UNIVERSITY OF TORONTO
RSM 222 H1S
MIDTERM EXAM, Winter 2011
Section I: 9 Multiple Choice Questions (3 marks each, 27 marks in total) :
Please circle the single best answer for the multiple-choice questions.
1. Which of the following items would be included as part of factory overhead in a microcomputer manufacturer?
a. the cost of memory chips
b. wage of computer assemblers
c. depreciation of computer assemblers
d. salary of marketing director
e. all of the above
2. Inventoriable costs
a. include only the prime costs of manufacturing a product.
b. include only the conversion costs of manufacturing a product.
c. are expensed when products become part of finished goods inventory.
d. are regarded as assets before the products are sold.
e. None of the above.
3. Once the break-even point is reached
a. The total contribution margin changes from negative to positive.
b. Net income will increase by the unit contribution margin for each item sold.
c. Variable costs will remain constant in total
d. The contribution margin ratio begins to decrease
e. None of the above
4. Miller manufactures desks. During the most productive month of the year, 3,500 desks are manufactured at a total cost of $84,400. In its slowest month, Miller makes 1,100 desks at a cost of $46,000. February is a regular month. Miller plans to make 2,000 units. What is the total variable costs for Fabruary?
e. None of the above.
5. Winsor Inc. has planned to increase factory manager salary by 10%. If selling prices and all other cost are held constant, the break-even point
a. decreases at rate higher than 10%
b. decreases at a rate lower than 10%.
c. increases at rate higher than 10%
d. increases at a rate lower than 10%.
e. None of the above.
6. The following information relates to Glow Ltd.
Cost of goods sold 56,000
Operating expenses 25,500
Finished goods, beginning inventory 15,000
Finished goods, ending inventory 15,000
Direct material 10,500
Direct labour 19,000
What is Glow’s cost of goods manufactured?
e. None of the above
7. Activity based costing may be used in which of the following scenarios?
a. For selling and administrative expenses.
b. For service related business.
c. Both a and b.
d. Nether a nor b.
8. The process of choosing among competing alternatives is called
b. Decision making
d. Performance evaluation
e. None of the above.
9. Which of the following statement is true?
I. A cost driver is a factor that causally affects costs.
II. A cost hierarchy is a categorization of costs into different cost pools on the basis of
the different types of cost drivers or different degrees of difficulty in determining
a. Only I
b. Only II
c. Both I and II
d. Neither I nor II
Section II. Short Answer Questions (18 marks)
1. Ruth Reed, divisional controller and certified management accountant, was upset by a recent memo she received from the divisional manager, Paul Chesser. Ruth was scheduled to present the division’s financial performance at headquarters in one week. In the memo, Paul had given Ruth some instructions for this upcoming report. In particular, she has been told to emphasize the significant improvement in the division’s profits over last year. Ruth, however, didn’t believe that there was any real underlying improvement in the division’s performance and was reluctant to say otherwise. She knew that the increase in profits was because of Paul’s conscious decision to produce for inventory.
Paul had convinced his plant managers to produce more than they knew they could sell. Paul argued that by doing so reported profits would jump. He pointed out two significant benefits. First, by increasing profits, the division could exceed the minimum level needed so that all the managers would qualify for the annual bonus. Second, by meeting the budgeted profit level, the division would be better able to compete for much needed capital. Ruth had objected but had been overruled. The most persuasive counterargument was that the increase in inventory could be liquidated in the coming year as the economy improved. However, Ruth considered this event unlikely. Based on past experience, she believe that it would take at least two years of improved market demand before the productive capacity of the division was exceeded.
Answer the following questions:
a. (4 marks) Why does the profit increase when the division produces for more inventory?
b. (4 marks) In chapter 1, ethical standards for management accountant were listed. Identify any standards that apply in this situation. Based on this, discuss what should Ruth do?
Should she comply with the directive to emphasize the increase in profits? If not, what options does she have?
2. DEF company has the following cost data for 2010. The data is collected before the disposition of under- or over-applied overhead.
Work in Process Inventory $60,000
Finished Goods Inventory $80,000
Cost of Goods Sold $200,000
Actual overhead $150,000
Applied overhead $130,000
a. (2 marks) How much is the under-applied or overapplied overhead for 2010?
b. (4 marks) Assume that the amount is significant, prepare the journal entry to dispose of the amount.
3. (4 marks) Provide two reasons why overhead might be under-applied/over-applied for DEF company in 2010.
Section III. 4 Problems (55 Marks)
1. Job Costing (13 marks)
Orange Inc. is a manufacturing firm that uses normal job-order costing. On January 1, the
beginning of its fiscal year, the company had the following inventory balances: Raw material
$ 20,000; Work in process $25,000; Finished goods $30,000.
The company applies overhead cost to jobs on the basis of machine-hours worked. For the
current year, the company estimated that it would work 75,000 machine-hours and incur
$450,000 in manufacturing overhead cost. The following transactions were recorded for the year:
1. Raw materials were purchased on account, $410,000.
2. Raw materials were requisitioned for use in production, $380,000 ($360,000 direct
materials and $20,000 indirect materials).
3. The following costs were incurred for employee services: direct labor, $75,000; indirect
labor, $110,000; sales commissions, $90,000; and administrative salaries, $200,000.
4. Sales travel costs were $17,000.
5. Utility costs in the factory were $43,000.
6. Advertising costs were $180,000
7. Depreciation was recorded for the year, $350,000 (80% relates to factory operations, and
20% relates to selling and administrative activities).
8. Insurance expired during the year, 10,000 (70% related to factory operations, and the
remaining 30% relates to selling and administrative activities).
9. Manufacturing overhead was applied to productions. Due to lower than expected
demand for its products, the company worked 70,000 machine-hours during the year.
10. Goods costing $880,000 to manufacture according to their job cost sheets were
completed during the year
Required ( A – C): (Show your calculation using T-Account)
A) (6 marks) Determine the amount of over or under applied overhead for the year
B) (4 marks) Determine the ending inventory balance of work-in-process.
C) (3 marks) Determine the amount of Selling, General & Administrative Costs for the year.
2. Process Costing (12 Marks)
Halifax Salt company process salt and accounts for production using weighted average process
costing method. Direct material is added at the start of production but labor and overhead costs
are incurred evenly throughout. The following data pertain to operations for February:
Beginning WIP (75% complete) 8,000 kg
Started in February 200,000 kg
Ending WIP (25% complete) 20,000 kg
The cost information is provided below:
Direct material Conversion
Beginning WIP $4,000 $2,282
Incurred in February $48,000 $20,878
Calculate the cost transferred out to finished goods inventory and the value of the ending WIP.
3. Cost-Volume-Profit Analysis (15 marks)
The ABC company produces two products. The marketing department expects that the company
can sell 1,000 units of regular product and 1,100 units of luxury product each month. The company provides the following information:
Unit sales price $210 $300
Unit variable cost $110 $130
Monthly fixed cost for FIVE machines used to manufacture both products is $150,000. It takes 1
machine hour to produce regular product and 2 hours to produce luxury product. Each machine
has a capacity of 600 hours/month.
a. What is the maximum profit that the company can make in January?
b. The marketing department figured out in January that the customers are willing to buy
luxury product at price $350. Should the company revise its production plan in February?
What would be the profit with the new plan?
4. ABC Problem (15 Marks)
The River Company manufactures a variety of prestige boardroom chairs. Its job-costing system
uses an activity based approach. There are two direct cost categories (direct materials and direct
labour) and three indirect cost pools. The cost pools represent the following three activities.
Activities Budgeted costs for
Cost driver used as
Cost allocation rate
Materials handling $200,000 Parts $0.25
Cutting 2,000,000 Parts 2.50
Assembly 2,000,000 Direct labour hours 25.00
Two styles of chairs were produced in February, 2011, the executive char and the chairman chair.
Their quantities, direct material costs, and other data for February are as follows:
Units produced Direct material
Number of parts Direct labour
Executive Chair 5,000 $600,000 100,000 7,500
Chairman Chair 100 25,000 3,500 500
The upstream activities to manufacturing (R&D and design) and downstream activities
(marketing, distribution, and customer serve) are analyzed, and the unit costs for these activities
Upstream Activities Downstream Activities
Executive Chair $60 $110
Chairman Chair 146 236
The direct manufacturing labour rate is $20 per hour. Assume no beginning or ending inventory.
1) Compute the unit manufacturing costs of the executive chair and the chairman chair.
Executive Chair Chairman Chair
2) The company sells the executive chair at the price $500 and the chairman chair at the price $1,200. What is the profit for the company in February?