ADMS2510 Fall 2009 Final Exam-Part One-With Solutions

Name:____________________ Student Number:____________

Fall 2009School of Administrative Studies, York UniversityADMS 2510-Introduction to Management Accounting

Final Exam: Part OneDecember 20, 20097 to 8:10PM

Instructions1. This is a closed book examination and no collaboration

is allowed.2. Only NON-PROGRAMMABLE calculators are allowed 3. Write your name and student number in the designated

area at the top of each page, and indicate your section letter on the cover page.

4. Place photo identification on your desk at the beginning of the exam to facilitate verification.

5. You must sign in.6. Formula sheets and dictionaries are not allowed.7. Cell phones must be turned off.

Indicate Section:____________ A: Tuesday 4-7pm S. Ding VH D B: Wednesday 7-10pm J. Nemi CLH KC: Thursday 7-10pm S. Ding CLH BD: Monday 7-10pm S. Ding VH D E: Wednesday 4-7pm J. Nemi CLH HF: Internet P. Gelinas G: Friday 11:30-2:30pm B. Bryant HNE 038Deferred Sign-in Number: ______________

Question 1 (20 marks): ________

Question 2 (20 marks): ________

Total: /40

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QUESTION 1 (20 marks)

In an attempt to conceal a theft of funds, Snake N. Grass, controller of Bucolic Products, placed a bomb in the company's record vault. The ensuing explosion left only fragments of the company's factory ledger, as shown below:

Raw Materials Manufacturing Overhead ControlBal. 6/1 8,000

79,000

Work in Process Accounts PayableBal. 6/1 7,200

Bal. 6/30 16,000

Finished Goods Cost of Goods Sold

Bal. 6/30 21,000

To bring Mr. Grass to justice, the company must reconstruct its activities for June. You have been assigned to perform the task of reconstruction. After interviewing selected employees and sifting through charred fragments, you have determined the following additional information:

a. According to the company's treasurer, the accounts payable are for purchases of raw materials only. The company's balance sheet, dated May 31, shows that Accounts Payable had a $20,000 balance at the beginning of June. The company's bank has provided photocopies of all cheques that cleared the bank during June. These photocopies show that payments to suppliers during June totalled $119,000. (All materials used during the month were direct materials.)

b. The production superintendent states that manufacturing overhead cost is applied to jobs on the basis of direct labour hours. 11,500 direct labour hours were used to apply overhead for June. However, he does not remember the rate currently being used by the company.

c. The company over-applied manufacturing overhead by $6,100 during the month of June.

d. Cost sheets kept in the production superintendent's office show that only one job was in process on June 30, at the time of the explosion. The job had been charged with $6,600 in materials, and 500 direct labour hours at $8 per hour had been worked on the job.

e. A log is kept in the finished goods warehouse showing all goods transferred in from the factory. This log shows that the cost of goods transferred into the finished goods warehouse from the factory during June totalled $280,000.

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f. The company's May 31 balance sheet indicates that the finished goods inventory totalled $36,000 at the beginning of June.

g. A charred piece of the payroll ledger, found after sifting through piles of smoking debris, indicates that 11,500 direct labour hours were recorded for June. The company's Personnel Department has verified that as a result of a union contract, there are no variations in pay rates among factory employees.

h. The production superintendent states that there was no under- or over-applied overhead in the Manufacturing Overhead account at May 31.

REQUIRED:

Determine the following amounts:

a) Predetermined overhead rate being used by the company (3 marks)

1. Predetermined overheade rate =Applied overhead / Actual activity measure=Applied overhead / Actual direct labor hours=Applied overhead / 11,500

11,500 direct labour hours are from condition b.

From the T account of Manufacturing Overhead Control, we know the actual overhead is $79,000; from condition c, we know that this company over-applied overhead by $6,100. Therefore, the Applied overhead should be 6,100 greater than the actual overhead. That is, $85,100 (79,000+6,100).

The predetermined overhead rate = 85,100 / 11,500 = $7.4/DLH

b) Work in process inventory, June 30 (5 marks)From condition d, there is only one unfinished job; the cost of ending inventory of work in process should be equal to the cost of the only unfinished job.

Working in process inventory at the end of June = DM + DL + MOH = $6,600 + $ 8 *500 hours + $7.4/DLH * 500 hours = $14,300

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c) Raw materials usage during June (6 marks)

The WIP account is as follows:

Work in Process

Beginning balance: 7,200 Cost of goods finished and transferred out: 280,000 (from condition e)

DM usage (unknown)

DL (from condition d and g) = 11,500 hours *8=92,000

MOH (from requirement 1 and condition g)=7.4*11,500 hours =85,100Ending balance: 14,300 (from requirement 2)

And the following relationship holds:

Beginning balance + DM usage + DL + MOH applied – cost of goods completed and transferred = ending balance

So, DM usage = ending balance + cost of goods completed and transferred – beginning balance – DL – MOH applied=14,300+ 280,000-7,200-92,000-85,100= 110,000

d) Raw materials inventory, June 30 (2 marks)Ending balance = Beginning balance + Purchase - Material usage

= 8,000 + 115,000 – 110,000= 13,000

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e) Unadjusted cost of goods sold for June (4 marks)

Beginning balance + transferred in = cost of goods sold + ending balance

Cost of goods sold = beginning balance + transferred in – ending balance= 36,000 (from condition f) + 280,000 (from condition e) – 21,000

= 295,000

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QUESTION 2 (20 marks)

Machine Replacement Incorporated is considering replacing an existing machine with a new more technologically superior and faster machine at October 31, 2009. The switch to this new machine will result in a superior product that will have a higher tolerance to downtime than the existing product. It is expected to allow Machine Replacement Incorporated to increase its sales price for the new product. The switch in machines will increase fixed costs, and reduce the overall variable operating costs. The corporate tax rate is 50%.

Technology Impact on Revenues and Cost Estimates.

Revenue /Cost Item New Technology Old Technology

Sales Price per Unit $ 200 $ 190Variable Cost per Unit 125 130

Monthly Fixed Costs $ 2,625,000 $ 1,800,000

Capital Costs & Useful Life

Acquisition Cost $ 3,000,000 $ 4,500,000Book Value 3,000,000 1,225,000Market Value 10/31/09 3,000,000 600,000Remaining Life 5 years 5 years

REQUIRED:Support your answers with appropriate schedules. Please round your answers to the nearest dollar.

a) Identify the relevant revenue and cost items in order for management to prepare an effective equipment replacement decision analysis. (3 marks)

b) What is the monthly break-even point in units for each machine. (2 marks) c) Determine the monthly sales level in units at which total company

income will be equal for either the old or new machine. (5 marks) d) Explain which machine represents a lower risk if demand is

uncertain in the short run? (4 marks) e) Determine the sales level in dollars and in units at which the new

machine will achieve a 10% after tax target income-to-sales ratio.(6 marks)

SUGGESTED SOLUTIONS

a).

- Change in Sales price per unit will impact the decision. - Change in Variable cost per unit will impact the decision. - Change in Monthly fixed costs will impact the decision.

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- Estimated demand in units in the decision period – 5 years.- Acquisition cost of the new technology.- Current market value of the old technology.

( 3 Marks ).

b).

Break Even Point in Units;

New Technology = $ 2,625,000 / ($ 200 - $ 125) = 35,000 units.

Old Technology = $ 1,800,000 / ($ 190 - $ 130) = 30,000 units.

( 2 Marks ).

c).

Equality of Profit Would Occur at the Volume Level Where:

( $ 75 x Sales units ) – $ 2,625,000 = ( $ 60 x Sales units ) – $ 1,800,000.

$ 15 Sales units = $ 825,000.

Sales units = 55,000 units.

( 5 Marks ).

d).

If demand is uncertain, the old machine represents less risk because of its lower fixed costs to recover and the lower break even units at 30,000 units versus the new machine with its higher fixed costs to recover and a higher level of break even units at 35,000 units. This is the concept of operatingleverage. For every unit short of its break-even point, the new machine results in a greater loss per unit, and for every unit past its break-even point, the new machine results in a greater profit per unit.

( 4 Marks ).

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e).

10% after tax target profit is equal to 20% before tax target profit when the corporate tax rate is 50%.

( $ 75 x Sales units ) – $ 2,625,000 = ( 0.20 ) ( $ 200 x Sales units ).

75Sales units – 2,625,000 = 40Sales units.

35Sales units = 2,625,000, Sales units=75,000.

Sales revenue = 75,000 x $ 200 = $ 15,000,000.

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ADMS2510 Fall 2009 Final Exam-Part One-With Solutions