COMPREHENSIVE EXAMINATION A

(Chapters 1 - 4)
Problem A - I Multiple Choice (20 points)
Circle the one best answer.
1.

Cost of goods manufactured during a period is obtained by taking the total manufacturing costs incurred during the
period and adding and subtracting the following inventories:
a.
b.
c.
d.

Adding
Subtracting
Beginning finished goods inventory
Ending finished goods inventory
Beginning work in process inventory
Ending finished goods inventory
Beginning raw materials inventory Ending work in process inventory
Beginning work in process inventory
Ending work in process inventory

2.

Cost of goods sold is equal to

a. total manufacturing costs plus beginning work in process less ending work in process.
b. cost of goods sold plus beginning work in process less ending work in process.
c. total manufacturing costs plus ending work in process less beginning work in process.
d. cost of goods manufactured plus beginning finished goods less ending finished goods.

3.

Inventory accounts for a manufacturer consists of

a. direct materials, work in process, and finished goods.
b. direct labor, work in process, and finished goods.
c. manufacturing overhead, direct materials, and direct labor.
d. work in process, direct labor, and manufacturing overhead.

4.

In a process cost system, equivalent units of production are the

a. work done on physical units expressed in fully completed units.
b. units that are transferred to the next processing department.
c. units completed and transferred to finished goods.
d. units that are incomplete at the end of a period.

Use the following information for questions 5 and 6.

In the month of November, a department had 500 units in the beginning work in process inventory that were 60% complete. These
units had $16,000 of materials cost and $12,000 of conversion costs. Materials are added at the beginning of the process and
conversion costs are added uniformly throughout the process. During November, 10,000 units were completed and transferred to
the finished goods inventory and there were 2,000 units that were 25% complete in the ending work in process inventory on
November 30. During November, manufacturing costs charged to the department were: Materials $368,000; Conversion costs
$408,000.
5.

The cost assigned to the units transferred to finished goods during November was
a. $720,000.
b. $724,000.
c. $752,000.
d. $716,000.

6.

The cost assigned to the units in the ending work in process inventory on November 30 was
a. $144,000.
b. $84,000.
c. $64,000.
d. $116,000.

7.

An appropriate cost driver for ordering and receiving materials cost is the
a. direct labor hours.
b. machine hours.
c. number of parts.
d. number of purchase orders.

8.

Benefits of activity-based costing include all of the following except

a. more accurate product costing.
b. fewer cost pools used to assign overhead costs to products.
c. enhanced control over overhead costs.
d. better management decisions.

9.

An example of a value-added activity in a manufacturing operation is

a. machine repair.
b. inventory control.
c. engineering design.
d. building maintenance.

10.

Assigning manufacturing costs to work in process results in credits to all of the following accounts except
a. Factory Labor.
b. Manufacturing Overhead.
c. Raw Materials Inventory.
d. Work in Process Inventory.
Problem A - II Cost of Goods Manufactured and Sold (20 points)
Selected account balances of Heedy Manufacturing Company appear below for 2008:

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Test Bank for ISV Managerial Accounting, Fourth Edition

Beginning of Year
$25,000
30,000
46,000

Finished Goods Inventory

Work In Process Inventory
Raw Materials Inventory
Sales
Direct Labor
Factory Supervisory Salaries
Income Tax Expense
Factory Insurance
Raw Material Purchases
Administrative Expenses
Sales Returns and Allowances
Factory Depreciation
Indirect Labor
Selling Expenses

End of Year
$ 32,000
35,000
26,000
360,000
45,000
18,000
25,000
12,000
75,000
17,000
15,000
22,000
11,000
35,000

Instructions
Using the above information for Heedy Manufacturing Company, answer the following questions. Support your answers with
clearly identified computations.
1.

What was the amount of direct materials used in production?

2.

What were the total manufacturing costs incurred?

3.

What was the cost of goods manufactured?

4.

What was the cost of goods sold?

5.

What was the amount of net income?

Problem A - III Job Order Cost Accounting (20 points)

Battle Manufacturing uses a job order cost accounting system. On October 1, the company has a balance in Work in Process
Inventory of $5,500 and two jobs in process: Job No. 429, $3,000 and Job No. 430, $2,500. During October, a summary of source
documents reveals the following:
For
Job No. 429
Job No. 430
Job No. 431
Job No. 432
General Use

Materials Requisition Slips

$ 3,500
2,600
3,400
3,000
1,000
$13,500

Labor Time Tickets

$ 4,400
3,400
4,200
4,000
1,500
$17,500

Battle Manufacturing applies manufacturing overhead to jobs at an overhead rate of 70% of direct labor cost. Job No. 429 is
completed during the month.
Instructions
(a)
Prepare summary journal entries to record the requisition slips, time tickets, the assignment of manufacturing overhead to
jobs, and the completion of Job No. 429. Show computations.
(b)

Answer the following questions.

1.

What is the balance in Work in Process Inventory at October 31?

2.

If Battle Manufacturing incurred $8,000 of manufacturing overhead in addition to indirect materials and indirect labor,
was overhead over- or underapplied in October and by how much?

Problem A - IV Process Cost Accounting (25 points)

The Mixing Department of Cherry Manufacturing Company has the following production and manufacturing cost data for January.
Production: Beginning inventory 8,000 units that are 100% complete as to materials and 40% complete as to conversion costs; units
started into production 27,000; ending inventory of 12,000 units 20% complete as to conversion costs.
Manufacturing Costs: Beginning work in process inventory of $40,000, comprised of $30,000 of materials and $10,000 of
conversion costs. Materials added during the month, $110,000; labor and overhead applied during the month, $62,000 and $55,000,
respectively.
Instructions
(a)
Compute the equivalent units of production for materials and conversion costs for the month of January.
(b)

Compute the unit costs for materials and conversion costs.

(c)

Determine the costs to be assigned to the units transferred out and ending work in process.

Problem A - V Activity-Based Costing (15 points)

Tuttle Manufacturing Company manufactures two products: radiators and gas tanks. During June, 200 radiators and 400 gas tanks
were produced and overhead costs of $66,000 were incurred. The following information related to overhead costs was available:

Comprehensive Examination A

Activity
Materials handling
Machine setups
Quality inspections

Cost Driver
Number of requisitions
Number of setups
Number of inspections

A-3

Total Cost
$28,000
18,000
20,000

The cost driver volume for each product was as follows:

Cost Driver
Number of requisitions
Number of setups
Number of inspections

Radiators
300
140
200

Gas Tanks
500
220
300

Total
800
360
500

Instructions
(a) Compute the overhead rate for each activity.
(b) Assign the manufacturing overhead costs for June to the two products using activity-based costing.
Solutions Comprehensive Examination A
Problem A - I Solution
1.
2.
3.
4.
5.

d
d
a
a
a

6.
7.
8.
9.
10.

b
d
b
c
d

Problem A - II Solution
1.

2.

3.

Direct materials
Raw materials inventory, Jan. 1 ...................................................................................................................
Raw material purchases ...............................................................................................................................
Raw materials available for use ...................................................................................................................
Raw materials inventory, Dec. 31 ................................................................................................................
Direct materials used....................................................................................................................................
Direct materials used............................................................................................................
Direct labor ..........................................................................................................................
Manufacturing overhead
Factory supervisory salaries .........................................................................................
Factory insurance .........................................................................................................
Factory depreciation.....................................................................................................
Indirect labor ................................................................................................................
Total manufacturing costs ............................................................................................
Work in process inventory, Jan. 1 ........................................................................................
Direct materials used............................................................................................................
Direct labor ..........................................................................................................................
Manufacturing overhead ......................................................................................................
Total work in process ...........................................................................................................
Work in process inventory, Dec. 31 .....................................................................................
Cost of goods manufactured ................................................................................................

4.

Finished goods inventory, Jan. 1 ..........................................................................................

Cost of goods manufactured ................................................................................................
Cost of goods available for sale ...........................................................................................
Finished goods inventory, Dec. 31 .......................................................................................
Cost of goods sold................................................................................................................

5.

Sales. ....................................................................................................................................
Less sales returns and allowances ........................................................................................
Expenses
Cost of goods sold ........................................................................................................
Selling expenses ...........................................................................................................
Administrative expenses ..............................................................................................
Income tax expense ......................................................................................................
Net income ...........................................................................................................................

$ 46,000
75,000
121,000
26,000
$ 95,000
$ 95,000
45,000

$18,000
12,000
22,000
11,000

63,000
$203,000
$ 30,000

$95,000
45,000
63,000

203,000
233,000
35,000
$198,000
$ 25,000
198,000
223,000
32,000
$191,000

$360,000
15,000
191,000
35,000
17,000
25,000

$345,000

268,000
$ 77,000

Problem A - III Solution

(a)
Oct. 31

Requisition slips
Work In Process Inventory.......................................................................................
Manufacturing Overhead .........................................................................................
Raw Materials Inventory ..............................................................................
Time tickets
Work in Process Inventory .......................................................................................

12,500
1,000
13,500

16,000

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Test Bank for ISV Managerial Accounting, Fourth Edition

Manufacturing Overhead ..........................................................................................
Factory Labor ...............................................................................................

1,500
17,500

Assignment of overhead
Work in Process Inventory ($16,000 70%) ...........................................................
Manufacturing Overhead ..............................................................................

11,200
11,200

Completion of Job 429

Finished Goods Inventory ........................................................................................
Work in Process Inventory ...........................................................................
($3,000 + $3,500 + $4,400 + $3,080)
(b)

1.

13,980
13,980

Work in Process Inventory balance:

October 1 balance
Costs added in October

$ 5,500
39,700
45,200
13,980
$31,220

Completed jobs
October 31 balance
2.

Under- or overapplied overhead:

Overhead incurred ($1,000 + 1,500 + $8,000)
Overhead applied
Overhead overapplied

$10,500
11,200
$ 700

Problem A - IV Solution
(a)
Physical Units
23,000*
12,000
35,000

Transferred out
Work in process, January 31
Total
*(8,000 + 27,000) 12,000

Materials
23,000
12,000
35,000

Equivalent Units
Conversion Costs
23,000
2,400**
25,400

**(12,000 .20)

(b)

Materials: [($30,000 + $110,000) 35,000] ........................................................................................

Conversion Costs: [($10,000 + $62,000 + $55,000) 25,400] ...........................................................

(c)

Costs accounted for

Transferred out (23,000 $9)

$4
5
$9

$207,000

Work in process, 1/31

Materials (12,000 $4)
Conversion costs (2,400 $5)

48,000
12,000

60,000
$267,000

Problem A - V Solution
(a)

The overhead rates are:

Activity
Materials handling
Machine setups
Quality inspections

(b)

Total Cost
$28,000
18,000
20,000

Total Driver Volume

800
360
500

Overhead Rate
$35
50
40

The assignment of the overhead costs to products is as follows:

Cost
Requisitions ($35)
Setups ($50)
Inspections ($40)
Total costs (a)

Radiators
Number
Cost
300
$10,500
140
7,000
200
8,000
$25,500

Gas Tanks
Number
Cost
500
$17,500
220
11,000
300
12,000
$40,500

Total units (b)

200

400

$127.50

$10

Cost per unit (a) (b)

Total Cost
$28,000
18,000
20,000
$66,000

COMPREHENSIVE EXAMINATION B
Problem B - I Multiple Choice (22 points)
Circle the one best answer.
1.

Juniper, Inc. sells a single product with a contribution margin of $12 per unit, fixed costs of $74,400, and sales for the
current year of $100,000. How much is Junipers break-even point?
a. 4,600 units
b. $25,600
c. 6,200 units
d. 2,133 units

2.

Homer Companys variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost
$22,000. If sales are expected to increase $40,000, by how much will the companys net income increase?
a. $28,000
b. $6,000
c. $12,000
d. $10,000

3.

A company has total fixed costs of $60,000 and a contribution margin ratio of 40%. The total variable costs incurred at
the break-even level of activity would be
a. $60,000.
b. $150,000.
c. $90,000.
d. $24,000.

4.

A company desires to earn target net income of $30,000 from the sale of its product. If the unit sales price is $15, unit
variable cost is $9, and total fixed costs are $90,000, the number of units that the company must sell to earn its target net
income is
a. 8,000 units.
b. 20,000 units.
c. 16,000 units.
d. 12,000 units.

5.

A company has a policy of having sufficient direct materials inventory on hand at the end of each month equal to 20% of
next month's budgeted production needs. The company has budgeted production of 15,000 units of product in June and
20,000 units in July. It takes 2 pounds of direct materials to produce one unit of product and 6,000 pounds of direct
materials were on hand on May 31. How many pounds of direct materials should be purchased in the month of June?
a. 28,000 pounds
b. 30,000 pounds
c. 38,000 pounds
d. 32,000 pounds

6.

A company has budgeted direct materials purchases of $100,000 in March and $160,000 in April. Past experience
indicates that the company pays for 70% of its purchases in the month of purchase and the remaining 30% in the next
month. During April, the following items were budgeted:
Wages Expense
Purchase of office equipment
Selling and Administrative Expenses
Depreciation Expense

$50,000
24,000
16,000
12,000

The budgeted cash disbursements for April are

a. $216,000.
b. $142,000.
c. $232,000.
d. $244,000.
*7.

Dustin Company sells its product for $40 per unit. During 2008, it produced 60,000 units and sold 50,000 units (there
was no beginning inventory). Costs per unit are: direct materials $10, direct labor $6, and variable overhead $2. Fixed
costs are: $480,000 manufacturing overhead, and $60,000 selling and administrative expenses. The per unit
manufacturing cost under absorption costing is
a. $16.
b. $18.
c. $26.
d. $27.

8.

Monroe Company manufactures a product with a unit variable cost of $42 and a unit sales price of $75. Fixed
manufacturing costs were $80,000 when 10,000 units were produced and sold, equating to $8 per unit. The company has
a one-time opportunity to sell an additional 1,000 units at $55 each in an international market which would not affect its
present sales. The company has sufficient capacity to produce the additional units. How much is the relevant income
effect of accepting the special order?
a. $42,000
b. $5,000
c. $50,000
d. $13,000

9.

Beavers, Inc. is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product
is $16, while the cost of assembling each unit is estimated at $17. Unassembled units can be sold for $55, while
assembled units could be sold for $71 per unit. What decision should Beavers make?

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Test Bank for Managerial Accounting, Fourth Edition

a.
b.
c.
d.

Sell before assembly, the company will save $1 per unit.

Sell before assembly, the company will save $15 per unit.
Process further, the company will save $1 per unit.
Process further, the company will save $16 per unit.

Use the following information for questions 10 and 11.

At January 1, 2008, Smithfield, Inc. has beginning inventory of 3,000 surfboards. Smithfield estimates it will sell 14,000 units
during the first quarter of 2008 with a 10% increase in sales each quarter. Smithfields policy is to maintain an ending inventory
equal to 20% of the next quarters sales. Each surfboard costs $140 and is sold for $200.
10.

How many units should Smithfield produce during the first quarter of 2008?
a. 14,080
b. 14,000
c. 16,800
d. 14,200

11.

How much is budgeted sales revenue for the third quarter of 2008?
a. $16,940
b. $3,388,000
c. $3,360,000
d. $3,080,000

Problem B - II Cost-Volume-Profit (24 points)

Reavis Company prepared the following income statement for 2008:
REAVIS COMPANY
Income Statement
For the Year Ended December 31, 2008

Sales (20,000 units) ..................................................................................................................................

Variable expenses ....................................................................................................................................
Contribution margin .................................................................................................................................
Fixed expenses .........................................................................................................................................
Net income ...............................................................................................................................................

$500,000
300,000
200,000
120,000
$ 80,000

Instructions
Answer the following independent questions and show computations to support your answers.
1. What is the companys break-even point in units?
2. How many more units would the company have had to sell to earn net income of $100,000 in 2008?
3. If the company expects a 25% increase in sales volume in 2009, what would be the expected net income in 2009?
4. How much sales (in dollars) would the company have to generate in order to earn a target net income of $150,000 in 2009?

Problem B - III Transfer Pricing (12 points)

Taner Company, a division of Douglas Cars, produces automotive batteries. Taner sells the batteries to its customers for $82 per
unit. The variable cost per unit is $38, and fixed costs per unit are $16. Top management of Douglas Cars would like Taner to
transfer 30,000 batteries to another division within the company at a price of $54. Taner has sufficient excess capacity to provide
the 30,000 batteries to the other division.
Instructions
(a) Compute the minimum transfer price that Taner should accept.
(b) Assume Taner is operating at full capacity. Compute the minimum transfer price that Taner should accept.
Problem B - IV Budgeting (18 points)
Grace Company has budgeted the following unit sales for the first quarter of 2009:

January
February
March

Units
36,000
54,000
45,000

It takes two pounds of direct materials, which cost $6 per pound, to manufacture one unit of product. It is the companys policy to
have a finished goods inventory on hand at the end of each month equal to 20% of next months sales and to maintain a direct
materials inventory at the end of the month equal to 30% of the next months production needs. The inventory levels at December
31, 2008, were in accordance with company policy.
Instructions
Answer the following independent questions and show computations to support your answers.
1. Calculate the number of units that should be scheduled for production in the month of February.
2. What was the number of units in ending finished goods inventory at December 31, 2008?
3. What was the number of units in ending direct materials inventory at December 31, 2008?
4. What was the number of units and the dollar amount of direct materials purchases budgeted for the month of January?

Comprehensive Examination B

B-3

Problem B - V Contribution Margin (14 points)

Sports Company makes two products, footballs and baseballs. Additional information follows:
Footballs
4,000
$60,000
36,000
9,000
$15,000

Units
Sales
Variable costs
Fixed costs
Net income

Baseballs
2,500
$25,000
7,000
9,000
$ 9,000

Profit per unit

$3.75
$3.60
If Sports has unlimited demand for both products, which product should the company emphasize?
Problem B - VI Incremental Analysis (10 points)
Knox Manufacturing incurs unit costs of $15 ($9 variable and $6 fixed) in making a subassembly part for its finished product. A
supplier offers to make 10,000 of the assembly part at $11 per unit. If the offer is accepted, all variable costs and $1 of fixed costs
per unit will be saved.
Instructions
(a)

Prepare an analysis to show whether Knox Manufacturing should make or buy the assembly part.

(b)

Would your answer be different if Knox Manufacturing could earn $25,000 of income with the facilities currently used to
make the part?
Solutions Comprehensive Examination B
Problem B - I Solution
1. c
2. b
3. c
4. b
5. d
6. c
Problem B - II Solution

7.
8.
9.
10.
11.

c
d
a
a
b

1.

Unit contribution margin = $10 ($200,000 20,000).

Break-even point in units = 12,000 units ($120,000 $10).

2.

Additional units to be sold = 2,000 units ($20,000 $10).

3.

Contribution margin
Fixed expenses
Expected net income

$250,000
120,000
$130,000

($200,000 1.25)

OR
Additional units: 20,000 25% = 5,000
Additional CM: 5,000 $10 = $50,000
Additional net income: $80,000 + $50,000 = $130,000
4.

Contribution margin ratio = 40% ($200,000 $500,000).

Sales dollars necessary = $675,000 [($120,000 + $150,000) .4].

Problem B - III Solution

(a)

If Taner has excess capacity, then its opportunity cost is zero. In this case, the minimum transfer price is:
Minimum transfer price = $38 + $0 = $38.

(b)

The minimum transfer price is equal to Taners variable cost plus its opportunity cost. In this case, the minimum transfer
price is:

Minimum transfer price = $38 + ($82 $38) = $82.

Problem B - IV Solution
1.

Budgeted unit sales

Desired ending inventory in units
Total required units
Less beginning inventory in units
Required production units
2.
3.

Production Budget
February
Units
54,000
9,000
(20% 45,000)
63,000
10,800
(20% 54,000)
52,200

7,200 units (36,000 20%)

Production Budget
January

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Test Bank for Managerial Accounting, Fourth Edition

Budgeted unit sales

Desired ending inventory in units
Total required units
Less beginning inventory in units
Required production units
Direct materials per unit
Raw materials inventory, Dec. 31

36,000
10,800
46,800
7,200
39,600
2
79,200

4.

(20% 54,000)
(20% 36,000)

30% = 23,760 pounds

Direct Materials
Budget
79,200

January
Pounds needed for production
Desired ending inventory
(52,200 2 = 104,400) 30%
Total materials required
Less beginning inventory in units
Direct materials purchases

31,320
110,520
23,760
86,760
$6
$520,560

Total cost of direct materials purchases

Problem B - V Solution
Contribution margin per unit:
Footballs = ($60,000 $36,000) 4,000 = $6
Baseballs = ($25,000 $7,000) 2,500 = $7.20
Sports Company should attempt to sell more baseballs due to the higher contribution margin per unit.
Problem B - VI Solution
(a)
Variable costs
Fixed costs
Purchase price
Total cost

Make
$ 90,000
60,000
$150,000

Buy
$ -050,000
110,000
$160,000

Net Income
Increase/(Decrease)
$ 90,000
10,000
(110,000)
$ (10,000)

Knox Manufacturing should continue to make the assembly part because net income will be $10,000 less if the part is
purchased.
(b)

Yes, the answer now would be to buy the part. The $25,000 is the opportunity cost. In the above analysis, it should be added
to the Make column. In such case, net income of $15,000 ($175,000 $160,000) would be realized by buying the part.

COMPREHENSIVE EXAMINATION C
(Chapters 10 - 14)
Problem C - I Multiple Choice (22 points)
Circle the one best answer.
1.

Items from Tedder Companys budget for March in which 2,100 units were produced and sold appear below:
Direct materials
Indirect materialsvariable
Supervisor salaries
Depreciation on factory equipment
Direct labor
Property taxes on factory
Total

$12,000
2,000
10,000
8,000
7,000
3,000
$42,000

At 2,200 units, how much are budgeted variable manufacturing costs?

a. $22,000
b. $43,000
c. $21,000
d. $19,905
2.

A company developed the following per-unit standards for its product: 2 pounds of direct materials at $6 per pound. Last
month, 2,000 pounds of direct materials were purchased for $11,400. The direct materials price variance for last month
was
a. $11,400 favorable.
b. $600 favorable.
c. $300 favorable.
d. $600 unfavorable.

3.

The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month, 11,200 gallons of direct materials
that actually cost $42,400 were used to produce 6,000 units of product. The direct materials quantity variance for last
month was
a. $3,200 favorable.
b. $2,400 favorable.
c. $3,200 unfavorable.
d. $5,600 unfavorable.

4.

The per-unit standards for direct labor are 2 direct labor hours at $12 per hour. If in producing 2,400 units, the actual
direct labor cost was $51,200 for 4,000 direct labor hours worked, the total direct labor variance is
a. $1,920 unfavorable.
b. $6,400 favorable.
c. $4,000 unfavorable.
d. $6,400 unfavorable.

5.

The standard rate of pay is $5 per direct labor hour. If the actual direct labor payroll was $19,600 for 4,000 direct labor
hours worked, the direct labor price (rate) variance is
a. $800 unfavorable.
b. $800 favorable.
c. $1,000 unfavorable.
d. $400 favorable.

6.

The standard number of hours that should have been worked for output attained is 8,000 direct labor hours, and the actual
number of hours worked was 8,400. If the direct labor price variance was $8,400 unfavorable, and the standard rate of
pay was $18 per direct labor hour, what was the actual rate of pay for direct labor?
a. $17.00 per direct labor hour
b. $15.00 per direct labor hour
c. $19.00 per direct labor hour
d. $18.00 per direct labor hour

7.

Which one of the following does not affect cash?

a. Acquisition and retirement of bonds payable
b. Write-off of an uncollectible accounts receivable
c. Acquisition of treasury stock
d. Payment of cash dividend

8.

Erickson Company reported net income of $140,000 for 2008. The income statement also indicates that interest expense
for 2008 was $50,000. Assuming an income tax rate of 30%, the number of times interest was earned for 2008 was
a. 4 times.
b. 5 times.
c. 3.8 times.
d. 2.8 times.

9.

During 2008, Thomas Company had an asset turnover ratio of 4 times with sales totaling $1,000,000. If net income was
$80,000, Thomas Company's return on assets in 2008 was
a. 8%.
b. 32%.
c. 40%.
d. 80%.

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Test Bank for Managerial Accounting, Fourth Edition

10.

Equipment was purchased for $72,000 and it is estimated to have a $12,000 salvage value at the end of its estimated 8year life. The equipment is estimated to generate cash inflows of $10,000 each year and will be depreciated by using the
straight-line method. The payback period on this investment is
a. 6 years.
b. 7.2 years.
c. 4.8 years.
d. 4.5 years.

11.

Jensen Company purchased a new machine for $200,000 and will use the straight-line method of depreciation over 4
years with no salvage value. If the company's minimum annual rate of return is 10%, this investment must generate
expected annual income of
a. $3,000.
b. $10,000.
c. $20,000.
d. $50,000.

Problem C - II Variance Analysis (12 points)

Camping Out Company manufactures down sleeping bags. Each sleeping bag requires 4 pounds of down and takes .3 hours of
direct labor. The standard cost of the down used by Camping Out is $8 per pound, and the standard labor cost is $10 per hour. In
November, Camping Out purchased 15,000 pounds of down for $120,750. During the year, the company manufactured 4,000
sleeping bags. Payroll reported a total of 1,480 direct labor hours at a cost of $14,060.
Instructions
(a)

Compute the materials price and quantity variances and indicate whether the variances are favorable or unfavorable.

(b)

Compute the labor price and quantity variances and indicate whether the variances are favorable or unfavorable.

Problem C - III Capital Budgeting (16 points)

Easton Company is considering a capital investment of $500,000 in new equipment. It is expected to have a useful life of 10 years
with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income
and cash inflows are expected to be $35,000 and $85,000, respectively. Easton requires either a 10% cost of capital "hurdle" rate, or
a payback period of 7 years.
Instructions
Compute the (a) cash payback period, (b) net present value, (c) internal rate of return (to the nearest percent), and (d) annual rate of
return. Show all computations. State whether the project should be accepted or rejected for each of the four capital budgeting
techniques.
Present Value of an Annuity of 1
(n)
Periods
10

5%

6%

8%

9%

10%

11%

12%

15%

7.72173

7.36009

6.71008

6.41766

6.14457

5.88923

5.65022

5.01877

Problem C - IV Flexible Overhead Budget (15 points)

Healey Company budgeted a level of activity of 20,000 machine hours to be worked each month in the Machining Department. At
this level of activity, manufacturing overhead costs were budgeted as follows:
Variable manufacturing overhead
Indirect materials
Indirect labor
Repairs
Utilities
Fixed manufacturing overhead
Supervisory salaries
Property taxes
Depreciation
Total manufacturing overhead

$ 25,000
38,000
4,000
10,000
20,000
1,000
12,000
$110,000

Instructions
The actual manufacturing costs incurred for the month of March, when 24,000 machine hours were worked, are listed below on a
partially completed budget report. Complete the budget report in a manner that would be most useful for evaluating the
performance of the Machining Department manager for the month of March, 2008.
HEALEY COMPANY
Manufacturing Overhead Budget Report
Machining Department
For the Month Ended March 31, 2008

Budget at
Variable manufacturing overhead

Actual at

Difference
Favorable F
Unfavorable U

C-3

Comprehensive Examination C
Indirect materials
Indirect labor
Repairs
Utilities
Total variable
Fixed manufacturing overhead
Supervisory salaries
Property taxes
Depreciation
Total fixed
Total costs

$ 30,800
44,500
7,000
11,000
93,300

20,000
1,000
12,000
33,000
$126,300

Problem C - V Statement of Cash Flows (17 points)

The comparative balance sheet for Mott Company appears below:
MOTT COMPANY
Comparative Balance Sheet
Dec. 31, 2008
Assets
Cash .................................................................................................................................
$54,000
Accounts receivable .........................................................................................................
6,000
Inventory ......................................................................................................................... 11,000
7,000
Prepaid expenses..............................................................................................................
2,000
Building ......................................................................................................................... 20,000 20,000
Accumulated depreciationbuilding ..............................................................................
(3,000)
Total assets...............................................................................................................
$90,000

Dec. 31, 2007

$12,000
8,000
3,000
(2,000)
$48,000

Liabilities and Stockholders' Equity

Accounts payable .............................................................................................................
Long-term note payable ...................................................................................................
Common stock .................................................................................................................
Retained earnings.............................................................................................................
Total liabilities and stockholders' equity ..................................................................

$ 1,000
13,000
33,000
43,000
$90,000

$ 4,000
14,000
18,000
12,000
$48,000

The income statement for the year is as follows:

MOTT COMPANY
Income Statement
For the Year Ended December 31, 2008
Sales (all on credit) ..........................................................................................................
Expenses and losses
Cost of goods sold....................................................................................................
Operating expenses, exclusive of depreciation ........................................................
Depreciation expense ...............................................................................................
Interest expense........................................................................................................
Loss on sale of land .................................................................................................
Income taxes ............................................................................................................
Total expenses and loss ....................................................................................
Net income .......................................................................................................................

$280,000
$184,000
42,300
1,000
1,200
2,500
9,000
240,000
$ 40,000

Cash dividends of $9,000 were paid during the year. Land costing $15,000 was acquired by the issuance of common stock. The
property was subsequently sold for $12,500 cash.
Instructions
Prepare a statement of cash flows for the year ended December 31, 2008 using the indirect method.
Problem C - VI Ratios (18 points)
The financial information below was taken from the annual financial statements of Falls Company.
Current assets
Current liabilities
Total assets
Sales
Cost of goods sold
Inventory
Receivables (net)
Net income
Common stockholders equity
Total liabilities
Instructions
Calculate the following ratios for Falls Company for 2008.
1. Current ratio.
2. Average collection period of receivables in days.
3. Return on assets.
4. Debt to total assets ratio.

2008
$280,000
80,000
550,000
760,000
525,000
100,000
100,000
57,000
330,000
220,000

2007
$170,000
90,000
450,000
600,000
510,000
110,000
60,000
48,000
270,000
180,000

C-4
5.
6.
7.
8.

Test Bank for Managerial Accounting, Fourth Edition

Inventory turnover.
Return on common stockholders equity.
Asset turnover.
Profit margin.
Solutions Comprehensive Examination C

Problem C - I Solution
1. a
2. b
3. a
4. b
5. d
6. c
Problem C - II Solution

7.
8.
9.
10.
11.

b
b
b
b
b

Actual Quantity
Actual Price

Actual Quantity
Standard Price

Standard Quantity
Standard Price

15,000 $8.05 =
$120,750

15,000 $8 =
$120,000

16,000 $8 =
$128,000

Price Variance
$750 U

Quantity Variance
$8,000 F

Total Materials Variance

$7,250 F
b.
Actual Hours
Actual Rate

Actual Hours
Standard Rate

Standard Hours
Standard Rate

1,480 $9.50 =
$14,060

1,480 $10 =
$14,800

1,200 $10 =
$12,000

Price Variance
$740 F

Quantity Variance
$2,800 U

Total Labor Variance

$2,060 U
Problem C - III Solution
(a)

Cash payback period $500,000 $85,000 = 5.88 years. Accept project.

(b)

Net present value ($85,000 6.14457) $500,000 = $22,288. Accept project.

(c)
Internal rate of return (to the nearest %) $500,000 $85,000 = 5.88235, close to factor
project.

for 11% (5.88923). Accept

(d)
Annual rate of return $35,000 $250,000 = 14%. Accept project.
Problem C - IV Solution
HEALEY COMPANY
Manufacturing Overhead Budget Report
Machining Department
For the Month Ended March 31, 2008

Budget at
24,000 MH
Variable manufacturing overhead
Indirect materials ($1.25)
Indirect labor ($1.90)
Repairs ($.20)
Utilities ($.50)
Total variable
Fixed manufacturing overhead
Supervisory salaries
Property taxes
Depreciation
Total fixed
Total costs

Actual at
24,000 MH

Difference
Favorable F
Unfavorable U

$ 30,000
45,600
4,800
12,000
92,400

$ 30,800
44,500
7,000
11,000
93,300

$ 800
1,100
2,200
1,000
900

U
F
U
F
U

20,000
1,000
12,000
33,000
$125,400

20,000
1,000
12,000
33,000
$126,300

-0$ 900 U

Comprehensive Examination C

C-5

Problem C - V Solution
MOTT COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2008
(Indirect Method)
Cash flows from operating activities
Net income
.................................................................................................................
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense ...........................................................................................
Decrease in accounts receivable ...........................................................................
Increase in inventory ............................................................................................
Decrease in prepaid expenses ...............................................................................
Decrease in accounts payable ...............................................................................
Loss on sale of land ..............................................................................................
Net cash provided by operating activities .................................................
Cash flows from investing activities
Proceeds from sale of land ...............................................................................................
Cash flows from financing activities
Payment of cash dividends ...............................................................................................
Payment of long-term note ...............................................................................................
Net cash used by financing activities ...................................................................
Net increase in cash .................................................................................................................
Cash at beginning of period .........................................................................................................
Cash at end of period .................................................................................................................

$40,000

$1,000
2,000
(4,000)
1,000
(3,000)
2,500

12,500
(9,000)
(1,000)
(10,000)
42,000
12,000
$54,000

Noncash financing and investing activities

Acquired land through issuance of common stock ..........................................................
Problem C - VI Solution
1.

Current ratio: $280,000 $80,000 = 3.5:1.

2.

Average collection period of receivables in days:

$760,000
= 9.5
(100,000 + $60,000) 2

365 9.5 = 38.4 days.

$57,000
= 11.4%.
($550,000 + $450,000) 2

3.

Return on assets:

4.

Debt to total assets ratio: $220,000 $550,000 = 40%.

5.

Inventory turnover:

6.

Return on common stockholders equity:

7.

Asset turnover:

8.

Profit margin: $57,000 $760,000 = 7.5%

$525,000
= 5.
($110,000 + $100,000) 2
$57,000
= 19%
($270,000 + $330,000) 2

$760,000
= 1.52
($450,000 + $550,000) 2

(500)
39,500

$15,000