COMPREHENSIVE EXAMINATION A

(Chapters 1 - 4)

Approximate
Problem Topic Points Minutes
A-I Multiple Choice............................................. 20 20
A - II Cost of Goods Manufactured and Sold......... 20 15
A - III Job Order Cost Accounting........................... 20 15
A - IV Process Cost Accounting.............................. 25 20
A-V Activity-Based Costing.................................. 15 15
100 85
Checking Work ............................................ 5
90
A-2 Test Bank for ISV Managerial Accounting, Fourth Edition

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:
Adding Subtracting
a. Beginning finished goods inventory Ending finished goods inventory
b. Beginning work in process inventory Ending finished goods inventory
c. Beginning raw materials inventory Ending work in process inventory
d. 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.
 Comprehensive Examination A A - 3

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.
A-4 Test Bank for ISV Managerial Accounting, Fourth Edition

Problem A - II Cost of Goods Manufactured and Sold (20 points)

Selected account balances of Heedy Manufacturing Company appear below for 2008:

Beginning of Year End of Year

Finished Goods Inventory $25,000 $ 32,000
Work In Process Inventory 30,000 35,000
Raw Materials Inventory 46,000 26,000
Sales 360,000
Direct Labor 45,000
Factory Supervisory Salaries 18,000
Income Tax Expense 25,000
Factory Insurance 12,000
Raw Material Purchases 75,000
Administrative Expenses 17,000
Sales Returns and Allowances 15,000
Factory Depreciation 22,000
Indirect Labor 11,000
Selling Expenses 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?
 Comprehensive Examination A A - 5

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 Materials Requisition Slips Labor Time Tickets

Job No. 429 $ 3,500 $ 4,400
Job No. 430 2,600 3,400
Job No. 431 3,400 4,200
Job No. 432 3,000 4,000
General Use 1,000 1,500
$13,500 $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?
A-6 Test Bank for ISV Managerial Accounting, Fourth Edition

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:

Activity Cost Driver Total Cost

Materials handling Number of requisitions $28,000
Machine setups Number of setups 18,000
Quality inspections Number of inspections 20,000

The cost driver volume for each product was as follows:

Cost Driver Radiators Gas Tanks Total

Number of requisitions 300 500 800
Number of setups 140 220 360
Number of inspections 200 300 500

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.
 Comprehensive Examination A A - 7

Solutions Comprehensive Examination A

Problem A - I Solution
1. d 6. b
2. d 7. d
3. a 8. b
4. a 9. c
5. a 10. d

Problem A - II Solution
1. Direct materials
Raw materials inventory, Jan. 1........................................................................ $ 46,000
Raw material purchases................................................................................... 75,000
Raw materials available for use........................................................................ 121,000
Raw materials inventory, Dec. 31...................................................................... 26,000
Direct materials used........................................................................................ $ 95,000

2. Direct materials used....................................................................... $ 95,000

Direct labor...................................................................................... 45,000
Manufacturing overhead
Factory supervisory salaries...................................................... $18,000
Factory insurance...................................................................... 12,000
Factory depreciation.................................................................. 22,000
Indirect labor.............................................................................. 11,000 63,000
Total manufacturing costs.......................................................... $203,000

3. Work in process inventory, Jan. 1.................................................... $ 30,000

Direct materials used....................................................................... $95,000
Direct labor...................................................................................... 45,000
Manufacturing overhead.................................................................. 63,000 203,000
Total work in process....................................................................... 233,000
Work in process inventory, Dec. 31................................................. 35,000
Cost of goods manufactured........................................................... $198,000

4. Finished goods inventory, Jan. 1..................................................... $ 25,000

Cost of goods manufactured........................................................... 198,000
Cost of goods available for sale....................................................... 223,000
Finished goods inventory, Dec. 31................................................... 32,000
Cost of goods sold........................................................................... $191,000

5. Sales............................................................................................... $360,000
Less sales returns and allowances.................................................. 15,000 $345,000
Expenses
Cost of goods sold..................................................................... 191,000
Selling expenses....................................................................... 35,000
Administrative expenses............................................................ 17,000
Income tax expense.................................................................. 25,000 268,000
Net income...................................................................................... $ 77,000
A-8 Test Bank for ISV Managerial Accounting, Fourth Edition

Problem A - III Solution

(a) Requisition slips
Oct. 31 Work In Process Inventory...................................................... 12,500
Manufacturing Overhead........................................................ 1,000
Raw Materials Inventory................................................. 13,500

Time tickets
Work in Process Inventory...................................................... 16,000
Manufacturing Overhead........................................................ 1,500
Factory Labor................................................................. 17,500

Assignment of overhead
Work in Process Inventory ($16,000 70%)........................... 11,200
Manufacturing Overhead................................................ 11,200

Completion of Job 429

Finished Goods Inventory....................................................... 13,980
Work in Process Inventory............................................. 13,980
($3,000 + $3,500 + $4,400 + $3,080)

(b) 1. Work in Process Inventory balance:

October 1 balance $ 5,500
Costs added in October 39,700
45,200
Completed jobs 13,980
October 31 balance $31,220

2. Under- or overapplied overhead:

Overhead incurred ($1,000 + 1,500 + $8,000) $10,500
Overhead applied 11,200
Overhead overapplied $ 700

Problem A - IV Solution
(a) Equivalent Units
Physical Units Materials Conversion Costs
Transferred out 23,000* 23,000 23,000
Work in process, January 31 12,000 12,000 2,400**
Total 35,000 35,000 25,400
*(8,000 + 27,000) 12,000 **(12,000 .20)

(b) Materials: [($30,000 + $110,000) 35,000]................................................. $4

Conversion Costs: [($10,000 + $62,000 + $55,000) 25,400] ................... 5
$9
 Comprehensive Examination A A - 9

(c) Costs accounted for

Transferred out (23,000 $9) $207,000

Work in process, 1/31

Materials (12,000 $4) 48,000
Conversion costs (2,400 $5) 12,000 60,000
$267,000

Problem A - V Solution
(a) The overhead rates are:

Activity Total Cost Total Driver Volume Overhead Rate

Materials handling $28,000 800 $35
Machine setups 18,000 360 50
Quality inspections 20,000 500 40

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

Radiators Gas Tanks

Cost Number Cost Number Cost Total Cost
Requisitions ($35) 300 $10,500 500 $17,500 $28,000
Setups ($50) 140 7,000 220 11,000 18,000
Inspections ($40) 200 8,000 300 12,000 20,000
Total costs (a) $25,500 $40,500 $66,000

Total units (b) 200 400

Cost per unit (a) (b) $127.50 $101.25

 COMPREHENSIVE EXAMINATION B

(Chapters 5 - 9)

Approximate
Problem Topic Points Minutes
B-I Multiple Choice............................................. 22 22
B - II Cost-Volume-Profit....................................... 24 16
B - III Transfer Pricing............................................ 12 12
B - IV Budgeting..................................................... 18 15
B-V Contribution Margin...................................... 14 10
B - VI Incremental Analysis..................................... 10 10
100 85
Checking Work............................................. 5
90
B-2 Test Bank for Managerial Accounting, Fourth Edition

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
 Comprehensive Examination B B-3

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 $50,000
Purchase of office equipment 24,000
Selling and Administrative Expenses 16,000
Depreciation Expense 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?
a. Sell before assembly, the company will save $1 per unit.
b. Sell before assembly, the company will save $15 per unit.
c. Process further, the company will save $1 per unit.
d. 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.
B-4 Test Bank for Managerial Accounting, Fourth Edition

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)....................................................................................... $500,000

Variable expenses.......................................................................................... 300,000
Contribution margin........................................................................................ 200,000
Fixed expenses.............................................................................................. 120,000
Net income..................................................................................................... $ 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?
 Comprehensive Examination B B-5

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:

Units
January 36,000
February 54,000
March 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?
B-6 Test Bank for Managerial Accounting, Fourth Edition

Problem B - V Contribution Margin (14 points)

Sports Company makes two products, footballs and baseballs. Additional information follows:
Footballs Baseballs
Units 4,000 2,500
Sales $60,000 $25,000
Variable costs 36,000 7,000
Fixed costs 9,000 9,000
Net income $15,000 $ 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?
 Comprehensive Examination B B-7

Solutions Comprehensive Examination B

Problem B - I Solution
1. c 7. c
2. b 8. d
3. c 9. a
4. b 10. a
5. d 11. b
6. c

Problem B - II Solution
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 $250,000 ($200,000 1.25)

Fixed expenses 120,000
Expected net income $130,000
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.
B-8 Test Bank for Managerial Accounting, Fourth Edition

Problem B - IV Solution
1. Production Budget
February
Units
Budgeted unit sales 54,000
Desired ending inventory in units 9,000 (20% 45,000)
Total required units 63,000
Less beginning inventory in units 10,800 (20% 54,000)
Required production units 52,200

2. 7,200 units (36,000 20%)

3. Production Budget
January
Budgeted unit sales 36,000
Desired ending inventory in units 10,800 (20% 54,000)
Total required units 46,800
Less beginning inventory in units 7,200 (20% 36,000)
Required production units 39,600
Direct materials per unit 2
Raw materials inventory, Dec. 31 79,200 30% = 23,760 pounds

4. Direct Materials
January Budget
Pounds needed for production 79,200
Desired ending inventory
(52,200 2 = 104,400) 30% 31,320
Total materials required 110,520
Less beginning inventory in units 23,760
Direct materials purchases 86,760
$6
Total cost of direct materials purchases $520,560

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.
 Comprehensive Examination B B-9

Problem B - VI Solution
(a) Net Income
Make Buy Increase/(Decrease)
Variable costs $ 90,000 $ -0- $ 90,000
Fixed costs 60,000 50,000 10,000
Purchase price 110,000 (110,000)
Total cost $150,000 $160,000 $ (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)

Approximate
Problem Topic Points Minutes
C-I Multiple Choice............................................. 22 11
C - II Variance Analysis......................................... 12 12
C - III Capital Budgeting......................................... 16 16
C - IV Flexible Overhead Budget............................ 15 15
C-V Statement of Cash Flows.............................. 17 15
C - VI Ratios........................................................... 18 16
100 85
Checking Work............................................. 5
90
C-2 Test Bank for Managerial Accounting, Fourth Edition

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 $12,000
Indirect materialsvariable 2,000
Supervisor salaries 10,000
Depreciation on factory equipment 8,000
Direct labor 7,000
Property taxes on factory 3,000
Total $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.
 Comprehensive Examination C C-3

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%.

10. Equipment was purchased for $72,000 and it is estimated to have a $12,000 salvage
value at the end of its estimated 8-year 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.
C-4 Test Bank for Managerial Accounting, Fourth Edition

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 5% 6% 8% 9% 10% 11% 12% 15%
10 7.72173 7.36009 6.71008 6.41766 6.14457 5.88923 5.65022 5.01877
 Comprehensive Examination C C-5

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 $ 25,000
Indirect labor 38,000
Repairs 4,000
Utilities 10,000
Fixed manufacturing overhead
Supervisory salaries 20,000
Property taxes 1,000
Depreciation 12,000
Total manufacturing overhead $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

Difference
Budget at Actual at Favorable F
Unfavorable U
Variable manufacturing overhead
Indirect materials $ $ 30,800 $
Indirect labor 44,500
Repairs 7,000
Utilities 11,000
Total variable 93,300
Fixed manufacturing overhead
Supervisory salaries 20,000
Property taxes 1,000
Depreciation 12,000
Total fixed 33,000
Total costs $ $126,300 $
C-6 Test Bank for Managerial Accounting, Fourth Edition

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 Dec. 31, 2007
Assets
Cash............................................................................................. $54,000 $12,000
Accounts receivable..................................................................... 6,000 8,000
Inventory....................................................................................... 11,000 7,000
Prepaid expenses......................................................................... 2,000 3,000
Building........................................................................................ 20,000 20,000
Accumulated depreciationbuilding............................................. (3,000) (2,000)
Total assets............................................................................. $90,000 $48,000

Liabilities and Stockholders' Equity

Accounts payable......................................................................... $ 1,000 $ 4,000

Long-term note payable................................................................ 13,000 14,000
Common stock............................................................................. 33,000 18,000
Retained earnings........................................................................ 43,000 12,000
Total liabilities and stockholders' equity.................................. $90,000 $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)....................................................................... $280,000
Expenses and losses
Cost of goods sold.................................................................. $184,000
Operating expenses, exclusive of depreciation....................... 42,300
Depreciation expense............................................................. 1,000
Interest expense..................................................................... 1,200
Loss on sale of land................................................................ 2,500
Income taxes.......................................................................... 9,000
Total expenses and loss.................................................... 240,000
Net income................................................................................... $ 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.
 Comprehensive Examination C C-7

Problem C - VI Ratios (18 points)

The financial information below was taken from the annual financial statements of Falls Company.
2008 2007
Current assets $280,000 $170,000
Current liabilities 80,000 90,000
Total assets 550,000 450,000
Sales 760,000 600,000
Cost of goods sold 525,000 510,000
Inventory 100,000 110,000
Receivables (net) 100,000 60,000
Net income 57,000 48,000
Common stockholders equity 330,000 270,000
Total liabilities 220,000 180,000

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.
5. Inventory turnover.
6. Return on common stockholders equity.
7. Asset turnover.
8. Profit margin.
C-8 Test Bank for Managerial Accounting, Fourth Edition

Solutions Comprehensive Examination C

Problem C - I Solution
1. a 7. b
2. b 8. b
3. a 9. b
4. b 10. b
5. d 11. b
6. c

Problem C - II Solution

Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price
15,000 $8.05 = 15,000 $8 = 16,000 $8 =
$120,750 $120,000 $128,000

Price Variance Quantity Variance

$750 U $8,000 F

Total Materials Variance

$7,250 F

b.

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate
1,480 $9.50 = 1,480 $10 = 1,200 $10 =
$14,060 $14,800 $12,000

Price Variance Quantity Variance

$740 F $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
for 11% (5.88923). Accept project.
(d) Annual rate of return $35,000 $250,000 = 14%. Accept project.
 Comprehensive Examination C C-9

Problem C - IV Solution
HEALEY COMPANY
Manufacturing Overhead Budget Report
Machining Department
For the Month Ended March 31, 2008

Difference
Budget at Actual at Favorable F
24,000 MH 24,000 MH Unfavorable U
Variable manufacturing overhead
Indirect materials ($1.25) $ 30,000 $ 30,800 $ 800 U
Indirect labor ($1.90) 45,600 44,500 1,100 F
Repairs ($.20) 4,800 7,000 2,200 U
Utilities ($.50) 12,000 11,000 1,000 F
Total variable 92,400 93,300 900 U
Fixed manufacturing overhead
Supervisory salaries 20,000 20,000
Property taxes 1,000 1,000
Depreciation 12,000 12,000
Total fixed 33,000 33,000 -0-
Total costs $125,400 $126,300 $ 900 U

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................................................................................... $40,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense.......................................................... $1,000
Decrease in accounts receivable......................................... 2,000
Increase in inventory............................................................ (4,000)
Decrease in prepaid expenses............................................ 1,000
Decrease in accounts payable............................................. (3,000)
Loss on sale of land............................................................. 2,500 (500)
Net cash provided by operating activities.................... 39,500
Cash flows from investing activities
Proceeds from sale of land........................................................... 12,500
Cash flows from financing activities
Payment of cash dividends........................................................... (9,000)
Payment of long-term note........................................................... (1,000)
Net cash used by financing activities................................... (10,000)
Net increase in cash.............................................................................. 42,000
Cash at beginning of period.................................................................. 12,000
Cash at end of period............................................................................ $54,000
Noncash financing and investing activities
Acquired land through issuance of common stock ....................... $15,000
C - 10 Test Bank for Managerial Accounting, Fourth Edition

Problem C - VI Solution
1. Current ratio: $280,000 $80,000 = 3.5:1.

$760,000
2. Average collection period of receivables in days: = 9.5
(100,000 + $60,000) 2
365 9.5 = 38.4 days.

$57,000
3. Return on assets: = 11.4%.
($550,000 + $450,000) 2

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

$525,000
5. Inventory turnover: = 5.
($110,000 + $100,000) 2

$57,000
6. Return on common stockholders equity: = 19%
($270,000 + $330,000) 2

$760,000
7. Asset turnover: = 1.52
($450,000 + $550,000) 2

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