COURSE: QUARTER: TEST:

Accounting 505 Summer 2007 Final !am

DATE: Wednesday, August 1 1:00 3:00 p.m.

PLEASE PRINT YOUR NAME:

""""""SOLUTION""""""""""""""""""""

All #uestions are to $e ans%ered in t&e spaces pro'ided. . Ans%er only t&e #uestions as(ed. )o not do any unnecessary %or(. *+ you ma(e any assumptions, please state t&em. ,&ey must not $e contradictory to t&e +act patterns gi'en. W&ere calculations are needed to arri'e at a solution, you are ad'ised to s&o% enoug& %or( so * can understand &o% you arri'ed at your ans%er. -artial credit is a'aila$le on some computational #uestions. .o%e'er, unless your %or( is s&o%n, it is not possi$le to determine i+ partial credit points are appropriate. -lease con+ine your %or( to t&e e!amination paper. /ou &a'e 120 minutes to complete t&is test. *n t&e interests o+ ma!imi0ing your grade, * recommend you skim thr u!h the entire e"#m $e% re & u st#rt t #ns'er #n& (uesti n so you can plan your strategy. *+ you need clari+ication 1e.g. de+inition o+ %ords, unclear instructions, unclear pro$lem2 during t&e test, raise your &and and * %ill come to you and pro'ide clari+ication %&ere appropriate and allo%a$le. * %ill not re3teac& any point. S)#*e h#s $een )r +i,e, $e- ' e#*h (uesti n % r & ur res) nse. P-e#se $e sure & u #ns'er #-- )#rts % # (uesti n. P int +#-ues % r e#*h (uesti n #re in,i*#te, in )#rentheses #t the en, % e#*h (uesti n. ,&ere are 12 pages 1including t&is title page2 in t&is e!amination pac(et. 4ount your pages and con+irm t&at you &a'e a complete pac(age and t&at no pages are duplicated or missing. By signing below you certify that the answers provided on this exam are the result of your own legitimate efforts

""""""""""""""""""""""""""""""""""" /our 5ame 33 Signature /UD0ET YOUR TIME 1ISELY2 0OOD LUC32

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P#rt 1. Mu-ti)-e4*h i*e 5 T )i*s 6#r&. 7 ) ints e#*h (uesti n8 79 t t#- ) ints. 1. 6udgeting pro'ides all o+ t&e +ollo%ing except a. $. c. d. 2. a means to communicate t&e organi0ation7s s&ort3term goals to its mem$ers. support +or t&e management +unctions o+ planning and coordination. a means to anticipate pro$lems. an et&ical +rame%or( +or decision ma(ing.

6udgeted production depends on a. $. c. d. t&e direct materials usage $udget and direct material purc&ases $udget. t&e direct manu+acturing la$or $udget. $udgeted sales and e!pected c&anges in in'entory le'els. t&e manu+acturing o'er&ead costs $udget.

3.

A primary consideration in assigning a cost to a responsi$ility center +or e'aluation purposes is a. $. c. d. %&et&er t&e cost is +i!ed or 'aria$le. %&et&er t&e cost is direct or indirect. %&o controls t&at cost. %&ere in t&e organi0ational structure t&e cost %as incurred.

:.

W&ic& o+ t&e +ollo%ing statements a$out production 'ariances is true8 a. $. c. d. ,&e direct manu+acturing la$or price 'ariance is li(ely to $e +a'ora$le i+ &ig&er3 s(illed %or(ers are put on a 9o$. ,&e use o+ &ig&3#uality ra% materials may result in a +a'ora$le e++iciency 'ariance and an un+a'ora$le price 'ariance. An un+a'ora$le 'aria$le o'er&ead e++iciency 'ariance indicates t&at 'aria$le o'er&ead items %ere %asted and ine++iciently used. -roduction management is al%ays &eld responsi$le +or any production 'olume 'ariance t&at may arise.

5.

All o+ t&e +ollo%ing statements relating to decision analysis are true, except a. $. c. d. A cost may $e rele'ant +or one decision, $ut not rele'ant +or a di++erent decision. *n a ma(e3or3$uy decision, %&en t&ere are alternati'e uses +or capacity, t&e opportunity cost relating to t&at capacity is rele'ant. :egardless o+ any e!isting constraining resource, to ma!imi0e pro+its managers s&ould produce more o+ t&e product %it& t&e greatest contri$ution margin per unit. W&en replacing an old mac&ine %it& a ne% mac&ine, t&e sales 'alue o+ t&e old mac&ine is rele'ant to t&e decision, $ut t&e $oo( 'alue o+ t&e old mac&ine is not rele'ant.

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;.

Frederic(, inc., is considering replacing a mac&ine. ,&e +ollo%ing data are a'aila$le: Re)-#*ement M#*hine =35,000 5 0 0 =>,000

O-, M#*hine <riginal cost %&en purc&ased =>5,000 ?se+ul li+e in years 10 4urrent age in years 5 6oo( 'alue =25,000 )isposal 'alue no% =@,000 )isposal 'alue in 5 years 0 Annual cas& operating costs =7,000

,&e di++erence $et%een (eeping t&e old mac&ine and replacing t&e old mac&ine is a. $. c. d. 7. =37,000 in +a'or o+ (eeping t&e old mac&ine. =12,000 in +a'or o+ (eeping t&e old mac&ine. =37,000 in +a'or o+ replacing t&e old mac&ine. =12,000 in +a'or o+ replacing t&e old mac&ine.

*n using t&e net present 'alue met&od in capital $udgeting analysis, only pro9ects %it& a 0ero or positi'e net present 'alue are accepta$le $ecause a. $. c. d. t&e return +rom t&ese pro9ects e#uals or e!ceeds t&e internal rate o+ return. t&e return +rom t&ese pro9ects e#uals or e!ceeds t&e re#uired rate o+ return. t&e return +rom t&ese pro9ects e#uals or e!ceeds t&e accrual accounting rate o+ return. a 0ero or positi'e net present 'alue on a particular pro9ect guarantees company pro+ita$ility.

@.

All o+ t&e +ollo%ing s&ould impro'e under decentrali0ation e!cept a. $. c. d. 4orporate control. Aocal responsi'eness. Banagement training. ,imeliness o+ decision ma(ing.

C. W&at is t&e term used to descri$e t&e situation %&en a manager7s decision %&ic& $ene+its one su$unit is more t&an o++set $y t&e costs to t&e organi0ation as a %&ole8 a. $. c. d. Su$optimal decision ma(ing Su$liminal decision ma(ing. 4ongruent decision ma(ing. 4ontingent decision ma(ing.

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10.

A trans+er3pricing met&od leads to goal congruence %&en a. $. c. d. managers al%ays act in t&eir o%n $est interest. managers act in t&eir o%n $est interest and t&e decision is in t&e long3term $est interest o+ t&e manager7s su$unit. managers act in t&eir o%n $est interest and t&e decision is in t&e long3term $est interest o+ t&e company as a %&ole. managers act in t&eir o%n $est interest and t&e decision is in t&e s&ort3term $est interest o+ t&e company.

11.

A di'ision earning a pro+it can increase its return on in'estment 1:<*2 $y a. $. c. d. increasing sales re'enue and operating e!penses $y t&e same dollar amount. decreasing sales re'enues and operating e!penses $y t&e same percentage. increasing in'estment and operating e!penses $y t&e same dollar amount. increasing sales re'enues and operating e!penses $y t&e same percentage.

12.

A pro$lem %it& using t&e residual income measure is t&at a su$unit %it& a a. &ig& in'estment turno'er ratio al%ays &as a &ig&er residual income t&an a corporation %it& a smaller in'estment turno'er ratio. $. &ig& return on sales al%ays &as a &ig&er residual income t&an a corporation %it& a smaller return on sales. c. larger dollar amount o+ assets is li(ely to &a'e a &ig&er residual income t&an a su$unit %it& a smaller dollar amount o+ assets. d. 5one o+ t&ese ans%ers is correct.

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P#rt 2. Sh rt4#ns'er Questi ns. T )i*s +#r&. 9: t t#- ) ints. 1. ,&e +ollo%ing in+ormation pertains to ,i++any 4ompany: M nth Danuary Fe$ruary Barc& S#-es =30,000 =>0,000 =50,000 Pur*h#ses =1;,000 =20,000 =2@,000

4as& is collected +rom customers in t&e +ollo%ing manner: 1All sales are credit sales.2 Bont& o+ sale 30E Bont& +ollo%ing t&e sale ;7E ?ncollecti$le 3E >0E o+ purc&ases are paid +or in cas& in t&e mont& o+ purc&ase, and t&e $alance is paid t&e +ollo%ing mont&. Aa$or costs are 20E o+ sales. <t&er operating costs are =15,000 per mont& 1in*-u,in! =>,000 o+ depreciation2. 6ot& o+ t&ese are paid in t&e mont& incurred. ,&e cas& $alance on Barc& 1 is =>,000. A minimum cas& $alance o+ =3,000 is re#uired at t&e end o+ t&e mont&. Boney can $e $orro%ed in multiples o+ =1,000.

W&at %ill $e t&e *#sh $#-#n*e at t&e end o+ Barc& prior to any $orro%ing t&at may $e necessary8 F@G
!"#$%% &!'#%%% beginning balance ( !'"#)%% receipts * !''#+%% disbursements , /rom 0arch sales. /rom /eb sales. !"1#%%% &!1%#%%% x 2%3, +$#)%% &!'%#%%% x $43, !'"#)%% !""#+%% &!+)#%%% x '%3, "+#%%% &!+%#%%% x $%3, !+2#+%% "%#%%% &!1%#%%% x +%3, ""#%%% &!"1#%%% * !'#%%%6, !''#+%%

-ash receipts from sales.

5isbursements. /or purchases. Other. Total disbursements

/rom 0arch purchases /rom /eb purchases. Labor. Operating costs

;:<000 // = ;:1<>00 re*ei)ts 4 ;::<200 ,is$ursements ? ;1<900 $#-#n*e $e% re $ rr 'in! @Sin*e ,e)re*i#ti n is n t # *#sh ut%- '< )er#tin! ,is$ursements #re re,u*e, $& ;:<000.

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2.

4o! 4ompany uses standard costing. ,&e +ollo%ing data are a'aila$le +or April: Actual #uantity o+ direct materials used....................................................... 3,050 gallons Standard price o+ direct materials................................................................ => per gallon Baterial #uantity 'ariance........................................................................... =2,000 un+a'ora$le Standard gallons allo%ed per unit produced 3 gallons .o% many units %ere actually produced during April8 F>G >A0 units A*tu#- !#-- ns " St#n,#r, )ri*e B7<0A0 " ;:C Less. Un%#+ r#$-e (u#ntit& +#ri#n*e St#n,#r, !#-- ns D st#n,#r, )ri*e % r #*tu#- ut)ut ;10<200 4:4 BA*tu#- ut)ut " 7 !#-- ns )er unit " ;: )er !#-- nC A*tu#- ut)ut ? ;10<200 4:4 ;12. ;12<200 BPr n! 2C 2<000 ;10<200 BPr n! 7C

3.

,&e +ollo%ing la$or standards &a'e $een esta$lis&ed +or a particular product: Standard la$or &ours per unit o+ output....................................................... @.7 &ours Standard la$or rate..................................................................................... =1@.10 per &our ,&e +ollo%ing data pertain to operations concerning t&e product +or t&e last mont&: Actual &ours %or(ed................................................................................... 3,@00 &ours Actual total la$or cost.................................................................................. =;7,;>0 Actual output............................................................................................... 500 units 1a2 4ompute t&e la$or rate and e++iciency 'ariances, and 1$2 prepare t&e 9ournal entry to record t&e la$or cost and to isolate any related 'ariances. F;G A*tu#- L#$ r C st =;7,;>0 A*tu#- h urs " st,. r#te St,. h urs " st,. r#te

3,@00 H =1@.10I&our 500 units ! @.7 &rs ! =10.10 =;@,7@0 =7@,735 =1,1>0 F =C,C55 F

W*-

7@,735 Aa$or rate 'ariance Aa$or e++iciency 'ariance Wages paya$le

1,1>0 C,C55 ;7,;>0

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>. DennyJs 4orporation manu+actured 2,500 units o+ product during Barc&. *t allocates +i!ed manu+acturing o'er&ead 1FB<.2 on t&e $asis o+ mac&ine &ours. ,&e +ollo%ing selected +i!ed o'er&ead data pertain to Barc&. A*tu#St#ti* /u,!et -roduction 2,500 units 2,>00 Bac&ine3&ours ;,100 &ours ;,000 &ours Fi!ed o'er&ead costs =123,000 8 ,&e +i!ed o'er&ead +le!i$le3$udget 'ariance +or Barc& %as =3,000 un+a'ora$le. 1a2 W&at are 1i2 t&e total FB<. $udgeted +or Barc& and 1ii2 t&e FB<. allocation rate per standard mac&ine &our8 F2G BiC ;120<000 B;127<000 #*tu#- E $u,!et $& ;7<000 un%#+ r#$-e F4/ +#ri#n*eC

BiiC ;20 )er m#*hine h ur. B;120<000 $u,!et 4:4 2<:00 st,. m#*hine hrs #t ,en min#t r -e+e- % #*ti+it& 5 i.e 'h#t 'e e")e*te, t , < #s in st#ti* $u,!et.C

1$2

W&at is t&e standard num$er o+ mac&ine &ours allo%ed per unit o+ production8 F2G 2.A st#n,#r, m#*hine h urs )er unit B9<000 m#*hine h urs 4:4 2<:00 unitsC

1d2 F2G

)etermine t&e amount and nature 1? or F2 o+ any production 'olume 'ariance +or Barc& FB<. 6udgeted =120,000 =5,000 F FB<. Applied 12,500 ! 2.5 ! =202 =125,000

1e2 W&o s&ould $e &eld primarily responsi$le +or t&e incurrence o+ t&e 'ariance you &a'e s&o%n in -art 1$28 W&y8 F2G SalesImar(eting Sales s&ould dri'e production.

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Sil'er Aa(e 4a$inets is approac&ed $y a representati'e o+ K&ang *ndustries, not a regular customer, to +ul+ill a large one3time3only special order o+ 12,000 ca$inets similar to t&at o++ered to regular customers. ,&e +ollo%ing per unit data apply +or sales to regular customers $ased on current production le'el:
5.

)irect materials )irect la$or Laria$le manu+acturing o'er&ead Fi!ed manu+acturing o'er&ead ,otal manu+acturing costs Bar(up 1;0E2 ?nit selling price

=100 125 ;0 75 3;0 21; =57;

K&ang *ndustries %ants to ca$inets in c&erry rat&er t&an oa(, so direct material %ill increase $y =30 per unit. a. Assuming Sil'er Aa(e &as su++icient capacity a'aila$le to meet t&is order, and considering only 7uantitative factors, %&at is t&e minimum price per unit t&at Sil'er Aa(e 4a$inets could accept +or t&is one3time3only special order8 F2G ;71A Sum % DM #t ;170< DL % ;12A< #n, 6MOG % ;90

$. Assume no% t&at Sil'er Aa(e &as a'aila$le capacity to ma(e only @,000 units o+ t&e special order. W&at is t&e minimum price no%8 F3G ;:12 ;71A %r m B#C )-us )) rtunit& * st % ;HI )er unit * m)ute, #s % -- 's: Re!u-#r CM )er unit % B;2H1@ " :<000 % r%eite,CJ12<000 nee,e, ? ;HI =57; selling price less )B =100, )A =125, and LB<. =;0. 5ote t&at t&e 4B on regular sales is computed assuming regular materials used at =100 a unit. c. W&at are ot&er 1i.e. #ualitati'e2 issues t&at Sil'er Aa(e 4a$inets s&ould consider $e+ore ma(ing a decision as to %&et&er or not to accept t&is one3time3only special order8 B/u--et4 ) int % rm#t is )re%erre, in & ur #ns'er.C F>G Any t%o o+ t&e +ollo%ing: *s t&is only a one3time deal8 *+ not, +i!ed costs $ecome rele'ant. W&at mig&t $e potential impact on regular customers i+ t&ey learn a$out it8 Big&t t&e customer attempt to resell t&ese units and undercut Sil'er Aa(eJs mar(et8

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;. Framing&am -roducts is considering purc&asing a ne% piece o+ e#uipment to impro'e its operations and increase production o'er t&e ne!t si! years. Wor(ing capital %ill need to increase $y =5,000 at t&e $eginning o+ t&e use o+ t&e e#uipment, $ut it is all e!pected to $e released at t&e end o+ t&e ;3year period. Annual cas& contri$ution margin %ill increase $y =1@,000. Sal'age 'alue o+ t&e e#uipment is estimated to $e =2,500 at t&e end o+ t&e si! years. Framing&amJs minimum re#uired rate o+ return on pro9ects o+ t&is type and le'el o+ ris( is 15E. ,&e net present 'alue o+ t&e purc&ase and use o+ t&is mac&ine is appro!imately =3,@;3. 1a2 W&at is t&e cost o+ t&e ne% piece o+ e#uipment8 F5G ;92<A00 P6 % *#sh in%- 's 'here n ? 9< I ? 1A< )#&ment ? ;1><000< #n, F6 ? ;I<A00 is ;I1<797. NP6 is P6 % in%- 's -ess P6 % ut%- 's8 there% re ;I1<797 5 in*re#se in 1C % ;A<000 5 * st % #sset ? ;7<>97 C st % ne' e(ui)ment is ;92<A00

1$2 8ithout calculating it, comment 'ery $rie+ly on t&e internal rate o+ return o+ t&is pro9ect compared %it& t&e re#uired rate o+ return, and 9usti+y your comment. F2G The IRR must $e hi!her th#n the re(uire, r#te % return $e*#use the net )resent +#-ue is ) siti+e.

1c2 *+ Framing&am sets its ma!imum pay$ac( period +or in'estments in ne% e#uipment at 3 years, is t&is in'estment accepta$le8 Support your ans%er %it& an appropriate computation. F2G NO. The )r Ke*t is n t #**e)t#$-e $& the )#&$#*k *riteri n. P#&$#*k )eri , is 7.IA &e#rs. C st % ;9I<A00 4:4 ;1><000 #nnu#- *#sh %- 's.

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7.

)i'ision M ma(es a part %it& t&e +ollo%ing c&aracteristics:

Pr ,u*ti n *#)#*it&.............................................................................................. 2A<000 units Se--in! )ri*e t utsi,e *ust mers...................................................................... ;1> 6#ri#$-e * st )er unit............................................................................................ 11 Fi"e, * st< t t#-..................................................................................................... ;100<000

)i'ision / o+ t&e same company %ould li(e to purc&ase 10,000 units eac& period +rom )i'ision M. )i'ision / no% purc&ases t&e part +rom an outside supplier at a price o+ =17 eac& 1a2 Suppose )i'ision M has ample excess capacity to &andle all o+ )i'ision /7s needs %it&out any increase in +i!ed costs and %it&out cutting into sales to outside customers. *+ )i'ision M re+uses to accept t&e =17 price internally and )i'ision / continues to $uy +rom t&e outside supplier, %ill t&e company as a %&ole $e $etter or %orse o++ eac& period, and $y %&at amount8 F>G C m)#n& #s # 'h -e ' u-, $e ' rse %% $& ;90<000 Sin*e Di+. D h#s #m)-e e"*ess *#)#*it&< #n& s#-es it m#kes t Di+ Y #$ +e its in*rement#- * st % ;11 +#ri#$-e * st )er unit )r +i,es #,,iti n#- * ntri$uti n m#r!in. In this inst#n*e it is i!n rin! ;90<000 % #,,iti n#- * ntri$uti n m#r!in. B;1I )er unit %r m Y -ess ;11 in*rement#- * st )er unit.C

1$2. Suppose no% t&at )i'ision M is operating at capacity and can sell all o+ its output to outside customers. *+ senior management re#uires )i'ision M to sell t&e parts to )i'ision / at =17 per unit Nto (eep t&e pro+its in t&e +irm,O %ill t&e company as a %&ole $e $etter or %orse o++, and $y %&at amount: F>G 1 rse %% $& ;10<000 F r the 10<000 units it is % r*e, t se-- t Y #t ;1I )er unit< it is !ener#tin! ;90<000 % CM. I% it s -, th se units e"tern#--& #t its re!u-#r CM % ;I )er unit< it ' u-, !ener#te t t#- CM % ;I0<000. This is # mis!ui,e, m#n#!ement ,e*isi n.

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@. 14BA adapted2 Dames We$$ is t&e general manager o+ t&e *ndustrial -roduct )i'ision o+ Borgan nterprises. <ne measure o+ &is per+ormance is di'isional residual income. We$$ anticipates t&at t&e di'isional asset $ase and re'enue +or ne!t year %ill $e =1C,000,000 and =30,000,000 respecti'ely. *+ t&e target rate o+ return is 15E and We$$ %ants to ac&ie'e a resi,u#- in* me o+ =2,000,000 ne!t year, %&at %ill costs &a'e to $e in order to ac&ie'e t&is target8 F;G
;2A<1A0<000 The s -uti n is ,etermine, $& settin! u) # resi,u#- in* me * m)ut#ti n< %i--in! in kn 'n ,#t#< then ' rkin! $#*k'#r,s #s sh 'n $e- '. Re+enues Less e")enses O)er#tin! in* me Less t#r!et in* me Resi,u#- in* me ,esire, L7C L2C L7C ;70<000<000 L1MM L2 L7MM ; 2<000<000

T#r!et in* me is ;2<>A0<000 B;1H<000<000 #sset $#se " 1ANC O)er#tin! in* me must $e ;:<>A0<000. BOI 4 ;2<>A0<000 ? ;2<000<000C There% re OI ? ;2<>A0<000 = ;2<000<000 ;2A<1A0<000. BRe+enues % ;70<000<000 -ess * sts ? ;:<>A0<000. There% re< * sts must $e ;2A<1A0<000

C. W&y mig&t reliance on :<* as a per+ormance measure o+ a su$unit lead to poor decision ma(ing8 -ro'ide an e!ample to support your ans%er. F>G Banagers mig&t c&oose not to enter into any ne% pro9ects t&at &a'e an estimated :<* $elo% t&eir current di'isional :<*, e'en i+ t&at estimated return %as greater t&an t&e di'isionJs target :<*. !ample. 4urrent di'isional :<* is 2>E. ,arget :<* +or di'ision is 12E. 5e% in'estment opportunity promises a return o+ 20E. Banager o+ di'ision mig&t $e reluctant to enter into t&e ne% in'estment, e'en t&oug& t&e promised return e!ceeds 12E, $ecause t&e 20E :<* o+ t&e in'estment %ill reduce t&e 2>E di'isional :<*

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P-e#se * m)-ete the % -- 'in! t #ssist me in the ,etermin#ti n % & ur )r %essi n#-ism ) ints. The s&--#$us st#te, th#t )r %essi n#-ism $% consists of &resenting 'ourself and 'our (or) et*icall' and in a manner consistent (it* res&ect for t*e su+,ect, 'our class colleagues, 'ourself, and t*e instructor. -t includes active participation in class topic discussion, coo&eration, res&onsi.eness to /uestions &osed +' t*e instructor, timeliness, and regular attendance.0 On # s*#-e % 1 t 20< 'ith 20 $ein! in %u-- * m)-i#n*e 'ith the ,es*ri)ti n in the s&--#$us< h ' m#n& ) ints , & u $e-ie+e & u h#+e e#rne, % r this #s)e*t % & ur !r#,eL

1h&L

I h#+e enK &e, ' rkin! 'ith & u this summer. 0

, -u*k 'ith the rest % A0A. 44 E1

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