Haas School of Business, UC Berkeley Managerial Accounting

Haas School of Business, UC Berkeley
Managerial Accounting
Sample Questions and Solutions for Midterm Preparation
NOTES:
 Our midterm will have 15-18 individual items. Roughly half of the questions will be of the
textbook style; the other half will be similar to the questions below. There are about 50
individual items below (since some questions have numerous items). So our midterm will be
significantly shorter than this sample set of questions.
 You will note a mix of short-answer and multiple-choice questions. My plan is to have
approximately 20% multiple-choice questions.
 You will also note a mix of conceptual and number-crunching questions. My plan is for
approximately 30-70 mix of conceptual and number-crunching.
 You will also note a mix of relatively easy and relatively difficult questions. Some of the
questions that proved difficult for students on prior exams (fewer than 40% of the students
answered these correctly) are marked with an asterisk.
 To prepare for the midterm, I urge you to work through all of questions suggested below.
If you want a good indication of how you are likely to do on the actual final, you must do the
sample questions in a simulated exam setting: solve the sample questions without the book,
solutions, or class notes. You will then get a good feel for the difficulty level and for the areas
where you need extra preparation.
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1. Marsk Global provides shipping services to clients around the world. Marsk allocates indirect costs to
specific shipments using two cost pools and two allocation bases: (i) the indirect shipping costs are
allocated to shipments using shipment weight as the allocation base; (ii) the indirect warehouse costs are
allocated to shipments using direct warehouse labor hours as the allocation base.
Marsk managers believe that their cost-allocation technique produces highly accurate estimates of shipment
costs (they view this as a source of competitive advantage when bidding for new business). What would
have to be true about Marsk’s economic reality for the cost-allocation technique to produce highly accurate
shipment-cost estimates?
Answer: There are two conditions to make their technique highly accurate:
1. Indirect shipping costs must be proportional to shipment weight (it is also acceptable to state
that indirect shipping costs must be driven by shipment weight); and
2. Indirect warehouse costs must be proportional to the direct warehouse labor hours (it is also
acceptable to state that indirect warehouse costs must be driven by direct warehouse labor
hours).
2. Goalcate Brands is a top seller of consumer goods. In the current recession, the company has lost
significant market share. A top manager believes that a key problem is the company’s internal accounting
system. Specifically, the manager believes that some of the company’s products are massively over-costed,
and some of the company’s products are massively under-costed.
Describe what over-costing and under-costing means.
Answer: Over-costing means the cost estimated by the company’s reporting system is greater than
the “real” unit cost; under-costing means the cost estimated by the company’s reporting system is less
than the “real” unit cost.
The following two ways to state this are also correct:
1.
Over-costing: Estimated (or reported) unit costs > “real” unit costs;
Under-costing: Estimated (or reported) unit costs < “real” unit costs.
2.
Over-costing implies that estimated unit margins < “real” unit margins;
Under-costing implies that estimate unit margins > “real” unit margins.
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3. Most companies in practice use year-ahead estimated overhead rates to compute unit costs. Explain the
advantage(s) of using estimated overhead rates.
Answer: Either one (or both) of the following is enough for full credit:
1. With this approach, we get unit costs before the year is over; we can thus make decisions
during the year using our estimated unit costs;
2. This approach removes the cyclicality of costs within the year.
4. In a manufacturing firm, allocation of indirect costs based on direct labor-hours or machine hours:
A. Is a key aspect of the activity-based costing model.
B. Will systematically over-cost high-volume products and under-cost low-volume products.
C. Will systematically over-cost low-volume products and under-cost high-volume products.
D. Must be used for external financial reporting.
E. None of the above.
The answer is B.
5. In a manufacturing firm, setting up equipment is most likely an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity.
E. All of the above.
The answer is B.
6. Testing a prototype of a new product is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity.
E. None of the above.
The answer is C (it is an activity that is performed for a particular product, regardless of the number of
units or batches of that product).
7. List the three major advantages of activity-based costing over traditional costing. List at least one
advantage of traditional costing over activity-based costing.
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Advantages of ABC (any three are sufficient):
1. Greater accuracy of unit costs;
2. Hierarchy of costs recognizes that not all activities are volume-level. It reverses the volume
bias. (Anything that says something about reversing the volume bias is sufficient).
3. Improves our ability to manage our firm (our processes are more visible).
4. Includes non-manufacturing costs in the analysis.
Advantages of traditional costing (any one is sufficient):
1. Simplicity;
2. Low cost.
8. A key difference between activity-based costing (ABC) and traditional costing is:
A. ABC first allocates costs along business processes, and then among products;
B. ABC is better suited for service firms, while traditional costing is better suited for manufacturing firms;
C. ABC uses allocation bases to allocate costs to products;
D. ABC prorates underallocated overhead more precisely than traditional costing;
E. All of the above.
The answer is A.
9. Wallace Printing has contracts to complete weekly mailings required by many customers. For 2008,
printing overhead cost is estimated at $420,000 for 12 million pages printed. In the past, the company used
a single company-wide cost pool to allocate printing overhead costs using pages as the allocation base.
For 2008, Wallace Printing decided to evaluate the use of activity-based costing. It was determined that
number of design changes, setups, and inspections are the primary printing overhead cost drivers. The
following information was gathered during the analysis:
Cost pool
Estimated Printing overhead costs
Design changes
$ 60,000
Setups
320,000
Inspections
40,000
Total printing overhead costs
$420,000
Total Estimated Activity level
200 design changes
4,000 setups
16,000 inspections
During 2008, two sample customers, Wealth Managers and Health Systems, are expected to use the
following services:
Activity
Wealth Managers
Health Systems
Pages
60,000
76,000
Design changes
10
2
Setups
20
10
Inspections
30
38
9.1. What are the benefits tor Wallace Printing in switching to the above activity-based costing system?
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A. Activity-based costing will help prevent the death spiral
B. Activity-based costing will provide Wallace Printing with a competitive advantage when pricing its
services
C. Activity-based costing will help Wallace Printing better manage its direct costs
D. Activity-based costing will utilize practical capacity measures for cost drivers
E. All of the above
The answer is B.
9.2. Using the traditional system (with a single cost pool and the number of pages as the allocation base),
what is the printing overhead cost to Health Systems in 2008?
Answer:
The rate per page is $420,000 / 12,000,000 = $0.035 per page. OH cost to Health Systems is 76,000 pages
× $0.035 per page = $2,660.
9.3. Using the activity-based costing system, what is the printing overhead cost to Health Systems in 2008?
Answer:
First we compute activity rates. Design changes: $60,000 / 200 changes = $300 per change. Setups:
$320,000 / 4,000 setups = $80 per setup. Inspections: $40,000 / 16,000 inspections = $2.50 per inspection.
Now the cost to Health Systems:
Design changes
2 changes × $300 per change =
Setups
10 setups × $80 per setup =
Inspections
38 inspections × $2.50 per inspection =
Total
$600.00
800.00
95.00
$1,495.00
10. FT Technologies is a small business providing contract computer assembly services. The company
receives orders from clients for custom computers, purchases components to build the computers, and then
tests the finished computers before sending them to its clients. The assembly facility, testing facility,
warehouses, central office, and sales operations are all located in a single location.
For each cost below, indicate if it would most likely be classified as direct labor (DL), direct materials
(DM), manufacturing overhead (MOH), or selling, general, and admin (SG&A) cost.
- The cost of a hard drive installed in a computer for a client. DM
- The cost of newspaper advertising. SG&A
- The wages of employees who assemble computers. DL
- Sales commissions paid to salespeople. SG&A
- The wages of the assembly shop’s supervisor. MOH
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11. WCT Group matches medium-sized companies with providers of debt and equity finance. WCT
recently completed a review and debt placement for Bisco Technologies. Below is WCT’s internal report
evaluating the cost of the Bisco review:
Bisco Engagement Cost Report: 2009
Attributable salaries - consultants
Attributable salaries - investment bankers
Other attributable expenses
Allocated corporate overhead
$
Total engagement cost
413,000
479,000
98,000
1,342,000
2,332,000
WCT allocates corporate overhead using engagement revenues as the allocation base. WCT’s estimated
2009 revenues were $225,000,000; WCT’s estimated 2009 total corporate overhead was $27,325,000.
11.1* What was WCT’s engagement profit on the Bisco engagement?
Answer: First, we need to compute Bisco’s revenue on the engagement. We can do this from the
Allocated corporate OH line (because OH is allocated using engagement revenue).
OH Allocation Rate = Estimated 2009 OH / Estimated 2009 Revenues
= $27,325,000 / $225,000,000 ≈ 12.14 %
OH Allocated to Bisco Engagement = Bisco Engagement Revenue × 12.14%, or
$1,342,000 = Bisco Engagement Revenue × 12.14%.
This gives Bisco Engagement Revenue = $1,342,000 / 12.14% ≈ $11,054,366.
And Bisco Engagement profit = $11,054,366 - $2,332,000 = $8,722,366.
Note: there could be two other answers because of rounding! If the OH rate is rounded to 12%, the answer
would be $8,851,333. If the OH rate is left unrounded, the answer would be $8,718,320.
11.2. WCT managers believe that their cost-allocation technique produces highly accurate estimates of
engagement costs. What would have to be true about WCT’s economic reality for the cost-allocation
technique to produce highly accurate engagement-cost estimates? Provide a brief answer.
Answer: WCT’s true corporate consumption OH would have to be proportional (driven by) to revenue.
11.3. WCT managers are worried that their reporting system over-costs certain engagements and undercosts other engagements. What kinds of engagements are likely to be over-costed? What kinds of
engagements are likely to be under-costed?
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Answer:
Because of OH allocation using revenues, relatively high-revenue engagements will receive higher OH
allocations than relatively low-revenue engagements.
Thus, relatively high-revenue engagements that in reality require little OH will be overcosted.
Conversely, relatively low-revenue engagements that in reality require a lot of OH will be undercosted.
To get full credit on this question, the answer must contain the two predictions above.
12. We manufacture two products: Product C and Product D. Our estimated manufacturing OH cost for
the current period was $119,100. Some data are:
Estimated volume (units)
Direct labor hours per unit
Direct materials cost per unit
Direct labor cost per unit
Product C Product D
3,000
400
1.2
1.3
$22.80
$4.00
$13.00
$12.00
We have been allocating OH costs using direct labor hours and machine hours. We are now considering
using an ABC system. The system would use 3 activity cost pools. Data for the three activity cost pools
are below:
Activity cost pool:
Estimated
Usage of activity
Activity Cost Product C
Product D
Machine setups
$10,440
60
120 setups
Processing production orders
$78,000
820
1,180 production orders
General factory
$30,660
480
3,900 square feet
Activity drivers used in the ABC system are: for machine setups – setups; for processing production orders
– production orders; for general factory – square feet.
12.1. What are the main reasons we would like to switch to an ABC system? Provide at least two reasons.
Answer: ABC provides numerous advantages:
1. Greater accuracy of unit costs.
2. Hierarchy of costs recognizes that not all activities are volume-level. It reverses the volume bias.
(Anything that says something about reversing the volume bias is sufficient).
3. Improves our ability to manage our firm (our processes are more visible).
4. Improves our ability to make decisions of all sorts (pricing, product-portfolio evaluation, new-product
introductions, etc.).
5. Improves our ability to compete.
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12.2. Compute product costs per unit of each of our two products using the proposed ABC system.
Answer: First, we need to compute our activity rates (OH rates to use in the ABC system). We estimate a
total of (60 + 120) = 180 setups; (820 + 1,180) = 2,000 production orders; and (480 + 3,900) = 4,380 square
feet. The rates are then:
Machine setups
Processing production orders
General factory
Estimated
Total Usage of
Activity Cost
Activity
$10,440
180
$78,000
2,000
$30,660
4,380
Rates
$58.00 per setup
$39.00 per production order
$7.00 per square foot
Indirect costs are then split between the two product lines as follows:
Machine setups: 60 × $58 = $3,480 to C; 120 × $58 = $6,960 to D.
Processing production orders: 820 × $39 = $31,980 to C; 1,180 × $39 = $46,020 to D.
General factory: 480 × $7 = $3,360 to C; 3,900 × $7 = $27,300 to D.
(Note that it is also perfectly fine to do the above split without first computing the rates, for example for
machine setups: $10,440 × (60 / (60+120)) = $3,480 to C; $10,440 × (120 / (60+120)) = $6,960 to D.)
Now we can compute unit costs with ABC:
Product D
Product C
ABC overhead allocation to the two products:
$6,960.00
Machine setups
$3,480.00
46,020.00
31,980.00
Processing production orders
27,300.00
3,360.00
General factory
÷ Units
ABC overhead per unit
DM
DL
Unit costs
$38,820.00
400
$80,280.00
3,000
$97.05
4.00
12.00
$26.76
22.80
13.00
$113.05
$62.56
13. HD Technologies is a small business that manufactures seventeen models of hard drives for its clients.
The company uses activity-based costing.
For each activity below, indicate the level in the hierarchy of costs:
- Managing inventories of parts required to make the hard drives. Product Level
- Designing new products. Product Level
- Setting up equipment to make a production run of a particular product. Batch Level
- Writing user manuals for the various hard-drive models. Product Level
- Interviewing and processing new employees in the personnel department. Facility Level (or
Organizational Level or Organization Sustaining).
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14. We make and sell consumer tablet PCs. We sell two models: Simple and Complex. In 2010, we
planned to sell 465,000 units of the Simple model and 64,000 units of the Complex model. We use activitybased costing (ABC), with estimated 2010 unit costs as follows:
Simple
Complex
Direct Materials (DM)
Direct Labor (DL)
Overhead (OH) from ABC system
$145.00
47.00
95.41
$276.00
69.00
391.22
Unit cost
$287.41
$736.22
There are three main activities in the ABC system: manufacturing equipment (the rate is $50 per machine
hour); setups (the rate is $2,300 per setup); and general factory (the rate is $85 per square foot).
For various reasons, our top management decided to stop using the ABC system and convert to a traditional
absorption costing system with a single OH cost pool, using direct-labor cost as the allocation base.
Compute the cost per unit of Simple and the cost per unit of Complex using this traditional system.
Answer: $316.08 per unit of Simple; $527.16 per unit of Complex (note that there may be small
differences in answers because of rounding the OH Rate; any rounding is fine).
Cost per unit = DM$ + DL$ + OH Allocation.
With the traditional system, Cost per unit = DM$ + DL$ + DL$ × OH Rate per DL$.
We only need to find the OH Rate per DL$ = Estimated Total OH / Estimated Total DL$.
Estimated Total OH = $95.41 ABC OH per unit of Simple × 465,000 Simple units
+ $391.22 ABC OH per unit of Complex × 64,000 Complex units = $ 69,403,730.
Estimated Total DL$ = $47.00 DL per unit of Simple × 465,000 Simple units
+ $69.00 DL per unit of Complex × 64,000 Complex units = $ 26,271,000.
So OH Rate per DL$ = $ 69,403,730 / $ 26,271,000 ≈ 264% (or, equivalently, $2.64 per DL$).
Cost per unit of Simple is then $145.00 + $47.00 + $47.00 × 264% = $316.08.
Cost per unit of Complex is $276.00 + $69.00 + $69.00 × 264% = $527.16.
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15. We manufacture two products: Product A and Product B.
Product A
Estimated volume (units)
Direct labor hours per unit
Direct materials cost per unit
Direct labor cost per unit
600
1.5
$4.00
$15.00
Product B
30,000
1.8
$22.80
$18.00
We have been allocating OH costs using direct labor cost. We are now considering using an ABC system.
The system would include all of our OH; it would use 3 activity cost pools. Data for the three activity cost
pools are below:
Activity cost pool:
Machine setups
Processing production orders
General factory
Estimated
Usage of activity
Activity Cost Product A
Product B
$144,320
$98,300
$12,380
60
820
1,350
70
1,180
1,800
Allocation
Base
setups
production orders
square feet
15.1. What is the cost per unit of Product A using the traditional costing system (with OH allocated using
direct labor cost)?
Answer. $25.90.
First, we need the OH Rate per DL$ = Estimated Total OH Cost / Estimated Total DL$.
Estimated Total OH Cost = $144,320 + $98,300 + $12,380 = $255,000.
Estimated Total DL$s = 600 As × $15.00 DL$ per unit of A + 30,000 Bs × $18.00 DL$ per unit of B
= $549,000.
Thus, OH Rate per DL$ = $255,000 / $549,000 ≈ 46%.
Cost per unit of A = $4.00 + $15.00 + $15.00 × 46% = $25.90.
(Note that with different rounding, you can get other answers, for example, $25.97 if you don’t round the
OH Rate. Any rounding is perfectly acceptable.)
15.2. Which of the following statements is correct?
A. Switching to the ABC system will reduce the estimated unit cost of Product A;
B. The rate for processing production orders is approximately $49.15 per production order;
C. The rate for machine setups for Product A is approximately $2,405.33 per setup;
D. The rate for general factory for Product B is approximately $17.23 per square foot;
E. None of the above.
Answer: B
The rate for processing production orders = $98,300 / (820 + 1,180) orders = $49.15. So the answer is B.
None of the other options is correct: C and D give incorrect numbers, and A is the opposite of what is likely
to happen (Product A is under-costed by the current system, thus, its cost will increase under ABC).
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16. Our company – RegionalAir – manufactures and sells small and medium-sized jet aircraft. We
currently make and sell two models:
− RA100 is a medium-sized jet with a maximum capacity of 100 passengers. RA100 is primarily sold to
airlines. We plan to sell 250 of the RA100 jets per year.
− RA25 is a small jet that can carry at most 25 passengers. RA25 is primarily sold as an executive jet to
corporations and charter companies. We plan to sell 75 RA25 jets per year.
Much of the manufacturing is outsourced to various suppliers. The components arrive at our production
facility, where jets are assembled and tested prior to delivery to clients.
We use activity-based costing (ABC) and include both manufacturing and selling costs in unit costs. ABC
rates are computed at the beginning of each year using that year’s estimates (budgets).
The company has two top-level vice-presidents (VPs): VP for RA100, and VP for RA25. The VP for RA25
recently complained about the company’s reporting system: “The market for executive jets is supercompetitive right now. Prices have collapsed to $9,900,000 per jet. The ABC system says that we are
losing $30,000 per RA25. I am sure this is wrong; we are a great company with a great product, so there is
no way we are really losing money on the RA25’s. Remember our old reporting system, with indirect costs
allocated by machine hours? If we just went back to that, we’d see that we are actually earning about
$3,000,000 per RA25. This must be the volume bias that we heard about.”
Below are the unit costs estimated by the current ABC system:
RA100
RA25
DM
DL
ABC indirect cost allocation
$5,520,000
680,000
6,130,000
$3,790,000
430,000
5,710,000
Unit cost
$12,330,000
$9,930,000
Suppose the VP of RA25 is correct in claiming that the unit cost per RA25 would be $6,900,000 per unit
with the old reporting system, allocating indirect costs using machine hours.
With the old system, allocating indirect costs using machine hours, what would be the unit cost of the
RA100 jet?
Answer: $13,239,000
Total company cost including DM, DL, and OH = $12,330,000 × 250 + $9,930,000 × 75 = $3,827,250,000.
Total cost allocated to RA25 with the MH-based system = $6,900,000 × 75 = $517,500,000.
So total cost allocated to RA100 with the MH-based system = $3,827,250,000 - $517,500,000
= $3,309,750,000.
Cost per unit of RA100 with the MH-based system = $3,309,750,000 / 250 = $13,239,000.
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17. We provide consulting services to large public corporations. We report profitability of consulting
engagements using normal absorption costing, with overhead (OH) allocated using engagement revenue, as
follows:
Engagement margin = Engagement revenue – (Direct engagement cost + OH Allocated to engagement)
Our OH mainly consists of the following: rent on corporate HQ; recruiting; salaries of top management and
industry experts; and advertising.
Our largest consulting engagement in 2010 was for the VTN Corporation. The following details about our
company and the VTN engagement are available:
Estimated 2010 OH cost
Actual 2010 OH cost
Estimated 2010 Total Revenues
Actual 2010 Total Revenues
VTN Engagement Revenues
VTN Engagement Direct Cost
$93,100,000
$87,423,000
$248,000,000
$231,248,000
$7,400,000
$3,120,000
17.1. Our VTN engagement margin is closest to:
A.
B.
C.
D.
E.
$1,300,774
$1,502,016
$1,392,440
$1,482,440
$1,412,016
Answer: B To compute engagement margin, we’ll need the OH Rate, using engagement revenue as the
allocation base:
OH Rate = Estimated 2010 OH cost / Estimated 2010 Total Revenues
= $93,100,000 / $248,000,000 ≈ 37.54032% (rounding is OK here)
Then engagement margin = Engagement Revenues – Engagement Direct Cost – OH Allocated to
Engagement
= $7,400,000 – $3,120,000 – $7,400,000 × 37.54032% ≈ $ 1,502,016.
17.2 Our company was able to negotiate a very good deal with the VTN Corporation; however, our
company’s CFO does not believe that our reporting system is accurate. Which of the following statements
is true about the VTN engagement:
A. The reported margin on this engagement is probably lower than the real margin;
B. The reported margin on this engagement is probably higher than the real margin;
C. The real OH cost on this engagement is probably proportional to direct engagement cost;
D. The real OH cost on this engagement is probably proportional to engagement revenue;
E. None of the above.
Answer: A. This is because of the volume bias. We are told that the VTN engagement is the company’s
largest, and revenues are relatively high because the negotiations were successful for our firm. OH
allocation is done by engagement revenues, so large engagements will be over-costed; their margins are
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thus under-estimated.
18. Our company manufactures and sells small and medium-sized jet aircraft. We currently make and sell
two models:
− RA100 is a medium-sized jet with a maximum capacity of 100 passengers. RA100 is primarily sold to
airlines. We plan to sell 250 of the RA100 jets per year.
− RA25 is a small jet that can carry at most 25 passengers. RA25 is primarily sold as an executive jet to
corporations and charter companies. We plan to sell 75 RA25 jets per year.
Much of the manufacturing is outsourced to various suppliers. The components arrive at our production
facility, where jets are assembled and tested prior to delivery to clients. We use normal absorption costing;
overhead (OH) costs are allocated using machine hours (MHs). Estimated 2011 unit margins are below:
RA100
RA25
Sales price
Unit costs:
DM
DL
Allocated OH
$18,100,000
$9,900,000
-5,520,000
-680,000
-10,130,000
-3,790,000
-430,000
-2,710,000
Unit margin
$1,770,000
$2,970,000
We are investigating switching to an activity-based-costing (ABC) system. We have found that, if we do
make the switch to ABC, the unit margin of RA100 will increase by $1,370,000.
What will be the unit margin of RA25 with the ABC system?
Answer. Approximately negative 1,596,667
If the unit margin of RA100 will increase by $1,370,000, the total decrease in costs allocated to RA100
equals $1,370,000 × 250 units = $342,500,000. The total increase in costs allocated to RA25 is the same:
$342,500,000. Thus, the cost per unit of RA25 will increase by $342,500,000 / 75 units ≈ $4,566,666.67
per unit.
Thus, the unit margin of RA 25 will equal $2,970,000 - $4,566,666.67 = – $1,596,666.67.
19* Huang Aerospace Corporation manufactures aviation control panels in two departments:
(i) Fabrication and (ii) Assembly. Work in the Fabrication department is largely automated, with panels
produced in production runs of 50-250 units. Work in the Assembly department requires substantial skilled
labor.
Consequently, in the Fabrication department, Huang uses machine hours (MHs) as the overhead (OH)
allocation base, with the estimated OH rate of $30 per MH. In the Assembly department, Huang uses direct
labor hours (DLHs) as the OH allocation base, with the estimated OH rate of $12 per DLH.
The following information is available about Order X2984 completed for Embraer Aviation in the current
year:
Fabrication
Assembly
Machine Hours
40
12
Direct Labor Hours
3
25
13
What is the total amount of OH that Huang Aerospace included in Order X2984?
Answer: $1,500
Total OH in Order X2984 = Fabrication MHs × $30 per MH + Assembly DLHs × $12 per DLH
= 40 MHs × $30 per MH + 25 DLHs × $12 per DLH = $1,500
20* We use normal absorption costing, with overhead (OH) applied using direct labor hours (DLHs). At
the beginning of this year, OH for the year was estimated to be $702,450. At the end of the year, actual
DLHs for the year were 33,100 hours, the actual OH for the year was $697,450, and OH for the year was
overapplied by $40,680. What were our estimated DLHs when we computed our estimated (predetermined)
OH rate at the beginning of the year?
A. 31,500 direct labor-hours
B. 29,452 direct labor-hours
C. 31,276 direct labor-hours
D. 33,100 direct labor-hours
E. None of the above
Answer: A
We have to get the estimated DLHs from OH Rate = Estimated OH / Estimated DLHs. We know Estimated
OH, so we just need to find the OH Rate. This we can get from Applied OH = OH Rate × Actual DLHs.
Applied OH = Actual OH + Over-applied OH = $697,450 + $40,680 = $738,130. So
$738,130 = OH Rate × 33,100, or OH Rate = $22.30. We can now find Estimated DLHs:
$22.30 = $702,450 / Estimated DLHs, or Estimated DLHs = 31,500.
21. We apply manufacturing overhead (MOH) cost to products at the rate of 70% of direct labor cost.
Production data for November are below:
What was our underapplied or overapplied OH? State the amount and whether it was over or under.
Answer:
Applied MOH = $200,000 × 70% = $140,000.
Actual MOH – Applied MOH = $132,000 – $140,000 = - $8,000. So Overapplied by $8,000.
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22. We use a predetermined OH rate based on direct labor hours. Last year, we had 10,000 direct labor
hours and incurred $80,000 of actual manufacturing overhead cost. Last year, overhead was underapplied
by $2,000.
Compute last year’s predetermined overhead rate.
Answer: Actual OH = $80,000; underapplied OH = $2,000. That means that applied OH = $78,000.
Predetermined OH Rate = $78,000 / 10,000 DLHs = $7.80 / DLH.
23. We manufacture and sell plastic boomerangs. Expected boomerang unit sales for JulyNovember are below:
July
12,000
August
15,000
September
7,000
October
8,000
November
10,000
Our inventory-buffer policy is to maintain a finished goods inventory equal to 15% of next month's
estimated sales.
How many boomerangs do we need to make in October?
Answer:
Ending inventory (10,000 x 15%)
October sales
Less: beginning inventory (8,000 x 15%)
October production
1,500
8,000
1,200
8,300
24. Caan Corporation used the following data to evaluate their current operating system. The
company sells items for $20 each and used a budgeted selling price of $20 per unit.
Units sold
Variable costs
Fixed costs
Actual
Budgeted
200,000 units 203,000 units
$1,250,000
$1,500,000
$ 925,000
$ 900,000
24.1. What is the static-budget variance of revenues?
A) $60,000 favorable
B) $60,000 unfavorable
C) $6,000 favorable
D) $6,000 unfavorable
Answer: B
(200,000 units × $20) - (203,000 units × $20) = $60,000 U
15
24.2 What is the static-budget variance of variable costs?
A) $200,000 favorable
B) $50,000 unfavorable
C) $250,000 favorable
D) $250,000 unfavorable
Answer: C
$1,250,000 - $1,500,000= $250,000 F
24.3 What is the static-budget variance of operating income?
A) $165,000 favorable
B) $190,000 unfavorable
C) $60,000 favorable
D) $60,000 unfavorable
Answer: A
Units sold
Actual
Results
200,000
Static
Budget
203,000
Static-budget
Variance
Revenues
$4,000,000
$4,060,000
Variable costs
1,250,000
1,500,000
Contribution margin$2,750,000 $2,560,000
Fixed costs
925,000
900,000
Operating income $1,825,000
$1,660,000
$(60,000)
(250,000)
190,000
25,000
$165,000
U
F
F
U
F
25. Bebee Corporation currently produces cardboard boxes in an automated process. Expected
production per month is 40,000 units, direct-material costs are $0.60 per unit, and manufacturing
overhead costs are $18,000 per month. Manufacturing overhead is all fixed costs. What is the
flexible budget for 20,000 and 40,000 units, respectively?
A) $21,000; $33,000
B) $21,000; $42,000
C) $30,000; $42,000
D) None of these answers are correct.
Answer: C
20,000 units
Materials ($0.60) $ 12,000
Machinery
18,000
$30,000
40,000 units
$24,000
18,000
$42,000
16
26. Diana Industries, Inc. (DII), developed standard costs for direct material and direct labor. In
2010, DII estimated the following standard costs for one of their major products, the 10-gallon
plastic container.
Direct materials
Direct labor
Budgeted quantity
0.10 pounds
0.05 hours
Budgeted price
$30 per pound
$15 per hour
During June, DII produced and sold 10,000 containers using 980 pounds of direct materials at an
average cost per pound of $32 and 500 direct manufacturing labor-hours at an average wage of
$15.25 per hour.
26.1. June's direct material flexible-budget variance is:
A) $1,860 unfavorable
B) $600 favorable
C) $1,360 unfavorable
D) None of these answers are correct.
Answer: C
(980 × $32) - (10,000 × 0.10 × $30) = $1,360 U
26.2. June's direct material price variance is:
A) $1,960 unfavorable
B) $600 favorable
C) $1,360 favorable
D) None of these answers are correct.
Answer: A
980 × ($32 - $30) = $1,960 U
26.3. June's direct manufacturing labor price variance is:
A) $125 unfavorable
B) $125 favorable
C) $7,623.50 unfavorable
D) None of these answers are correct.
Answer: A
500 dlh × ($15.25 - $15.00) = $125 U
26.4. June's direct manufacturing labor efficiency variance is:
A) $125 unfavorable
B) $125 favorable
C) $7,623.50 unfavorable
D) None of these answers are correct.
Answer: D
[500 dlh - (10,000 × 0.05)] × $15 = Zero
17
27. Our standards are 2.5 hours of machine time per unit. Our variable overhead consists mainly
of a liquid used to cool down our equipment; variable overhead is allocated using machine hours.
Because of high demand for our product, the machines had to operate 50% more than the budgeted
time. Because large quantities of coolant were bought, we were able to obtain volume discounts
and paid lower than budgeted prices for the coolant. Which of the following is most likely to
occur?
a. Variable overhead spending variance will be unfavorable because more coolant was used than
budgeted
b. Variable overhead will be under applied because the costs were lower than expected
c. Variable overhead efficiency variance will be favorable because more product was produced
than budgeted
d. Variable overhead efficiency variance will be unfavorable because more product was produced
than budgeted
e. Variable overhead spending variance will be favorable because the price paid for the coolant
was lower than budgeted.
The answer is E.
28. Brown Corporation manufactured 3,000 chairs during June. The following variable overhead
data pertain to June:
Budgeted variable overhead cost per unit
Actual variable manufacturing overhead cost
Flexible-budget amount for variable manufacturing overhead
Variable manufacturing overhead efficiency variance
28.1. What is the variable overhead flexible-budget variance?
A) $2,400 favorable
B) $720 unfavorable
C) $3,120 favorable
D) $2,400 unfavorable
Answer: A
$33,600 - $36,000 = $2,400 (F)
28.2. What is the variable overhead spending variance?
A) $1,680 unfavorable
B) $2,400 favorable
C) $2,400 unfavorable
D) $3,120 favorable
Answer: D
$2,400 (F) = X + $720 (U)
X=3,120 (F)
18
$ 12.00
$33,600
$36,000
$720 unfavorable
29. Roberts Corporation manufactured 100,000 buckets during February. The overhead costallocation base is $5.00 per machine-hour. The following variable overhead data pertain to
February:
Actual
Production
100,000 units
Machine-hours
9,800 hours
Variable overhead cost per machine-hour
$5.25
Budgeted
100,000 units
10,000 hours
$5.00
29.1. What is the actual variable overhead cost?
Answer:
9,800 mh × $5.25 = $51,450
29.2. What is the flexible-budget amount?
Answer:
10,000 mh × $5.00 = $50,000
29.3. What is the variable overhead spending variance?
Answer:
($5.25 - $5.00) × 9,800 mh = $2,450 unfavorable
29.4. What is the variable overhead efficiency variance?
Answer:
[9,800 - 10,000] × $5.00 = $1,000 favorable
30*. We use standard costing. Variable overhead is allocated using machine hours (the standard
is 2 machine hours per unit). In July, actual variable overhead cost was $47,000. Actual machine
hours were 3,250. Variable overhead spending variance was $6,800 unfavorable. Total variable
overhead variance for July was $9,000 unfavorable.
How many units did we make in July?
Answers: We’ll have to use the VOH Efficiency Variance to answer this question.
Total VOH Variance = VOH Spending Variance + VOH Efficiency Variance,
$9,000 = $6,800 + VOH Efficiency Variance, or
VOH Efficiency Variance = $2,200.
VOH Efficiency Variance = (Actual Base – Budgeted Base allowed for Actual Output) ×
Budgeted Rate, so to find Budgeted Base allowed for Actual Output we first need the
Budgeted Rate. We can compute the budgeted rate from
19
VOH Spending Variance = Actual Base × (Actual Rate – Budgeted Rate) = Actual VOH cost
– Actual Base × Budgeted Rate
$6,800 = $47,000 – 3,250 × Budgeted Rate, or Budgeted Rate = $12.369.
Now back to the VOH Efficiency Variance:
$2,200 = (3,250 – Budgeted Base allowed for Actual Output) × $12.369, or Budgeted Base
Allowed for Actual Output ≈ 3,072. This is the standard quantity of machine hours allowed
for actual quantity produced. The standard is 2 MHs per unit, so the units produced are 3,072
/ 2 = 1,536.
31. What are the causes of the “death spiral”? What are its main dangerous consequences?
Causes (Any one of the statements below is good enough for full credit):
-
Normal absorption costing;
The way fixed overhead rates are computed using estimated units (or MHs or levels of
allocation base) in the denominator;
OH Rate = Estimated OH / Estimated Units (or MHs or something or levels of allocation
base). When Estimated Units decrease, OH Rate increases.
Anything describing the “death spiral”, along the lines of: Volumes decrease  OH Rates
increase  Unit costs increase  This can convince us to increase prices or cut away good
business  Volumes decrease, and so on…
Dangerous consequences: Something along the lines of “It can convince managers to increase prices
or cut away good business precisely at the wrong times, eroding market share”
32. FT Technologies is a provider of contract electronic manufacturing services. The company uses
practical capacity to allocate its overhead costs (mostly equipment-related costs) to individual jobs, using
machine hours. In 2008, the company’s fixed overhead rate was $130 per machine hour; total estimated
fixed overhead cost was $3,137,300; and total machine hours used to make products for clients equaled
20,310.
What was FT’s excess-capacity cost in 2008?
Answer: We can get at the excess-capacity cost in one of the following ways:
1.
Total practical capacity = $3,137,300 / $130 per MH ≈ 24,133.08. MHs
Excess-capacity cost = (24,133.08 MHs – 20,310 MHs) × $130 per MH = $497,000
2.
Cost of used capacity = 20,310 MHs × $130 per MH = $2,640,300
Excess-capacity cost = $3,137,300 – $2,640,300 = $497,000
NOTE: If you use the first method, your number may be slightly different because of rounding.
20
33. WCT Group matches medium-sized companies with providers of debt and equity finance. WCT
recently completed a review and debt placement for Bisco Technologies for a total fee of $2,900,000.
Below is WCT’s internal report evaluating the profitability of the Bisco review:
Bisco Engagement Profitability Report: 2009
Engagement revenues
Engagement expenses:
Attributable salaries - consultants
Attributable salaries - investment bankers
Other attributable expenses
Allocated corporate overhead
Total engagement expenses
$
$
2,900,000
323,000
479,000
98,000
130,500
1,030,500
Engagement profit
$
1,869,500
WCT allocates total corporate overhead using estimated engagement revenues as the allocation base.
33.1 Which of the following best describes WCT Group’s reporting system?
A.
B.
C.
D.
E.
Absorption costing
Direct costing
Attributable costing
Practical costing
None of the above
The answer is A – absorption costing.
33.2* WCT’s estimated 2009 revenues were $225,000,000. What was WCT’s estimated 2009 corporate
overhead?
Answer:
First we compute the OH allocation rate from the Bisco Engagement Profitability Report:
Allocated OH to Bisco = OH Rate × Engagement Revenues for Bisco,
$130,500 = OH Rate × $2,900,000
OH Rate = 4.5%
Next we compute the estimated 2009 Corporate OH:
OH Rate = Estimated 2009 Corporate OH / Total Estimated 2009 Revenues
4.5% = Estimated 2009 Corporate OH / $225,000,000
Estimated 2009 Corporate OH = $ 10,125,000
33.3. WCT managers believe that their cost-allocation technique produces highly accurate estimates of
engagement costs. What would have to be true about WCT’s economic reality for the cost-allocation
technique to produce highly accurate engagement-cost estimates? Provide a brief answer.
Answer: WTC’s overhead costs would have to be proportional to WTC’s engagement revenues.
21
34. Concorde Medical Imaging (CMI) is a top provider of expensive radiology and nuclear-medicine
imaging services. CMI owns state-of-the-art medical equipment: CT, MRI, and PET scanners. CMI
computes the cost of a patient’s scan as the sum of two components:
(i) Direct cost. This includes: the costs of the medical technician administering the scan; the costs of the
doctor interpreting the scan and writing the report; and the cost of any direct materials.
(ii) Overhead allocation. Overhead includes the cost of the equipment; overhead is allocated using direct
cost as the allocation base.
Although CMI’s equipment is currently completely utilized, CMI’s top financial expert is concerned about
over-costing and under-costing by the company’s reporting system.
34.1. Which of the following is most likely to be the true over-costing / under-costing pattern?
A. Relatively low-volume services are over-costed
B. Services using expensive equipment and little technician and doctor time are over-costed
C. Services using inexpensive equipment and lots of technician and doctor time are over-costed
D. All services are over-costed
E. None of the above
The answer is C.
34.2. What are the dangers of over-costing / under-costing for CMI? Provide a brief answer.
Answer:
Fundamentally, over-costing / under-costing will distort unit costs; when these unit costs are used to make
decisions, CMI’s managers will make incorrect decisions.
To get full credit on this question, it is sufficient either to state the short paragraph above or to give
examples of decisions that will be distorted: pricing, service-profitability evaluation, investment in new
equipment.
34.3. CMI’s top financial expert would also like to begin using practical capacity to allocate overhead
costs. What is the most likely benefit for CMI in using practical capacity?
A. This will help reverse the volume bias
B. This will help reverse the over-costing / under-costing phenomenon in part 1 of this question
C. This will increase all the estimated service costs and thus all the prices CMI charges
D. This will help prevent increases in the estimated service costs in case of a drop in demand for CMI’s
services
E. All of the above
The answer is D.
35. We make a variety of consumer goods. We use normal absorption costing and allocate OH costs using
direct labor hours (DLHs). The following information is available for 2009:
Total OH estimated for 2009 on January 1, 2009
Total DLHs estimated for 2009 on January 1, 2009
Actual OH incurred in 2009
Actual DLHs worked in 2009
$4,500,000
100,000
$4,630,000
98,300
22
Most of the OH costs are for the manufacturing equipment and quality control personnel and equipment.
Our direct labor cost is $10 per DLH.
35.1* One of our most popular products is the Wave brand of shampoo. One bottle of Wave has a directmaterial cost of $0.90 and a direct labor cost of $1.00. With our normal absorption costing, the unit cost for
a bottle of Wave shampoo is closest to:
A.
B.
C.
D.
E.
$6.40
$6.61
$6.53
$46.90
$6.48
Answer: A
First we compute our OH Rate = Estimated OH / Estimated DLHs = $4,500,000 / 100,000 DLHs = $45 per
DLH.
Allocated OH per unit = DLHs per unit × OH Rate.
We can compute DLHs per unit from DL Cost per unit = DLHs per unit × DL cost per DLH,
$1.00 = DLHs per unit × $10 per DLH, or DLHs per unit = 0.1.
We now compute our unit cost = $0.90 + $1.00 + 0.1 DLHs per unit × $45 per DLH = $6.40.
35.2. Our top management is concerned about the volume bias. Explain what the volume bias means.
Also explain its possible dangerous consequences.
Answer:
First, what is the volume bias?
The volume bias is an overcosting / undercosting phenomenon present in traditional reporting systems.
Specifically, traditional reporting systems overcost high-volume products and services and undercost lowvolume products and services.
(To describe the volume bias, it is perfectly sufficient to state instead that the profitability of high-volume
products and services is underestimated, while profitability of low-volume products and services is
overestimated.)
To get full credit on this question, the answer must contain one of the two reporting distortions above (and
specifically mention low-volume vs. high-volume phenomenon).
Second, what are its dangerous consequences?
If managers make decisions based on reports subject to the volume bias, they will view their low-volume
products and services as being more profitable than they really are, and their high-volume products and
services as being less profitable than they really are.
Managers may then incorrectly:
23
- over-invest in niche, low-volume products and services, while under-investing in high-volume products
and services;
- under-price low-volume products and services; over-price high-volume products and services.
To get full credit on this question, the answer must mention that the main danger of the volume bias is
through distorted managerial decisions.
36. FT Technologies is a provider of contract electronic manufacturing services. The company uses
practical capacity to allocate its overhead (OH) costs (mostly equipment-related costs) to individual jobs,
using machine hours. For 2010, the company’s overhead rate is $135 per machine hour, and total OH cost
was $3,437,300.
The company’s CFO is considering changing the OH allocation procedure, to allocate OH to individual jobs
using estimated capacity utilization. If this method were adopted, the 2010 OH rate would have been $243
per machine hour.
36.1. Using the practical capacity approach to allocate OH, what is the company’s estimated cost of excess
capacity in 2010?
Answer: $1,527,689
Estimated cost of excess capacity = Total OH cost – Estimated MHs Used × $135 per MH.
We just need to find Estimated MHs Used. We can do that with the information about the method CFO is
considering: OH Rate = Estimated Total OH / Estimated MHs Used, or
$243 per MH = $3,437,300 / Estimated MHs Used.
Thus, Estimated MHs Used = $3,437,300 / $243 per MH ≈ 14,145.27 MHs.
Then Estimated cost of excess capacity = $3,437,300 – 14,145.27 MHs × $135 per MH ≈ $1,527,689.
Alternatively, we could have done the analysis as below:
With practical capacity, OH Rate = Estimated Total OH / Practical MHs, or
$135 per MH = $3,437,300 / Practical MHs.
Thus, Practical MHs = $3,437,300 / $135 per MH ≈ 25,461.48 MHs.
Excess MHs = Practical MHs – Estimated MHs Used
= 25,461.48 MHs – 14,145.27 MHs = 11,316.21 MHs.
Then Estimated cost of excess capacity = 11,316.21 MHs × $135 per MH ≈ 1,527,688. (The $1 difference
is because of rounding.)
24
36.2. Which of the following is a valid reason for the company to switch to using estimated capacity
utilization to compute OH rates?
A. This will prevent the death spiral;
B. This will reverse the volume bias;
C. This will allow us to pass on our cost of excess capacity to our clients;
D. This will allow us to signal the scale of any excess-capacity problems to our managers;
E. None of the above.
Answer: E None of the other options is correct.
A is incorrect because switching to estimated capacity is likely to cause the death spiral.
B is incorrect – this has nothing to do with the volume bias.
C is incorrect because, as we discussed in class, it is not feasible to pass on the cost of excess capacity to
clients (an attempt to do that will cause the death spiral).
D is incorrect; it is the practical capacity approach that allows us to signal the scale of excess-capacity
problems to our managers. Estimated capacity approaches hide the scale of the problem.
37. The Zygon Corporation was recently formed to produce a semiconductor chip that forms an
essential part of the personal computer manufactured by a major corporation. The direct materials
are added at the start of the production process while conversion costs are added uniformly
throughout the production process. June is Zygon's first month of operations, and therefore, there
was no beginning inventory. Direct materials cost for the month totaled $895,000, while
conversion costs equaled $4,225,000. Accounting records indicate that 475,000 chips were started
in June and 425,000 chips were completed.
Ending inventory was 50% complete as to conversion costs.
a. What is the total manufacturing cost per chip for June?
b. Allocate the total costs between the completed chips and the chips in ending inventory.
Answer:
a.
Cost to account for
Divided by equiv units
Cost per equivalent
units
Direct Materials
$895,000
475,000
Conversion
Costs
$4,225,000
450,000
$1.88
$9.39
Equivalent unit for conversion costs =
425,000 completed + (50,000 × 0.5 completed) =
425,000 + 25,000 = 450,000
b. Completed units = $11.27 × 425,000 = $4,789,750 Rounded
25
Total
$5,120,000
$11.27
Ending work in process = Direct materials = 50,000 × $1.88 =$ 94,000
Conversion costs = 25,000 × $9.39 =
234,750
Total
Rounded $328,750
38. Jordana Woolens is a manufacturer of wool cloth. The information for March is as follows:
Beginning work in process
Units started
Units completed
10,000 units
20,000 units
25,000 units
Beginning work-in-process direct
materials
Beginning work-in-process conversion
Direct materials added during month
Direct manufacturing labor during
month
Factory overhead
$ 6,000
$ 2,600
$30,000
$12,000
$ 5,000
Beginning work in process was half converted as to labor and overhead. Direct materials are added
at the beginning of the process. All conversion costs are incurred evenly throughout the process.
Ending work in process was 60% complete.
Under the weighted-average method, what is the cost of units completed and transferred out in
March?
Under the weighted-average method, what is the cost of Work-in-Process Ending Inventory?
Answer:
Note that you do need to provide the tables in the following format; you can simply describe your
calculations.
Flow of production
Work in process,
beginning
Started during period
To account for
Units completed
Work in process, ending
Accounted for
Costs
Work in process,
beginning
Costs added during
period
Physical
Units
Direct Materials Conversion
10,000
20,000
30,000
25,000
5,000
30,000
Totals
25,000
5,000
30,000
25,000
3,000
28,000
Direct Materials Conversion
$ 8,600
$ 6,000
$ 2,600
47,000
30,000
17,000
26
Total costs to account for
Divided by equivalent
units
Equivalent unit costs
$55,600
$36,000
$19,600
$ 1.90
30,000
$ 1.20
28,000
$ 0.70
Assignment of costs
Costs transferred out (25,000 ×
$1.90)
Work in process, ending
Direct materials (5,000 × $1.20)
Conversion (5,000 × $0.70 ×
0.60)
Costs accounted for
Assignment of costs
Costs transferred out (25,000 ×
$1.90)
Work in process, ending
Direct materials (5,000 × $1.20)
Conversion (5,000 × $0.70 ×
0.60)
Costs accounted for
$47,500
6,000
2,100
$55,600
$47,500
6,000
2,100
$55,600
39*. Our company uses a process costing system. The direct materials are added at the start of the
production process while conversion costs are added uniformly throughout the production process.
Consider the following information for the month of March:
Beginning Inventory
Units Started in March
Degree of WIP completion at the end of March
Equivalent Units as to Conversion Costs (total,
includes completed units and WIP inventory)
None
500
10%
410
How many units were completed and transferred out in March?
Answer. Let X be the number of units completed. Then, WIP inventory at the end of March is
500-X physical units. These units are 10% complete, therefore they convert to .10*(500-X)
equivalent units with respect to Direct Materials. Transferred out units correspond to X equivalent
units as to conversion costs. The total number of equivalent units as to conversion costs then is:
.10*(500-X)+X=410
Therefore,
.90*X=360
X=400.
27