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Accounting 202: Managerial Accounting Fundamentals

Midterm Examination # 1

General Instructions:

You may write on this exam and use a calculator (without a sophisticated memory). Please show your work on all Problems for partial credit. No credit will be given for multiple-choice and matching answers on your exam. The answers must appear on your Scantron form.

 

Your grade will be weighted as follows:

30 % Multiple Choice & Matching

60 % Problems

10 % Essay

100% Total (plus up to 5% extra-credit given very sparingly)

 

Multiple Choice (24%—2 % each)

Instructions: Choose the best answer.

  1. Managerial accounting:
  1. focuses on financial statements and other financial reports.
  2. is governed by GAPP.
  3. provides information for parties external to the organization.
  4. focuses primarily on the needs of the stock market.
  5. focuses primarily on the needs of the organization’s internal parties.
2. Total costs are $100,000, when 10,000 units are produced; of this amount variable costs are $60,000. What are the total costs when 15,000 units are produced?
  1. $200,000.
  2. $160,000.
  3. $130,000.
  4. $150,000.
  5. none of the above.
3.  A factory worker worked a normal 40-hour shift (i.e., with no overtime), but 8 hours were idle time due to equipment break down. The employee earns $20 per hour. How much of the compensation is overhead?
  1. $ 160.
  2. $ 320.
  3. $ 640.
  4. $ 800.
  5. none of the above.
4.  Once production is completed, all manufacturing costs are added to the:
  1. Work-in-Process Inventory account.
  2. Manufacturing Overhead Inventory account.
  3. Cost-of-Goods-Sold account.
  4. Finished-Goods Inventory account.
  5. Production Labor account.
5.  When underapplied or overapplied manufacturing overhead is prorated, amounts can be assigned to which of the following accounts?
  1. Cost of Goods Sold, Work-in-Process Inventory, and Raw-Material Inventory.
  2. Raw-Material Inventory, Manufacturing Overhead, and Direct Labor.
  3. Work-in-Process Inventory, Raw-Material Inventory, and Cost of Goods Sold.
  4. Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold
  5. None of the above.

6.  A custom-furniture manufacturer would most likely use:

  1. Job-order budgeting.
  2. Joint costing.
  3. Job-order costing.
  4. Process costing
  5. Underapplied joint-job-process costing.
7.  Six Flags Corporation adds all material at the beginning of the production and incurs conversion costs evenly throughout manufacturing. The company had 30,000 units in process on January 1, 1999, 24% complete with respect to conversion costs, and 20,000 units in process at December 31,1999, 20% complete with respect to conversion cost. The company completed and transferred out 400,000 units during the year. Using weighted-average process costing calculate the equivalent units for the year.
  1. materials, 420,000; conversion 404,000.
  2. materials, 420,000; conversion 407,200.
  3. materials, 430,000; conversion 407,200.
  4. materials, 450,000; conversion 420,000.
  5. none of the above.
8.  Unit costs in a process-costing system are derived by using:
  1. completed units.
  2. in-process units.
  3. physical units.
  4. completed and transferred out units.
  5. a measure of activity other than those listed above.
9.  Farlow Corporation, which adds materials at the beginning of the production, uses a weighted-average process-costing system. Consider the data that follow:
 

Number of Units

Cost of Materials

Beg. Work-in-Process

30,000

$27,200

Started in May

170,000

$72,800

Production Completed

185,000

 
Ending Work-in-Process

15,000

 

The company’s cost per equivalent unit for materials is:

  1. $ 0.47
  2. $ 0.50
  3. $ 1.18
  4. $ 2.00
  5. none of the above.
10.  Engineering is an example of a:
  1. direct material cost.
  2. material handling cost.
  3. product-sustaining-level cost
  4. setup cost pool.
  5. facility-level cost pool.

11.  Activity-based costing systems:

  1. have a tendency to distort product costs.
  2. assign overhead to products based on the products' relative usage of direct labor.
  3. use a single, volume-based cost driver to assign overhead costs to products.
  4. typically use fewer cost drivers than more traditional costing systems
  5. use a two-stage procedure to assign overhead costs to products.
  1. Defender Corporation used a traditional volume-based costing system with a single cost pool and overhead allocated to products based on machine hours. They produced some very high-volume and some very low-volume products. This year they changed to an activity-based costing-system. The company will likely find that:
  1. all of its products are undercosted.
  2. its high-volume products are overcosted.
  3. all of its products are overcosted.
  4. Its high-volume products are undercosted.
  5. its low-volume products are overcosted.

 

Matching (6 %—2% each)

Instructions: Match the term with the correct definition and mark the appropriate answer on your Scantron. NO CREDIT WILL BE GIVEN IN THIS SECTION FOR ANSWERS ON THE EXAM. You may use each definition as many times as you would like; however, each definition is the correct answer for only one question.

Terms:

  1. Product Cost:
  2. Job-Order Costing:
  3. Activity-Based Costing:
  4. Definitions:

    A. It is used by companies that produce large numbers of identical goods.

    B. It is a cost that is not directly traceable to a particular department.

    C. It is a cost assigned to goods that were either purchased or manufactured for resale.

    D. It is used by companies where goods are produced in distinct batches and there are significant differences among the batches.

    E. It assigns overhead costs to products or services produced using a two-stage process that focuses on activities.

    Problems (60.0%)

    All problem in this section will be weighted evenly (15% each).

    Instructions: Please show all your work for partial credit where applicable.

  5. An automobile factory worker earns $8.00 per hour. The employee earns $12.00 for overtime hours. The operator worked 50 hours during the first week of January, instead of his usual 40 hours (i.e., all hours in excess of 40 hours are overtime).

Required:

    1. Compute the factory worker’s total compensation for the week.
    2. Total Compensation………………………………………….$ __________

       

    3. Calculate the factory worker’s total overtime premium for the week.

Total overtime premium………………………………………….$__________

            3. How much of the factory worker’s total compensation for the week  is direct-labor cost? How much is overhead?

Direct-labor cost………………………………………………….$__________

Overhead…………………………………………………………$__________

Total compensation…..………………………………………….$__________

 

17.  The accounting department of Game Hens, Inc. estimates that the company’s fixed overhead is $100,000 per year. The department has also determined that the variable overhead is approximately $.50 per chicken raise and sold. The firm sells a single product, thus overhead is applied on the basis of output units—Cornish game hens raised and sold.

Required:

  1. Calculate the predetermined overhead rate when the output predictions are 200,000 Cornish game hens.

Predetermined overhead rate $ ______________________ per unit

 

Show your work here:

 

18.  Ginnis Company buys barley and processes it into beer. For this problem assume that barley is the only raw material necessary to produce beer. Also assume that all raw materials are added at the beginning of the production process and conversion activity occurs evenly throughout the production process.

Ginnis Company started June with 8,750 units in process that were 60% complete with respect to conversion costs. 27,000 units were completed and transferred out during June. There were 7,500 units in process that were 40% completed with respect to conversion costs on June 30.

 

The following data pertain to the firm’s beer production facility:

Work-in-Process, June 1:

Direct Material………………………………………….$ 62,350

Conversion……………………………………………...$ 32,400

Costs incurred during June:

Direct material…………………………………………..$ 236,000

Conversion……...…...………………………………….$ 517,500

 

Required: Using weighted-average process costing, calculate the following:

                    1.  equivalent units of production for conversion only____________units

2.   the cost per equivalent unit for conversion cost only $ _____________

Show all your work here:

 

19.  Whipco Corporation manufactures sophisticated binoculars and telescopes. The company is now preparing its annual profit plan. As part of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the following information. The total budgeted materials-handling costs are $120,000.
 

Binoculars

Telescopes

Units produced

250

10

Material moves per product line

5

25

Direct labor hours per unit

50

20

Required:

  1. Using activity-based costing (ABC) calculate the material handling costs allocated to one binocular.
  2. $ _______________per binocular

    Show your work here:

     

  3. Answer the same question as in requirement 1, but for telescopes.

$ __________________ per telescope

Show your work here:

 

Essay (10%):

  1. Discuss the importance of correctly identifying an organization’s cost drivers. In discussing cost drivers, you may want to address the following: (1) the cost driver concept; (2) the negative consequences associated with misidentifying cost drivers; (3) the benefits of correctly identifying cost drivers. Be specific and concise, no credit will be given for wordy answers not addressing the question directly (i.e., B.S.). A short and concise essay dealing directly with the question may receive more credit than a long drawn-out answer that says the same thing. Stay within the allotted space!

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Extra-credit (Up to 5% given very sparingly)

Explain the behavioral tendencies many people show when they encounter opportunity and sunk costs. Be specific, concise and include definitions of opportunity and sunk costs. No credit will be awarded for wordy answers not directly applicable to the question. Stay within the allotted space—no more!

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DISCLOSURE STATEMENT: By signing below you agree to allow anonymous disclosure of your essay for academic purposes. Typically, the best student answer(s) may be disclosed (with all names omitted) in class or on the class web site posted on the Internet.

X ___________________________________________________

END OF EXAMINATION

NAME____________________________________

Key

  1. E (page 8 and Chapters 1 & 2 Examination)
  2. C (pages 31-33 and Chapters 1 & 2 Examination)
  3. A (page 37 & Homework Ex. 2-25)
  4. D (page 67--Exhibit 3-1 & Chapter 3 Examination #1)
  5. D (page 81 & Chapter 3 Examination # 5)
  6. C (page 68 & Chapter 3 Examination # 7)
  7. A (page 126—Exhibit 4-6 & Chapter 4 Examination # 6)
  8. E (page 126-7 & Chapter 4 Examination # 3)
  9. B (page 127—Exhibit 4-7 & Chapter 4 Examination # 10)
  10. C (page 162 & Chapter 5 Examination # 2)
  11. E (page 160 & Chapter 5 Examination # 7)
  12. B (page 165-6 & Chapter 5 Examination # 9)
  13. C (page 39)
  14. D (page 67)
  15. E (page 160)
16. (page 37 & Homework Ex. 2-26)

1.

Regular wages (40 x $8.00)

$320

Overtime wages  (10 x $12.00)

$120

Total Compensation  

$440

2. 

Overtime hours

10

Overtime premium per hour

X $4

Total overtime premium

$40

3.

Classification:    
Direct labor (50 hours x $8)

$400

Overhead(O.T. premium) (10 hours x $4)

$40

Total compensation  

$440

 

17. 

(page 72 & Homework Ex. 3-36)

100,000 + .50 (200,000)  = $200,000

$1.00

200,000

200,000  
 

18. 

(page 126 & 127—Exhibits 4-6; 4-7.)

1. 

Units completed and trasferred out

27,000 units

Work-in-process, June 1(7500 x 40%)

3,000 units 

Total

30,000 units

2

Total conversion costs

$517,500

Total conversion equivalent units

$30,000

 $ 17.25 per unit conversion cost

19.

(page 166—Exhibit 5-9 & Homework Exercise 2-25)

1.

Total budgeted material-handling costs  / Total material moves

Binoculars produced

= Cost  per  move

Cost per move X Number of moves

= M.H. costs

$120,000 / 30

250

= $16

$16 X $5

= $ 80
   
2. The formula is identical for 1, just substitute in the numbers for telescopes.

$ 120,000

        30

———————— = $400 x 25 = $10,000 per unit

        10

20. Essay (Text at 34):

    Model Answer:

    A cost driver is an event or activity that results in costs being incurred. For example, many of the costs in an automated environment are created by the operation of machines, and machine hours may be a suitable cost driver for overhead application.

    In most firms different types of costs respond to widely different cost drivers. Therefore, correctly identifying the relationship between costs and activities is crucial for reliable and accurate accounting information. Firms that misidentify their cost drivers may distort the actual cost of producing products. This could result in some products, such as high-volume products, subsidizing other products, such as low-volume products. [See text at 159-160]. In using the distorted costs firms may be overpricing some products while selling others at a low. Therefore, the firm could be pricing themselves out of the market on some products and selling others at a loss; all the while wondering why no one can compete with their prices on one product, and why they cannot compete with other firms’ prices on other products.

    The importance of correctly identifying a cost driver cannot be emphasized enough. It is important, however, that the benefits of having the cost driver information outweigh the costs of collecting it. The main benefit of correctly identifying cost drivers is more accurate cost information. This can maximize the firm’s profitability resulting from better managerial decision-making based on accurate information.

21. EXTRA CREDIT

Model Answer:

Opportunity costs are the potential benefits given up when the choice of one action precludes selection of different actions. Studies by behavioral scientists and economists have shown that many people have a tendency to ignore or downplay the importance of opportunity costs. Ignoring or downplaying the importance of opportunity costs can result in inconsistent and faulty business decisions.

Sunk costs are costs that have been incurred in the past and cannot be altered by any current or future decision. Hence, these costs are irrelevant for all future decisions. Human nature runs contrary to this idea. Most people attempt to justify past decisions. So while incorrect, from an economic perspective, people often allow sunk costs to affect future decisions. It is important for managerial accountants to be aware of such behavioral tendencies. Such an awareness enables the accountant to prepare the most relevant data for managers’ decisions and, sometimes, to assist the managers in using the information.

 

Grading Checklist

MIDTERM EXAMINATION ESSAY (Problem 20)

 

  1. Substantive Analysis [ 8 points]

A. Cost Driver Defined [2 points] __________

 B.  Discusses negative consequences [3 points] __________
    1. Provides examples
    2. Provides accurate and appropriate conclusions
C. Discusses positive consequences [3 points] __________
    1. Provides examples
    2. Provides accurate and appropriate conclusions
  1. Effective organization and writing [2 points]
    1. States relevant information and is clear, concise and
    2. coherently organized [ 1 point] __________

    3. Comes to appropriate conclusion giving reasons behind

conclusion [1 point] —————--

 

TOTAL [10 total points]                                          __________

 

EXTRA CREDIT ESSAY (Problem 21)

 

  1. Substantive Analysis [4 points]
    1. Sunk Cost [2 points] __________
    1. Definition
    2. Explains behavioral tendencies people show
    3. Provides other relevant information including

examples

    1. Opportunity Costs [2 points] __________
    1. Definition
    2. Explains behavioral tendencies people show
    3. Provides other relevant information including examples
  1. Effective organization and writing [1 point]
    1. States relevant information and is clear, concise and
    2. coherently organized [1/2 point]     __________

    3. Comes to appropriate conclusion giving reasons behind

Conclusion [1/2 point]          —————--

 

TOTAL [5 total points]                                                     __________

GRADING SUMMARY

 

MIDTERM EXAMINATION # 1

 

 

Multiple Choice ______% X 30% = _________ %

Problem 16 (15% Maximum) _____________ %

Problem 17 (15% Maximum) _____________ %

Problem 18 (15% Maximum)   _____________ %

Essay (10% Maximum)             _____________ %

Extra Credit (5% Maximum) _____________ %

                                                    _________________

TOTAL SCORE (100% MAXIMUM)