1. 2. 3. 4. 5.

D A C D C

6. 7. 8. 9. 10.

B D C C C

PART III—DETERMINE WORK IN PROCESS AND FINISHED GOODS BALANCES (22 points) 1. 2. 3. 4. 5. 6.

$8,700 ($5,100 + $3,600) $10,200 $16,800 ($3,600 + $5,900 + $7,300) $11,500 ($5,100 + $6,400) $17,800 ($7,300 + $7,400 + $3,100) $13,500 ($3,600 + $5,900 + $4,000)

*Four points each, except for item 2 (2 points). PART IV — JOB ORDER COST ACCOUNTING ENTRIES (28 points)*

1. 2. 3. 4. 5. 6.

Account(s) Debited 3 12 4 4 6 6

Account(s) Credited 7 8 12 3 7 12

Dollar Amount $96,000 75,000 68,000 82,000 38,000 7,000

7. 8. 9. 10. 11. 12.

Account(s) Debited 6 4 5 14 2 14

Account(s) Credited 9 6 4 5 10 6

Dollar Amount $11,000 54,400 204,400 204,400 330,000 13,000

*One point for each account title and one point for computed amounts (Entries 6, 8, 9, and 12).

Achievement Test 2: Chapters 3-4 Managerial Accounting, 6e

Name _________________________ Instructor ______________________ Section # _______ Date _________

Part

III

Total

Points

100

Score

PART I — MULTIPLE CHOICE (30 points) Instructions: Designate the best answer for each of the following questions. ____ *1. In a JIT cost accounting system, a. no inventories are kept on hand. b. no manufacturing overhead costs are incurred. c. a company strives to have the right amount of materials, parts, and products on hand. d. conversion costs are eliminated. ____

2. The number of purchase orders would be an appropriate cost driver for a. inspecting and testing cost. b. machining cost. c. ordering and receiving materials cost. d. supervising cost.

____

3. Which one of the following is a product-level activity? a. Assembly of staplers b. Every tenth stapler produced is tested to be sure it meets quality standards. c. The factory janitor is paid. d. A setup is undertaken when the model of staplers to be produced changes.

____

4. The primary benefit of activity-based costing is that it leads to a. more cost pools used to assign overhead costs to products. b. more accurate product costing. c. enhanced control over overhead costs. d. better management decisions.

____

5. All of the following are value-added activities in a manufacturing operation except a. assembly. b. engineering design. c. inspections. d. machining.

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Test Bank for Managerial Accounting, Sixth Edition

____

6. ABC costing is an approach for allocating a. direct materials to products. b. direct labor to products. c. manufacturing overhead to products. d. direct materials and direct labor to products.

____

7. The first step in activity-based costing is to a. assign overhead costs for each activity cost pool to products. b. compute the activity-based overhead rate. c. identify cost drivers that accurately measure each activity's contribution to the finished product. d. identify and classify the major activities involved in the manufacture of specific products.

____

8. Given the following data, compute equivalent units of production for conversion costs: Beginning Work in Process—8,000 units, 40% complete Units Completed and Transferred Out—90,000 units Ending Work in Process—5,000 units, 20% complete. a. b. c. d.

____

95,000 91,000 87,800 94,200

9. When there is beginning work in process, units transferred out can be computed by subtracting a. ending work in process units from the units accounted for. b. ending work in process units from the units started into production. c. beginning work in process units from the units to be accounted for. d. beginning work in process units from the units started into production.

____ 10. Given the following data, compute equivalent units of production for materials. Materials are added at the beginning of the process. Beginning Work in Process—8,000 units, 40% complete Units Completed and Transferred Out—90,000 units Ending Work in Process—5,000 units, 20% complete. a. b. c. d.

98,200 91,000 90,000 95,000

____ 11. Which of the following does not describe a characteristic of process costing? a. Job cost sheets must pass from one production department to the next on a daily basis. b. Once production begins, it continues until the finished product emerges. c. All units of production receive precisely the same amount of material, labor, and overhead. d. Work in process accounts are maintained for each production department.

Achievement Test 2

AT2- 3

____ 12. Which item is not a calculation performed on a production cost report? a. Number of physical units to be accounted for b. Materials cost per equivalent unit c. Cost of goods transferred out of finished goods d. Cost of goods transferred remaining in work in process PART II — TRUE/FALSE (10 points) Instructions: Designate whether each of the following statements is true or false by circling the T or F. T

1. The flow of costs is essentially the same in a job order and a process cost system.

2. The method of assigning costs is essentially the same in a job order and a process cost system.

3. The physical units are a measure of the work done during a period, expressed in fully completed units.

4. Manufacturing costs in beginning work in process are ignored in computing the cost of units transferred out and the cost of ending work in process.

5. A cost reconciliation schedule is prepared to assign total costs to units transferred out and in ending work in process.

6. Activity-based costing allocates overhead to multiple activity cost pools and assigns the activity cost pools to products by means of cost drivers.

7. The first step in activity-based costing is to identify the cost driver that has a strong correlation to the activity pool.

8. An activity-based overhead rate is computed by dividing the estimated overhead per activity by the number of cost drivers expected to be used per activity.

9. Non-value-added activities are production-related activities that add cost to a product without increasing its market value.

10. Product-level activities are required to support or sustain an entire production process.

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Test Bank for Managerial Accounting, Sixth Edition

PART III — PROCESS COSTING (25 points) Instructions: Using the following data, complete the requirements given below. When you are given amounts to assume the answers to previous requirements, be careful to use such assumed amounts rather than your answers (in order to minimize carry-through errors). The Finishing Department of Wayland Fixtures reports the following for January 2014: Production: All materials are added at the beginning of the process. Beginning work in process 11,000 units, 20% complete. Units started into production 88,000 units. Ending work in process 9,000 units, 40% complete. Manufacturing Costs: Beginning work in process, $35,100, comprised of $21,100 of materials and $14,000 of conversion costs. Materials added $68,000; labor and overhead added $56,200. (a)

Required: Compute equivalent units of production for (1) materials and (2) conversion costs. Materials Conversion

(b)

Assume your answers to (a) above were 49,500 units for materials and 46,800 for conversion costs. Required: Compute the unit costs for the month. Materials

Conversion

(c)

Assume your answers to (b) above were $1.50 for materials and $0.80 for conversion costs. Required: Determine the costs to be assigned to the units transferred out.

(d)

Assume the same unit costs as given in (c) above. Required: Determine the costs assigned to the 9,000 units in ending work in process.

Achievement Test 2

AT2- 5

PART IV — ACTIVITY-BASED COSTING (20 points) Bella Clear Windows designs and builds custom windows for luxury homes. Most of the windows are custom made but occasionally the company does mass production on order. Its budgeted manufacturing overhead costs for the year 2014 are as follows: Overhead Cost Pools Purchasing Production (cutting, milling, finishing) Setting up machines Inspecting Utilities Total budget overhead costs

Amount $ 26,000 176,000 65,000 35,000 75,000 $377,000

For the last three years, the company has been allocating overhead to products on the basis of machine hours. For the year 2014, 20,000 machine hours are budgeted. The operations manager of Bella Clear recently directed her accountant to implement the activitybased costing system she has repeatedly proposed. The accountant and production foreman identified the following cost drivers and their usage for the previously budgeted overhead cost pools: Overhead Cost Pools Purchasing Production (cutting, milling, finishing) Setting up machines Inspecting Utilities

Activity Cost Drivers Number of orders Direct labor hours Number of setups Number of inspections Square feet occupied

Total Activity 80 16,000 250 1,250 15,000

During this month, the company received an order for 80 windows from a housing development contractor. The accountant prepared cost estimates for producing components for 80 windows to submit a contract price per window set to the contractor. The following data for the production of 80 windows is accumulated: Direct materials Direct labor Machine hours Direct labor hours Number of purchase orders Number of machine setups Number of inspections Number of square feet occupied

$22,000 $23,100 1,600 2,100 8 15 12 1,200

Instructions (a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis. (b) Compute the manufacturing cost per window under traditional costing. (c) Compute the manufacturing cost per window under the proposed activity-based costing system.

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Test Bank for Managerial Accounting, Sixth Edition

PART V — ABC COST DRIVERS (15 points) Scoot Motors manufactures motor scooters in its Jacksonville, Florida plant. Instructions Identify an appropriate cost driver that may be used to assign each of the following costs to each line of motor scooters. Cost drivers may be used more than once. Cost Drivers Machine hours Number of parts Number of finished vehicles Engineering hours Number of setups Number of employees/direct labor hours Number of tests Number of orders Square footage

Cost

Cost Driver

Assembling

__________________________

Engineering

__________________________

Machining

__________________________

Ordering and receiving

__________________________

Painting scooters

__________________________

Machine setup

__________________________

Storing materials

__________________________

Supervising

__________________________

Packing and shipping

__________________________

10.

Inspecting and testing

__________________________

Achievement Test 2

Solutions — Achievement Test 2: Chapters 3-4 PART I — MULTIPLE CHOICE (30 points) 1. 2. 3. 4.

C C B B

5. 6. 7. 8.

C C D B

9. 10. 11. 12.

A D A C

PART II — TRUE/FALSE (10 points) 1. 2. 3. 4. 5.

T F F F T

6. 7. 8. 9. 10.

T F T T F

PART III — PROCESS COSTING (25 points) (a)

(b)

Materials (Units) 90,000 + 9,000 99,000

Conversion (Units) 90,000 + 3,600 93,600

Materials $89,100 49,500

Conversion $1.80

$70,200 46,800

$1.50

(c)

$207,000

((90,000 × $1.50) + (90,000 × $0.80))

(d)

$16,380

(($1.50 × 9,000) + ($0.80 × 3,600))

PART IV — ACTIVITY-BASED COSTING (20 points) (a)

Predetermined overhead rate using machine hours: $377,000 ÷ 20,000 hours = $18.85 per machine hour

(b)

Manufacturing cost per window under traditional costing: Direct materials $22,000 Direct labor 23,100 Overhead (1,600 × $18.85) 30,160 Total cost of 80 windows $75,260 Cost per window ($75,260 ÷ 80)

$940.75

AT2- 7

AT2- 8 (c)

Test Bank for Managerial Accounting, Sixth Edition

Manufacturing cost per window set under activity-based costing: Computation of Activity-Based Overhead Rate

Activity Cost Pool Purchasing Production Setting up machines Inspecting Utilities

Estimated Overhead $ 26,000 176,000 65,000 35,000 75,000 $377,000

Total Estimated Drivers 80 orders 16,000 D/L hrs. 250 setups 1,250 inspections 15,000 sq. ft.

Activity-Based = Overhead Rate $325 per order $11 per D/L hr. $260 per setup $28 per inspection $5 per sq. ft.

Assignment of Overhead to Order of 50 Windows

Activity Cost Pool Purchasing Production Setting up machines Inspecting Utilities

Expected Use of Driver 8 orders 2,100 D/L hrs. 15 setups 12 inspections 1,200 sq. ft.

Activity-Based Overhead Rate $325 $11 $260 $28 $5

Total manufacturing cost per window under ABC: Direct materials Direct labor Overhead Total cost of 80 windows Total cost per window: ($81,036 ÷ 80)

Cost Assigned $ 2,600 23,100 3,900 336 6,000 $35,936

$22,000 23,100 35,936 $81,036 $1,012.95

PART V — ABC COST DRIVERS (15 points) 1. Number of parts 2. Engineering hours 3. Machine hours 4. Number of orders 5. Number of finished vehicles

6. Number of setups 7. Square footage 8. Number of employees/direct labor hours 9. Number of finished vehicles 10. Number of tests

Achievement Test 3: Chapters 5-6 Managerial Accounting, 6e

Name _________________________ Instructor ______________________ Section # _______ Date _________

Part

III

Total

Points

100

Score

PART I — MULTIPLE CHOICE (28 points) Instructions: Designate the best answer for each of the following questions. ____

1. Given the following costs for Abay Liquidators, select the answer choice that correctly classifies each cost’s behavior. Total Cost at 1,500 Units 1,800 Units Cost A $4,650 $5,580 Cost B 8,600 9,400 a. b. c. d. e.

Cost A and Cost B are both variable Cost A is variable; Cost B is mixed Cost A is variable; Cost B is fixed Cost A and Cost B are both mixed There is not enough information provided to determine the answer.

____

2. Which one of the following is not one of the assumptions that underlie basic CVP analysis? a. When more than one product is sold, total sales will be in a constant sales mix. b. All costs can be classified as variable or fixed with reasonable accuracy. c. The behavior of both costs and revenues is linear throughout the relevant range. d. The breakeven point changes when the number of units sold changes.

____

3. Candial Enterprises can produce and sell only one of the following two products:

Product A Product B

Machine Hours Required 0.6 0.4

Contribution Margin Per Unit $4.50 $3.20

The company has machine capacity of 1,496 hours. How much will contribution margin be if Candial produces only the most profitable product? a. $3,740 b. $11,968 c. $2,493 d. $11,220

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Test Bank for Managerial Accounting, Sixth Edition

____

4. Nova Supreme has a weighted-average unit contribution margin of $12 for its two products, Standard and Premium. Expected sales for Nova are 30,000 for Standard and 10,000 for Premium. Fixed expenses are $840,000. How many Standards will Nova Supreme sell at the break-even point? a. 70,000 b. 50,000 c. 30,000 d. 52,500

____

5. Winners Games reported sales of $72,000 and net income totaling $12,000 during the year. It’s selling price is $6 per unit, its variable cost is $2 per unit, and its total fixed costs are $36,000. How much is the projected margin of safety? a. $54,000 b. $66,000 c. $12,000 d. $18,000

____

6. Hanley’s Carwash has $80,000 of fixed costs and variable costs of 60% of sales. How much is total sales to achieve a net income of $140,000? a. $550,000 b. $220,000 c. $150,000. d. $366,667

____

7. In order to decrease a company's break-even point, which of the following should be decreased? a. The contribution margin ratio b. The contribution margin c. The selling price d. Variable costs per unit

____

8. Little Tykes Day Care desires net income of $84,000. It has $28,000 of fixed costs and variable costs of 60% of sales. How much is contribution margin? a. $280,000 b. $112,000 c. $186,667 d. $75,000

____

9. Assume October is the high-volume month for a toy manufacturer and July is the lowvolume month. The following total production costs and volume levels have been recorded: Total Costs Volume October $72,000 4,000 July $60,000 1,500 How much are total fixed costs? a. $12,000 b. $52,800 c. $132,000 d. $60,010

Achievement Test 3

AT3- 3

____ 10. Fixed costs a. increase in total as total production increases. b. decrease in total as total production decreases. c. decrease per unit as total production decreases. d. increase per unit as total production decreases. ____ 11. Variable costs, as activity increases, will a. will stay the same in total. b. increase per unit. c. remain constant per unit. d. decrease in total. ____ 12. A cost that increases in total, but not proportionately with increases in the activity level, is a(n) a. mixed cost. b. variable cost. c. fixed cost. d. unusual fixed cost. ____ *13. Which of the following is included in the cost of goods manufactured under absorption costing but not under variable costing? a. Direct materials b. Variable factory overhead c. Fixed factory overhead d. Direct labor ____ *14. Which of the following would not be deducted in determining the contribution margin under variable costing? a. Direct labor b. Sales commissions c. Sales office depreciation using the straight line method d. Variable factory overhead PART II — TRUE/FALSE (10 points) Instructions: Designate whether each of the following statements is true or false by circling the T or F. T

1. Contribution margin is the amount of revenue left over to cover selling and administrative costs after manufacturing costs have been deducted.

2. The margin of safety is the difference between actual profit and target net income.

4. A company’s break-even point can be decreased by increasing the contribution margin ratio.

5. A CVP income statement classifies costs by function, but a traditional income statement classifies costs by cost behavior (variable or fixed).

At the break-even point, total contribution margin is equal to total fixed costs.

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Test Bank for Managerial Accounting, Sixth Edition

PART III — SCARCE RESOURCE ALLOCATION (12 points) Genavine manufactures and sells two products. Relevant per unit data concerning each product are given below: Product X21 R45 Selling price $55 $88 Variable costs $30 $48 Machine hours 2.5 4.2 Instructions (a) Compute the contribution margin per unit of limited resource for each product.

(b) Which product should be manufactured if 1,200 additional machine hours are available? Explain.

PART IV — HIGH-LOW METHOD (14 points) Nugent Enterprise incurred the following high and low maintenance costs totals during 2014: $208,000 at 12,000 units of activity during March and $164,000 at 7,000 units during August. Instructions: Answer parts (a) through (c) below, presenting carefully labeled supporting calculations in all cases. (a)

Use the high-low method to compute the variable cost per unit and the total fixed cost element of the mixed cost component.

(b)

Based on the above analysis, express the total maintenance cost in formula format.

(c)

Compute the total maintenance cost for May when activity is 11,000 units.

Achievement Test 3

AT3- 5

PART V — COST-VOLUME-PROFIT (24 points) Walton Widgets manufactures a product that sells for $40 per unit. Walton incurs a variable cost per unit of $24 and $1,400,000 in total fixed costs to produce this product. It is currently selling 92,000 units. Instructions: Complete each of the following requirements, presenting labeled supporting computations. (a)

Compute and label the contribution margin per unit and contribution margin ratio.

(b)

Using the contribution margin per unit, compute the break-even point in units.

(c)

Using the contribution margin ratio, compute the break-even point in dollars.

(d)

Compute the margin of safety and margin of safety ratio.

(e)

Compute the number of units that must be sold in order to generate net income of $240,000 using the contribution margin per unit.

(f)

Should Walton Widgets give a commission to its salesmen based on 8% of sales, if it will decrease fixed costs by $300,000 and increase sales volume 10%? Support your answer with labeled computations.

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Test Bank for Managerial Accounting, Sixth Edition

PART VI — OPERATING LEVERAGE (12 points) The following CVP income statements are available for Liu Company and Sadji Company. Sales revenue Variable costs Contribution margin Fixed costs Net income

Lui Company $800,000 325,000 475,000 375,000 $100,000

Sadji Company $800,000 195,000 605,000 505,000 $100,000

Instructions (a) Compute the degree of operating leverage for each company.

(b) Prepare a CVP income statement for each company, assuming that sales revenue decreases by 30%.

Achievement Test 3

AT3- 7

Solutions — Achievement Test 3: Chapters 5-6 PART I — MULTIPLE CHOICE (28 points) 1. 2. 3. 4. 5.

B D B D D

6. 7. 8. 9. 10.

A D B B D

11. 12. *13. *14.

C A C C

PART II — TRUE/FALSE (10 points) 1. F 2. F 3. T

4. T 5. F

PART III — SCARCE RESOURCE ALLOCATION (12 points) (a)

Product Contribution margin per unit Machine hours required Contribution margin per unit of limited resource

X21 $25 ÷ 2.5 $10

R45 $40 ÷ 4.2 $9.52

(b) The X21 product should be manufactured because it results in the highest contribution margin per machine hour: $10 × 1,200 = $12,000 PART IV — HIGH-LOW METHOD (14 points) (a)

$208,000 - $164,000 12,000 - 7,000

Total costs Less: Variable costs 12,000 × $8.80 7,000 × $8.80 Total fixed costs

$8.80 per unit High $208,000

Low $164,000

105,600 $102,400

(b)

Total cost = ($8.80 × sales volume) + $102,400

(c)

(11,000 × $8.80) + $102,400 = $199,200

61,600 $102,400

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Test Bank for Managerial Accounting, Sixth Edition

PART V — COST-VOLUME-PROFIT (24 points) (a)

Unit selling price Unit variable costs Contribution margin per unit

$40 24 $16

Contribution margin per unit Unit selling price Contribution margin ratio

(b)

$1,400,000 ÷ $16 = 87,500 units

(c)

$1,400,000 ÷ 40% = $3,500,000 sales dollars

(d)

(92,000 × $40) – $3,500,000 = $180,000 margin of safety $180,000 ÷ (92,000 × $40) = 4.9% margin of safety ratio

(e)

($1,400,000 + $240,000) ÷ $16 = 102,500 units

(f)

Current expected income Sales (92,000 × $40) Variable (92,000 × $24) Contribution margin Fixed expenses Net income

New expected income Sales (101,200 × $40) Variable [(101,200 × $24) + ($4,048,000 × 8%)] Contribution margin Fixed expenses Net income

$3,680,000 2,208,000 1,472,000 1,400,000 $ 72,000

$16 ÷ $40 40%

$4,048,000 2,752,640 1,295,360 1,100,000 $ 195,360

Yes, the change should be made. PART VI — OPERATING LEVERAGE (12 points) (a) Liu Sadji

Contribution Margin $475,000 $605,000

(b) Sales revenue Variable costs Contribution margin Fixed costs Net loss *$800,000 × 0.7 **$325,000 × 0.70 ***$195,000 × 0.70

÷ ÷ ÷

Liu Company $560,000* 227,500** 332,500 375,000 ($ 42,500)

Net Income $100,000 $100,000

= = =

Degree of Operation Leverage 4.75 6.05

Sadji Company $560,000* 136,500*** 423,500 505,000 ($ 81,500)

Achievement Test 4: Chapters 7-8 Managerial Accounting, 6e

Name _________________________ Instructor ______________________ Section # _______ Date _________

Part

III

Total

Points

100

Score

PART I — MULTIPLE CHOICE (20 points) Instructions: Designate the best answer for each of the following questions.

____

1. Danolin Signs is bidding on painting buildings in a large apartment complex. The company has gathered the following information: Estimated wages of 8 painters for the project Estimated labor hours for the entire company Estimated cost of fringes Desired profit margin per direct labor hour Expected number of units to be produced and sold

$14,040 16,000 15% of labor $12 800

The cost of paint and other materials is $9,400. The average hourly wage per employee is $18 per hour with 780 hours estimated for the project. The overhead rate is 20% of total labor cost (including fringes.) The material loading charge is 10%. How much is the bid price if time-and-material pricing is used? a. $38,135 b. $28,735 c. $39,075 d. Some other answer. ____

2. What is a relevant cost? a. It is a sunk cost. b. It is a past cost. c. It is a cost that differ across alternatives. d. It is an opportunity cost.

____

3. The Cookie Division of Kaboodle Foods manufactures home-style cookies which are sold for $4 per box. Its variable cost is $1.50 per box, and its fixed cost per unit is $0.90. Management would like the Mixing Division to transfer 20,000 boxes of cookies to another division within the company to be used to make snack pack lunches. The Cookie Division has available capacity to produce the 20,000 boxes for the Mixing division. What is the minimum transfer price the Cookie Division should accept for each box of cookies? a. $4.00 b. $1.50 c. $2.40 d. $3.20

AT4- 2

Test Bank for Managerial Accounting, Sixth Edition

____ *4. Landau Gears provides the following cost information related to its production of its primary product: Per Unit Variable manufacturing cost $12 Fixed manufacturing cost 8 Variable selling and administrative expenses 2 Fixed selling and administrative expenses 3 Desired ROI per unit 7 What is the markup percentage assuming that Landau Gears uses absorption costing? a. 60% b. 35% c. 100% d. 28% ____

5. Bride-To-Be produces three-tier wedding cakes. Costs for producing one cake appear below: Direct materials $11 Direct labor 24 Variable overhead 16 Fixed overhead 14 An outside supplier has offered to produce the cakes for $66 per cake. If Bride-To-Be decides to buy instead of making the cakes, what is the maximum price it would be willing pay? a. $65 b. $66 c. $51 d. $35

____

6. Which one of the following is used to determine the selling price when cost-plus pricing is used? a. Selling price = fixed costs + (markup percentage × variable costs) b. Selling price = cost + (markup percentage × cost) c. Selling price = variable costs + (markup percentage × fixed costs) d. Selling price = cost + (markup percentage × variable costs)

____

7. The following information is provided by Garden Gears for a new product it recently introduced: Total unit cost $50 Desired ROI per unit $22 Target selling price $72 How much is Garden Gears’ percentage of markup on cost? a. 44% b. 55% c. 30.6% d. 69.4%

Achievement Test 4

AT4- 3

____

8. Target costing assumes a. the market price is known and works to achieve an acceptable cost. b. the cost is known and works to achieve an acceptable market price. c. the desired profit is known and works to achieve an acceptable market price. d. the desired profit is known and works to achieve an acceptable cost.

____

9. The Molding Division of White Corporation manufactures plastic molds and then sells them to customers for $40 per unit. Its variable cost is $15 per unit, and its fixed cost per unit is $5. Management would like the Molding Division to transfer 15,000 of these molds to another division within the company at a price of $23. The Molding Division is operating at full capacity. What is the minimum transfer price the Molding Division should accept? a. $23 b. $20 c. $40 d. $25

____

10. Which one of the following is a qualitative factor as it relates to make-or-buy decisions? a. The cost to buy the part or product b. Loss of customers due to eliminating a product line c. Customer perceptions due to a change in pricing d. Quality of products from the supplier

PART II — TRUE/FALSE (10 points) Instructions: Designate whether each of the following statements is true or false by circling the T or F. T

1. A sunk cost is the potential benefit that may be obtained by following an alternative course of action.

2. A company should process further as long as the incremental costs of further production exceed the incremental revenue of further production.

3. Joint costs are all costs incurred prior to the point at which two products are separately identified.

4. Sunk costs are relevant costs that differ across alternatives.

5. In the minimum transfer price formula, variable cost is defined as the variable cost of units sold internally.

AT4- 4

Test Bank for Managerial Accounting, Sixth Edition

PART III — INCREMENTAL ANALYSIS (26 points) This problem consists of two independent mini-problems. A.

Zane Wheels produces lawn mower tires in batches of 1,200 at a cost of $2.40 each. The tires can be sold without further processing for $5.00 per tire, or can be processed further by injecting solid foam which insures the tires will never become flat. The solid foam tires can be sold for $11.00 each. The additional processing costs total $6,600 per batch. Instructions Compute the incremental income from further production of one batch of solid foam tires.

Lansing Manufacturers produces can openers. For the first six months of 2014, the company reported the following operating results for 16,000 units, while operating at 80% of plant capacity. Sales Cost of goods sold Gross profit Operating expenses Net income

$2,000,000 1,200,000 800,000 420,000 $ 380,000

Cost of goods sold was 75% variable and 25% fixed. Operating expenses were 60% variable and 40% fixed. In July of 2014, Lansing receives a special order for 2,000 can openers at $85 each from a foreign company. The can openers normally sell for $112.00. Acceptance of the special order would result in $1,000 of shipping costs but no increase in fixed operating expenses. Instructions Prepare an incremental analysis for the special order.

Achievement Test 4

AT4- 5

*PART IV — PRODUCT COSTING (20 points) Big Time Bags provides the following information related to the production of its primary product, backpacks: Per Unit $12.50 $1.50 $1.30 $1.80 $4.60

Variable manufacturing cost Fixed manufacturing cost Variable selling and administrative expenses Fixed selling and administrative expenses Desired ROI per unit A.

What is the markup percentage, assuming that Big Time Bags uses absorption costing?

What is the markup percentage, assuming that Big Time Bags uses variable costing?

PART V — COST-PLUS PRICING (24 points) Lanahan Corporation is in the process of setting a selling price for a new product it has just designed. The following data relate to this product for a budgeted volume of 10,000 units. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit $ 30 25 15

Total

$200,000 10 110,000

Lanahan uses cost-plus pricing to set its target selling price. The markup on total unit cost is 25%. Instructions Compute each of the following for the new product: 1. Total variable cost per unit, total fixed cost per unit, and total cost per unit. 2. Desired ROI per unit. 3. Target selling price.

AT4- 6

Test Bank for Managerial Accounting, Sixth Edition

Solutions — Achievement Test 4: Chapters 7-8 PART I — MULTIPLE CHOICE (20 points) 1. 2. 3. 4. 5.

C C B A C

6. 7. 8. 9. 10.

B A A C D

PART II — TRUE/FALSE (10 points) 1. F 2. F 3. T

4. F 5. T

PART III — INCREMENTAL ANALYSIS (26 points) A.

1,200 × ($11.00 – $5.00) = $7,200 incremental revenue Incremental costs of further processing = $6,600 Incremental income from further processing = $7,200 – $6,600 = $600

Revenue from special order (2,000 × $85) Variable CGS costs from special order (2,000 × $56.25)* Variable operating expenses from special order (2,000 × $15.75)** Contribution margin from special order Fixed costs from special order Net income from special order

*$1,200,000 × .75 = $900,000 $900,000 ÷ 16,000 units = $56.25 variable CGS per unit **420,000 × .6 = $252,000 $252,000 ÷ 16,000 units = $15.75 variable operating expenses per unit PART IV — PRODUCT COSTING (20 points) A.

$4.60 + $1.30 + $1.80 $12.50 + $1.50

55.0%

$4.60 + $1.50 + $1.80 $12.50 + $1.30

57.2%

$170,000 (112,500) (31,500) 26,000 (1,000) $ 25,000

Achievement Test 4

AT4- 7

PART V — COST-PLUS PRICING (24 points) 1.

Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Variable cost per unit

Fixed manufacturing overhead Fixed selling and administrative expenses Fixed cost per unit Total cost per unit: $80 + $31 = $111 2.

Total cost per unit Markup Desired ROI per unit

$111.00 × 25% $27.75

Total cost per unit Desired ROI per unit Target selling price

$111.00 27.75 $138.75

$30 25 15 10 $80

Total Costs $200,000 110,000

Budgeted Cost Volume Per Unit ÷ 10,000 = $20 ÷ 10,000 = 11 $31

Achievement Test 5: Chapters 9-10 Managerial Accounting, 6e

Name _________________________ Instructor ______________________ Section # _______ Date _________

Part

III

Total

Points

100

Score

PART I — MULTIPLE CHOICE (26 points) Instructions: Designate the best answer for each of the following questions. ____

1. Office Stuff produced 15,000 file cabinets at a cost of $80,000. Production for the period was estimated at 14,000 file cabinets at a cost of $75,000. On which of the following should the flexible budget be based? a. Budgeted costs of actual production b. Budgeted costs of budgeted production c. Actual costs of budgeted production d. Actual costs of actual production

____

2. Which of the following is true with regard to budgeting vs. long-range planning? a. Both tend to be very detailed. b. They are the same in all significant aspects. c. The maximum length for both usually is a year, with shorter periods of time also common. d. Budgeting is oriented more toward short-term goals; long-range planning toward long-term goals.

____

3. Which of the following is false with regard to budgetary planning? a. The starting point for the budgets of a not-for-profit organization is generally receipts, rather than expenditures. b. A merchandising company uses a purchases budget instead of a production budget. c. Budgets may be used by manufacturing companies, merchandising companies, service enterprises, and not-for-profit organizations. d. For a service enterprise, the critical factor in budgeting is coordinating professional staff needs with anticipated services.

____

4. The manager of an investment center can improve ROI by a. reducing variable and/or controllable fixed costs. b. reducing average operating assets. c. increasing sales. d. all of the above.

AT5- 2

Test Bank for Managerial Accounting, Sixth Edition

____

5. Which of the following is true with regard to budgetary planning? a. Generally accepted accounting principles require the budgets be prepared at least annually. b. The cash budget is often considered to be the most important output in preparing financial budgets. c. The likelihood of a realistic budget is greater when the budget is developed from top management down to lower management. d. The human behavior aspects of budgeting, while they should not be ignored, are generally of little real significance.

____

6. A static budget is a. applicable to cost budgets but not to a sales budget. b. modified or adjusted for changes in activity during the year. c. appropriate in evaluating a manager's effectiveness in controlling fixed costs. d. appropriate in evaluating a manager's effectiveness in controlling variable costs.

____

7. When considering controllable versus noncontrollable costs, a. costs allocated to, and thus identifiable with, a particular responsibility level are controllable. b. costs incurred directly by a level of responsibility are controllable at that level. c. controllable cost and noncontrollable cost, respectively, are synonymous with variable cost and fixed cost. d. more costs are controllable as one moves down to the lower levels where actual production takes place.

____

8. A responsibility report for a profit center shows a. gross profit and income from operations. b. contribution margin and controllable margin. c. contribution margin, controllable margin, and return on investment. d. gross profit, income from operations, and net income.

____

9. A flexible budget a. is, in essence, a series of static budgets at different levels of activity. b. can be prepared for each of the types of budgets included in a master budget. c. increases budget allowances both directly and proportionately for variable costs as production increases. d. all of the above.

____ 10. Responsibility centers are generally classified as either a. divisions, departments, or branches. b. segments, subunits, or subdivisions. c. cost centers, profit centers, or divisions. d. cost centers, profit centers, or investment centers. ____ 11. The initial budget prepared in the master budget is the a. sales budget. b. production budget. c. budgeted balance sheet. d. budgeted income statement.

Achievement Test 5

AT5- 3

____ 12. The ROI formula for an investment center is a. Controllable Margin ÷ Sales. b. Net Income ÷ Average Operating Assets. c. Contribution Margin ÷ Average Operating Assets. d. Controllable Margin ÷ Average Operating Assets. ____ 13. The Florida Division of Right Enterprises had an ROI of 18% when sales were $1,500,000 and controllable margin was $118,800. What were the average operating assets? a. $270,000 b. $21,384 c. $291,384 d. $660,000 PART II — BUDGETARY PLANNING (32 points) This problem consists of four independent mini-problems. Omit headings other than those already given. A. Kriter Kitchen Tools produces and sells insulated ice buckets. The sales budget for 2014 is as follows: 1st quarter — 8,000 units 2nd quarter — 11,000 units

3rd quarter — 13,000 units 4th quarter — 10,000 units

Kriter desires an ending inventory equal to 10% of the next quarter's sales. The January 1, 2014 inventory is 800 units. Unit sales during the 1st quarter of 2015 are estimated at 9,000 units. Instructions: Compute required production for 2014, showing quarterly data. Description

Quarter 1

Quarter 2

Quarter 3

Quarter 4

—————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— ——————————————————————————————————————————

AT5- 4

Test Bank for Managerial Accounting, Sixth Edition

B. Shanigan’s Manufacturers is preparing its direct labor budget for the second quarter of 2014 from the following budgeted production figures: April—8,000 units; May—7,000 units; and June—9,000 units. Each unit requires 3.25 hour of direct labor. The hourly wage rates are expected to be $15 in April, and $15.50 in May and June. Instructions: Prepare a direct labor budget for the quarter, showing monthly data. Description

April

May

June

Quarter

C. JetGreen Cleaners makes 80% of its sales on credit. Experience shows that 25% of the credit customers pay in the month of sale, 55% within the following month, the rest during the next month. Total sales for May, June, July, and August are estimated at $180,000; $220,000; $280,000; and $200,000, respectively. Instructions: Determine budgeted cash receipts for July and August. Description

July

August

Achievement Test 5

AT5- 5

D. Southside Sports is preparing its annual cash budget, showing quarterly data, for 2014. A $14,000 cash balance is desired at the end of each quarter. Borrowings and repayments are in $1,000 increments at 6% annual interest. The company borrows at the beginning of a quarter based on the estimated deficiency. Interest is paid only when principal is repaid at the end of a quarter with excess cash. The maximum amount of principal was repaid in the second and fourth quarters. The cash balance on December 31, 2013 is $17,000. Total receipts and disbursements, other than borrowings and principal or interest payments, are estimated at: Quarter 1 Quarter 2 Quarter 3 Quarter 4 Disbursements: $110,000 $135,000 $124,000 $140,000 Receipts: 102,000 142,000 120,000 155,000 Instructions: Prepare a schedule of estimated borrowings and repayments of principal and interest for the four quarters of 2014. Description

Quarter 1

Quarter 2

Quarter 3

Quarter 4

AT5- 6

Test Bank for Managerial Accounting, Sixth Edition

PART III — FLEXIBLE BUDGETS (22 points) Handover Company uses a flexible budget for overhead based on direct labor hours (DLH). Annual master budget figures, based on 400,000 direct labor hours, and actual overhead for March, when 30,000 labor hours were worked, are as follows:

Variable: Indirect labor Indirect materials Other Fixed: Supervision Depreciation Other

Master Budget

March Actual

$ 24,000 45,000 280,000

$ 1,900 3,300 21,100

120,000 54,000 216,000

10,000 4,600 17,700

Instructions: Prepare a flexible budget performance report for March. Omit headings other than descriptive columnar headings. FLEXIBLE BUDGET PERFORMANCE REPORT: —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— ——————————————————————————————————————————

Achievement Test 5

PART IV — COMPUTATION OF RETURN ON INVESTMENT (ROI) (20 points) For the year ended December 31, 2014, SanaDune Tools reports the following: Sales Variable costs Controllable fixed costs Average operating assets

$4,000,000 2,700,000 600,000 3,400,000

Instructions: Compute ROI for each of the following situations. Show all computations. 1. The year ended December 31, 2014. _________________ ÷ _________________ = ________%

2. For 2015 assuming the following independent courses of action: (a) Sales will increase 15% with no change in the contribution margin ratio. _________________ ÷ _________________ = ________%

(b) Variable costs and controllable fixed costs will both be reduced 8%. _________________ ÷ _________________ = ________%

AT5- 7

AT5- 8

Test Bank for Managerial Accounting, Sixth Edition

Solutions — Achievement Test 5: Chapters 9-10 PART I — MULTIPLE CHOICE (26 points) 1. 2. 3. 4. 5.

A D A D B

6. 7. 8. 9. 10.

C B B D D

11. A 12. D 13. D

PART II — BUDGETARY PLANNING (32 points) A. Description Expected unit sales Desired ending finished goods units Total required units Beginning finished goods units Required production units B. Description Units to be produced Direct labor hours/unit Total direct labor hours Direct labor cost/hour Total direct labor cost

Quarter 1 8,000 1,100 9,100 (800) 8,300 April 8,000 × 3.25 26,000 × $15.00 $390,000

Quarter 2 11,000 1,300 12,300 (1,100) 11,200

May 7,000 × 3.25 22,750 × $15.50 $352,625

C. Description Collections from May Collections from June

Quarter 3 13,000 1,000 14,000 (1,300) 12,700 June 9,000 × 3.25 29,250 × $15.50 $453,375 July $ 28,800 96,800

($180,000 × 80% × 20%) ($220,000 × 80% × 55%) ($220,000 × 80% × 20%) Collections from July ($280,000 × 80% × 25%) ($280,000 × 80% × 55%) Collections from August ($200,000 × 80% × 25%) Cash sales, July ($280,000 × 20%) Cash sales, August ($200,000 × 20%)

Quarter 24,000 × 3.25 78,000 $1,196,000 August

$ 35,200 56,000 123,200 40,000 56,000 $237,600

40,000 $238,400 Quarter 4 $ 14,850 155,000 $169,850 140,000 29,850

D. Description Beginning cash balance Add: Receipts Total available cash Less: Disbursements Excess (deficiency) Financing Borrowings Repayments

Quarter 1 $ 17,000 102,000 $119,000 110,000 9,000

Quarter 2 $ 14,000 142,000 $156,000 135,000 21,000

Quarter 3 $ 15,850 120,000 $135,850 124,000 11,850

5,000 0

0 5,150*

3,000 0

Ending cash balance

$ 14,000

$ 15,850

$ 14,850

*$5,000 + (5,000 × .06 × 2/4) **$3,000 + (3,000 × .06 × 2/4)

Quarter 4 10,000 900 10,900 (1,000) 9,900

0 3,090** $ 26,760

Achievement Test 5

AT5- 9

PART III — FLEXIBLE BUDGETS (22 points) PERFORMANCE REPORT:

Variable costs Indirect labor Indirect materials Other Total variable Fixed costs Supervision Depreciation Other Total fixed Total costs

Budget at 30,000 DLH

Actual Costs 30,000 DLH

Difference Favorable (F) Unfavorable (U)

$ 1,800 3,375 21,000 26,175

$ 1,900 3,300 21,100 26,300

$100 75 100 125

U F U U

10,000 4,500 18,000 32,500 $58,675

10,000 4,600 17,700 32,300 $58,600

0 100 300 200 $ 75

U F F F

PART IV — COMPUTATION OF RETURN ON INVESTMENT (ROI) (20 points) 1. $4,000,000 – $2,700,000 – 600,000 = $700,000: $700,000 ÷ $3,400,000 = 20.6% 2. (a) ($700,000 + $195,000*) ÷ $3,400,000 = 26.3% *($4,000,000 – $2,700,000) × 0.15 = $195,000 (b) ($700,000 + $264,000*) ÷ $3,400,000 = 28.4% *($2,700,000 + $600,000) × 0.08 (c) $700,000 ÷ ($3,400,000 – $850,000) = 27.5%

Achievement Test 6: Chapters 11-12 Managerial Accounting, 6e

Name _________________________ Instructor ______________________ Section # _______ Date _________

Part

III

Total

Points

100

Score

PART I — MULTIPLE CHOICE (30 points) Instructions: Designate the best answer for each of the following questions. ____

1. Wilson Company determined that its standard number of hours that should have been worked for the output attained is 6,000 direct labor hours and the actual number of direct labor hours worked was 5,800. The direct labor price variance was $1,160 unfavorable, and the standard rate of pay was $14 per direct labor hour, what was the actual rate of pay for direct labor? a. $14.20 per direct labor hour b. $13.80 per direct labor hour c. $14.39 per direct labor hour d. $14.68 per direct labor hour

____

2. Which one of the capital budgeting methods does not use cash flow amounts? a. Cash payback technique b. Annual rate of return method c. Internal rate of return method d. Net present value method

____

3. Which method does not consider time value of money? a. Profitability index b. Net present value method c. Internal rate of return method d. Annual rate of return

____

4. A company uses 2,400 pounds of materials and exceeds the standard by 80 pounds. The quantity variance is $40 unfavorable. What is the standard price? a. $2.00 b. $62.00 c. $5.00 d. $0.50

AT6- 2

Test Bank for Managerial Accounting, Sixth Edition

____

5. Which of the following is considered to be a rigorous but attainable standard? a. All material standards b. Normal standards c. Ideal standards d. Balanced standards

____

6. A company uses 30,000 pounds of materials for which the price paid was $3.80 a pound. The materials price variance was $3,000 favorable. What is the standard price per pound? a. $10.00 b. $3.90 c. $3.70 d. $13.80

____

7. An unfavorable materials quantity variance would occur if a. more materials are purchased than are used. b. actual pounds of materials used were less than the standard labor hours. c. actual labor hours were greater than the standard labor hours allowed. d. actual pounds of materials used were greater than the standard pounds allowed.

____

8. The annual rate of return method of capital budgeting a. incorporates the time value of money. b. considers the timing of the cash flows. c. ignores length of time over which the cash flows will be received. d. all of the above.

____

9. Which statement is true? a. A project with an internal rate of return that is zero or positive is acceptable. b. A project with a net present value that is zero is acceptable. c. Potential salvage value is ignored as a noncash flow item. d. The internal rate of return method cannot be calculated when unequal annual cash inflows exist.

____ 10. Which statement is true concerning how the internal rate of return is expressed? a. As a yes-no decision b. As a dollar amount c. In years d. In the same expression as the annual rate of return ____ 11. Which statement is true as it relates to a standard cost? a. It is the actual cost of a unit of product. b. It represents the selling price of a product to produce the most profit. c. It is a total budgeted amount in the accounting records. d. It is often journalized in the accounting system. ____ *12. From what does the overhead volume variance result? a. Variable overhead costs b. Fixed overhead costs c. Both variable and fixed overhead costs d. All manufacturing costs

Achievement Test 6

AT6- 3

PART II — TRUE/FALSE (10 points) Instructions: Designate whether each of the following statements is true or false by circling the T or F. T

1. If actual costs are less than standard costs, the variance is favorable.

2. On an income statement prepared under a standard cost accounting system, cost of goods sold is stated at standard costs with variances disclosed separately.

3. An unfavorable labor quantity variance indicates the actual number of direct labor hours worked was greater than the number of direct labor hours that should have been worked for the output attained.

4. Both the book value and the disposal value of an existing asset are relevant in a retain or replace equipment decision.

5. A direct labor price standard is frequently called the direct labor efficiency standard.

6. The cash payback technique identifies the time period required to recover the cost of the capital investment from the annual cash inflow produced by the investment.

7. The primary capital budgeting method that uses discounted cash flow techniques is the cash payback method.

8. Intangible benefits in capital budgeting include increased quality, safety, or employee loyalty.

9. Normal capacity is the average activity output that a company achieves at its highest level of profit.

F 10. The annual rate of return method is based on accounting data and indicates the profitability of a capital expenditure.

AT6- 4

Test Bank for Managerial Accounting, Sixth Edition

PART III — VARIANCE ANALYSIS (30 points) Gulf Production manufactures recycle bins using recycled plastic that it sells to municipal governments. It has developed the following per unit standard costs for 2014 for each bine: Direct Materials Direct Labor Manufacturing Overhead Standard quantity 3 pounds ½ hour ½ hour Standard price $0.80 $12.00 $4.50 Unit standard cost $2.40 $6.00 $2.25 In 2014, the company planned to produce 40,000 bins at a level of 20,000 hours of direct labor. Actual results for 2014 are presented below: 1. 2. 3. 4.

Direct materials purchased and used were 116,000 pounds of plastic that cost $98,600. Direct labor costs were $258,300 for 21,000 direct labor hours actually worked. Total manufacturing overhead was $88,000. Actual production was 40,200 bins.

Instructions Compute the following variances: 1. Direct materials price 2. Direct materials quantity 3. Direct labor price 4. Direct labor quantity 5. Total overhead variance

Achievement Test 6

AT6- 5

PART IV — CAPITAL BUDGETING (20 points) Shangria Company is considering a capital investment of $140,000 in new equipment, which is expected to have a useful life of 4 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $10,000 and $45,000, respectively. Shangria requires either a 10% rate of return, or a payback period of 3 years. Instructions: Compute the (a) annual rate of return, (b) cash payback period, (c) net present value, (d) profitability index, and (e) internal rate of return. Show all computations. State whether the project should be accepted or rejected for each of the five capital budgeting techniques. Present Value of a Series of Future Payments Periods 1 2 3 4 5

1% 0.990 1.970 2.941 3.902 4.853

2% 0.98 1.942 2.884 3.808 4.714

3% 0.971 1.914 2.829 3.717 4.580

4% 0.962 1.886 2.775 3.630 4.452

5% 0.952 1.859 2.723 3.546 4.330

6% 0.943 1.833 2.673 3.465 4.212

7% 0.935 1.808 2.624 3.387 4.100

(a) Annual Rate of Return = _____________________.

(b) Cash Payback Period = _____________________.

(d) Profitability Index = _____________________.

(e) Internal Rate of Return = _______________________.

8% 0.926 1.783 2.577 3.312 3.993

9% 0.917 1.759 2.531 3.240 3.89

10% 0.909 1.736 2.487 3.170 3.791

11% 0.901 1.713 2.444 3.102 3.696

12% 0.893 1.690 2.402 3.037 3.605

13% 0.885 1.668 2.361 2.975 3.517

14% 0.877 1.647 2.322 2.914 3.433

AT6- 6

Test Bank for Managerial Accounting, Sixth Edition

PART V — BALANCED SCORECARD (10 points) A. For what purpose is a balanced scorecard approach used? B. Name the four perspectives of the balanced scorecard approach. C. Describe the nature of the balanced scorecard.

Achievement Test 6

AT6- 7

Solutions — Achievement Test 6: Chapters 11-12 PART I — MULTIPLE CHOICE (30 points) 1. 2. 3. 4. 5.

A B D D B

6. 7. 8. 9. 10.

B D C B D

11. D *12. B

PART II — TRUE/FALSE (10 points) 1. 2. 3. 4. 5.

T T T F F

6. 7. 8. 9. 10.

T F T F T

PART III — VARIANCE ANALYSIS (30 points) 1. Direct materials price variance = $5,800 Unfavorable (AQ × AP) – (AQ × SP) (116,000 × $0.85*) – (116,000 × $0.80) = $5,800 *AP = $98,600 ÷ 116,000 pounds = $0.85 2. Direct materials quantity variance = $3,680 Favorable (AQ × SP) – (SQ × SP) (116,000 × $0.80) – (120,600* × $0.80) = $3,680 *SQ = 40,200 × 3 pounds = 120,600 pounds 3. Direct labor price variance = $6,300 Unfavorable (AH × AR) – (AH × SR) (21,000 × $12.30*) – (21,000 × $12.00) = $6,300 *AR = $258,300 ÷ 21,000 hours = $12.30 per hour 4. Direct labor quantity variance = $10,800 Unfavorable (AH × SR) – (SH × SR) (21,000 × $12.00) – (20,100* × $12.00) = $10,800 *SH = 40,200 × ½ hour = 20,100 hours 5. Actual overhead – Overhead applied = Total overhead variance $88,000 – $90,450* = $2,450 Favorable *SH = 40,200 × $4.50 × ½ = $90,450 PART IV — CAPITAL BUDGETING (20 points) (a) Annual rate of return — $10,000 ÷ (($140,000 + $0) ÷ 2) = 14.3%. Accept (b) Cash payback period — $140,000 ÷ $45,000 = 3.11 years. Accept (c) Net present value — ($45,000 × 3.170) – $140,000 = $2,650 Accept (d) Profitability index — ($45,000 × 3.170) ÷ $140,000 = 1.02. Accept (e) Internal rate of return — $140,000 ÷ $45,000 = 3.111, or slightly less than 11%. Accept

AT6- 8

Test Bank for Managerial Accounting, Sixth Edition

PART V — BALANCED SCORECARD (10 points) A. It is used for performance measurement. B. Financial perspective; customer perspective; internal processes perspective; learning and growth perspective C. The balanced scorecard incorporates and links performance measurement and a company’s strategic goals. Objectives are set within each of the perspectives. It goes beyond financial issues, and considers qualitative issues as well.

Achievement Test 7: Chapters 13-14 Managerial Accounting, 6e

Name _________________________ Instructor ______________________ Section # _______ Date _________

Part

III

Total

Points

100

Score

PART I — MULTIPLE CHOICE (28 points) Instructions: Designate the best answer for each of the following questions. ____

1. Mason Mowers had inventory of $420,000 and $444,000 on December 31, 2013, and December 31, 2014, respectively. Cost of goods sold for 2014 was $2,613,600. For what time period does Mason Mowers hold its inventory, on average before selling it? a. 6.1 days b. 60.3 days c. 5.8 days d. 62 days

____

2. Which of the following statements is true? a. The price-earnings ratio is a long-term solvency ratio. b. High asset turnover is a sign of efficient use of assets. c. The payout ratio measures the profitability of the owners' investment. d. The acid-test ratio applies to manufacturing companies, but not to service or retailing businesses.

____

3. Fane Consulting sold office equipment which resulted in a loss on the sale. Which activities are affected by this transaction? a. Operating and investing activities b. Operating and financing activities c. Financing and investing activities d. Operating, financing, and investing activities

____

4. One major purpose of the statement of cash flows is to provide information about a. the firm's profitability. b. the firm's cash receipts and payments during a period. c. the firm's resources and claims against those resources. d. changes in retained earnings.

____

5. Cash provided by operating activities a. may be larger than net income. b. equals the change in cash for the year. c. summarizes cash flows relating to the purchase and sale of long-lived assets. d. decreases when long-term debt is repaid.

AT7- 2

Test Bank for Managerial Accounting, Sixth Edition

____

6. Traynham Produce reported equipment at $120,000, and $25,700 accumulated depreciation on its December 31, 2013, balance sheet. During 2014, the company purchased equipment costing $32,000 and sold equipment costing $15,000 (book value $11,300) for $2,000. On December 31, 2014, net equipment was $104,800. Using the indirect method, how much depreciation expense will be added in the operating activities sections of Trayhnam’s statement of cash flows for 2014? a. $32,200 b. $14,400 c. $17,800 d. $10,200

____

7. Which one of the following is a short-term liquidity ratio? a. Profit margin ratio b. Payout ratio c. Debt to total assets ratio d. Acid-test ratio

____

8. Team Gear reported sales of $854,000, total assets of $420,000, total stockholders' equity of $220,000, current assets of $125,000, current liabilities of $43,000, and cash of $50,400. In a common size balance sheet, at what amount would Cash be shown? a. 50.4% b. 12.0% c. 5.9% d. 40.3%

____

9. The use of common size financial statements is an example of a. ratio analysis. b. vertical analysis. c. liquidity analysis. d. horizontal analysis.

____ 10. How should the purchase of an office building by issuing long-term notes payable be reported? a. Cash outflow in the financing section of the statement of cash flows b. Cash outflow in the investing section of the statement of cash flows c. Cash outflow in the operating section of the statement of cash flows d. Noncash investing and financing activity ____ 11. For which of the following is a low ratio an indicator of good financial health? a. Asset turnover ratio b. Return on assets ratio c. Acid-test ratio d. Debt to total assets ratio ____ 12*. When using the direct method to compute cash provided by operations, a. income taxes paid may be ignored. b. depreciation expense is added to net income. c. decreases in inventory are added to total operating expenses to compute cash payments for operating expenses. d. increases in accounts receivable are subtracted from total sales to compute cash receipts from customers.

Achievement Test 7

AT7- 3

____ 13. Which item is not reported on the income statement? a. Unrealized gain on available-for-sale securities b. Extraordinary loss due to volcano eruption damage c. Gain from the disposal of a division d. Interest expense ____ 14. Which cash flow activities result in the same reported amounts if the statement of cash flows is prepared using the indirect method compared to the direct method? a. Investing and financing activities b. Operating and financing activities c. Financing and operating activities d. Operating, investing, and financing activities PART II — RATIO ANALYSIS (27 points) Financial statements for Advantage Corporation are presented below. ADVANTAGE CORPORATION Comparative Balance Sheet December 31 Assets Cash .............................................................................................. Accounts receivable (net) ............................................................... Inventory ........................................................................................ Land............................................................................................... Machinery ...................................................................................... Accumulated depreciation .............................................................. Total assets .............................................................................. Liabilities and Stockholders' Equity Accounts payable........................................................................... Long-term notes payable ............................................................... Common stock ($2 par value) ........................................................ Retained earnings .......................................................................... Total liabilities and stockholders' equity ....................................

2014

2013

8,000 64,000 40,000 24,000 124,000 (40,000) $220,000

$ 12,000 48,000 36,000 16,000 96,000 (28,000) $180,000

$ 40,000 70,000 80,000 30,000 $220,000

$32,000 58,000 80,000 10,000 $180,000

ADVANTAGE CORPORATION Income Statement For the year ended December 31, 2014 Sales ................................................................................................................ Less: Sales returns and allowances ................................................................. Net sales .......................................................................................................... Cost of goods sold ........................................................................................... Gross profit ...................................................................................................... Selling expenses .............................................................................................. Administrative expenses .................................................................................. Income before income taxes ............................................................................ Income tax expense ......................................................................................... Net income.......................................................................................................

$720,000 20,000 $700,000 550,000 150,000 42,000 28,000 80,000 24,000 $ 56,000

AT7- 4

Test Bank for Managerial Accounting, Sixth Edition

Additional Information: All sales were on account. Cash dividends were declared and paid during 2014. The market price of Advantage's common stock was $25 on December 31, 2013, and $28 on December 31, 2014. Instructions: Compute the indicated ratios at December 31, 2014, or for the year ended December 31, 2014, as appropriate. Report answers to one decimal place. 1. Return on assets

________________________________________________________ .

2. Acid-test ratio ___________________________________________________________ .

3. Profit margin ____________________________________________________________ .

4. Payout ratio _____________________________________________________________ .

5. Debt to total assets ratio ___________________________________________________ .

6. Asset turnover

__________________________________________________________ .

7. Receivables turnover ______________________________________________________ .

8. Price-earnings ratio

______________________________________________________ .

9. Current ratio ____________________________________________________________ .

Achievement Test 7

AT7- 5

PART III — STATEMENT OF CASH FLOWS CLASSIFICATIONS (10 points) Instructions: Each of the events below may have an effect on the statement of cash flows. Designate how the event should be reported within the statement of cash flows using the codes provided below. Codes may be used more than once, or not at all. Codes A. Investing activity; cash inflow B. Investing activity; cash outflow C. Financing activity; cash inflow D. Financing activity; cash outflow E. Operating activity; cash inflow F. Operating activity; cash outflow G. Noncash investing and financing activity

Events _____

1. Issued checks for the weekly payroll

_____

2. Paid an account payable

_____

3. Issued notes payable for cash

_____

4. Declared and paid a cash dividend

_____

5. Paid cash for a new delivery truck

_____

6. Purchased treasury stock for cash

_____

7. Paid cash for 12% interest in another company

_____

8. Received interest on a long-term note receivable

_____

9. Converted bonds payable into common stock

_____ 10. Received cash proceeds from the sale of equipment at book value

AT7- 6

Test Bank for Managerial Accounting, Sixth Edition

PART IV — IRREGULAR ITEMS (10 Points) Acousta, Inc. is located in Kansas. It provides the following results of transactions which occurred during the year: •

• • •

A hurricane damaged a warehouse destroying the inventory and the building. The cost of the building was $800,000, its book value was $480,000, and the insurance company reimbursed the company $390,000. Hurricanes are not common in Kansas. The company disposed on its Western division during the year. The loss during the year from the Western Division was $250,000. The company experienced a gain on disposal of the assets of the Western Division in the amount of $140,000. Income from continuing operations totaled $178,000 during the year. The company experienced an unrealized gain in value on its available-for-sale securities in the amount of $20,000.

The company’s income tax rate is 30%. Instructions: Prepare a partial income statement beginning with income from continuing operations for the year. For any transaction listed above that you do not include on the income statement, indicate where it will be reported.

Achievement Test 7

AT7- 7

PART V — STATEMENT OF CASH FLOWS — Indirect Method (25 Points) Condensed financial data for Back Yard Depot are given below. BACK YARD DEPOT Comparative Balance Sheet December 31 Assets Cash Accounts receivable Inventory Land Equipment Accumulated depreciation Total assets

2014 68,000 39,000 100,000 720,000 493,000 (40,000) $1,380,000 $

Liabilities and Stockholders' Equity Accounts payable $ 52,000 Accrued expenses payable 21,000 Bonds payable 575,000 Common stock 674,000 Retained earnings 58,000 Total liabilities and stockholders’ equity $1,380,000

2013 20,000 27,000 115,000 650,000 458,000 (20,000) $1,250,000 $

12,000 24,000 575,000 604,000 35,000 $1,250,000

Additional information for 2014: 1. A cash dividend of $15,000 was declared and paid during the year. 2. Additional equipment was purchased for cash. 3. Land was acquired by issuing common stock. Instructions: Prepare a statement of cash flows for 2014 using the indirect method.

AT7- 8

Test Bank for Managerial Accounting, Sixth Edition

Solutions — Achievement Test 7: Chapters 13-14 PART I — MULTIPLE CHOICE (28 points) 1. 2. 3. 4. 5.

A B A B A

6. 7. 8. 9. 10.

D D B B D

11. 12. 13. 14.

D D A D

PART II — RATIO ANALYSIS (27 points) 1. 2. 3. 4. 5. 6. 7. 8.

$56,000 ÷ [($220,000 + $180,000) ÷ 2] = 28.0% ($8,000 + $64,000) ÷ $40,000 = 1.8 : 1 $56,000 ÷ $700,000 = 8.0% Dividends: $10,000 + $56,000 - $30,000 = $36,000 $36,000 ÷ $56,000 = 64.3% ($40,000 + $70,000) ÷ $220,000 = 50.0% $700,000 ÷ (($220,000 + $180,000) ÷ 2) = 3.5 times $700,000 ÷ (($64,000 + $48,000) ÷ 2) = 12.5 times Number of shares: $80,000 ÷ $2 par value = 40,000 shares Earnings per share: $56,000 ÷ 40,000 = $1.40 per share $28 ÷ $1.40 = 20.0 times ($8,000 + $64,000 + $40,000) ÷ $40,000 = 2.8 : 1

PART III — STATEMENT OF CASH FLOWS CLASSIFICATIONS (10 points) 1. 2. 3. 4. 5.

F F C D B

6. 7. 8. 9. 10.

D B E G A

PART IV — IRREGULAR ITEMS — Indirect Method (10 points) Income from continuing operations Discontinued operations: Loss from operations of Western Division, net of $75,000 tax savings Gain on disposal of Western Division, net of $42,000 income taxes Income before extraordinary item Extraordinary loss due to hurricane, net of $27,000 tax savings Net income

$178,000 $(175,000) 98,000

(77,000) 101,000 (63,000) $ 38,000

The unrealized gain on available-for-sale securities in the amount of $20,000 is reported as part of comprehensive income.

Achievement Test 7

AT7- 9

PART V — STATEMENT OF CASH FLOWS — Indirect Method (25 points) Net income = $35,000 + NI - $15,000 = $58,000 Net income = $38,000 ADVANTAGE CORPORATION Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense Increase in accounts receivable Decrease in inventory Increase in accounts payable Decrease in accrued expenses payable Net cash provided by operating activities Cash flows from investing activities Purchase of equipment Net cash used by investing activities Cash flows from financing activities Payment of dividends Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period Noncash investing and financing activities Land was acquired by issuing common stock

$ 38,000

$20,000 (12,000) 15,000 40,000 (3,000)

60,000 98,000

(35,000) (35,000) (15,000) (15,000) 48,000 20,000 $68,000 $70,000

APPENDIX A TIME VALUE OF MONEY SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item

Item

6 7

C K

9. 10.

8 9

K K

29. 30. 31. 32. 33. 34.

5 5 5 5 5 5

AP AP AP C AP AP

35. 36. 37. 38. 39. 40.

5 6 6 6 6 6

AP AP C AP AP AP

59. 60. 61. 62. 63. 64.

6 6 6 6 6 6

AP AP AP AP AN AP

65. 66.

6 6

AP AP

True-False Statements 1. 2.

1 1

K K

3. 4.

2 3

K C

5. 6.

4 5

K K

7. 8.

Multiple Choice Questions 11. 12. 13. 14. 15. 16.

1 2 2 2 2 3

K C AP K K C

17. 18. 19. 20. 21. 22.

3 3 3 3 4 4

AP K AP K K C

23. 24. 25. 26. 27. 28.

4 4 5 5 5 5

C AP AP AP AP C

Exercises 41. 42. 43. 44. 45. 46.

2 2 2,3 2 2 3

AP AP AP AP AP AP

47. 48. 49. 50. 51. 52.

3 3 3 3 5 5

AP AP AP AP AP AP

53. 54. 55. 56. 57. 58.

5 5 5 5 5 5

AP AP AP AP AP AP

Completion Statements 67.

68.

69.

70.

A-2

Test Bank for Managerial Accounting, Sixth Edition

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

Item

11.

3. 12.

TF MC

13. 14.

MC MC

15. 41.

4. 16.

TF MC

17. 18.

MC MC

19. 20.

21.

22.

6. 25. 26.

TF MC MC

27. 28. 29.

MC MC MC

30. 31. 32.

36.

37. 38. 39.

MC MC MC

40. 59. 60.

70.

Type

Item

Type

Item

Learning Objective 1 MC Learning Objective 2 MC 42. Ex 44. Ex Ex 43. Ex 45. Ex LearningObjective 3 MC 43. Ex 47. Ex MC 46. Ex 48. Ex Learning Objective 4 MC 23. MC 24. MC Learning Objective 5 MC 33. MC 51. Ex MC 34. MC 52. Ex MC 35. MC 53. Ex Learning Objective 6 MC 61. Ex 64. Ex Ex 62. Ex 65. Ex Ex 63. Ex 66. Ex Learning Objective 7 C Learning Objective 8 Learning Objective 9

10.

Note: TF = True-False MC = Multiple Choice

Type

C = Completion Ex = Exercise

The chapter also contains one set of five Matching questions.

Item

Type

Item

Type

49. 50.

Ex Ex

67. 68.

C C

69.

54. 55. 56.

Ex Ex Ex

57. 58.

Ex Ex

Time Value of Money

A-3

CHAPTER LEARNING OBJECTIVES 1. Distinguish between simple and compound interest. Simple interest is computed on the principal only, while compound interest is computed on the principal and any interest earned that has not been withdrawn. 2. Solve for future value of a single amount. Prepare a time diagram of the problem. Identify the principal amount, the number of compounding periods, and the interest rate. Using the future value of 1 table, multiply the principal amount by the future value factor specified at the intersection of the number of periods and the interest rate. 3. Solve for future value of an annuity. Prepare a time diagram of the problem. Identify the amount of the periodic payments, the number of compounding periods, and the interest rate. Using the future value of an annuity of 1 table, multiply the amount of the payments by the future value factor specified at the intersection of the number of periods and interest rate. 4. Identify the variables fundamental to solving present value problems. The following three variables are fundamental to solving present value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the discount rate). 5. Solve for present value of a single amount. Prepare a time diagram of the problem. Identify the future amount, the number of discounting periods, and the discount (interest) rate. Using the present value of a single amount table, multiply the future amount by the present value factor specified at the intersection of the number of periods and the discount rate. 6. Solve for present value of an annuity. Prepare a time diagram of the problem. Identify the amount of future periodic receipts or payment (annuities), the number of discounting periods, and the discount (interest) rate. Using the present value of an annuity of 1 table, multiply the amount of the annuity by the present value factor specified at the intersection of the number of periods and the interest rate. 7. Compute the present value of notes and bonds. Determine the present value of the principal amount: Multiply the principal amount (a single future amount) by the present value factor (from the present value of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Determine the present value of the series of interest payments: Multiply the amount of the interest payment by the present value factor (from the present value of an annuity of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Add the present value of the principal amount to the present value of the interest payments to arrive at the present value of the note or bond. 8. Compute the present values in capital budgeting situations. Compute the present values of all cash inflows and all cash outflows related to the capital budgeting proposal (an investment-type decision.) If the net present value is positive accept the proposal (make the investment). If the net present value is negative, reject the proposal (do not make the investment). 9. Use a financial calculator to solve time value of money problems. Financial calculators can be used to solve the same and additional problems as those solved with time value of money tables. Enter into the financial calculator the amounts for all of the known elements of a time value of money problem (periods, interest rate, payments, future or present value), and it solves for the unknown element. Particularly useful situations involve interest rates and compounding periods not presented in the tables.

A-4

Test Bank for Managerial Accounting, Sixth Edition

TRUE-FALSE STATEMENTS 1.

Interest is the difference between the amount borrowed and the principal.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

Compound interest is computed on the principal and any interest earned that has not been paid or received.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

The future value of a single amount is the value at a future date of a given amount invested now, assuming compound interest.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity table.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

The process of determining the present value is referred to as discounting the future amount.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

A higher discount rate produces a higher present value.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

In computing the present value of an annuity, it is not necessary to know the number of discount periods.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

Many companies calculate the future value of the cash flows involved in an investment in evaluating long-term capital investments.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

The decision to make long-term capital investments is best evaluated using discounting techniques that recognize the time value of money.

Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Decision Analysis

10.

With a financial calculator, one can solve for any interest rate or for any number of periods in a time value of money problem.

Ans: T, LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Decision Analysis

Answers to True-False Statements Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1. 2.

F T

3. 4.

T F

5. 6.

T F

7. 8.

F F

9. 10.

Time Value of Money

A-5

MULTIPLE CHOICE QUESTIONS Note: Students will need future value and present value tables for some questions. 11.

Compound interest is the return on principal a. only. b. for one or more periods. c. plus interest for two or more periods. d. for one period.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

12.

The factor 1.0609 is taken from the 3% column and 2 periods row in a certain table. From what table is this factor taken? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1

Ans: a, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

13.

If $40,000 is put in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years? a. $32,878 b. $48,000 c. $48,620 d. $48,666

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

14.

The future value of 1 factor will always be a. equal to 1. b. greater than 1. c. less than 1. d. equal to the interest rate.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

15.

All of the following are necessary to compute the future value of a single amount except the a. interest rate. b. number of periods. c. principal. d. maturity value.

Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

16.

Which table has a factor of 1.00000 for 1 period at every interest rate? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1

Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

A-6 17.

Test Bank for Managerial Accounting, Sixth Edition McGoff Company deposits $20,000 in a fund at the end of each year for 5 years. The fund pays interest of 4% compounded annually. The balance in the fund at the end of 5 years is computed by multiplying a. $20,000 by the future value of 1 factor. b. $100,000 by 1.04. c. $100,000 by 1.20. d. $20,000 by the future value of an annuity factor.

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

18.

The future value of an annuity factor for 2 periods is equal to a. 1 plus the interest rate. b. 2 plus the interest rate. c. 2 minus the interest rate. d. 2.

Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Investment Decision

19.

If $30,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years? a. $48,867 b. $315,000 c. $377,337 d. $450,000

Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

20.

Which of the following is not necessary to know in computing the future value of an annuity? a. Amount of the periodic payments b. Interest rate c. Number of compounding periods d. Year the payments begin

Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Quantitative Methods

21.

In present value calculations, the process of determining the present value is called a. allocating. b. pricing. c. negotiating. d. discounting.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Quantitative Methods

22.

Present value is based on a. the dollar amount to be received. b. the length of time until the amount is received. c. the interest rate. d. all of these.

Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Quantitative Methods

Time Value of Money 23.

A-7

Which of the following accounting problems does not involve a present value calculation? a. The determination of the market price of a bond. b. The determination of the declining-balance depreciation expense. c. The determination of the amount to report for long-term notes payable. d. The determination of the amount to report for lease liability.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Quantitative Methods

24.

If you are able to earn an 8% rate of return, what amount would you need to invest to have $30,000 one year from now? a. $27,747 b. $27,778 c. $27,273 d. $29,700

Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

25.

If you are able to earn a 15% rate of return, what amount would you need to invest to have $15,000 one year from now? a. $14,852 b. $13,125 c. $12,750 d. $13,044

Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

26.

If the single amount of $2,000 is to be received in 2 years and discounted at 11%, its present value is a. $1,818. b. $1,623. c. $1,802. d. $2,754.

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

27.

If the single amount of $3,000 is to be received in 3 years and discounted at 6%, its present value is a. $2,519. b. $2,830. c. $2,600. d. $2,820.

Ans: a, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

28.

Which of the following discount rates will produce the smallest present value? a. 8% b. 9% c. 10% d. 4%

Ans: c, LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

A-8 29.

Test Bank for Managerial Accounting, Sixth Edition Suppose you have a winning lottery ticket and you are given the option of accepting $3,000,000 three years from now or taking the present value of the $5,000,000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is a. $2,518,860. b. $2,591,520. c. $2,670,000. d. $3,000,000.

Ans: a, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

30.

The amount you must deposit now in your savings account, paying 6% interest, in order to accumulate $6,000 for a down payment 5 years from now on a new car is a. $1,200. b. $4,484. c. $4,477. d. $4,200.

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

31.

The amount you must deposit now in your savings account, paying 5% interest, in order to accumulate $10,000 for your first tuition payment when you start college in 3 years is a. $8,500. b. $7,830. c. $8,638. d. $8,860.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

32.

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is a. increased. b. decreased. c. not changed. d. equal to the stated rate of interest.

Ans: a, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

33.

Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1 $120,000 Year 2 $200,000 Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment? a. $274,380 b. $165,290 c. $320,000 d. $160,000

Ans: a, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Time Value of Money 34.

A-9

If Sloane Joyner invests $10,514.81 now and she will receive $30,000 at the end of 11 years, what annual rate of interest will she be earning on her investment? a. 8% b. 8.5% c. 9% d. 10%

Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

35.

Suzy Douglas has been offered the opportunity of investing $73,540 now. The investment will earn 8% per year and at the end of its life will return $200,000 to Suzy. How many years must Suzy wait to receive the $200,000? a. 10 b. 11 c. 12 d. 13

Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

36.

Peter Johnson invests $35,516.80 now for a series of $5,000 annual returns beginning one year from now. Peter will earn 10% on the initial investment. How many annual payments will Peter receive? a. 10 b. 12 c. 13 d. 15

Ans: c, LO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

37.

In order to compute the present value of an annuity, it is necessary to know the 1. discount rate. 2. number of discount periods and the amount of the periodic payments or receipts. a. b. c. d.

1 2 both 1 and 2 something in addition to 1 and 2

Ans: c, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

38.

A $10,000, 6%, 5-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following periodinterest combinations? a. 5 interest periods, 6% interest b. 20 interest periods, 6% interest c. 20 interest periods, 1.5% interest d. 5 interest periods, 1.5% interest

Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

A - 10 39.

Test Bank for Managerial Accounting, Sixth Edition Hazel Company has just purchased equipment that requires annual payments of $40,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments? a. $114,199 b. $160,000 c. $46,975 d. $150,135

Ans: a, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

40.

Perdue Company has purchased equipment that requires annual payments of $30,000 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the equipment? a. $180,000 b. $123,342 c. $165,772 d. $115,650

Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: FSA

Answers to Multiple Choice Questions Item

11. 12. 13. 14. 15.

Ans .

c a d b d

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

16. 17. 18. 19. 20.

b d b c d

21. 22. 23. 24. 25.

d d b b d

26. 27. 28. 29. 30.

b a c a b

31. 32. 33. 34. 35.

c a a d d

36. 37. 38. 39. 40.

c c c a b

EXERCISES Ex. 41 Jose Reynolds deposited $10,000 in an account paying interest of 4% compounded annually. What amount will be in the account at the end of 4 years? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 41

(5 min.)

Use Table 1. $10,000 × 1.16986 (4 periods and 4%) = $11,698.60

Ex. 42 Wingate Company borrowed $90,000 on January 2, 2013. This amount plus accrued interest of 6% compounded annually will be repaid at the end of 3 years. What amount will Wingate repay at the end of the third year? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Time Value of Money Solution 42

A - 11

(5 min.)

Use Table 1. $90,000 × 1.19102 (3 periods and 6%) = $107,191.80

Ex. 43 Pleasant Company has decided to begin accumulating a fund for plant expansion. The company deposited $80,000 in a fund on January 2, 2009. Pleasant will also deposit $40,000 annually at the end of each year, starting in 2009. The fund pays interest at 4% compounded annually. What is the balance of the fund at the end of 2013 (after the 2013 deposit)? Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 43

(8 min.)

Use Tables 1 and 2. $80,000 × 1.21665 (5 periods and 4%; Table 1) = $ 97,332 $40,000 × 5.41632 (5 periods and 4%; Table 2) = 216,652.80 Fund Balance at 12-31-13 $313,984.80

Ex. 44 Mandy How plans to buy an automobile and can deposit $3,000 toward the purchase today. If the annual interest rate is 8%, how much can Mandy expect to have as a down payment in 3 years? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 44

(3 min.)

Use Table 1 $3,000 × 1.2597 = $3,779.10.

Ex. 45 Rob Honda plans to buy a home and can deposit $15,000 for the purchase today. If the annual interest rate is 8%, how much can Rob expect to have for a down payment in 5 years? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 45

(5 min.)

Use Table 1 $15,000 × 1.46933 = $22,039.95.

Ex. 46 Bill and Ellen Sweatt plan to invest $2,500 a year in an educational IRA for their granddaughter, Sloane Martin. They will make these deposits on January 2nd of each year. Bill and Ellen feel they can safely earn 8%. How much will be in this account on December 31 of the 18th year? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

A - 12

Test Bank for Managerial Accounting, Sixth Edition

Solution 46

(5 min.)

Use Table 2 $2,500 × 37.45024 = $93,625.60.

Ex. 47 Bill Cigarettes acquired a bad habit of smoking in high school. Bill spends approximately $70 a month or $840 a year on cigarettes. He is not concerned with health issues, but he is keenly aware of financial issues. Show Bill how much he would have at retirement in 20 years if he invested $840 a year at 8% instead of smoking. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 47

(5 min.)

Use Table 2 $840 × 45.76196 = $38,440.05.

Ex. 48 Robin Clark has a cell phone that she uses only for emergencies. The cost of the phone is $40 a month. The cellular company is offering unlimited nights and weekends for an additional $10 a month ($120 a year). Robin thinks it would be “cool” to have this benefit and after all $10 a month is not so much. Show Robin how much she will have in 20 years if she invests this $120 a year at 9% instead of accepting the unlimited nights and weekends offer. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 48

(5 min.)

Use Table 2 $120 × 51.16012 = $6,139.21.

Ex. 49 Lamb Company deposited $15,000 annually for 6 years in an account paying 5% interest compounded annually. What is the balance of the account at the end of the 6th year? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 49

(5 min.)

Use Table 2. $15,000 × 6.80191 (6 periods and 5%) = $102,028.65

Ex. 50 Martin Company issued $900,000, 10-year bonds and agreed to make annual sinking fund deposits of $72,000. The deposits are made at the end of each year to a fund paying 5% interest compounded annually. What amount will be in the sinking fund at the end of the 10 years? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Time Value of Money Solution 50

A - 13

(5 min.)

Use Table 2. $72,000 × 12.57789 (10 periods and 5%) = $905,608.08

Ex. 51 (a) (b)

What is the present value of $90,000 due 7 years from now, discounted at 9%? What is the present value of $150,000 due 5 years from now, discounted at 12%?

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 51

(8 min.)

Use Table 3. (a) $90,000 × .54703 (7 periods and 9%) = $49,232.70 (b) $150,000 × .56743 (5 periods and 12%) = $85,114.50

Ex. 52 Flower Company is considering an investment which will return a lump sum of $2,500,000 six years from now. What amount should Flower Company pay for this investment to earn an 11% return? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 52

(5 min.)

Use Table 3. $2,500,000 × .53464 (6 periods and 11%) = $1,336,600

Ex. 53 Chang Company earns 12% on an investment that will return $400,000 eleven years from now. What is the amount Chang Company should invest now to earn this rate of return? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 53

(5 min.)

Use Table 3. $400,000 × .28748 (11 periods and 12%) = $114,992

Ex. 54 If Kelly Cranford invests $11,970 now, she will receive $40,000 at the end of 14 years. What annual rate of return will Kelly earn on her investment? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 54

(5 min.)

Use Table 3. Answer: 9% $11,970 ÷ $40,000 = .29925

Read across the 14-period row in Table 3 to find .29925 in the 9% column.

A - 14

Test Bank for Managerial Accounting, Sixth Edition

Ex. 55 Luis Rodriguez wants to buy a car in 3 years. He will need $3,000 for a down payment. The annual interest rate is 9%. How much money must Luis invest today for the purchase? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 55

(5 min.)

Use Table 3 $3,000 × .77218 = $2,316.54.

Ex. 56 Amy Brown plans to buy a surround sound stereo system for $1,100 after 3 years. If the interest rate is 6%, how much money should Amy set aside today for the purchase? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 56

(5 min.)

Use Table 3 $1,100 × .83962 = $923.58.

Ex. 57 Compute the future value of $6,000 invested every year at an interest rate of 9%. You invest the money for 20 years with the first payment made at the end of the year. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 57

(5 min.)

Use Table 2 $6,000 × 51.16012 = $4306,960.72.

Ex. 58 Kim Black plans to buy a truck for $2,4000 after 3 years. If the interest rate is 6%, how much money should Kim set aside today for the purchase? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 58

(3 min.)

Use Table 3. $2,4000 × .83962 = $20,150.88

Ex. 59 DMV leases a building for 20 years. The lease requires 20 annual payments of $12,000 each, with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Time Value of Money Solution 59

A - 15

(3 min.)

Use Table 4. $12,000 + ($12,000  8.36492) = $112,379.04

Ex. 60 Frye Company is considering investing in an annuity contract that will return $50,000 annually at the end of each year for 20 years. What amount should Frye Company pay for this investment if it earns an 8% return? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 60

(3 min.)

Use Table 4. $50,000  9.81815 (20 periods and 8%) = $490,907.50

Ex. 61 Sarah Denny purchased an investment for $40,260.48. From this investment, she will receive $6,000 annually for the next 10 years starting one year from now. What rate of interest will Sarah be earning on her investment? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 61

(4 min.)

Use Table 4. Answer: 8% $40,260.48  $6,000 = 6.71008 (10 periods and 8%) = 6.71008

Ex. 62 You are purchasing a car for $25,000, and you obtain financing as follows: $2,500 down payment, 12% interest, semiannual payments over 5 years. Instructions Compute the payment you will make every 6 months. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 62

(3 min.)

Use Table 4. $25,000 cost – $2,500 down payment = $22,500 Payment  7.36009 = $22,500 Payment = $22,500/7.36009 = $3,057.03

A - 16

Test Bank for Managerial Accounting, Sixth Edition

Ex. 63 Frostmore Company is considering investing in an annuity contract that will return $50,000 annually at the end of each year for 20 years. What amount should Frostmore pay for this investment if it earns an 8% return? Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Solution 63

(5 min.)

Use Table 4 $50,000 × 9.81815 (20 periods and 8%) = $490,907.50.

Ex. 64 Cecilia Jeffries purchased an investment for $49,090.75. From this investment, she will receive $5,000 annually for the next 20 years starting one year from now. What rate of interest will Cecilia be earning on her investment? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 64

(5 min.)

Use Table 4. Answer: 8% ($49,090.75 ÷ $5,000) = 9.81815

Read across the 20-period row in Table 4 to find 9.81815 in the 8% column.

Ex. 65 Lucky Lou has just won the lottery and will receive an annual payment of $100,000 every year for the next 20 years. If the annual interest rate is 8%, what is the present value of the winnings? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 65

(5 min.)

Use Table 4 $100,000 × 9.81815 = $981,815.

Ex. 66 CVS leases a building for 20 years. The lease requires 20 annual payments of $10,000 each, with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

Solution 66

(5 min.)

Use Table 4 $10,000 + ($10,000 × 8.36492) = $93,649.20.

Time Value of Money

A - 17

COMPLETION STATEMENTS 67.

Payments or receipts of equal dollar amounts are referred to as __________________.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

68.

The _____________________ of an annuity is the sum of all the payments plus the accumulated compound interest on them.

69.

The process of determining the present value is referred to as _________________ the future amount.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

70.

If the present value of the cash ______________ exceeds the present value of the cash ________________, the investment should be rejected.

Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Answers to Completion Statements 67. 68. 69. 70.

annuities future value discounting payments, receipts

MATCHING 71.

Match the items below by entering the appropriate code letter in the space provided. A. Compound interest B. Future value of a single amount C. Future value of an annuity

D. Present value of a single amount E. Present value of an annuity

_____ 1. The value today of a future amount to be received or paid. _____ 2. The value at a future date of a given amount invested. _____ 3. Return on principal plus interest for two or more periods. _____ 4. Value today of a series of future amounts to be received or paid. _____ 5. The sum of all the payments or receipts plus the accumulated compound interest on them. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision

Answers to Matching 1. D 2. B 3. A

4. E 5. C

SOLUTIONS TO CASES FOR MANAGEMENT DECISION MAKING CASE 1 1.

A predetermined manufacturing overhead rate means that all manufacturing overhead costs, are allocated to each job based on a cost driver. Often this is done based on the expected volume of units produced. That is, products that are produced in higher volume are allocated more overhead. In the case of Wall Décor, in addition to volume sold, the base used is the cost of each print sold. That is, each print is allocated an amount of manufacturing overhead based on the cost of the print. The management of Wall Décor felt that this approach was logical because it was expected that more expensive prints would be more likely to be framed, and that the processing of framing requires the incurrence of considerably more overhead costs.

The advantages of using the cost of each print as the manufacturing overhead cost driver are that: (1) it is relatively inexpensive to implement in a business, (2) it is easy to explain, and (3) it keeps accounting records in compliance with GAAP. The primary disadvantage of using the cost of each print as the manufacturing overhead cost driver is that it may not result in a reasonable estimate of the cost of a job, batch, or service. That is, the assumed relationship—that the cost of the print is related to the amount of overhead cost incurred—may be incorrect. Many of the overhead costs incurred are the result of the framing and matting processes. However, the approach used by Wall Décor will result in a high overhead allocation to expensive prints, even if those prints are not framed. Furthermore, even if overhead costs are related to the cost of prints, and substantially more unframed prints are sold than framed prints, then an inordinate amount of overhead will still be allocated to the unframed prints simply because more of those are sold. By allocating overhead in an inappropriate fashion, product costs are distorted, and, as a consequence, management decision making is affected.

Weygandt, Managerial Accounting, 6/e, Solutions Manual

(For Instructor Use Only)

Case 1-1

CASE 1 (Continued) 3.

Under a job order costing system, a predetermined overhead rate must be used, since the cost of jobs must be calculated throughout the year (rather than just at year-end). This predetermined overhead rate is based on expected costs and the expected total amount of the cost driver. Therefore, the first thing that must be done is to compute the total expected overhead cost. This step was completed in the information provided by the accounting and production teams. It was determined to be $375,200 (Illustration CA 1-2). The second step is to determine the total expected cost of prints for the period. Unframed: 80,000 X $12 = $ 960,000 Steel-framed: 15,000 X $16 = 240,000 Wood-framed: 7,000 X $20 = 140,000 Total expected cost of prints $1,340,000 Once the total expected overhead cost and total expected print cost are known, the overhead rate can be determined. Predetermined overhead rate = $375,200 ÷ $1,340,000 = $0.28 This means that for every $1 of print cost, it is assumed that 28¢ of manufacturing overhead costs are consumed. For example, a $12 print will be assigned $3.36 ($12 X $0.28) of overhead.

Case 1-2

Weygandt, Managerial Accounting, 6/e, Solutions Manual

(For Instructor Use Only)

CASE 1 (Continued) 4.

Lance Armstrong Print

John Elway Steel-Framed Print, No Matting

Lambeau Field Wood-Framed Print, with Matting

$12.00

$16.00 4.00

$20.00 6.00 4.00

2.00

Direct material Print Frame and glass Matting Direct labor Picking ([10/60] X $12) Matting and framing ([20/60] X $21) ([30/60] X $21) Manufacturing overhead (0.28 X $12, $16, $20) Total product cost

(a) Unframed prints (b) Steel-framed prints (c) Wood-framed prints

7.00 10.50 3.36 $17.36

4.48 $33.48

5.60 $48.10

80,000 X $12 X $0.28 = 15,000 X $16 X $0.28 = 7,000 X $20 X $0.28 =

$268,800 67,200 39,200 $375,200

(d) As a percentage, unframed prints are being allocated 71.6 percent or ($268,800 ÷ $375,200) of the total overhead cost. 6.

No. Unframed prints are being allocated too much manufacturing overhead and framed prints too little manufacturing overhead. In designing the allocation approach, management had assumed that since the average cost of framed prints would exceed the average cost of unframed prints, more of the overhead would be allocated to framed prints. However, the cause of the apparent misallocation is that the volume of unframed prints is much greater than the volume of framed prints. This dramatic difference in volume far outweighs the difference in price. Therefore, unframed prints as a category end up absorbing the bulk of the overhead costs. This does not seem appropriate since a review of the manufacturing overhead costs shows that many of the overhead costs are associated with the framing and matting component of the production area, such as salaries, rent of factory equipment, and information systems.

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Case 1-3

CASE 1 (Continued) 7.

The high-volume unframed prints will be overcosted and the low-volume framed prints will be undercosted. This will occur because the category of prints that are sold most frequently will generally carry the greatest amount of overhead. For example, in reference to the solution to question 4, the framed and matted print is being allocated only $5.60, but an unframed print is allocated $3.36 of manufacturing overhead. This is not logical because a substantial portion of manufacturing overhead costs is dedicated to framing and matting prints. As a result, Wall Décor might end up selling framed prints at a price that is too low to cover its cost. Changing the way the overhead is allocated may improve the profit center’s performance.

Case 1-4

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CASE 2

ABC is beneficial when traditional overhead allocation results in inaccurate product costing. Wall Dêcor should investigate the product costing system because in order to sell the unframed prints the stores must mark them up only slightly above their cost, while the framed prints enjoy a large profit margin. Traditional overhead allocation often results in inappropriate overhead allocation when one product is a high-volume item (in this case, the unframed prints) and another product is a more complex, low-volume item (in this case, the framed prints). Another indication that ABC would be beneficial occurs when company managers have begun to develop their own costing systems because they have lost faith in the traditional system. In this case, the production manager does not have faith in the company’s costing system and instead has developed her own costing system.

The activity-based overhead rates can be calculated by dividing the estimated overhead associated with each activity by the expected use of the cost driver.

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Case 2-1

CASE 2 (Continued) Cost Driver

Estimated Overhead

Expected Use of Cost Driver

Picking prints

Number of prints

$ 30,600

(80,000 + 15,000 + 7,000) = 102,000 prints

$0.30 per pick

Inventory selection and management

Number of components: Print (1) Print and frame (2) Print, mat, and frame (3)

$ 91,700

Prints: 80,000 components Print and frame: 15,000 X 2 = 30,000 components Print, mat, and frame: 7,000 X 3 = 21,000 components Total = 131,000 components

$0.70 per component

Website optimization Unframed

Number of prints at capacity $ 25,800

Unframed prints— 100,000 print capacity

$0.258 per print

$103,200

Framed or framed and matted prints— 25,000 capacity

$4.128 per framed or framed and matted print

$123,900

Print and frame: 16,000 X 2 = 32,000 components at capacity Print, mat, and frame: 9,000 X 3 = 27,000 components at capacity Total = 59,000 components

$2.10 per component

Activity

Framed

Framing and matting

Number of components at capacity

Activity-Based Overhead Rate

$375,200

Case 2-2

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CASE 2 (Continued) 3. Description Direct materials Print Frame and glass Matting Total Direct labor Picking ([10/60] X $12) Matting and framing ([20/60] X $21) ([30/60] X $21) Total Manufacturing overhead by activity Picking prints @ $0.30 per pick Inventory selection and management @ $0.70 per component (1, 2, and 3) Website optimization @ $0.258 per print @ $4.128 per framed or framed and matted Framing and matting @ $2.10 per component Total Total product cost

Lance Armstrong Print

John Elway Steel-Framed Print, No Matting

Lambeau Field Wood-Framed Print, with Matting

$12.00 000.00 12.00

$16.00 4.00 000.00 20.00

$20.00 6.00 4.00 30.00

2.00

000.00 2.00

7.00 000.00 9.00

10.50 12.50

0.30

0.70

1.40

2.10

0.258

0.00

4.128

000 .00 1.258

4.200 10.028

6.300 12.828

$15.258

$39.028

$55.328

In Case 1 the high-volume prints consumed the greatest amount of overhead because it was assumed all manufacturing overhead was driven by print cost combined with sales volume, regardless of the mix of unframed prints and framed prints. Since far more unframed prints were sold, most of the overhead was allocated to unframed prints.

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Case 2-3

CASE 2 (Continued) Under ABC, this changes. Although still based on estimates, ABC first provides an analysis of how resources were consumed by activity. Next, in the second step of allocation, activity costs are allocated to unframed prints and framed prints using different types of drivers. These drivers are designed to model how manufacturing overhead resources were consumed at the product level. For example, the last activity (framing and matting) is allocated to framed items only. The reason is that unframed prints do not consume framing and matting equipment, space, and general overhead resources. The primary implication for the company is that the product costs will be more accurate, which will result in better product pricing and more accurate evaluation of the relative profitability of the products. 5.

There are some costs that are very difficult to allocate because it is difficult to determine a meaningful cost driver that captures differences across products. Time and resources dedicated to web optimization for an integrated system fall into this category. In this case, in order to reflect the significant difference between the amount of time spent on web optimization by the IT staff on unframed prints versus framed prints, the total cost of web optimization was first split between these two categories. Time of IT staff was used to subdivide the cost by resource consumption between unframed prints and framed prints. This allocation, although it may appear simple, is sometimes very difficult to accomplish in the real world. Once identified, management can see that much of IT’s resources are being consumed by framed and matted items.

The advantage of ABC versus traditional predetermined overhead allocation is that ABC allocates costs based on the activities that generate those costs. This results in more accurate product costing. By breaking costs down into more refined categories, product costing will be even more accurate. However, having more categories is costly from a record-keeping perspective. Increasingly, there is an effort by ABC consultants to “keep it simple” so as to reduce the cost of implementing ABC. It is believed that many of the benefits of ABC can be attained with relatively simple systems.

Case 2-4

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CASE 2 (Continued) 7.

By allocating fixed overhead costs using operating capacity as the basis, management can see how much, approximately, each item costs at capacity. Although this is somewhat arbitrary, it does provide a benchmark for comparability and improvement. The advantage is that management can manage costs based on a standard. If expected sales volume is used to allocate fixed overhead costs, then the allocation rate will fluctuate as sales fluctuate. This reduces the usefulness of analysis across years and makes planning very difficult. In fact, it can result in a vicious cycle: As volume decreases, the fixed cost per unit goes up, so product cost goes up. In response, management raises prices (because the product cost has risen). When the price rises, volume falls even further, and the cycle starts over again. Keep in mind that costs must be controlled at the activity level. Therefore, an activity cost at a standard is what is necessary for measurement, resource allocation, and evaluation. By allocating based on capacity these fluctuations can be eliminated (as long as capacity doesn’t vary). Therefore, the use of operating capacity for allocating fixed overhead costs can result in better decision making.

(a) The allocation of the overhead to the three product categories would be as follows: Unframed prints Activity Cost Pool Picking prints Inventory selection management Website optimization Framing and matting Total

Expected Use of Cost Driver

Overhead Rate

Cost Assigned

80,000 80,000 80,000 na

$0.30 0.70 0.258

$ 24,000 56,000 20,640 000,00 0 $100,640

Expected Use of Cost Driver

Overhead Rate

Cost Assigned

15,000 30,000 15,000 30,000

$0.300 0.700 4.1280 2.10

Steel-framed prints Activity Cost Pool Picking prints Inventory selection management Website optimization Framing and matting Total

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4,500 21,000 61,920 63,000 $150,420

Case 2-5

CASE 2 (Continued) Wood-framed prints with matting Activity Cost Pool Picking prints Inventory selection management Website optimization Framing and matting Total

Expected Use of Cost Driver

Overhead Rate

Cost Assigned

7,000 21,000 7,000 21,000

$0.300 0.700 4.128 2.10

$ 2,100 14,700 28,896 44,100 $89,796

(b) The total overhead allocated was $340,856, ($100,640 + $150,420 + $89,796). This is $34,344 less than the total overhead of $375,200. The overhead rates for website optimization and framing and matting were both determined using the capacity amount rather than the expected sales amount. The reasons for this were discussed earlier. Since expected/ actual sales were less than capacity, the overhead is underapplied. This cost of $34,344 can be viewed as the cost of operating at less than capacity. In order to reduce this amount, management should either figure out ways to increase sales or reduce fixed costs by shifting resources to other products.

Case 2-6

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CASE 3

Several different views are likely to surface. Below are representative responses: Now you have a much better understanding of Mr. Burns’ situation and realize that finding a good solution rests on setting the transfer price so that: (1) Wall Décor generates the highest rate of return possible, and (2) the transfer price to each store must be reasonable according to each store’s external market conditions. Essentially, Mr. Burns must keep everyone focused on the success of the overall company. His biggest fear is that the business units will take a narrow focus and be concerned only about their individual situation and thus hurt the overall company profits. Mr. Burns’ greatest problem is to keep Wall Décor and the individual stores working together to maximize the profit of the overall company and remain innovative. If not, Wall Décor will seek to sell to competitors in an attempt to increase its return on investment. The result is that store competitors will be able to sell high-quality framed print items and increase competitive pressures on Greetings stores. If the price of framed prints gets too high, store managers will seek different suppliers. This could hurt Wall Décor because it could be left with excess capacity. Setting the transfer price so both parties to the transaction win is a challenging task. If leadership continues to use a straight cost-plus approach, it may lose store sales, and Wall Décor will not meet its required rate of return. If leadership sets the transfer price at market price, it may also lose store sales because of a lost competitive position. Thus, the transfer price must be flexible, and all must benefit and earn a fair return.

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Case 3-1

CASE 3 (Continued) 2.

(a) Profits under original transfer price Unframed Print

Steel-framed, no matting

Total profit per unit Selling price Wall Décor cost Total profit per unit

$21.00 17.36 $ 3.64

$50.00 33.48 $16.52

$70.00 48.10 $21.90

Profit to store per unit Selling price Wall Décor transfer Profit to store per unit

$21.000 20.832* $ 0.168

$50.000 ** 40.176** $ 9.824

$70.000 *** 57.720*** $12.280

$3.640 0.168 $3.472

$16.520 9.824 $ 6.696

$21.900 12.280 $ 9.620

$3.472 X 80,000 $277,760

$6.696 X 15,000 $100,440

$9.620 X 7,000 $ 67,340

$0.168

$9.824

$12.280

4.000 $4.168 X 80,000 $333,440

8.000 $17.824 X 15,000 $267,360

8.000 $20.280 X 7,000 $141,960

Profit to Wall Décor per unit Total profit Profit to store Profit to Wall Décor per unit Total profit to Wall Décor Profit per unit Volume Wall Décor profits Total profit to stores Store item profits Store profits on related sales items Total Volume Store profits

Wood-framed, with matting

Total profits *$ 17.36 X 1.20 $20.832

Case 3-2

$ 445,540

742,760 $1,188,300

**$ 33.48 X 1.20 $ 40.176

***$48.10 X 1.20 $57.72

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CASE 3 (Continued) (b)

Profits under proposed transfer price Print

Steel-framed, no matting

Wood-framed, with matting

Total profit per unit Selling price Wall Décor cost Per unit

$20.000 15.258 $ 4.742

$50.000 39.028 $10.972

$70.000 55.328 $14.672

Profit to store per unit Selling price Transfer price Per unit

$20.000 18.577* $ 1.423

$50.000 44.514** $ 5.486

$70.000 62.664*** $ 7.336

Profit to Wall Décor per unit Total profit Profit to store per unit Per unit

$4.742 1.423 $3.319

$10.972 5.486 $ 5.486

$14.672 7.336 $ 7.336

$3.319 X 100,000 $331,900

$5.486 X 15,000 $ 82,290

$7.336 X 7,000 $ 51,352

$1.423

$5.486

$7.336

4.000 $5.423 X 100,000 $542,300

8.000 $13.486 X 15,000 $202,290

8.000 $15.336 X 7,000 $107,352

Total profit to Wall Décor Profit per unit Volume Wall Décor profits Total profit to stores per unit Store item profit per unit Store profits on related sales items Total Volume Total profit on stores Total profit

Profit Cost Transfer price

* $ 4.742 X 0.70 $ 3.319 15.258 $18.577

** $10.972 X 0.50 $ 5.486 39.028 $44.514

$ 465,542

851,942 $1,317,484

*** $14.672 X 0.50 $ 7.336 55.328 $62.664

(c)

Greetings stores Wall Décor

Company overall

New transfer pricing profits Traditional transfer pricing profits Benefits of new transfer pricing policy

$851,942 742,760 $109,182

$1,317,484 1,188,300 $ 129,184

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$465,542 445,540 $ 20,002

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Case 3-3

CASE 3 (Continued) The analysis points to an improvement in overall company performance of $129,184. The benefits come from Greetings stores increasing the volume of business in print items and the associated profits from selling related items. In addition, each profit center is happy because profits improve for stores by $109,182 and for Wall Décor by $20,002. 3.

• Profits are defined as the store selling price less the ABC cost. This is a necessary and useful clarifying definition. • Stores do not share the profits from related products with Wall Décor. This could be potentially harmful. Since stores don’t have to share the profits on these related products with Wall Décor, the stores might decide to sell the prints as “loss leaders.” While this would reduce the stores’ profit on prints (as well as Wall Décor’s), it would increase the sale of related products, which the stores would benefit from. In this way, Wall Décor would actually be subsidizing the stores because it would be absorbing part of the loss on prints. The last term below, which restricts the stores’ ability to change prices, would appear to mitigate this problem; however, as noted below, that part of the agreement is not particularly desirable either. • Wall Décor will not seek to sell unframed and framed print items through anyone other than Greetings. This is potentially harmful, but also, given the profit-sharing agreement, probably an unnecessary restriction. In most circumstances a company should not force a supplying division to sell to another division rather than to outside parties. However, given the nature of Wall Décor, and the potential competitive advantage it represents for the company as a whole, it might make sense to restrict its ability to sell to competitors. However, an economic incentive should be provided to ensure that Wall Décor doesn’t want to sell to outsiders. The opportunity to share in the profits of the store probably does act as an incentive to dissuade Wall Décor from selling to competitors. • Wall Décor will work to decrease costs. This is an ineffective term, as well as unnecessary under the circumstances. Simply telling a division that it must work to decrease costs is not effective. However, in this case, since Wall Décor will share in the stores’ profits, it has an incentive to decrease costs. Therefore, it would appear that this term was unnecessary.

Case 3-4

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CASE 3 (Continued) • Greetings stores will not seek suppliers of prints other than Wall Décor. It is not unusual for a company to require its divisions to purchase goods internally as long as the selling division provides goods of comparable quality and price to those available from outside suppliers. • Stores will keep the selling price of framed prints as it was before the change in transfer price. On average, stores will decrease the selling price of unframed prints to $20, with an expected increase in volume to 100,000 prints. This reduces the flexibility of the individual stores to make decisions based on local market conditions. Therefore, it might be potentially harmful to the company.

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Case 3-5

CASE 4

Present value of future cash flows: Cost of equipment (zero residual value) ........................................................... Cost of ink and paper supplies (purchased immediately) ................................................... Annual cash flow savings for Wall Décor ($175,000 X 3.60478)* ......................................................... Annual additional store cash flow from increased sales ($100,000 X 3.60478)........................................................... Sale of ink and paper supplies at end of 5 years ($50,000 X 0.56743)** .......................................................... Net present value ...................................................................

($800,000) (100,000) ( 630,837) ( 360,478) ( 28,372) ($119,687)

**Present value of an annuity for 5 years at 12% **Present value of 1 for 5 years at 12% The analysis shows that if Mr. Burns approves the purchase of equipment, the net present value of the project is $119,687. This suggests that the project should be undertaken. 2.

Computation of revised amounts:

Cost of equipment (zero residual value) Cost of ink and paper supplies Annual cash flow savings from Wall Décor Annual additional store cash inflow from increased sales Sale of ink and paper supplies at end of 5 years

Original Amounts ($800,000) (100,000) ( 175,000)

Revised Amounts ($880,000) (110,000) ( 157,500)

( 100,000)

(

90,000)

(

45,000)

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Case 4-1

CASE 4 (Continued) Present value of future cash flows, revised amounts: Cost of equipment Cost of ink and paper supplies (purchased immediately) ... Annual cash flow savings for Wall Décor ($157,500 X 3.60478) ........................................................... Annual additional store cash flow from sales ($90,000 X 3.60478) ............................................................. Sale of ink and paper supplies at end of 5 years ($45,000 X 0.56743) ............................................................. Net present value ....................................................................

($880,000) (110,000) ( 567,753) ( 324,430) ( 25,534) ($ 72,283)

The analysis shows that if Mr. Burns approves the purchase of equipment, the net present value of the project is a negative $72,283. This suggests that under these assumptions the project should not be undertaken. 3.

Analysis of flaws and risks (a) The analysis and decision framework may be flawed in its time period assumption. The analysis is based on a five-year time period. Notice the projected cost savings and additional profits are based on five-year projections. Implicit is that it will require five years for the competition to match the cost advantage of printing on demand. It might be naïve to think that it will take five years for the competition to match and generate whatever advantage is created by this new approach. Competition will likely be able to purchase the same equipment and licensing rights. If it becomes clear that this strategy is working well for Greetings, the competitors will be quick to follow suit. (b) Quality must be assured. The analysis assumed that the “in-store” printing process can match the supply and quality of traditional prints. Selling a poor quality product to valued customers could result in lost business. (c) What about new prints that become popular? Can reasonably priced license agreements be secured, on a timely basis, for new popular prints? (d) Will acquiring a license right become a bidding war?

Case 4-2

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CASE 4 (Continued) (e) The analysis assumes that the expanded market will turn additional profits with the purchase of related products. Although this may be reasonable, it is only an educated guess. Students will likely develop additional issues. 4.

Memo: The one-page memo should be divided into two sections: (a) Conclusion and support (b) Suggestions Conclusion Our initial analysis points to a decision to purchase the printing-ondemand equipment. This option enables the Greetings stores to maintain and build customer relationships. The projections provided point to a net present value of $119,687. By not purchasing the equipment, profits will decline during this period. Any capital budgeting decision must rely on estimates and assumptions. To test the sensitivity of the assumptions used, I redid the analysis assuming costs would be 10% higher than projected, and cash inflows would be 10% lower. Under these more conservative assumptions the project’s net present value is a negative $72,283. While every effort was made to arrive at the most accurate estimates possible, it is not unusual for estimates to differ from actual results by as much as 10%. Other concerns merit further investigation before a decision is made. First, this analysis was based on an assumption that the project will provide a competitive advantage for a five-year period. This may prove to be too optimistic. If the project is successful, the competition will certainly adopt these same techniques as quickly as possible. It may be that a competitive advantage is provided for only a three-year period. In addition, a market test should be performed to ensure that the quality of these prints is acceptable to the target customers. Also, licensing arrangements need to be pursued further to ensure that popular prints can be obtained at a reasonable price, and that contract terms can be negotiated to ensure that licensing fees stay relatively constant during this period.

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Case 4-3

CASE 4 (Continued) Suggestions Purchasing equipment should be only one component of the decision process. I suggest you challenge the stores and Wall Décor to shorten the time frame to achieve a positive net present value. The target level of success would be to generate enough additional business to generate a positive net present value in a time frame of approximately three years. Furthermore, the stores and Wall Décor should try to find additional applications for the new equipment purchased. I also suggest that the decision to purchase the equipment be used as a pilot study. Lessons learned from this project can likely be extended to additional products and services. The key is for management to build a compensation structure that encourages innovation in expanding product-mix offerings within the same store space. For example, the computer used to link the stores to Wall Décor may also be used to help sell a specialty line of reading material for senior citizens. Be assured that the cost advantage created by producing prints on demand will be matched by the competition. The only question is how quickly it will act.

Case 4-4

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CASE 5

Yes. All organizations should set goals. A large-scale project such as a professional rodeo may not make a profit in the first year. Based on ticket sales, the Auburn Circular Club Pro Rodeo Roundup appears to be a popular attraction. Therefore, if the club uses management accounting techniques successfully to plan, control, and monitor activities, the project should produce a profit in the future. Civic organizations often give back to the community in a variety of ways, such as providing scholarships, making donations to worthy causes, and volunteering. Auburn Circular Club wants to give back to the community by providing entertainment to the public through an enjoyable three-day family event. Funds raised by the rodeo will then be filtered back into the community via traditional channels. By sponsoring the rodeo, Auburn Circular Club gains exposure through public radio announcements, fliers, and advertising posters throughout the community. Patrons will look forward to next year’s entertainment, will tell others, and ticket sales will increase. Patrons may also seek to join such a civic-minded organization and support future fund-raising efforts sponsored by the club.

Like profit-seeking organizations, nonprofit organizations should make sure an activity is worth the required investment of time, effort, and monetary resources. Jonathan’s comment implies that the rodeo is expected to fulfill the organization’s goals and objectives.

Yes. Jonathan views this project as a capital investment for the organization—not the purchase of tangible, long-term assets—but a project that will have a positive impact on the organization over a long term. In other words, even though the rodeo reported a loss in its first year, Jonathan appears to believe the rodeo will be profitable in the future and that the community is well served by the club providing a highquality, family-oriented event.

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Case 5-1

CASE 5 (Continued) 4.

Within a relevant range, most of these costs are fixed costs. In other words, variable costs would be a very small percentage of the costs in any of these categories.

The high and low levels of activity are 96 contestants Saturday night and 68 contestants on Friday. The catering costs at these two levels are $1,243 and $998 respectively. The difference in catering cost is $245 or ($1,243 – $998). The difference in contestants is 28 or (96 – 68). Therefore, the variable cost for catering is $8.75 per contestant ($245 ÷ 28). The fixed cost is determined by subtracting the variable cost at either level from the total cost at the corresponding level as follows:

Total cost Less: Variable costs 96 contestants X $8.75 68 contestants X $8.75 Total fixed costs 6.

Activity Level High Low $1,243 $ 998 840 $ 403

595 $ 403

Some suggestions include: • Promote ticket sales for the Friday and Sunday shows. • Consider renting additional bleachers. • Include additional entertainment such as a rock or country music star to attract individuals who did not attend the first annual event. • Increase revenue by having members of Auburn Circular Club provide concessions to the public instead of outsourcing concessions to a local youth organization. • Increase revenue by raising ticket prices. • Include group rates to businesses and organizations. • Decrease costs by bartering with a local hotel for free accommodations for stock contractors in exchange for a free sponsorship.

Case 5-2

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CASE 5 (Continued) • Decrease costs by exchanging free tickets with a local farmer for hay. • Negotiate with a local insurance agent for a lower rate. 7.

To determine the break-even point in dollars, we need to determine fixed costs and the contribution margin ratio. Fixed costs are estimated to be $51,000 and variable costs at 4% of total revenue. The contribution margin ratio is therefore 96%. The formula to compute the break-even point in dollars is therefore as follows: Fixed costs Break-even point = = $51,000 = $53,125 in dollars Contribution margin ratio 0.96 We then subtract from the break-even point in dollars the contribution from sponsors to determine a break-even point in dollars from ticket sales. Break-even point in dollars ...................................................... Less: Contributions from sponsors ........................................ Amount needed from ticket sales to break even ....................

$53,125 25,600 $27,525

(a) To determine the dollar volume of ticket sales needed in order to earn a target profit of $6,000, we use the following formula: Fixed costs + Target profit = $51,000 + $6,000 = $59,375 Contribution margin ratio 0.96 We then subtract contributions from sponsors to arrive at the required ticket sales in dollars. Amount needed to earn $6,000 ........................................ Less: Contributions from sponsors ............................... Amount needed from ticket sales....................................

$59,375 25,600 $33,775

(b) We follow the same procedure as in (a), using the same formula: Fixed costs + Target profit = $51,000 + $12,000 = $65,625 Contribution margin ratio 0.96

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Case 5-3

CASE 5 (Continued) We then subtract contributions from sponsors to arrive at the required ticket sales in dollars. Amount needed to earn $12,000..................................... Less: Contributions from sponsors .............................. Amount needed from ticket sales .................................. 9.

$65,625 25,600 $40,025

At a target profit of $6,000, the rodeo will need to generate $59,375 in total receipts. Of these total receipts, $25,600 are expected to be contributions from sponsors. The receipts from ticket sales are computed as follows: Amount needed to earn $6,000 ........................................... Less: Contributions from sponsors .................................. Ticket revenues ....................................................................

$59,375 25,600 $33,775

We then compute the average cost per ticket using first-year data as follows: Average cost per ticket =

Ticket revenue = $28,971 = $8.70 Number in attendance 3,330*

*1,663 + 898 + 769 Given an average price of $8.70, it will take 3,882 tickets over the three days or 1,294 tickets per day as shown below. Ticket revenues = $33,775 = 3,882 for three days or 1,294 per day Average cost per ticket $8.70 Since the stands were able to hold the Saturday night audience of 1,663, the facilities appear adequate.

Case 5-4

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CASE 5 (Continued) 10.

Receipts Contributions from sponsors ........................ Receipts from ticket sales (from 8.) .............. Total cash receipts ......................................... Expenses Livestock contractor ...................................... Prize money .................................................... Sponsor signs for arena (1,900 X $1.164*) ... Insurance ........................................................ Ticket printing ($1,050 X .50) ......................... Sanctioning fees............................................. Entertainment ................................................. Judging fees ................................................... Rent ................................................................. Utilities ............................................................ Sand for arena ................................................ Miscellaneous fixed costs ............................. Total expenses ............................................... Net income ......................................................

$25,600 40,025 $65,625 $26,000 21,000 2,212 600 525 925 859 750 600 300 300 100 54,171 $11,454

*$25,600 ÷ 22,000 11.

The costs associated with Shelley’s rodeo apparel are not relevant costs. First, even if these were costs incurred by the rodeo, they would be considered sunk costs, which are never relevant. Second, they are personal costs of Shelley and not relevant to the rodeo.

12.

You should encourage the committee to accept the offer of the tent and Shady’s Bar-B-Q catering. Because there is room for additional banners in the arena, the only relevant costs to consider here are the potential savings of $3,341 for contestant hospitality and the cost of the two banners totaling $96. Even if there was no space in the arena for additional banners, the Committee should consider accepting the tent and the Bar-B-Q meal offered by Shady’s and consider eliminating other sponsors. A better alternative, however, would be to extend the arena in order to add more signs or provide another way to advertise sponsors. For example, include them in radio and television advertising. The cost is an opportunity cost; i.e., the foregone benefit ($3,341 cost savings) that would be lost from not accepting Shady’s and the Fun Shop’s offers.

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Case 5-5

CASE 6 SWEATS GALORE, INC. 1.

Yes, it is important for Michael to stipulate certain criteria during planning for his new business. Michael is wise to set criteria other than simply making a profit. First, Michael wants to do something he enjoys. Because he has prior experience in a related industry and he has envisioned having his own business he will be better prepared to handle the responsibilities of this new business. Michael’s positive attitude will be reflected in the way he handles employees and customers. Michael’s business will probably come from customers such as university groups, church groups, civic organizations, youth athletic clubs, and secondary school groups. Because Michael is offering quality shirts at a modest price, he will, in effect, be contributing to the community. In addition, as Michael’s company becomes more profitable he will give back to the community through cash donations to some of these groups. Michael’s foresight (wanting to grow and be more successful every year) will encourage him to make decisions that will profit the business not just in the short run, but also in the long run.

The difference in the high and low levels of activity is 6,000 units (8,000 units in September less 2,000 units in January). The difference in utility costs is $300 ($1,400 – $1,100). Therefore, estimated variable cost per unit is $.05 and total fixed costs are $1,000 computed as follows: $300 ÷ 6,000 = $.05 $1,400 – ($.05 X 8,000) = $1,000 The difference in maintenance costs is $198 ($1,914 – $1,716). Therefore, estimated variable cost per unit is $.033 and total fixed costs are $1,650 computed as follows: $198 ÷ 6,000 = $.033 $1,914 – ($.033 X 8,000) = $1,650 If the company has sales of $12,000, the units sold total 750 ($12,000 ÷ $16). Therefore, total variable costs relating to utilities and maintenance for 750 shirts total $62.25 computed as follows: 750 shirts X $.05 = $37.50 750 shirts X $.033 = $24.75 If the company has sales of $12,000, the total fixed costs would be $2,650 ($1,000 + $1,650).

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Case 6-1

CASE 6 (Continued) 3. SWEATS GALORE, INC. Sales Budget For the Year Ending December 31, 2013 Quarter Expected unit sales Unit selling price Budgeted sales revenue

1 8,000 X $16 $128,000

2 10,000 X $16 $160,000

3 20,000 X $16 $320,000

4 12,000 X $16 $192,000

Year 50,000 X $16 $800,000

4. SWEATS GALORE, INC. Schedule of Expected Collections from Customers For the Year Ending December 31, 2013 Quarter Accounts receivable 1/1/13 First quarter ($128,000) Second quarter ($160,000) Third quarter ($320,000) Fourth quarter ($192,000) Total collections

1 –0– $89,600

$89,600

$ 38,400 112,000

$150,400

$ 48,000 224,000

$ 96,000 134,400 $230,400

$272,000

5. SWEATS GALORE, INC. Shirt Purchases Budget For the Year Ending December 31, 2013 Quarter Shirts to be silk-screened Plus: Desired ending inventory Total shirts required Less: Beginning inventory Total shirts needed Cost per shirt* Total cost of shirt purchases

1 8,000 2,500 10,500 –0– 10,500 $10 $105,000

2 10,000 5,000 15,000 2,500 12,500 $10 $125,000

3 20,000 3,000 23,000 5,000 18,000 $10 $180,000

4 12,000 4,500 16,500 3,000 13,500 $10 $135,000

Year 50,000 4,500 54,500 –0– 54,500 $10 $545,000

*$1,440 ÷ 144 (a gross)

Case 6-2

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CASE 6 (Continued)

6. SWEATS GALORE, INC. Schedule of Expected Payments for Purchases For the Year Ending December 31, 2013

Account payable 1/1/13 First quarter ($105,000) Second quarter ($125,000) Third quarter ($180,000) Fourth quarter ($135,000) Total payments

1 –0– $42,000

$42,000

Quarter 3

$ 63,000 50,000

$ 75,000 72,000

$113,000

$147,000

$108,000 54,000 $162,000

7. SWEATS GALORE, INC. Silk-Screen Labor Budget For the Year Ending December 31, 2013

Units to be produced Silk-screen labor hours per unit* Total required silk-screen labor hours Silk-screen labor cost per hour** Total silk-screen labor cost

1 8,000 .12 hrs

Quarter 2 3 10,000 20,000 .12 hrs .12 hrs

4 12,000 .12 hrs

Year 50,000 .12 hrs

960 $12 $11,520

1,200 $12 $14,400

1,440 $12 $17,280

6,000 $12 $72,000

2,400 $12 $28,800

*(6 workers X 20 hrs. X 50 weeks) ÷ 50,000 shirts **$72,000 ÷ (6 X 20 hrs. X 50)

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Case 6-3

CASE 6 (Continued) 8.

SWEATS GALORE, INC. Selling and Administrative Expenses Budget For the Year Ending December 31, 2013 Quarter 1

Variable expenses Sales commissions $12,800 Total variable expenses 12,800 Fixed expenses Advertising [($25 + $75) X 13] $ 1,300 Rent ($1,000 X .25 X 3) 750 Sales salaries ($1,200 X .50 X 3) 1,800 Office salaries 1,800 Depreciation* 75 Property taxes and Insurance ($380 ÷ 4) 95 Total fixed expenses 5,820 Total selling and administrative expenses $18,620 *[($2,000 ÷ 10) + ($500 ÷ 5)] ÷ 4

Year

$16,000 16,000

$32,000 32,000

$19,200 19,200

$ 80,000 80,000

$ 1,300 750

1,800 1,800 75

7,200 7,200 300

95 5,820

380 23,280

$21,820

$37,820

$25,020

$103,280

5,200 3,000

SWEATS GALORE, INC. Silk-screen Overhead Expenses Budget For the Year Ending December 31, 2013 Quarter

Variable expenses Ink ($.75/unit) Maintenance ($.033/unit) Utilities ($.05/unit) Graphics design ($.10/unit) Total variable expenses Fixed expenses Rent ($1,000 X .75 X 3) Maintenance ($1,650 X 3) Utilities ($1,000 X 3) Graphics design ($500 X 3) Property taxes and insurance ($2,240 ÷ 4) Depreciation* Total fixed expenses Total silk-screen overhead Case 6-4

Year

$ 6,000 264 400 800 7,464

$ 7,500 330 500 1,000 9,330

$15,000 660 1,000 2,000 18,660

$ 9,000 396 600 1,200 11,196

$37,500 1,650 2,500 5,000 46,650

2,250 4,950 3,000 1,500

9,000 19,800 12,000 6,000

560 690 12,950 $20,414

560 690 12,950 $22,280

560 690 12,950 $31,610

560 690 12,950 $24,146

2,240 2,760 51,800 $98,450

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Direct silk-screen hours 960 1,200 2,400 1,440 Overhead rate per silk-screen hour *($7,500 ÷ 5) + [($1,350 + $2,500) ÷ 10] + ($3,500 ÷ 4)] = $2,760; $2,760 ÷ 4 = $690

6,000 $16.41

CASE 6 (Continued)

10. SWEATS GALORE, INC. Budgeted Income Statement For the Year Ending December 31, 2013 Sales ............................................................................. Cost of goods sold....................................................... Gross profit .................................................................. Selling and administrative expenses.......................... Income from operations .............................................. Interest expense ($20,000 X .08) ................................. Income before income taxes ....................................... Income tax expense ($24,670 X .20)............................ Net income ................................................................... *Purchase of shirts *Labor *Overhead

$800,000 *670,450 129,550 103,280 26,270 1,600 24,670 4,934 $ 19,736

$500,000 (50,000 @ $10) 72,000 98,450 $670,450

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Case 6-5

CASE 6 (Continued) 11. SWEATS GALORE, INC. Cash Budget For the Year Ending December 31, 2013

Beginning cash balance .................. Add: Receipts Collections from customers ............ Total available cash ......................... Less: Disbursements Payments for shirt purchases ......... Silk-screen labor .............................. Silk-screen overhead ....................... Selling and administrative expenses ....................................... Payment for equipment purchase .. Total disbursements ........................ Excess (deficiency) of available cash over disbursements ............ Financing Borrowings ....................................... Ending cash balance .......................

1 $ 10,000

Quarter 2 3 19,136 ($ 9,874)

4 $ 17,661

89,600 99,600

150,400 169,536

272,000 262,126

230,400 248,061

42,000 11,520 19,724*

113,000 14,400 21,590

147,000 28,800 30,920

162,000 17,280 23,456

18,545** 8,675*** 100,464

21,745 8,675 179,410

37,745 0 244,465

24,945 0 227,681

(864)

(9,874)

17,661

20,380

20,000 19,136

0 ($ 9,874) $

0 17,661

0 $ 20,380

*$20,414 – $690 depreciation **$18,620 – $75 depreciation ***($7,500 + $1,350 + $2,500 + $3,500 + $2,000 + $500) X .50 12. SWEATS GALORE, INC. Budgeted Balance Sheet December 31, 2013 Assets Cash .................................................................................................. Accounts receivable ($192,000 X .30) ............................................. Sweatshirt inventory (4,500 X $10) .................................................. Equipment ($7,500 + $1,350 + $2,500 + $3,500 + $2,000 + $500) ..... Less: Accumulated depreciation ($300 + $2,760) .......................... Total assets ...................................................................................... Case 6-6

Weygandt, Managerial Accounting, 6/e, Solutions Manual

$ 20,380 57,600 45,000 17,350 (3,060) $137,270

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CASE 6 (Continued) Liabilities and Stockholders’ Equity Liabilities: Accounts payable ($135,000 X .60) ....................................... Notes payable ........................................................................ Interest payable ($20,000 X .08) ............................................ Taxes payable ........................................................................ Total liabilities ........................................................................ Stockholders’ Equity: Common stock…………………………………………………... Retained earnings………………………………………………. Total stockholders’ equity .................................................... Total liabilities and owner’s equity .......................................

$ 81,000 20,000 1,600 4,934 107,534 10,000 19,736 29,736 $137,270

13. (a) Unit Selling Price – Unit Variable Costs = Contribution Margin $16 – $10 – ($80,000 ÷ 50,000) – ($46,650 ÷ 50,000) = Contribution Margin $16 – $12.533 = $3.467 (b) Estimated fixed costs: Selling and administrative ......... Overhead .................................... Salaries ....................................... Interest ........................................ Taxes .......................................... Total estimated fixed costs ............

$ 23,280 51,800 72,000 1,600 4,934 $153,614

(c) Fixed costs ÷ CM = Break-even point in units $153,614 ÷ $3.467 = 44,308 Break-even point in units 44,308 X $16 = $708,928 Break-even point in dollars 14. (a) Required Sales = VC + FC + Target Net Income $16X = $12.533x + $153,614 + $25,000 $3.467X = $178,614 X = 51,519 shirts (b)The company’s net income differs from the cash balance because the accrual basis accounting was used to compute net income. Consequently, net income includes revenue that has not been Copyright © 2012 John Wiley & Sons, Inc.

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Case 6-7

CASE 6 (Continued) received and expenses that have not been paid. For example, revenue of $57,600 was included in the Budgeted Income Statement that was not in the Cash Budget because it was earned but not received. Likewise items such as accounts payable, notes payable, interest payable, and taxes payable affect the Income Statement in one period and the Cash Budget in another period. 15. Answers will vary. Some students will argue that the 10 percent commission is too high and Michael should try to find someone with similar qualifications who is willing to work for a smaller commission. Other students will argue that with Cary Sue’s contacts, sales would be much lower without Cary Sue. In addition, they may argue that if sales are low, Cary Sue’s commission will also be low.

Case 6-8

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CASE 7 ARMSTRONG HELMET COMPANY 1.

Item Administrative salaries Advertising for helmets Depreciation on factory building Depreciation on office equipment Insurance on factory building Miscellaneous expenses— factory Office supplies expense Professional fees Property taxes on factory building Raw materials used Rent on production equipment Research and development Sales commissions Utility costs—factory Wages—factory Totals

Direct Materials

Product Costs Direct Manufacturing Labor Overhead

Period Costs $15,500 11,000

$ 1,500 800 1,500 1,000 300 500 400 $70,000 6,000 10,000 40,000 900 $70,000 $70,000

$70,000

Weygandt, Managerial Accounting, 6/e, Solutions Manual

$11,300

$78,100

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Case 7-1

CASE 7 (Continued) 2. Item Administrative salaries ....................... Advertising for helmets ...................... Depreciation on factory building ....... Depreciation on office equipment ..... Insurance on factory building ............ Miscellaneous expenses—factory .... Office supplies expense ..................... Professional fees ................................ Property taxes on factory building .... Raw materials used ............................ Rent on production equipment .......... Research and development ............... Sales commissions ............................. Utility costs—factory .......................... Wages—factory ................................... Totals ...................................................

Case 7-2

Variable Costs

Fixed Costs $15,500 11,000 1,500 800 1,500

1,000 300 500 400 70,000 6,000 10,000 40,000 900

70,000 $181,000

$48,400

Weygandt, Managerial Accounting, 6/e, Solutions Manual

Total Costs $15,500 11,000 1,500 800 1,500 1,000 300 500 400 70,000 6,000 10,000 40,000 900 70,000 $229,400

(For Instructor Use Only)

CASE 7 (Continued) 3. ARMSTRONG HELMET COMPANY Cost of Goods Manufactured Schedule For the Month Ended December 31, 2013 Work in process, December 1 ........... Direct materials Raw materials inventory .............. (Dec. 1) Raw materials purchased ............ Less: Raw materials inventory (Dec. 31) .............................. Direct materials used ......................... Direct labor ......................................... Manufacturing overhead Rent on production equipment..... Insurance on factory building ..... Depreciation on factory building .................................... Utility costs—factory ................... Property taxes on factory building .................................... Miscellaneous expenses— factory ......................................

$ $

–0–

70,000 0 $70,000 70,000 $ 6,000 1,500 1,500 900 400 1,000

11,300

Total manufacturing costs ................. Total cost of work in process ............ Less: Work in process (Dec. 31)........ Cost of goods manufactured .............

$151,300 151,300 –0– $151,300

Production cost per helmet = $151,300 [from 3.] ÷ 10,000 = $15.13.

The Armstrong Helmet Company likely uses a process cost system. Process costing is used when large volumes of a homogenous product are produced on a continuous basis. Armstrong Helmet Company would find it useful, using a process costing system, to identify the cost of each production batch of bicycle helmets.

If Armstrong Helmet Company decides to produce additional helmets (e.g., baseball, hockey, football, etc., or different models of bicycle helmets), it may find it useful to move to a job order costing system.

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Case 7-3

CASE 7 (Continued) 7. Unit variable cost 8.

= $181,000 (from 2.) ÷ 10,000 helmets = $18.10 per helmet

Contribution margin per unit = Unit selling price – Unit variable costs = $40.00 – $18.10 = $21.90 Contribution margin ratio

= Contribution margin per unit ÷ Unit selling price = $21.90 ÷ $40.00 = 54.75%

9. Break-even point in dollars: Sales dollars at the break-even point = Fixed costs ÷ Contribution margin ratio X = $48,400 (from 2.) ÷ 54.75% X = $88,402 Break-even point in units = Fixed costs ÷ Contribution margin per unit X = $48,400 ÷ $21.90 X = 2,210 helmets 10. (a) ARMSTRONG HELMET COMPANY Sales Budget For the Month Ended December 31, 2013 Expected unit sales .......................................................... Unit selling price ............................................................... Total sales .........................................................................

8,000 X $40 $320,000

(b) ARMSTRONG HELMET COMPANY Production Budget For the Month Ended December 31, 2013 Expected unit sales .......................................................... Add: Desired ending finished goods units (10,000 X 20%) ......................................................... Total required units .......................................................... Less: Beginning finished goods units ........................... Required production units ...............................................

Case 7-4

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8,000 2,000 10,000 0 10,000

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CASE 7 (Continued) (c)

ARMSTRONG HELMET COMPANY Direct Materials Budget For the Month Ended December 31, 2013 Units to be produced ........................................................ Direct materials per unit ................................................... Total kilograms needed for production ........................... Add: Desired ending direct materials (kilograms) ......... Total materials required .................................................... Less: Beginning direct materials (kilograms) ................ Direct materials purchases............................................... Cost per kilogram .............................................................. Total cost of direct materials purchases .........................

10,000 X 1kg 10,000 0 10,000 0 10,000 X $7 $70,000

(d) ARMSTRONG HELMET COMPANY Direct Labor Budget For the Month Ended December 31, 2013 Units to be produced ........................................................ Direct labor time (hours) per unit ..................................... Total required direct labor hours ..................................... Direct labor cost per hour ................................................ Total direct labor cost .......................................................

10,000 X 0.35 3,500 X $20 $70,000

(e) ARMSTRONG HELMET COMPANY Selling and Administrative Expenses Budget For the Month Ended December 31, 2013 Variable expenses Sales commissions ....................................................... Total variable ..................................................................... Fixed expenses Administrative salaries ................................................. Advertising for helmets ................................................ Depreciation on office equipment ................................ Office supplies expense ............................................... Research and development .......................................... Professional fees .......................................................... Total fixed .......................................................................... Total selling and administrative expenses ......................

Weygandt, Managerial Accounting, 6/e, Solutions Manual

$40,000 $40,000 $15,500 11,000 800 300 10,000 500 38,100 $78,100

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Case 7-5

CASE 7 (Continued) (f) ARMSTRONG HELMET COMPANY Cash Budget For the Month Ended December 31, 2013 Beginning cash balance ................................................... Add: Receipts Collections from customers (75% of sales, $320,000) ................................... Total receipts ................................................ Total available cash .......................................................... Less: Disbursements Direct materials............................................... (75% of direct materials purchases, $70,000) Direct labor...................................................... Manufacturing overhead ($11,300 from part (1) – $1,500 depreciation) ........................................... Selling and administrative expenses ($78,100 from part (e) – $800 depreciation) ........................................... Total disbursements ............................. Excess (deficiency) of available cash over disbursements ......................................................... Financing: Borrowing.................................................... Ending cash balance ......................................................

–0– 240,000 240,000 240,000 52,500 70,000 9,800 77,300 209,600

30,400 –0– $ 30,400

(g) ARMSTRONG HELMET COMPANY Budgeted Income Statement For the Month Ended December 31, 2013 Sales (8,000 X $40) ............................................................ Cost of goods sold [8,000 X $15.13 (from part (4.)] ........ Gross profit ....................................................................... Selling and administrative expenses .............................. Income from operations ................................................... Income tax expense (45%) ............................................... Net income ....................................................................

Case 7-6

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$320,000 121,040 198,960 78,100 120,860 54,387 $ 66,473

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CASE 7 (Continued) 11. ARMSTRONG HELMET COMPANY Monthly Flexible Manufacturing Costs Budget For the Month Ended December 31, 2013 Activity level Production in units .............. Variable costs Raw materials ($7)................ Wages ($7) ............................ Miscellaneous ($0.10*) ......... Total variable costs..... Fixed costs .................................... Total fixed costs .................... Total costs .....................................

8,000

9,000

10,000

$ 56,000 56,000 800 112,800

$ 63,000 63,000 900 126,900

$ 70,000 70,000 1,000 141,000

10,300** $123,100

10,300 $137,200

10,300 $151,300

*$1,000 ÷ 10,000 **$11,300 [from (1)] – $1,000 miscellaneous (variable cost). 12. Potential causes of a materials variance: price paid for plastics or any other raw materials included in helmet; employees; faulty equipment Potential causes of a direct labor variance: change in pay rates; inexperienced employees; faulty equipment Potential causes of a manufacturing overhead variance: change in use of supplies; increase in indirect costs such as fuel, heat, etc. 13. Cash payback period: Cost of capital investment ÷ Net cash flow $720,000 ÷ [$30,400 (from part (10f)] = 23.68 months or approximately 2 years.

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Case 7-7