微信客服：xiaoxionga100
微信客服：ITCS521
管理会计代写-MGTB03
时间：2022-02-25
MGTB03 Managerial Accounting – Midterm Exam Review Questions
1
QUESTION 1
Saito Company manufactures basketballs. The company has a ball that sells for $25. At present,
the ball is manufactured in a small plant that relies heavily on direct labour workers. Thus,
variable costs are high, totaling $15 per ball. Last year, the company sold 30,000 of these balls,
and the fixed costs were $210,000.
Required:
1. Compute (1) the CM ratio and the break-even point in balls, and (b) the degree of operating
leverage at last year’s sales level.
2. Due to an increase in labour rates, the company estimates that variable costs will increase by
$3 per ball next year. If this change takes place and the selling price per ball remains constant
at $25, what will be the new CM ratio and break-even point in balls?
3. Refer to the data in (2) above. If the expected change in variable costs take place, how many
balls will have to be sold next year to earn the same operating income as last year?
4. Refer again to the data in (2) above. The president feels that the company must raise the
selling price of its basketballs. If Saito wants to maintain the same CM ratio as last year,
what selling price per ball must it charge next year to cover the increased labour costs?
5. Refer to the original data. The company is discussing the purchasing a new, automated
machine. The new machine would slash variable costs per ball by 40%, but it would cause
the fixed cost per year to double. If the new machine is purchased, what would be the
company’s new CM ratio and new break-even point in balls?
6. Refer to the data in (5) above.
a. If the new machine is purchased, how many balls will have to be sold next year to earn
the same operating income ($90,000) as last year?
b. Assume the new machine is purchased and that next year the company manufactures and
sells 30,000 balls (the same number as sold last year). Compute the degree of operating
leverage.
c. Determine the annual unit sales volume at which Saito would be indifferent between the
current and the new machines? If demand exceeds this amount, which machine should be
used?
MGTB03 Managerial Accounting – Midterm Exam Review Questions
QUESTION 2
ComTech, Inc. manufactures 2 types of mini computers – CT100 and CT200, and applies
overhead costs on the basis of direct labor hours. The anticipated overhead is $710,000.
Information about the company’s products follows.
CT100 CT200
Estimated production volume 2,500 3,125
Direct material per unit $30 $45
Direct labor per unit ($15/hr) $45 $60
Applied overhead ?
ComTech’s overhead of $710,000 can be identified with 3 major activities: order processing
($120,000), machine processing ($500,000), and product inspection ($90,000). These activities
are driven by the number of orders processed, machine hours worked, and inspection hours,
respectively. Data relevant to these activities follow.
CT100 CT200
Orders processed 350 250
Machine hours worked per unit 9.20 8.64
Inspection hours 4,000 11,000
Management is very concerned about declining profitability despite a healthy increase in sales
volume. The decrease in income is especially puzzling because the company recently undertook
a massive plant renovation during which new, highly, automated machinery was installed –
machinery that was expected to product significant operating efficiencies.
Required:
1. Assuming use of direct labor hours to apply overhead to production, compute the unit
manufacturing costs of the CT100 and CT200 products if the expected manufacturing
volume is attained.
2. Assuming use of activity-based costing, compute the unit manufacturing costs of the CT100
and CT200 products if the expected manufacturing volume is attained.
3. ComTech’s selling prices are based heavily on cost. By using direct labor hours as an
application base, which product is over-costed and which product is under-costed?
Calculate the selling price for each product, if ComTech wants to have a markup of 50%.
4. Using bullet form, state the benefits and limitations associated with carrying out an activity-
based costing analysis.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
3
Question 3:
Regal Millwork, Ltd., produces reproductions of antique residential mouldings at a plant located
in Manchester, England. Since there are hundreds of products, some of which are made only to
order, the company uses a job-order costing system. On July 1, the start of the company's fiscal
year, inventory account balances were as follows:
Raw Materials £10,000
Work in Process £4,000
Finished Goods. £8,000
The company applies overhead cost to jobs on the basis of machine-hours. For the fiscal year
starting July 1, it was estimated that the plant would operate 45,000 machine-hours and incur
£99,000 in manufacturing overhead cost. During the year, the following transactions were
completed:
a. Raw materials purchased on account, £160,000.
b. Raw materials requisitioned for use in production, £140,000 (materials costing £120,000
were chargeable directly to jobs; the remaining materials were indirect).
c. Costs for employee services were incurred as follows:
Direct labour £90,000
Indirect labour. £60,000
Sales commissions £20,000
Administrative salaries. £50,000
d. Prepaid insurance expired during the year: £18,000 (£13,000 of this amount related to
factory operations, and the remainder related to selling and administrative activities).
e. Utility costs incurred in the factory: £10,000.
f. Advertising costs incurred: £15,000.
g. Depreciation recorded on equipment: £25,000. (£20,000 of this amount was on
equipment used in factory operations; the remaining £5,000 was on equipment used in
selling and administrative activities.)
h. Manufacturing overhead cost was applied to jobs: £ ?. (The company recorded 50,000
machine-hours of operating time during the year.)
i. Goods that had cost £310,000 to manufacture according to their job cost sheets were
completed.
j. Sales (all on account) to customers during the year totalled £498,000. These goods had
cost £308,000 to manufacture according to their job cost sheets.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
4
Required:
1. Prepare journal entries to record the transactions for the year.
2. Prepare T-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold. Post
relevant data from your journal entries to these T-accounts (don't forget to enter the opening
balances in your inventory accounts). Compute an ending balance in each account.
3. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry
to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.
4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods
manufactured; all of the information needed for the income statement is available in the
journal entries and T-accounts you have prepared.)
MGTB03 Managerial Accounting – Midterm Exam Review Questions
5
Question 4:
Prince Company's total overhead costs at various levels of activity are presented below:
Month Machine-Hours Total Overhead Cost
September 100,000 $388,000
October 80,000 $340,400
November 135,000 $485,600
December 140,000 $483,200
Assume that the overhead cost above consists of utilities, supervisory salaries, depreciation, and
maintenance. The breakdown of these costs at the 80,000 machine-hour level of activity in
October is as follows:
Utilities (variable) $104,000
Supervisory salaries and depreciation (fixed) 120,000
Maintenance (mixed) 116,400
Total overhead cost $340,400
The company wants to break down the maintenance cost into its variable and fixed cost
elements.
Required:
1. Estimate how much of the $483,200 of overhead cost in December was maintenance cost.
(Hint: To do this, it may be helpful to first determine how much of the $483,200 consisted of
utilities and supervisory salaries. Think about the behaviour of variable and fixed costs
within the relevant range.)
2. Using the high–low method, estimate a cost formula for maintenance.
3. Express the company's total overhead cost in the form Y = a + bX.
4. What total overhead cost would you expect to be incurred at an activity level of 90,000
machine-hours?
MGTB03 Managerial Accounting – Midterm Exam Review Questions
6
Question 5:
Darby Company's contribution-format income statement for the most recent month is given
below:
Sales (30,000 units) $ 900,000
Variable expenses 630,000
Contribution margin 270,000
Fixed expenses 180,000
Operating income $ 90,000
The industry in which Darby Company operates is quite sensitive to cyclical movements in
the economy. Thus, profits vary considerably from year to year according to general economic
conditions. The company has a large amount of unused capacity and is studying ways of
improving profits.
Required:
1. New equipment has come on the market that would allow Darby Company to automate a
portion of its operations. Variable costs would be reduced by $9 per unit However, fixed
costs would increase to a total of $450,000 each month. Prepare two contribution-format
income statements, one showing present operations and one showing how operations would
appear if the new equipment is purchased. Show an Amount column, a Per Unit column, and
a Percentage column on each statement. Do not show percentages for the fixed costs.
2. Refer to the income statements in (1) above. For both present operations and the proposed
new operations, compute (a) the degree of operating leverage, (b) the break-even point in
dollars, and (c) the margin of safety in both dollar and percentage terms.
3. Refer again to the data in (1) above. As a manager, what factor would be paramount in your
mind in deciding whether to purchase the new equipment? (You may assume that .ample
funds are available to make the purchase.)
4. Refer to the original data. Rather than purchase new equipment, the marketing manager
argues that the company's marketing strategy should be changed. Instead of paying sales
commissions, which are included in variable expenses, the marketing manager suggests that
salespeople be paid fixed salaries and that the company invest heavily in advertising. The
marketing manager claims that this new approach would increase unit.sales by 60% without
any change in selling price; the company's new monthly fixed expenses would be $247,500;
and its operating income would increase by 25%. Compute the break-even point in dollar
sales for the company under the new marketing strategy. Do you agree with.the marketing
manager's proposal?
MGTB03 Managerial Accounting – Midterm Exam Review Questions
7
Question 6:
Data concerning Cranberry Architects Corporation's two major business lines are given below:
Direct materials per square metre $6.00 $4.50
Direct labour per square metre $48 $36
Direct labour-hours per square metre 0.1 DLHs 0.075 DLHs
Estimated annual output 40,000 m2 280,000 m2
The company has a traditional costing system in which architecture department overhead is
applied to units (square metres of architectural drawings) based on direct labour-hours. Data
concerning architecture department overhead and direct labour-hours for the upcoming year
appear below:
Estimated total architecture department overhead $670,000
Estimated total direct labour-hours 25,000 DLHs
Required:
1. Determine the unit costs of the Commercial and Residential products under the company's
traditional costing system.
2. The company is considering replacing its traditional costing system for determining unit
product costs for external reports with an activity-based costing system. The activity-based
costing system would have the following three activity cost pools:
Estimated
Activities and Overhead Expected Activities
Activity Measures Costs Commercial Residential Total
Supporting direct labour
(direct labour-hours) $600,000 4,000 21,000 25,000
Drawing software
modifications (changes) 60,000 100 25 125
Quality review and technical
checks (tests) 10,000 80 20 100
Total service department
overhead cost $670,000
.
Determine the unit costs (cost per square metre of architectural drawings) of the Commercial
and Residential lines of business under the activity-based costing system.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
8
Question 1
1. Sales Break-even will be:
1. a. Selling price .................................... $25 100%
Less variable expenses ................... 15 60
Contribution margin ....................... $10 40%
Break-even point
in unit sales
=
Fixed expenses
Unit contribution margin
=
$210,000
$10 per ball
=21,000 balls
b. The degree of operating leverage would be:
Degree of
operating leverage
=
Contribution margin
Net operating income
=
$300,000
$90,000
=3.33 (rounded)
2. The new CM ratio will be:
Selling price .................................... $25 100%
Less variable expenses .................... 18 72
Contribution margin ........................ $ 7 28%
Break-even point
in unit sales
=
Fixed expenses
Unit contribution margin
=
$210,000
$7 per ball
=30,000 balls
3. Sales Break-even will be:
Unit sales to attain
target profit
=
Fixed expenses +Target profit
Unit contribution margin
=
$210,000 + $90,000
$7 per ball
=42,857 balls
MGTB03 Managerial Accounting – Midterm Exam Review Questions
9
Thus, sales will have to increase by 12,857 balls (42,857 balls, less 30,000 balls currently being
sold) to earn the same amount of operating income as last year. The computations above and in
part (2) show quite clearly the dramatic effect that increases in variable costs can have on an
organization. The effects on Saito are summarized below:
Present Expected
Combination margin ratio ............................................................... 40% 28%
Break-even point (in balls) ............................................................. 21,000 30,000
Sales (in balls) needed to earn a $90,000 profit .............................. 30,000 42,857
Note particularly that if variable costs do increase next year, then the company will just break
even if it sells the same number of balls (30,000) as it did last year.
4. The contribution margin ratio last year was 40%. If we let P equal the new selling price,
then: VC = 0.6S = $18 S = $30
Selling price ................................... $30 100%
Less variable expenses ................... 18 60
Contribution margin ....................... $12 40%
Therefore, to maintain a 40% CM ratio, a $3 increase in variable costs would require a $5
increase in the selling price.
5. The new CM ratio would be:
Selling price ......................................... $25 100%
Less variable expenses*$15 – ($15 x 40%) = $9 9* 36
Contribution margin ............................. $16 64%
The new break-even point would be:
Break-even point
in unit sales
=
Fixed expenses
Unit contribution margin
=
$420,000
$16 per ball
=26,250 balls
Although this new break-even is greater than the company’s present break-even of 21,000 balls
[see Part (1) above], it is less than the break-even point will be if the company does not automate
and variable labour costs rise next year [see Part (2) above].
6. Sales Break-even will be:
Unit sales to attain
target profit
= Fixed expenses + Target profit
Unit contribution margin
= $420,000 + $90,000
$16 per ball
=31,875 balls
MGTB03 Managerial Accounting – Midterm Exam Review Questions
10
Thus, the company will have to sell 1,875 more balls (31,875 – 30,000 = 1,875) than now being
sold to earn a profit of $90,000 per year. However, this is still far less than the 42,857 balls that
would have to be sold to earn a $90,000 profit if the plant is not automated and variable labour
costs rise next year [see Part (3) above].
b. DOL:
Degree of
operating leverage
=
Contribution margin
Operating income
=
$480,000
$60,000
=8
c. $9X + $420,000 = $15X + $210,000
X = $210,000 ÷ 6 = 35,000 units
If demands beyond this point, then use new machine should be used because it will
provide greater profit (higher DOL)
MGTB03 Managerial Accounting – Midterm Exam Review Questions
Question 2
1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours
= $710,000 ÷ 20,000* = $35.50 per direct labor hour
*20,000 budgeted direct-labor hours
= (2,500 units x 3 hrs/unit CT100)+ (3,125 units x 4 hrs/unit CT200)
CT100 CT200
Direct material $30.00 $45.00
Direct labor: 3 hours x $15 $45.00 4 hours x $15 $60.00
Manufacturing overhead: 3 hours x $35.50 $106.50 4 hours x $35.50 $142.00
Total cost $181.50 $247.00
2. Activity-based overhead application rates:
Activity Cost Activity Cost Driver Application Rate
Order processing $120,000 ÷ 600 orders processed (OP) = $200 per OP
Machine processing 500,000 ÷ 50,000 machine hrs. (MH) = $10 per MH
Product inspection 90,000 ÷ 15,000 inspection hrs. (IH) = $6 per IH
Order processing, machine processing, and product inspection costs of a CT100 unit and a
CT200 unit:
Activity CT100 CT200
Order processing: 350 OPx$200 $70,000 250 OPx$200 $50,000
Machine processing: 9.20 MHx2,500x$10 230,000 8.64 MHx3,125x$10 270,000
Product inspection: 4,000 IHx$6 24,000 11,000 IHx$6 66,000
Total $324,000 $386,000
Production volume (units) ÷ 2,500 ÷ 3,125
Cost per unit $129.60 $123.52
The manufactured cost of a CT100 unit is $204.60, and the manufactured cost of a CT200 unit is
$228.52:
CT100 CT200
Direct material: $30.00 $45.00
Direct labor: 3 hours x $15 $45.00 4 hours x $15 $60.00
OH $129.60 $123.52
Total Cost per unit $204.60 $228.52
Markup 50% $102.30 $114.26
Selling Price $306.90 $342.78
3. The CT200 product is overcosted by $18.48 ($247.00 - $228.52) under the traditional
product-costing system. The labor-hour application base resulted in a $247 unit cost; in
contrast, the more accurate ABC approach yielded a lower unit cost of $228.52. The
MGTB03 Managerial Accounting – Midterm Exam Review Questions
12
opposite situation occurs with the CT100 product, which is undercosted by $23.10 under the
traditional approach ($181.50 vs. $204.60 under ABC).
Question 3:
1. a. Raw Materials .............................................................. 160,000
Accounts Payable .................................................. 160,000
b. Work in Process ........................................................... 120,000
Manufacturing Overhead.............................................. 20,000
Raw Materials ....................................................... 140,000
c. Work in Process ........................................................... 90,000
Manufacturing Overhead.............................................. 60,000
Sales Commissions Expense ........................................ 20,000
Salaries Expense ........................................................... 50,000
Salaries and Wages Payable .................................. 220,000
d. Manufacturing Overhead.............................................. 13,000
Insurance Expense ........................................................ 5,000
Prepaid Insurance .................................................. 18,000
e. Manufacturing Overhead.............................................. 10,000
Accounts Payable .................................................. 10,000
f. Advertising Expense .................................................... 15,000
Accounts Payable .................................................. 15,000
g. Manufacturing Overhead.............................................. 20,000
Depreciation Expense ................................................... 5,000
Accumulated Depreciation .................................... 25,000
h. Work in Process ........................................................... 110,000
Manufacturing Overhead ...................................... 110,000
Estimated total manufacturing overhead cost £99,000
= = £2.20 per MH
Estimated total amount of the allocation base 45,000 MHs
50,000 actual MHs × £2.20 per MH = £110,000 overhead applied.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
13
i. Finished Goods ....................................................... 310,000
Work in Process ............................................... 310,000
j. Accounts Receivable .............................................. 498,000
Sales ................................................................. 498,000
Cost of Goods Sold ................................................. 308,000
Finished Goods ................................................ 308,000
2.
Raw Materials Work in Process
Bal. 10,000 (b) 140,000 Bal. 4,000 (i) 310,000
(a) 160,000 (b) 120,000
(c) 90,000
(h) 110,000
Bal. 30,000 Bal. 14,000
Finished Goods Manufacturing Overhead
Bal. 8,000 (j) 308,000 (b) 20,000 (h) 110,000
(i) 310,000 (c) 60,000
(d) 13,000
(e) 10,000
(g) 20,000
Bal. 10,000 Bal. 13,000
Cost of Goods Sold
(j) 308,000
3. Manufacturing overhead is underapplied by £13,000 for the year. The entry to close this
balance to Cost of Goods Sold would be:
Cost of Goods Sold ............................................................. 13,000
Manufacturing Overhead ............................................. 13,000
MGTB03 Managerial Accounting – Midterm Exam Review Questions
14
4.
Regal Millwork, Ltd.
Income Statement
For the Year Ended June 30
Sales .......................................................................................... £498,000
Cost of goods sold (£308,000 + £13,000) ................................. 321,000
Gross margin ............................................................................. 177,000
Selling and administrative expenses:
Sales commissions ................................................................ £20,000
Administrative salaries .......................................................... 50,000
Insurance expense ................................................................. 5,000
Advertising expenses ............................................................ 15,000
Depreciation expense ............................................................ 5,000 95,000
Operating income ...................................................................... £ 82,000
Additional Notes:
You may wish to have the student prepare a statement of Cost of Goods manufactured as
follows:
Raw Materials, B.I. $ 10,000
Purchase of RM 160,000
R.M. Available 170,000
Less: Raw Material, E.I. 30,000
Raw Materials Used 140,000
Less: Indirect Material 20,000
Direct Material Used $ 120,000
Direct Labour 90,000
Manufacturing Overhead Applied 110,000
Manufacturing Costs for the year 320,000
Add: WIP B.I. 4,000
Less: WIP E.I. 14,000
Cost of Goods Manufactured $310,000
MGTB03 Managerial Accounting – Midterm Exam Review Questions
15
Question 4:
Maintenance cost at the 140,000 machine-hour level of activity can be isolated as follows:
Level of Activity
80,000 MH 140,000 MH
Total factory overhead cost ............................... $340,400 $483,200
Deduct:
Utilities cost @ $1.30 per MH* .................... 104,000 182,000
Supervisory salaries ...................................... 120,000 120,000
Maintenance cost .............................................. $116,400 $181,200
*$104,000 ÷ 80,000 MHs = $1.30 per MH
2. High-low analysis of maintenance cost:
Maintenance
Cost
Machine-
Hours
High activity level ........................... $181,200 140,000
Low activity level ........................... 116,400 80,000
Change ............................................ $ 64,800 60,000
Note: in this problem the high level of activity (140,000 hours) does not correspond to the
highest level of total overhead costs, which occurs in November.
Variable cost per unit of activity:
Total fixed cost:
Total maintenance cost at the low activity level ...................................... $116,400
Less the variable cost element
(80,000 MHs × $1.08 per MH) ............................................................. 86,400
Fixed cost element .................................................................................... $30,000
Therefore, the cost formula is $30,000 per month plus $1.08 per
Change in cost = $64,800 = $1.08 per MH
Change in activity 60,000 MHs
MGTB03 Managerial Accounting – Midterm Exam Review Questions
16
machine-hour or Y = $30,000 + $1.08X, where X represents machine-hours.
3.
Variable Rate per
Machine-Hour Fixed Cost
Maintenance cost ............................ $1.08 $ 30,000
Utilities cost: $104,000/80,000 ........... 1.30
Supervisory salaries cost ................ 120,000
Totals .............................................. $2.38 $150,000
Therefore, the cost formula would be $150,000 plus $2.38 per machine-hour, or Y =
$150,000 + $2.38X.
4. Fixed costs ...................................................................................... $150,000
Variable costs: $2.38 per MH × 90,000 MHs ................................. 214,200
Total overhead costs ....................................................................... $364,200
MGTB03 Managerial Accounting – Midterm Exam Review Questions
17
Question 5:
1. The income statements would be:
Present Proposed
Amount
Per
Unit % Amount
Per
Unit %
Sales .................................... $900,000 $30 100 $900,000 $30 100
Variable expenses ................ 630,000 21 70 360,000 12 * 40
Contribution margin ............ 270,000 $9 30 540,000 $18 60
Fixed expenses .................... 180,000 450,000
Operating
income ............................. $ 90,000 $ 90,000
*$21 – $9 = $12
2. a. Present Proposed
Degree of operating
leverage .................................
$270,000
= 3
$90,000
$540,000
= 6
$90,000
b.
Break-even point in
dollars ....................................
$180,000
= $600,000
0.30
$450,000
= $750,000
0.60
c.
Margin of safety =
Total sales –
Break-even sales:
$900,000 – $600,000 ............ $300,000
$900,000 – $750,000 ............ $150,000
Margin of safety
percentage =
Margin of safety ÷
Total sales:
$300,000 ÷ $900,000 ............ 33 1/3%
$150,000 ÷ $900,000 ............ 16 2/3%
MGTB03 Managerial Accounting – Midterm Exam Review Questions
18
3. The major factor would be the sensitivity of the company’s operations to cyclical movements
in the economy. In years of strong economic activity, the company will be better off with the
new equipment. The new equipment will increase the CM ratio and, as a consequence, profits
would rise more rapidly in years with strong sales. However, the company will be worse off
with the new equipment in years in which sales drop. The greater fixed costs of the new
equipment will result in losses being incurred more quickly and they will be deeper. Thus,
management must decide whether the potential greater profits in good years is worth the risk
of deeper losses in bad years.
4. No information is given in the problem concerning the new variable
expenses or the new contribution margin ratio. Both of these items must be determined
before the new break-even point can be computed. The computations are:
New variable expenses:
Sales = Variable expenses + Fixed expenses + Profits
$1,440,000* = Variable expenses + $247,500 + $112,500**
$1,080,000 = Variable expenses
* New level of sales: $900,000 × 1.6 = $1,440,000
** New level of operating income: $90,000 × 1.25 = $112,500
New CM ratio:
Sales ...................................................... $1,440,000 100%
Variable expenses .................................. 1,080,000 75%
Contribution margin .............................. $ 360,000 25%
With the above data, the new break-even point can be computed:
Fixed expenses $247,500Break-even point = = = $990,000in dollar sales CM ratio 0.25
The greatest risk is that the marketing manager’s estimates of increases in sales and operating
income will not materialize and that sales will remain at their present level. Note that the
present level of sales is $900,000, which is well below the break-even level of sales under the
new marketing method.
It would be a good idea to compare the new marketing strategy to the current situation more
directly. What level of sales would be needed
under the new method to generate at least the $90,000 in profits the company is currently
MGTB03 Managerial Accounting – Midterm Exam Review Questions
19
earning each month? The computations are:
Fixed expenses + Target profitDollar sales to attain = target profit CM ratio
$247,500 + $90,000
=
0.25
= $1,350,000 in sales each month
Thus, sales would have to increase by at least 50% ($1,350,000 is 50% higher than $900,000)
in order to make the company better off with the new marketing strategy than with the
current situation. This appears to be extremely risky.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
Question 6
1. The predetermined overhead rate is computed as follows:
Total estimated overhead/total estimated direct-labour hours: $670,000/25,000 = $26.80 per hour
The unit costs (cost per square metre of architectural drawings) under the company’s traditional costing system are computed as
follows:
Commercial Residential
Direct materials ......................................................................................... $6.00 $4.50
Direct labour.............................................................................................. 48.00 36.00
Architecture department overhead
(0.1 DLH × $26.80 per DLH;
0.075 DLH x $26.80 per DLH) ............................................................. 2.68 2.01
Unit cost (per square metre of drawings) .................................................. $56.68 $42.51
2. The activity rates are computed as follows:
(a)
Estimated (b)
Overhead Total (a) ÷ (b)
Activities Cost Expected Activity Activity Rate
Supporting direct labour ............. $600,000 25,000 DLHs $24 per DLH
Software changes ....................... $60,000 125 changes $480 per change
Technical checks ........................ $10,000 100 tests $100 per check
Architecture department overhead is assigned to the two products as follows:
MGTB03 Managerial Accounting – Midterm Exam Review Questions
21
Commercial Product:
Activity Cost Pool (a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Supporting direct labour ...................... $24 per DLH 4,000 DLHs $96,000
Software changes ................................. $480 per change 100 changes 48,000
Technical checks .................................. $100 per test 80 tests 8,000
Total ..................................................... $152,000
Residential Product:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Supporting direct labour ....................... $24 per DLH 21,000 DLHs $504,000
Software changes .................................. $480 per change 25 changes 12,000
Technical checks................................... $100 per test 20 tests 2,000
Total ...................................................... $518,000
Activity-based costing unit costs are computed as follows:
Commercial Residential
Direct materials .............................................................................. $6.00 $4.50
Direct labour................................................................................... 48.00 36.00
Architecture department overhead ($152,000 ÷ 40,000 sq.
metres; $518,000 ÷ 280,000 sq. metres) .................................... 3.80 1.85
Unit cost (per square metre of drawings) ....................................... $57.80 $42.35
1
QUESTION 1
Saito Company manufactures basketballs. The company has a ball that sells for $25. At present,
the ball is manufactured in a small plant that relies heavily on direct labour workers. Thus,
variable costs are high, totaling $15 per ball. Last year, the company sold 30,000 of these balls,
and the fixed costs were $210,000.
Required:
1. Compute (1) the CM ratio and the break-even point in balls, and (b) the degree of operating
leverage at last year’s sales level.
2. Due to an increase in labour rates, the company estimates that variable costs will increase by
$3 per ball next year. If this change takes place and the selling price per ball remains constant
at $25, what will be the new CM ratio and break-even point in balls?
3. Refer to the data in (2) above. If the expected change in variable costs take place, how many
balls will have to be sold next year to earn the same operating income as last year?
4. Refer again to the data in (2) above. The president feels that the company must raise the
selling price of its basketballs. If Saito wants to maintain the same CM ratio as last year,
what selling price per ball must it charge next year to cover the increased labour costs?
5. Refer to the original data. The company is discussing the purchasing a new, automated
machine. The new machine would slash variable costs per ball by 40%, but it would cause
the fixed cost per year to double. If the new machine is purchased, what would be the
company’s new CM ratio and new break-even point in balls?
6. Refer to the data in (5) above.
a. If the new machine is purchased, how many balls will have to be sold next year to earn
the same operating income ($90,000) as last year?
b. Assume the new machine is purchased and that next year the company manufactures and
sells 30,000 balls (the same number as sold last year). Compute the degree of operating
leverage.
c. Determine the annual unit sales volume at which Saito would be indifferent between the
current and the new machines? If demand exceeds this amount, which machine should be
used?
MGTB03 Managerial Accounting – Midterm Exam Review Questions
QUESTION 2
ComTech, Inc. manufactures 2 types of mini computers – CT100 and CT200, and applies
overhead costs on the basis of direct labor hours. The anticipated overhead is $710,000.
Information about the company’s products follows.
CT100 CT200
Estimated production volume 2,500 3,125
Direct material per unit $30 $45
Direct labor per unit ($15/hr) $45 $60
Applied overhead ?
ComTech’s overhead of $710,000 can be identified with 3 major activities: order processing
($120,000), machine processing ($500,000), and product inspection ($90,000). These activities
are driven by the number of orders processed, machine hours worked, and inspection hours,
respectively. Data relevant to these activities follow.
CT100 CT200
Orders processed 350 250
Machine hours worked per unit 9.20 8.64
Inspection hours 4,000 11,000
Management is very concerned about declining profitability despite a healthy increase in sales
volume. The decrease in income is especially puzzling because the company recently undertook
a massive plant renovation during which new, highly, automated machinery was installed –
machinery that was expected to product significant operating efficiencies.
Required:
1. Assuming use of direct labor hours to apply overhead to production, compute the unit
manufacturing costs of the CT100 and CT200 products if the expected manufacturing
volume is attained.
2. Assuming use of activity-based costing, compute the unit manufacturing costs of the CT100
and CT200 products if the expected manufacturing volume is attained.
3. ComTech’s selling prices are based heavily on cost. By using direct labor hours as an
application base, which product is over-costed and which product is under-costed?
Calculate the selling price for each product, if ComTech wants to have a markup of 50%.
4. Using bullet form, state the benefits and limitations associated with carrying out an activity-
based costing analysis.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
3
Question 3:
Regal Millwork, Ltd., produces reproductions of antique residential mouldings at a plant located
in Manchester, England. Since there are hundreds of products, some of which are made only to
order, the company uses a job-order costing system. On July 1, the start of the company's fiscal
year, inventory account balances were as follows:
Raw Materials £10,000
Work in Process £4,000
Finished Goods. £8,000
The company applies overhead cost to jobs on the basis of machine-hours. For the fiscal year
starting July 1, it was estimated that the plant would operate 45,000 machine-hours and incur
£99,000 in manufacturing overhead cost. During the year, the following transactions were
completed:
a. Raw materials purchased on account, £160,000.
b. Raw materials requisitioned for use in production, £140,000 (materials costing £120,000
were chargeable directly to jobs; the remaining materials were indirect).
c. Costs for employee services were incurred as follows:
Direct labour £90,000
Indirect labour. £60,000
Sales commissions £20,000
Administrative salaries. £50,000
d. Prepaid insurance expired during the year: £18,000 (£13,000 of this amount related to
factory operations, and the remainder related to selling and administrative activities).
e. Utility costs incurred in the factory: £10,000.
f. Advertising costs incurred: £15,000.
g. Depreciation recorded on equipment: £25,000. (£20,000 of this amount was on
equipment used in factory operations; the remaining £5,000 was on equipment used in
selling and administrative activities.)
h. Manufacturing overhead cost was applied to jobs: £ ?. (The company recorded 50,000
machine-hours of operating time during the year.)
i. Goods that had cost £310,000 to manufacture according to their job cost sheets were
completed.
j. Sales (all on account) to customers during the year totalled £498,000. These goods had
cost £308,000 to manufacture according to their job cost sheets.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
4
Required:
1. Prepare journal entries to record the transactions for the year.
2. Prepare T-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold. Post
relevant data from your journal entries to these T-accounts (don't forget to enter the opening
balances in your inventory accounts). Compute an ending balance in each account.
3. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry
to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.
4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods
manufactured; all of the information needed for the income statement is available in the
journal entries and T-accounts you have prepared.)
MGTB03 Managerial Accounting – Midterm Exam Review Questions
5
Question 4:
Prince Company's total overhead costs at various levels of activity are presented below:
Month Machine-Hours Total Overhead Cost
September 100,000 $388,000
October 80,000 $340,400
November 135,000 $485,600
December 140,000 $483,200
Assume that the overhead cost above consists of utilities, supervisory salaries, depreciation, and
maintenance. The breakdown of these costs at the 80,000 machine-hour level of activity in
October is as follows:
Utilities (variable) $104,000
Supervisory salaries and depreciation (fixed) 120,000
Maintenance (mixed) 116,400
Total overhead cost $340,400
The company wants to break down the maintenance cost into its variable and fixed cost
elements.
Required:
1. Estimate how much of the $483,200 of overhead cost in December was maintenance cost.
(Hint: To do this, it may be helpful to first determine how much of the $483,200 consisted of
utilities and supervisory salaries. Think about the behaviour of variable and fixed costs
within the relevant range.)
2. Using the high–low method, estimate a cost formula for maintenance.
3. Express the company's total overhead cost in the form Y = a + bX.
4. What total overhead cost would you expect to be incurred at an activity level of 90,000
machine-hours?
MGTB03 Managerial Accounting – Midterm Exam Review Questions
6
Question 5:
Darby Company's contribution-format income statement for the most recent month is given
below:
Sales (30,000 units) $ 900,000
Variable expenses 630,000
Contribution margin 270,000
Fixed expenses 180,000
Operating income $ 90,000
The industry in which Darby Company operates is quite sensitive to cyclical movements in
the economy. Thus, profits vary considerably from year to year according to general economic
conditions. The company has a large amount of unused capacity and is studying ways of
improving profits.
Required:
1. New equipment has come on the market that would allow Darby Company to automate a
portion of its operations. Variable costs would be reduced by $9 per unit However, fixed
costs would increase to a total of $450,000 each month. Prepare two contribution-format
income statements, one showing present operations and one showing how operations would
appear if the new equipment is purchased. Show an Amount column, a Per Unit column, and
a Percentage column on each statement. Do not show percentages for the fixed costs.
2. Refer to the income statements in (1) above. For both present operations and the proposed
new operations, compute (a) the degree of operating leverage, (b) the break-even point in
dollars, and (c) the margin of safety in both dollar and percentage terms.
3. Refer again to the data in (1) above. As a manager, what factor would be paramount in your
mind in deciding whether to purchase the new equipment? (You may assume that .ample
funds are available to make the purchase.)
4. Refer to the original data. Rather than purchase new equipment, the marketing manager
argues that the company's marketing strategy should be changed. Instead of paying sales
commissions, which are included in variable expenses, the marketing manager suggests that
salespeople be paid fixed salaries and that the company invest heavily in advertising. The
marketing manager claims that this new approach would increase unit.sales by 60% without
any change in selling price; the company's new monthly fixed expenses would be $247,500;
and its operating income would increase by 25%. Compute the break-even point in dollar
sales for the company under the new marketing strategy. Do you agree with.the marketing
manager's proposal?
MGTB03 Managerial Accounting – Midterm Exam Review Questions
7
Question 6:
Data concerning Cranberry Architects Corporation's two major business lines are given below:
Direct materials per square metre $6.00 $4.50
Direct labour per square metre $48 $36
Direct labour-hours per square metre 0.1 DLHs 0.075 DLHs
Estimated annual output 40,000 m2 280,000 m2
The company has a traditional costing system in which architecture department overhead is
applied to units (square metres of architectural drawings) based on direct labour-hours. Data
concerning architecture department overhead and direct labour-hours for the upcoming year
appear below:
Estimated total architecture department overhead $670,000
Estimated total direct labour-hours 25,000 DLHs
Required:
1. Determine the unit costs of the Commercial and Residential products under the company's
traditional costing system.
2. The company is considering replacing its traditional costing system for determining unit
product costs for external reports with an activity-based costing system. The activity-based
costing system would have the following three activity cost pools:
Estimated
Activities and Overhead Expected Activities
Activity Measures Costs Commercial Residential Total
Supporting direct labour
(direct labour-hours) $600,000 4,000 21,000 25,000
Drawing software
modifications (changes) 60,000 100 25 125
Quality review and technical
checks (tests) 10,000 80 20 100
Total service department
overhead cost $670,000
.
Determine the unit costs (cost per square metre of architectural drawings) of the Commercial
and Residential lines of business under the activity-based costing system.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
8
Question 1
1. Sales Break-even will be:
1. a. Selling price .................................... $25 100%
Less variable expenses ................... 15 60
Contribution margin ....................... $10 40%
Break-even point
in unit sales
=
Fixed expenses
Unit contribution margin
=
$210,000
$10 per ball
=21,000 balls
b. The degree of operating leverage would be:
Degree of
operating leverage
=
Contribution margin
Net operating income
=
$300,000
$90,000
=3.33 (rounded)
2. The new CM ratio will be:
Selling price .................................... $25 100%
Less variable expenses .................... 18 72
Contribution margin ........................ $ 7 28%
Break-even point
in unit sales
=
Fixed expenses
Unit contribution margin
=
$210,000
$7 per ball
=30,000 balls
3. Sales Break-even will be:
Unit sales to attain
target profit
=
Fixed expenses +Target profit
Unit contribution margin
=
$210,000 + $90,000
$7 per ball
=42,857 balls
MGTB03 Managerial Accounting – Midterm Exam Review Questions
9
Thus, sales will have to increase by 12,857 balls (42,857 balls, less 30,000 balls currently being
sold) to earn the same amount of operating income as last year. The computations above and in
part (2) show quite clearly the dramatic effect that increases in variable costs can have on an
organization. The effects on Saito are summarized below:
Present Expected
Combination margin ratio ............................................................... 40% 28%
Break-even point (in balls) ............................................................. 21,000 30,000
Sales (in balls) needed to earn a $90,000 profit .............................. 30,000 42,857
Note particularly that if variable costs do increase next year, then the company will just break
even if it sells the same number of balls (30,000) as it did last year.
4. The contribution margin ratio last year was 40%. If we let P equal the new selling price,
then: VC = 0.6S = $18 S = $30
Selling price ................................... $30 100%
Less variable expenses ................... 18 60
Contribution margin ....................... $12 40%
Therefore, to maintain a 40% CM ratio, a $3 increase in variable costs would require a $5
increase in the selling price.
5. The new CM ratio would be:
Selling price ......................................... $25 100%
Less variable expenses*$15 – ($15 x 40%) = $9 9* 36
Contribution margin ............................. $16 64%
The new break-even point would be:
Break-even point
in unit sales
=
Fixed expenses
Unit contribution margin
=
$420,000
$16 per ball
=26,250 balls
Although this new break-even is greater than the company’s present break-even of 21,000 balls
[see Part (1) above], it is less than the break-even point will be if the company does not automate
and variable labour costs rise next year [see Part (2) above].
6. Sales Break-even will be:
Unit sales to attain
target profit
= Fixed expenses + Target profit
Unit contribution margin
= $420,000 + $90,000
$16 per ball
=31,875 balls
MGTB03 Managerial Accounting – Midterm Exam Review Questions
10
Thus, the company will have to sell 1,875 more balls (31,875 – 30,000 = 1,875) than now being
sold to earn a profit of $90,000 per year. However, this is still far less than the 42,857 balls that
would have to be sold to earn a $90,000 profit if the plant is not automated and variable labour
costs rise next year [see Part (3) above].
b. DOL:
Degree of
operating leverage
=
Contribution margin
Operating income
=
$480,000
$60,000
=8
c. $9X + $420,000 = $15X + $210,000
X = $210,000 ÷ 6 = 35,000 units
If demands beyond this point, then use new machine should be used because it will
provide greater profit (higher DOL)
MGTB03 Managerial Accounting – Midterm Exam Review Questions
Question 2
1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours
= $710,000 ÷ 20,000* = $35.50 per direct labor hour
*20,000 budgeted direct-labor hours
= (2,500 units x 3 hrs/unit CT100)+ (3,125 units x 4 hrs/unit CT200)
CT100 CT200
Direct material $30.00 $45.00
Direct labor: 3 hours x $15 $45.00 4 hours x $15 $60.00
Manufacturing overhead: 3 hours x $35.50 $106.50 4 hours x $35.50 $142.00
Total cost $181.50 $247.00
2. Activity-based overhead application rates:
Activity Cost Activity Cost Driver Application Rate
Order processing $120,000 ÷ 600 orders processed (OP) = $200 per OP
Machine processing 500,000 ÷ 50,000 machine hrs. (MH) = $10 per MH
Product inspection 90,000 ÷ 15,000 inspection hrs. (IH) = $6 per IH
Order processing, machine processing, and product inspection costs of a CT100 unit and a
CT200 unit:
Activity CT100 CT200
Order processing: 350 OPx$200 $70,000 250 OPx$200 $50,000
Machine processing: 9.20 MHx2,500x$10 230,000 8.64 MHx3,125x$10 270,000
Product inspection: 4,000 IHx$6 24,000 11,000 IHx$6 66,000
Total $324,000 $386,000
Production volume (units) ÷ 2,500 ÷ 3,125
Cost per unit $129.60 $123.52
The manufactured cost of a CT100 unit is $204.60, and the manufactured cost of a CT200 unit is
$228.52:
CT100 CT200
Direct material: $30.00 $45.00
Direct labor: 3 hours x $15 $45.00 4 hours x $15 $60.00
OH $129.60 $123.52
Total Cost per unit $204.60 $228.52
Markup 50% $102.30 $114.26
Selling Price $306.90 $342.78
3. The CT200 product is overcosted by $18.48 ($247.00 - $228.52) under the traditional
product-costing system. The labor-hour application base resulted in a $247 unit cost; in
contrast, the more accurate ABC approach yielded a lower unit cost of $228.52. The
MGTB03 Managerial Accounting – Midterm Exam Review Questions
12
opposite situation occurs with the CT100 product, which is undercosted by $23.10 under the
traditional approach ($181.50 vs. $204.60 under ABC).
Question 3:
1. a. Raw Materials .............................................................. 160,000
Accounts Payable .................................................. 160,000
b. Work in Process ........................................................... 120,000
Manufacturing Overhead.............................................. 20,000
Raw Materials ....................................................... 140,000
c. Work in Process ........................................................... 90,000
Manufacturing Overhead.............................................. 60,000
Sales Commissions Expense ........................................ 20,000
Salaries Expense ........................................................... 50,000
Salaries and Wages Payable .................................. 220,000
d. Manufacturing Overhead.............................................. 13,000
Insurance Expense ........................................................ 5,000
Prepaid Insurance .................................................. 18,000
e. Manufacturing Overhead.............................................. 10,000
Accounts Payable .................................................. 10,000
f. Advertising Expense .................................................... 15,000
Accounts Payable .................................................. 15,000
g. Manufacturing Overhead.............................................. 20,000
Depreciation Expense ................................................... 5,000
Accumulated Depreciation .................................... 25,000
h. Work in Process ........................................................... 110,000
Manufacturing Overhead ...................................... 110,000
Estimated total manufacturing overhead cost £99,000
= = £2.20 per MH
Estimated total amount of the allocation base 45,000 MHs
50,000 actual MHs × £2.20 per MH = £110,000 overhead applied.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
13
i. Finished Goods ....................................................... 310,000
Work in Process ............................................... 310,000
j. Accounts Receivable .............................................. 498,000
Sales ................................................................. 498,000
Cost of Goods Sold ................................................. 308,000
Finished Goods ................................................ 308,000
2.
Raw Materials Work in Process
Bal. 10,000 (b) 140,000 Bal. 4,000 (i) 310,000
(a) 160,000 (b) 120,000
(c) 90,000
(h) 110,000
Bal. 30,000 Bal. 14,000
Finished Goods Manufacturing Overhead
Bal. 8,000 (j) 308,000 (b) 20,000 (h) 110,000
(i) 310,000 (c) 60,000
(d) 13,000
(e) 10,000
(g) 20,000
Bal. 10,000 Bal. 13,000
Cost of Goods Sold
(j) 308,000
3. Manufacturing overhead is underapplied by £13,000 for the year. The entry to close this
balance to Cost of Goods Sold would be:
Cost of Goods Sold ............................................................. 13,000
Manufacturing Overhead ............................................. 13,000
MGTB03 Managerial Accounting – Midterm Exam Review Questions
14
4.
Regal Millwork, Ltd.
Income Statement
For the Year Ended June 30
Sales .......................................................................................... £498,000
Cost of goods sold (£308,000 + £13,000) ................................. 321,000
Gross margin ............................................................................. 177,000
Selling and administrative expenses:
Sales commissions ................................................................ £20,000
Administrative salaries .......................................................... 50,000
Insurance expense ................................................................. 5,000
Advertising expenses ............................................................ 15,000
Depreciation expense ............................................................ 5,000 95,000
Operating income ...................................................................... £ 82,000
Additional Notes:
You may wish to have the student prepare a statement of Cost of Goods manufactured as
follows:
Raw Materials, B.I. $ 10,000
Purchase of RM 160,000
R.M. Available 170,000
Less: Raw Material, E.I. 30,000
Raw Materials Used 140,000
Less: Indirect Material 20,000
Direct Material Used $ 120,000
Direct Labour 90,000
Manufacturing Overhead Applied 110,000
Manufacturing Costs for the year 320,000
Add: WIP B.I. 4,000
Less: WIP E.I. 14,000
Cost of Goods Manufactured $310,000
MGTB03 Managerial Accounting – Midterm Exam Review Questions
15
Question 4:
Maintenance cost at the 140,000 machine-hour level of activity can be isolated as follows:
Level of Activity
80,000 MH 140,000 MH
Total factory overhead cost ............................... $340,400 $483,200
Deduct:
Utilities cost @ $1.30 per MH* .................... 104,000 182,000
Supervisory salaries ...................................... 120,000 120,000
Maintenance cost .............................................. $116,400 $181,200
*$104,000 ÷ 80,000 MHs = $1.30 per MH
2. High-low analysis of maintenance cost:
Maintenance
Cost
Machine-
Hours
High activity level ........................... $181,200 140,000
Low activity level ........................... 116,400 80,000
Change ............................................ $ 64,800 60,000
Note: in this problem the high level of activity (140,000 hours) does not correspond to the
highest level of total overhead costs, which occurs in November.
Variable cost per unit of activity:
Total fixed cost:
Total maintenance cost at the low activity level ...................................... $116,400
Less the variable cost element
(80,000 MHs × $1.08 per MH) ............................................................. 86,400
Fixed cost element .................................................................................... $30,000
Therefore, the cost formula is $30,000 per month plus $1.08 per
Change in cost = $64,800 = $1.08 per MH
Change in activity 60,000 MHs
MGTB03 Managerial Accounting – Midterm Exam Review Questions
16
machine-hour or Y = $30,000 + $1.08X, where X represents machine-hours.
3.
Variable Rate per
Machine-Hour Fixed Cost
Maintenance cost ............................ $1.08 $ 30,000
Utilities cost: $104,000/80,000 ........... 1.30
Supervisory salaries cost ................ 120,000
Totals .............................................. $2.38 $150,000
Therefore, the cost formula would be $150,000 plus $2.38 per machine-hour, or Y =
$150,000 + $2.38X.
4. Fixed costs ...................................................................................... $150,000
Variable costs: $2.38 per MH × 90,000 MHs ................................. 214,200
Total overhead costs ....................................................................... $364,200
MGTB03 Managerial Accounting – Midterm Exam Review Questions
17
Question 5:
1. The income statements would be:
Present Proposed
Amount
Per
Unit % Amount
Per
Unit %
Sales .................................... $900,000 $30 100 $900,000 $30 100
Variable expenses ................ 630,000 21 70 360,000 12 * 40
Contribution margin ............ 270,000 $9 30 540,000 $18 60
Fixed expenses .................... 180,000 450,000
Operating
income ............................. $ 90,000 $ 90,000
*$21 – $9 = $12
2. a. Present Proposed
Degree of operating
leverage .................................
$270,000
= 3
$90,000
$540,000
= 6
$90,000
b.
Break-even point in
dollars ....................................
$180,000
= $600,000
0.30
$450,000
= $750,000
0.60
c.
Margin of safety =
Total sales –
Break-even sales:
$900,000 – $600,000 ............ $300,000
$900,000 – $750,000 ............ $150,000
Margin of safety
percentage =
Margin of safety ÷
Total sales:
$300,000 ÷ $900,000 ............ 33 1/3%
$150,000 ÷ $900,000 ............ 16 2/3%
MGTB03 Managerial Accounting – Midterm Exam Review Questions
18
3. The major factor would be the sensitivity of the company’s operations to cyclical movements
in the economy. In years of strong economic activity, the company will be better off with the
new equipment. The new equipment will increase the CM ratio and, as a consequence, profits
would rise more rapidly in years with strong sales. However, the company will be worse off
with the new equipment in years in which sales drop. The greater fixed costs of the new
equipment will result in losses being incurred more quickly and they will be deeper. Thus,
management must decide whether the potential greater profits in good years is worth the risk
of deeper losses in bad years.
4. No information is given in the problem concerning the new variable
expenses or the new contribution margin ratio. Both of these items must be determined
before the new break-even point can be computed. The computations are:
New variable expenses:
Sales = Variable expenses + Fixed expenses + Profits
$1,440,000* = Variable expenses + $247,500 + $112,500**
$1,080,000 = Variable expenses
* New level of sales: $900,000 × 1.6 = $1,440,000
** New level of operating income: $90,000 × 1.25 = $112,500
New CM ratio:
Sales ...................................................... $1,440,000 100%
Variable expenses .................................. 1,080,000 75%
Contribution margin .............................. $ 360,000 25%
With the above data, the new break-even point can be computed:
Fixed expenses $247,500Break-even point = = = $990,000in dollar sales CM ratio 0.25
The greatest risk is that the marketing manager’s estimates of increases in sales and operating
income will not materialize and that sales will remain at their present level. Note that the
present level of sales is $900,000, which is well below the break-even level of sales under the
new marketing method.
It would be a good idea to compare the new marketing strategy to the current situation more
directly. What level of sales would be needed
under the new method to generate at least the $90,000 in profits the company is currently
MGTB03 Managerial Accounting – Midterm Exam Review Questions
19
earning each month? The computations are:
Fixed expenses + Target profitDollar sales to attain = target profit CM ratio
$247,500 + $90,000
=
0.25
= $1,350,000 in sales each month
Thus, sales would have to increase by at least 50% ($1,350,000 is 50% higher than $900,000)
in order to make the company better off with the new marketing strategy than with the
current situation. This appears to be extremely risky.
MGTB03 Managerial Accounting – Midterm Exam Review Questions
Question 6
1. The predetermined overhead rate is computed as follows:
Total estimated overhead/total estimated direct-labour hours: $670,000/25,000 = $26.80 per hour
The unit costs (cost per square metre of architectural drawings) under the company’s traditional costing system are computed as
follows:
Commercial Residential
Direct materials ......................................................................................... $6.00 $4.50
Direct labour.............................................................................................. 48.00 36.00
Architecture department overhead
(0.1 DLH × $26.80 per DLH;
0.075 DLH x $26.80 per DLH) ............................................................. 2.68 2.01
Unit cost (per square metre of drawings) .................................................. $56.68 $42.51
2. The activity rates are computed as follows:
(a)
Estimated (b)
Overhead Total (a) ÷ (b)
Activities Cost Expected Activity Activity Rate
Supporting direct labour ............. $600,000 25,000 DLHs $24 per DLH
Software changes ....................... $60,000 125 changes $480 per change
Technical checks ........................ $10,000 100 tests $100 per check
Architecture department overhead is assigned to the two products as follows:
MGTB03 Managerial Accounting – Midterm Exam Review Questions
21
Commercial Product:
Activity Cost Pool (a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Supporting direct labour ...................... $24 per DLH 4,000 DLHs $96,000
Software changes ................................. $480 per change 100 changes 48,000
Technical checks .................................. $100 per test 80 tests 8,000
Total ..................................................... $152,000
Residential Product:
Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Supporting direct labour ....................... $24 per DLH 21,000 DLHs $504,000
Software changes .................................. $480 per change 25 changes 12,000
Technical checks................................... $100 per test 20 tests 2,000
Total ...................................................... $518,000
Activity-based costing unit costs are computed as follows:
Commercial Residential
Direct materials .............................................................................. $6.00 $4.50
Direct labour................................................................................... 48.00 36.00
Architecture department overhead ($152,000 ÷ 40,000 sq.
metres; $518,000 ÷ 280,000 sq. metres) .................................... 3.80 1.85
Unit cost (per square metre of drawings) ....................................... $57.80 $42.35
