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Introduction to Managerial Accounting Practice Midterm Exam 1 Part I. 25 Points Question 1 a. (6 points) Jackson Co. has prepared the following preliminary budget data for its two products, A and B: A B selling price $15/unit $11/unit variable manufacturing costs $ 5/unit $ 6/unit Fixed costs for Jackson are as follows: manufacturing $100,000 selling and admin. $250,000 If Jackson's total demand is 50,000 units, consisting of 20,000 units of A and 30,000 units of B, what is Jackson's total breakeven point in units? b. (4 points) If the demand changed such that total demand is still 50,000 units, but more A units and less B units were demanded, what would be the impact on Jackson’s total breakeven point? Why? Question 2 Courtney Corp. is considering one of two compensation schemes for its salespeople. They can either pay salespeople $2 for every unit sold, or they can pay the salesforce a fixed salary of $70,000. Assume the following: Selling price is $18/unit; variable manufacturing costs are $8/unit; fixed manufacturing costs are $110,000; variable admin. costs are $1/unit; and fixed admin. costs are $35,000. a. (5 points) At what level of sales in units is Courtney Corp. indifferent between the two compensation schemes? b. (5 points) If Courtney Corp. expects to sell 40,000 units, which compensation scheme should management select? Why? c. (7 points) Given the level of sales in (a) above, if shareholders of Courtney Corp. have a very strong preference for holding low risk investments, which compensation scheme would they prefer? Why? Describe an accounting measure that is useful in determining this preference. Part II. 25 Points (5 points each) Transwear co. uses job order costing. Factory overhead is applied to production at a budgeted rate of 200% of direct labor cost. Any overapplied or underapplied overhead is prorated. At the end of the period, there are three unfinished jobs, and $15,000 of direct materials and $35,000 of direct labor have been charged to these jobs. Additional information is available as follows: Direct labor = $60,000. Actual factory overhead was $150,000 for the period. Beginning balance of work in process = $70,000. Cost of goods sold (before disposition of over or under applied overhead) = $120,000. Finished goods beg. Inventory = $20,000. Finished goods ending inventory = $60,000. 1. The cost of goods manufactured is: (a) $100,000 (b) $120,000 (c) $130,000 (d) $160,000 (e) None of the above; the correct answer is ___________. 2. Ending balance in WIP is: (a) $100,000 (b) $120,000 (c) $130,000 (d) $160,000 (e) None of the above; the correct answer is ___________. 3. Factory overhead applied is: (a) $100,000 (b) $120,000 (c) $130,000 (d) $160,000 (e) None of the above; the correct answer is ___________. 4. Direct materials used are: (a) $10,000 (b) $20,000 (c) $30,000 (d) $40,000 (e) None of the above; the correct answer is ___________. 5. Finished goods after disposition of over or under applied overhead is: (a) $ 54,000 (b) $ 66,000 (c) $ 88,000 (d) $100,000 (e) None of the above; the correct answer is ___________. Part III. 25 Points (5 points each) Apex Corp. uses a standard absorption costing system that applies variable and fixed overhead on the basis of direct labor hours. They have developed some budgeted costs for the year as follows: at standard, each unit requires 4 pounds of direct materials at $3/pound, and 2 hours of direct labor at $5/hour. Apex corp.’s policy is to isolate the material price variance as soon as possible. They purchased 180,000 pounds of material at $4/pound. During the year, 25,000 units were produced. Budgeted costs at a level of 20,000 units (not necessarily the denominator level): Total factory overhead $500,000 Fixed factory overhead $340,000. Additionally, the following information is available: Actual direct labor cost $240,000. Direct labor efficiency variance $20,000 F. Direct materials efficiency variance $30,000 U. Actual fixed factory overhead $450,000. Actual variable factory overhead $190,000. Fixed overhead production volume variance $60,000 F. a. Actual pounds used by Apex Corp. are: b. Direct labor price variance is c. Variable overhead spending variance is: d. Variable overhead efficiency variance is: e. Denominator level in hours is Part IV. 20 Points Holden Corp. has the following income statement under standard absorption costing: Sales $1,000,000 Cost of Goods sold: beg. inv. $ 0 Production $975,000 ending inv. $225,000 Cost of goods sold: $750,000 adjust for variances - $ 95,000 adjusted Cost of goods sold $655,000 Gross Profit $345,000 Selling and Admin. expenses Variable selling and admin. $ 30,000 Fixed selling and admin. $170,000 Net income $145,000 ========= During the period Holden produced 130,000 units and sold 100,000 units. There was no beg. or ending WIP inventory. Budgeted fixed factory overhead was $150,000, actual fixed factory overhead was $90,000, and denominator level was 100,000 units. Holden does not prorate variances. Present a variable costing income statement (list the amount of any variance in an adjustment for variances). Part V. (5 Points) Horngren and Foster discuss a formula to determine the difference in income between absorption and variable costing. List this formula, and explain its meaning (why does it work, what does it represent). Does this formula always hold? Page 4 of 4Copyright © Arizona Board of Regents Sheet1 ACCT 569 Midterm 1 Spring 1994 I1a0.4*(10x)+0.6*(5x) -350,000 =0x = 50,000 units bBE point goes down because A has higher CM/unit than B and you are trading off A units for B units 2a 70000 = 2x => x=35000 units bselect fixed salary solution because at any level > 35000 units it costs the corp. less under this alternative At any level > 35000 units it costs the corp. an additional $2 per unit to select the variable scheme relative to the fixed compensation coperating levarage =CM/NIcommissionFixed salary 7*(35,000) =CM9*35000 = CM -145,000 =NI=-215000 = NI CM/NI = 245'/100' =2.45CM/NI = 315'/100' =3.15 Since investors want to avoid risk, they would prefer lower operating leverage => prefer variable commission II1d2-b3-b4-c5-b IIIa110,000 poundsSQ*SP AQ*APAQ*SPAQ*SP(25,000*4*3) 110,000*3= $300,000 DM$30,000 U Price Variance (Purchased)Efficiency Variance (Used) AQ*APAQ*SPSQ*SP $240,000$230,000(25'*2*5)=$250,000 bDL$10,000 U$20,000 F AQ*APAQ*SPSQ*SP $190,000c(46,000*4)=$184,000d(25,000*2*4)=$200,000 cVFO$6,000 U$16,000 F dSQ*SP (25,000*2*8 ) e$340,000=$400,000 FFO$60,000 F 340000/x = 8x = 42500 hrs IV1Sales1,000,000 VC Standard Var Man. cost of Goods Sold Beg inv0 Prod780,000 End inv180,000 600,000 Adjustment for variance10,000 610,000 Var Sell and Adm30,000 CM360,000 FC FFO90,000 FSA170,000 Net Income100,000 b Change in inventory * FFO rate = Change in income Represents the FFO amount attached to units in inventory (eg F/G) not shown on var I/S. Formula