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Name:_____________________________________ ACC604 Management Accounting Final SLOAT Questions (11-14-07) four (4) points to each question (in the case of multiple choice questions, one point to each question in a set of four) Learning Outcome no. 1 Evaluate the reporting of managerial accounting information in terms of ethical considerations, and identify the importance of ethical standards in a market economy. 1. Short essay (writing quality counts): Walter is a staff accountant for one of the stores in a retail chain. His manager, Steven, is evaluated based on year-end profits. He has asked Walter to record sales that occurred in the first several days of next year in this year's records instead of next year's. Walter knows that sales should be recorded in the period in which they occurred, but if he does not do what Steven asks, Steven will probably not recommend him for a raise, and might even fire him. What should Walter do first? If that does not resolve the issue, what should Walter do next? If that does not resolve the issue either, what is the remaining course of action open to Walter? If some of next year's sales are indeed reported this year, what harm might that cause and to whom? Learning Outcome no. 2 Apply both the single cost-driver approach and activity-based costing (ABC) to the allocation of manufacturing overhead, and compare them in terms of cost information quality. Use the following to answer the next THREE questions: Acton Company has two products: A and B. The annual production and sales of Product A is 800 units and of Product B is 500 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor hours per unit and Product B requires 0.2 direct labor hours per unit. The total estimated overhead for next period is $92,023. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows: Estimated Activity Cost Pool Activity 1 Activity 2 General Factory Total Overhead Costs $14,487 $64,800 $12,736 $92,023 Product A 500 2,500 240 Expected Activity Product B Total 600 1,100 500 3,000 100 340 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours. 1 2(a). The predetermined overhead rate under the traditional costing system is closest to: A) $37.46. B) $21.60. C) $13.17. D) $270.66. 2(b). The overhead cost per unit of Product B under the traditional costing system is closest to: A) $54.13. B) $7.49. C) $4.32. D) $2.63. 2(c). The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to: A) $28.97. B) $13.17. C) $83.66. D) $24.15 2 (d). When used to allocate manufacturing overhead to multiple products, activity based costing is likely to provide a more reliable cost allocation than a single plant-wide cost driver because: A) In activity based costing, overhead rates are applied to the actual number of cost driver units consumed instead of an estimated number of cost driver units consumed. B) Multiple cost drivers are used so that more appropriate measures can be used to allocate overhead costs. C) Multiple activities enables overhead rates to be based on actual costs instead of estimated costs. D) Activity based costing is acceptable for financial statement reporting in accordance with U.S. GAAP, whereas overhead allocation by a single cost driver is not sufficiently accurate. . Learning Outcome no. 3 Apply various techniques for analyzing mixed costs into variable vs. fixed components, and use the results to predict costs at forecasted levels of activity. 3(a). Anaconda Mining Company shipped 9,000 tons of copper concentrate for $450,000 in March and 11,000 tons for $549,000 in April. Shipping costs for 12,000 tons to be shipped in May would be expected to be: A) $548,780. B) $549,020. C) $594,000. D) $598,500. 2 3(b). Which of the following is true about the high-low, scattergraph, and least squares regression methods of analyzing mixed costs? A) The high-low method is more accurate than the least squares regression method because it requires only two data points. B) High-low and least squares regression provide the same results but the high-low method is simpler to use. C) Least squares regression is more accurate than high-low because it makes use of all available data points. D) High-low and least squares regression provide the same results but both are more complex than the scattergraph method. 3(c). The linear equation Y = a + bx is often used to express cost formulas. In this equation: A) the b term represents variable cost per unit of activity. B) the a term represents variable cost in total. C) the x term represents total cost. D) the Y term represents total fixed cost 3(d). Within the relevant range of activity, variable cost per unit will: A) increase in proportion with the level of activity. B) remain constant. C) vary inversely with the level of activity. D) none of the above. Learning Outcome no. 4 Analyze accounting data by application of cost-volume-profit concepts . 4(a). George Company sells one product at a price of $20 per unit. Variable expenses are 60 percent of sales, and fixed expenses are $20,000. The amount of sales required to break even is: A) $2,500 B) $12,000 C) $33,333 D) $50,000 4(b). The income statement for Ellwell is as follows: Sales (10,000 units) Less variable costs Contribution margin Less fixed costs Net income If sales increase by 1,000 units, profits will: A) B) C) D) 3 increase by $800. increase by $3,200. increase by $4,800. increase by $8,000 $80,000 -$48,000 $32,000 -$24,000 $8,000 4(c). The following information pertains to Oliver's operations: Selling price per unit Variable costs per unit Total fixed costs $50 $30 $100,000 The sales volume required to obtain a target pretax profit of $25,000 is: A) $125,000 B) $208,333 C) $250,000 D) $312,500 4(d). In a contribution income statement: A) B) C) D) gross margin is the difference between sales revenue and the cost of goods sold. all fixed costs are grouped together and subtracted from gross profit. contribution margin equals the sum of net income plus all fixed expenses. contribution margin equals the difference between sales revenue and fixed costs. Learning Outcome no. 5 Evaluate operational budgeting in terms of the process by which it is implemented and its possible benefits to the organization. 5(a). A) B) C) D) Which of the following is not a benefit of budgeting? It reduces the need for tracking actual cost activity. It sets benchmarks for evaluation performance. It uncovers potential bottlenecks. It formalizes a manager's planning efforts. 5(b). Self-imposed participatory budgets typically are: A) not subject to review by higher levels of management since to do so would contradict the participative aspect of the budgeting processing. B) not subject to review by higher levels of management except in specific cases where the input of higher management is required. C) subject to review by higher levels of management in order to prevent the budgets from becoming too loose. D) not critical to the success of a budgeting program. 5(c). A) B) C) D) 4 Under the zero-based approach to budgeting, budgeted revenue must equal budgeted expense. the amount budgeted for this year must be the same as the amount budgeted for last year. budgeted amounts are adjusted to equal the actual amounts at the end of the period. every dollar must be justified without using the prior year's budget amounts as a basis. 5(d). A) B) C) D) National Telephone Company has been forced by competition to put much more emphasis on planning and controlling its costs. Accordingly, the company's controller has suggested initiating a formal budgeting process. Which of the following steps will NOT help the company gain maximum acceptance by employees of the proposed budgeting system? Implementing the change quickly. Including in departmental responsibility reports only those items that are under the department manager's control. Demonstrating top management support for the budgeting program. Ensuring that favorable deviations of actual results from the budget, as well as unfavorable deviations, are discussed with the responsible managers. Learning Outcome no. 6 Apply the concept of flexible budgeting and demonstrate why it may be more appropriate than a static budget for measuring a manager's performance. 6(a).A flexible budget variance for a manufacturing cost is computed as the difference between: A) B) C) D) 6(b). Flexible budget costs and static budget costs Actual costs and flexible budget costs Departmental costs and cost center costs Flexible budget costs and original budget costs To determine the flexible budget amount: A) Multiply the budgeted variable cost per unit times the actual number of units produced. B) Multiply the actual variable cost per unit times the budgeted number of units produced. C) Multiply the total budgeted variable cost per unit times the budgeted number of units produced. D) Divide the actual number of units produced by the variable cost per unit. 6(c). If the actual number of units produced during the period is less than the budgeted number of units: A) The flexible budget variance between actual fixed costs and budgeted fixed costs will be more favorable than it would be for a static budget variance. B) The flexible budget variance between actual fixed costs and budgeted fixed costs will be less favorable than it would be for a static budget variance. C) The flexible budget variance between actual variable costs and budgeted variable costs will be less favorable than it would be for a static budget variance. D) The flexible budget variance between actual variable costs and budgeted variable costs will be more favorable than it would be for a static budget variance. 6(d). A flexible budget is more appropriate than a static budget to measure a cost center manager's performance because: A) Unlike static budgets, cost center managers are responsible only for costs and not for revenue. B) Unlike static budgets, flexible budgets consider the actual volume of production. C) Unlike static budgets, non-controllable costs are eliminated in flexible budgets. D) Unlike static budgets, flexible budgets can be adjusted to match actual costs. 5 Learning Outcome no. 7 Apply commonly used techniques such as ROI (DuPont method) and Residual Income for measuring the performance of investment center managers. 7(a). Which of the following changes would NOT change return on investment (ROI)? A) The division decreases sales and expenses by the same percentage. B) The division increases total assets. C) The division increases sales dollars by the same amount that total assets increase. D) The division decreases sales and expenses by the same dollar amount. 7(b).Information for Lynch division is as follows: Net earnings for division Asset base for division Target rate of return Operating income margin Weighted average cost of capital Lynch $20,00 0 $50,00 0 15% 10% 2% : What is Lynch's residual income? A) B) C) D) 7(c). $20,000 $12,500 $7,500 $14,000 Which of the following is NOT an advantage of ROI? A) It encourages managers of departments with high ROIs to invest in average ROI projects. B) It encourages managers to pay careful attention to the relationships among sales, expenses, and investment. C) It encourages cost efficiency. D) It discourages excessive investment in operating assets. 7(d). Which of the following is a legitimate disadvantage of residual income? A) It does not explicitly capture cost of capital in the computation of the measure. B) It does not encourage managers to accept all projects above the minimum return. C) It is not an effective basis for comparing divisions of substantially different sizes. D) It does not provide any new information beyond ROI. 6 Learning Outcome no. 8 Evaluate proposed capital budget expenditures on the basis of commonly used project assessment technique. Waterman Publishing is considering the purchase of a used printing press costing $38,400. The printing press would generate a net cash inflow of $16,000 a year for 3 years. At the end of 3 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation. The present value factors of an annuity of $1.00 for different rates of return are as follows: 8a). The project's accounting rate of return (rounded to the nearest percent) on the initial investment is: A) 8 percent B) 10 percent C) 42 percent D) 75 percent 8b). Use the same facts as for the prior question. The investment's payback period in years (rounded to two decimal points) is: A) 2.00 B) 2.13 C) 2.40 D) 3.00 8(c). Project A has a predicted payback period of 2.5 years and Project B has a predicted payback period of 5 years. Based on this information we can conclude: A) Project B is preferred to Project A B) Project B provides twice the return of Project A C) Project B is preferred to Project A, but it is not necessarily twice as profitable D) More information should be gathered before deciding on which project, if either is desirable 8(d). This is a reason to employ the net present value method in making capital expenditure decisions. A) The NPV method determines the length of time necessary to recover the entire cost of an investment from the resulting annual net cash flow B) The NPV method determines the rate of return on average investment C) The NPV method considers the timing of future cash flows D) All of the above 7 Learning Outcome no. 9 Analyze a segment report, and for a low-performing segment, provide rationale for continuance if appropriate, along with recommendations for performance improvement. 9. Short essays (writing quality counts): The following is a segment report for Moonbeam Tea Houses, Inc. Samuel Lipton, the CEO is proposing to close the Midwest division since he believes that will increase the company's net income by $25,000 Company Totals $300,000 $200,000 $500,000 $1,000,000 195,000 170,000 300,000 665,000 West Sales Variable expenses Fixed expenses: Direct traceable fixed expense Allocated corporate expense Net income (loss) Midwest East 40,000 25,000 20,000 30,000 30,000 30,000 $35,000 ($25,000) $150,000 85,000 90,000 $160,000 (a) What would be the actual effect on the company's net income if the Midwest division were to be closed? Explain why. In your answer, refer to \"segment margin\". (b) If the Midwest division were to be closed, what would be the effect on the company's net income if $5,000 of the Midwest division's Direct traceable fixed expenses is Depreciation of Furniture and Fixtures? Assume these assets have no alternative use if the Midwest division is closed. Explain why. In your answer, refer to \"sunk cost\". 8