The Islamic University of Gaza

Faculty of Commerce
Department of Accounting

Advanced Managerial Accounting.

First Term Final Exam (2012/2013).
Master for Accounting and Finance &
Master of Business Administration.

Please read the following instructions before answering the

questions:
(a) Time Allowed for this exam: Three hours.
(b) Answer Eight Questions only.
(c) For each Question 6.25 Mark.
(d) Use the provided answer book.
(e) Insert your name and student No. below.
Student Name……………………………………………………

Student No………………………………………………………

Prof. Salem Abdalla Helles

6 Jan., 2013

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Question One:
The Gaza Fruit Farm has always hired workers to pick its annual
cherry crop. Ahmad Ali, the farm manager, has just received
information on a cherry picking machine that is being purchased by
many, fruit farms. The machine is a motorized device that shakes the
cherry tree, causing the cherries to fall onto plastic tarps that funnel
the cherries into bins. Mr. Ahmad has gathered the following
information to decide whether a cherry picker would be a profitable
investment for the Gaza Fruit Farm.
a. Currently, the Farm is paying an average of $40,000 per year to
workers to pick the cherries.
b. The cherry picker would cost $94,500, and it would have an
estimated 12-year useful life. The Farm uses straight-line
depreciation on all assets and considers salvage value in
computing depreciation deductions. The estimated salvage value
of the cherry picker is $4,500.
c. Annual out-of-pocket costs associated with the cherry picker would
be: cost of an operator and an assistant, $14,000; insurance, $200;
fuel, $1,800; and a maintenance contract, $3,000.

Required:
1. Determine the annual savings in cash operating costs that would
be realized if the cherry picker were purchased.
2. Compute the simple rate of return expected from the cherry picker.
Would the cherry picker be purchased if Gaza Fruit Farm's
required rate of return is 16%?
3. Compute the payback period on the cherry picker. The Gaza Fruit
Farm will not purchase equipment unless it has a payback period
of five years or less. Would the cherry picker be purchased?
4. Compute (to the nearest whole percent) the internal rate of return
promised by the cherry picker. Based on this computation, does it
appear that the simple rate of return is an accurate guide in
investment decisions?

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Question Two:
Suppose a MS Company is considering entering the online digital
lockbox business by renting server space to customers to store any type of
computer file. The company's managers believe this business has a large
potential market as more individuals and small business are moving their
file backups to secure online servers that can be accessed around the
clock. Here is a summary of data projections for this business:
Selling price per year per customer
$95
account:
Direct Supplies $23
Direct Labor 8
Overhead 6
Selling expense 5
Variable costs per unit $42
Overhead $195,000
Advertising 55,000
Administrative expense 68,000
Total annual fixed costs $318,000
Required:
1- Compute the annual breakeven point in customer accounts.
2- Suppose managers projects sales to 6,500 customer accounts
next year. If that projection is accurate, how much profit will the
company realize?
3- To improve profitability, management is considering the following
four alternative courses of action. (in performing the required
steps, use the figures from items 1 and 2, and treat each
alternative independently.)
a. Calculate the number of digital lockbox accounts that must
be sold to generate a targeted profit of $95,400. Assume
that costs and selling price remain constant.
b. Calculate the operating income if the company increases the
number of accounts sold by 20 percents and cuts the selling
price by $5 per account.
c. Determine the number of accounts that must be sold to
break even if advertising costs (fixed costs) increase by
$47,700.
d. Find the number of accounts that must be sold to generate a
targeted profit of $120,000 if variable costs decrease by 10
percent.
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Question Three:
LG Products, Inc., produces a broad line of sports equipment
and uses a standard cost system for control purposes. Last year
the company produced 8,000 varsity footballs. The standard
costs associated with this football, along with the actual costs
incurred last year, are given below (per football):
Standard Actual
Cost Cost
Direct materials:
Standard: 3.7 feet at $5.00 per football…… $18.50
Actual: 4.0 feet at $4.80 per football……... $19.20
Direct labor:
Standard: 0.9 hour at $7.50 per hour ……. 6.75
Actual: 0.8 hour at $8.00 per hour …….... 6.40
Variable manufacturing overhead:
Standard: 0.9 hour at $2.50 per hour ……. 2.25
Actual: 0.8 hour at $2.75 per hour ……… 2.20
Total cost per football …………………… $27.50 $27.80

The president was elated when he saw that actual costs exceeded standard
costs by only $0.30 per football. He stated, "I was afraid that our unit cost
might get out of hand when we gave out those raises last year in order to
stimulate output. But it's obvious our costs are well under control." There
was no inventory of materials on hand to start the year. During the year,
32,000 feet of materials were purchased and used in production.
Required:
a. For direct materials: Compute the price and quantity variances for
the year.
b. For direct labor: Compute the rate and efficiency variances.
c. Compute the variable overhead spending and efficiency variances.
d. Was the president correct in his statement that "our costs are well
under control"? Explain.

Question Four:
The cordless phone manufacturing division of a Denver-based consumer
electronics company uses activity-based costing. For simplicity, assume
that its accountants have identified only the following three activities and
related cost drivers for indirect production costs:
Activity Cost Driver
Materials handling Direct-materials cost
Engineering Engineering change notices
Power Kilowatt hours

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 Three types of cordless phones are produced: SA2, SA5, and SA9.
Direct costs and cost-driver activity for each product for a recent month
are as follows:
SA2 SA5 SA9
Direct-materials cost $25,000 $50,000 $125,000
Direct-labor cost $4,000 $1,000 $3,000
Kilowatt hours 50,000 200,000 150,000
Engineering change notices 13 5 2

Indirect production cost for the month was:

Materials handling $ 8,000
Engineering 20,000
Power 16,000
Total indirect production cost $44,000
1- Compute the indirect production cost allocated to each product
with the activity-based costing system.
2- Suppose all indirect production costs had been allocated to
products in proportion to their direct-labor costs. Compute the
indirect production costs allocated to each product.
3- In which product costs, those in number 1 or those in number 2,
do you have the most confidence? Why?

Question Five:
Part (A)
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ً‫نظامًًمتكاماًحقياسًمألامءمًكيفًياصاًهذمًمحنظامً؟‬
ً‫ًكيفًتخت فًنقط ًتصاثاًًمحتكاحيفًعنًنقط ًتصاثاًمحسارً؟‬:ً ‫ثانيًا ا‬
Part (B)
Watertown paper corporation is considering adding another machine for
the manufacture of corrugated cardboard. The machine would cost
$900,000. It would have an estimated life of 6 years and no salvage value.
The company estimates that annual revenues would increase by $430,000
and that annual expenses excluding depreciation would increase by
$190,000. It uses the straight-line method to compute depreciation
expense. Management has a required rate of return of 9%. Compute the
accounting rate of return.

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 Question Six:
Suppose a loan officer at Bank of Palestine has been analyzing Home Services,
Inc., to determine whether the bank should grant it a loan. Home Service has
been in business for ten years, and its services now include S1, S2, S3, and S4.
The following data pertaining to those services were available for analysis:

Home Services, Inc.

Segmented Income Statement
For the Year Ended December 31, 2012
S1 S2 S3 S4 Total
Sales $297,500 $114,300 $126,400 $97.600 $635,800
Less Variable costs:
Direct labor $119,000 $40,005 $44,240 $34,160 $237,405
Operating supplies 14,785 5,715 6,320 4,880 31,790
Small tools 11,900 4,572 5,056 7,808 29,336
Replacement parts 59,500 22,860 25,280 - 107,640
Truck costs - 11,430 12,640 14,640 38,710
Selling costs 44,625 17,145 18,960 9,760 90,490
Other variable costs 5,950 2,286 2,528 1,952 12,716
Contribution
$41,650 $10,287 $11,376 $24,400 $87,713
margin
Less direct fixed
35,800 16,300 24,100 5,200 81,400
costs
Segment margin $5,850 ($6,013) ($12,724) $19,200 $6,313
(-)Common fixed
32,100
Costs
Operating
($25,787)
income/loss
Home Services' profitability has decreased over the past two years, and to
increase the likelihood that the company will qualify for a loan, the loan officer
has advised its owner to determine which service lined are not meeting the
company's profit targets. Once the owner has identified the unprofitable service
lines, he can either eliminate them or set higher prices. If he sets higher prices,
those prices will have to cover all variable and fixed operating, selling, and
general administration costs.

Required:
1- Analyze the performance of the four service lines. Should the
owner eliminate any of them? Explain your answer.
2- Why might the owner want to continue providing unprofitable service
lines?

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Question Seven:
Ali Saed has recently opened a store specializing in fashionable stockings.
Mr. Saed has just completed a course in managerial accounting and he
believes that he can apply certain aspects of the course to his business. He is
particularly interested in adopting the cost- volume- profit (CVP) approach
to decision making .Thus, he has prepared the following analysis:
Sales price per pair of stockings................. $ 2.00
Variable expense per pair of stockings...... 0.80
Contribution margin per pair of stockings... $1.20
Fixed expenses per year:
Building rental ........................................... $12,000
Equipment depreciation ............................ 3,000
Selling....................................................... 30,000
Administrative............................................ 15,000
Total fixed expenses .................................. $60,000

Required:
1. How many pairs of stockings must be sold to break even? What does
this represent in total dollar sales?
2. How many pairs of stockings must be sold to earn a $9,000 target profit
for the first year?
3. Mr. Saed now has one full- time and one part- time salesperson
working in the store. It will cost him an additional $8,000 per year to
convert the part- time position to a full- time position. Mr. Saed
believes that the change would bring in an additional $ 20,000 in sales
each year. Should he convert the position?
4. Refer to the original data. Actual operating results for the first year are
as follows:

Sales $ 125,000
Less variable expenses 50,000
Contribution margin 75,000
Less fixed expenses 60,000
Net operating income $ 15,000

a. What is the store's degree of operating leverage?

b. Mr. Saed is confident that with some effort he can increase sales by 20%
next year. What would be the expected percentage increase in net
operating income?

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 Question Eight:
Jerusalem Company produces a single product. Variable
manufacturing overhead is applied to products on the basis of direct
labor-hours. The standard costs for one unit of product are as follows:
Direct material; 6 ounces at $0.50 per ounce …………….. $3
Direct labor: 1.8 hours at $10 per hour …………………... 18
Variable manufacturing overhead: 1.8 hours at $5 per hour 9
Total standard variable cost per unit … … …….. $30

During June, 2,000 units were produced. The costs associated with
June's operations were as follows:
Material purchased: 18,000 ounces at $0.60 per ounce $10,800
Material used in production: 14,000 ounces
Direct labor :4,000 hours at $9.75 per hour……… …… $39,000
Variable manufacturing overhead costs incurred...…… . $20,800
Required:
Compute the materials, labor, and variable manufacturing overhead
variances.

Question Nine:
GD Company is a retailer that is preparing its budget for the upcoming
fiscal year. Management has prepared the following summary of its
budgeted cash flows:

1st 2nd 3rd 4th

Quarter Quarter Quarter Quarter
Total cash receipts $180,000 $330,000 $210,000 $230,000
Total cash disbursements $260,000 $230,000 $220,000 $240,000

The company's beginning cash balance for the upcoming fiscal year
will be $20,000. The company requires a minimum cash balance of
$10,000 and may borrow any amount needed from a local bank at a
quarterly interest rate of 3%. The company may borrow any amount at
the beginning of any quarter and may repay its loans, or any part of its
loans, at the end of any quarter. Interest payments are due on any
principal at the time it is repaid. For simplicity, assume that interest is
not compounded.

Required:
Prepare the company's cash budget for the upcoming fiscal year.

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Question Ten:
DP Company manufactures three products from a common input in a joint
processing operation. Joint processing costs up to the split-off point total
$350,000 per quarter. The company allocates these costs to the joint products
on the basis of their relative sales value at the split-off point. Unit selling
prices and total output at the split-off point are as follows:

Product Selling Price Quarterly Output

A $16 per pound 15,000 pounds
B $8 per pound 20,000 pounds
C $25 per pound 4,000 gallons

Each product can be processed further after the split-off point. Additional
processing requires no special facilities. The additional processing costs
(per quarter) and unit selling prices after further processing are given
below:

Product Additional Selling Price

processing costs
A $63,000 $20 per pound
B $80,000 $13per pound
C $36,000 $32 per gallon

Required
Which product or products should be sold at the split-off point and which
product or products should be processed further? Show computations.

Question Eleven:
" I know headquarters wants us to add on that new product line, " said F.
Helmy, manager of Sun Product East Division " But I want to see the
numbers before I make a move. Our division has led the company for
three years, and I don't want any letdown".
Sun products is a decentralized company with four autonomous
divisions. The divisions are evaluated on a basis of the return that they are
able to generate on invested assets, with year- end bonuses given to
divisional managers who have the highest ROI figures. Operating results
for the company's East Division for last year are given below:
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 Sales ................................................. $21,000,000
Less variable expenses ...................... $13,400,000
Contribution margin ........................ $7,600,000
Less fixed expenses ......................... $5,920,000
Net operating income........................ $1,680,000
Divisional operating assets................. $5,250,000

The company had an overall return on investment ( ROI) of 18% last year
(considering all divisions). The company's East Division has an
opportunity to add a new product line that would require an investment of
$3,000,000. The cost and revenue characteristics of the new product line
per year would be as follows:
Sales ................................................. $9,000,000
Variable expenses ............................. 65% of Sales
Fixed expenses ................................. $2,520,000

Required:
1. Compute the East Division's ROI for last year; also compute the
ROI as it will appear if the new product line is added.
2. If you were in F. Helmy's position , would you be inclined to
accept or reject the new product line? Explain
3. suppose that the company views a return of 15% on invested
assets as being the minimum that any division should earn and that
performance is evaluated by the residual income approach.
Compute the East Division's residual income for last year, also
compute the residual income as it will appear if the new product
line is added.

Good Luck

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