Accounting-final_questions- sample.docx

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Question No. 1 (20 minutes) Oak, Inc. had the following income statement for last period: Sales (unit sales price $100) $40,000 Cost of Sales (manufacturing) 24,000 Selling and General Administrative 6,000 Net Income $10,000 Assume cost of sales was 75% variable and 25% fixed, and Selling and General Expense was 60% variable and 40% fixed. Required: a. calculate its contribution margin percentage b. Calculate the break even sales level in dollars (round to nearest whole dollar) c.calculate the break even level in units (round to nearest whole unit) d.prepare a contribution format income statement a. Contribution margin percentage 46% b. Breakeven sales in dollars = $18261 c. Breakeven sales in units= 183 units d. The table provided illustrates the Contribution Margin Income Statement format of Oak Inc. Oak Inc Contribution Margin Income Statement For the year ended Sales $40,000 Less: Variable cost Cost of sales (75%*24,000) $18,000 Selling and General expenses (60%*6000) $3,600 $21,600 $18,400 Less: Fixed cost Cost of sales (25%* 24,000) $6,000 Selling and general expenses (40% * 2400) $2,400 $8,400 Net Income $10,000 Explanation:

Provided below the calculation of contribution margin ratio, breakeven sales in dollar and unit. a. Contribution margin ratio= Sales-Variable cost/Sales Given Sales. $40000 Cost of sales (24000×75%) $18000 Selling&General expenses. $3600 ($6000×60%) Total Variable cost. 21600 Contribution margin ratio= $40000-21600/$40000 Contribution margin ratio= 18400/40000 Contribution margin ratio = 0.46 ×100 Contribution margin ratio= 46% B. Breakeven sales in dollar= total fixed cost/contribution margin ratio Cost of sales(24000×25%) $6000 Selling general expenses. $2400 (6000× 40%) Total fixed cost. $ 8400 Breakeven sales in dollar= 8400/0.46 Breakeven sales in dollar=18260.86957 Breakeven sales in dollar= $18261 C. Breakeven sales in units= Total fixed cost/ Sale price per unit -variable cost per unit Given Sales price per unit = $100 ( $40000sales) Variable cost per unit= $21600/400 units = $54 Breakeven sales in units= 8400/$100-$54 Breakeven sales in units= 8400/46 Breakeven sales in units=182.6086957 Breakeven sales in units= 183 units

D.The table provided illustrates the Contribution Margin Income Statement format of Oak Inc. Oak Inc Contribution Margin Income Statement For the year ended Sales $40,000 Less: Variable cost Cost of sales (75%*24,000) $18,000 Selling and General expenses (60%*6000) $3,600 $21,600 Contribution expenses $18,400 Less: Fixed cost Cost of sales (25%* 24,000) $6,000 Selling and general expenses (40% * 2400) $2,400 $8,400 Net Income $10,000 Question No. 2 (15 minutes) Cutler Company currently buys 30,000 units of a part used to manufacture its product at a cost of $76 per unit. The supplier recently informed Cutler Company that a 20 percent price increase will take effect next year. Cutler has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): Direct materials $32 Direct labor $24 Variable manufacturing overhead $24 If Cutler purchases the units from the supplier, Cutler can rent out the plant for $40,000 per year. Required: a)Using differential/incremental analysis, calculate whether Should Cutler Company buy the part externally or make it internally. b)State your conclusion as to whether Cutler should purchase the part externally or

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produce the part internally . a) Net cost to purchase = $2,696,000 Cost to produce = $2,400,000 b) Cutler should produce the part internally. Given information: Cutler Company currently buys 30,000 units of a part used to manufacture its product at a cost of $76 per unit. The supplier recently informed Cutler Company that a 20 percent price increase will take effect next year. Cutler has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): Direct materials $32 Direct labor $24 Variable manufacturing overhead $24 If Cutler purchases the units from the supplier, Cutler can rent out the plant for $40,000 per year. With this information, we proceed with answering the required. a) If purchased externally: Purchased price (30,000 * $76 * 1.20) $2,736,000 Rent received (40,000) Net cost to purchase $2,696,000 If produced internally: Cost to produce (($32 + $24 + $24) * 30,000) $2,400,000 b) The cost to produce is lower than the net cost to purchase . This means that Cutler should produce the part internally, as it saves $296,000 (that is, $2,696,000 minus $2,400,000). Therefore, Cutler should produce the part internally.

Cutler can rent out the part internally, because it only the cost of 2,400,000 (32+24+24=80 per unit *30,000) =$2,400,000 Explanation: =$2,400,000 If cutler buy the part externally cost is huge Currently it cost of $76 but supplier said in future it will increase to 20% =15.2 + $76=$91.20 per unit * 30,000 unit=$2,736,000 -$40,000(income as rent out the plant) Internally = $2,400,000 (best option) less cost Externally = $2,696,000 Therefore; Cutler Company should buy the part or make it internally. QUESTION (B): As seen in question a, it is preferable to manufacture the product internally because the capacity is available and the cost is in the company's best interests, which is lower than the price of an outside supplier. Question No. 3 (20 minutes) Gleason manufactures a single product with the following full unit costs for 6,000 units: Direct materials $160 Direct labor 80 Manufacturing overhead (40% variable) 240 Selling expenses (60% variable) 80 Administrative expenses (10% variable) 40 Total per unit $600 A company recently approached Gleason with a special order to purchase 1,000 units for $550. Gleason currently sells the models to dealers for $1,100 per unit.. Capacity is sufficient to produce the extra 1,000 units. No selling expenses would be incurred on the special order. a)Calculate Gleason’s existing contribution margin on production and sales of 6,000 units b) Calculate the impact on contribution margin of accepting the order and conclude if

the order should be accepted to maximize short term profit ? c.Calculate the minimum price Gleason would want in order to increase pre-tax profit by $ 60,000 if this special order was accepted. Requirement A Contribution margin= $4,272,000 Requirement B Contribution margin from special order $210,000.00 Based on the result of the contribution margin computation the special order should be accepted for short-term profit maximization since it will increase the overall contribution margin by $210,000 and the firm can still accommodate this sale based on a capacity basis so the regular sales will not be affected. Requirement C minimum selling price= $1,110 Explanation: Requirement A 1st step: Compute for the variable cost per unit by getting the variable portion of the per-unit cost of line-item cost. Direct Materials 160 Direct Labour 80 Manufacturing overheads 240*40% 96 Selling Expenses 80*60% 48 Administrative Expenses 40*10% 4 388 2nd step: Now compute for the existing contribution margin of production and sales of 6,000 units simply by getting cm per unit and multiplying it to the 6,000 units sold. Contribution margin = (selling price - variable cost per unit) x unit sold = (1,100 - 388) x 6,000 =$4,272,000 Requirement B Compute for the contribution margin of the special order by getting its cm per unit related to the special order wherein variable cost does not include selling expense.

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Selling price for special order 550 Less: Relevant variable cost/unit Direct materials 160 Direct Labour 80 Manufacturing overhead 96 Administrative expenses. 4 340 Contribution per unit. 210 Unit sold from special order 1,000 Contribution margin from special order 210,000 Based on the result of the contribution margin computation the special order should be accepted for short-term profit maximization since it will increase the overall contribution margin by $210,000 and the firm can still accommodate this sale based on a capacity basis so the regular sales will not be affected. Requirement C To compute simply add an increased income to the cm of regular sales and divide to the current unit sold and add the variable cost per unit to get the minimum selling price of regular sales. minimum selling price =(Contribution margin/ unit sold ) + variable cost per unit = [4,272,000 + 60,000)/6,000] + 388 =$1,110 Profit = special order (minimum profit) – Special order (variable costs) $60,000 = 1,000 units (Minimum price) – 1000 units (340) $60,000 = 1000 units (Minimum price) – 340,000 340,000 + $60,000 = 1,000 units (Minimum price) 400,000 = 1,000 units (minimum price) $400 = Minimum Price. Question No. 4 (25 minutes) The following information applies to the General Lawnmower Company for the year ended December 31, 2019.

a) Prepare a statement of cost of goods manufactured in proper format for the year ended December 31, 2019. b) Prepare an income statement in proper format for the year ended December 31, 2019. General Lawnmower Company Statement of cost of goods Manufactured December 31, 2019 Direct Materials Direct materials Inventory, beginning 50,000 Direct materials purchases. 325,000 Inventory available for use 375,000 Less: Direct materials Inventory, ending 45,000 Total direct materials used 330,000 Direct Labour 550,000 Factory Overhead Factory Rent 80,000 Indirect Labor – Wages. 25,000 Indirect materials 50,000 Plant utilities. 25,000 180,000

Total Manufacturing Costs 1,060,000 Work in process Inventory, beginning 50,000 Total cost of work in process inventory 1,110,000 Less: Work-in-process Inventory, Ending 55,000 Total cost of goods manufactured 1,055,000 B. Income Statement General Lawnmower Company Income Statement December 31, 2019 Sales Revenue 1,825,000 Cost of goods sold : Finished goods inventory, beginning 50,000 Cost of goods manufactured 1,055,000 Cost of goods available for sale 1,105,000 Less: Finished goods Inventory, Ending 75,000 1,030,000. Gross Profit 795,000 Operating Expenses General and Administrative Expenses 130,000 Marketing Expenses 180,000 310,000 Net Income $485,000 Question #5 (20 minutes) Tony Corporation manufactures and distributes a number of products to retailers. One of these products, SuperStick, requires 4 kilograms of material D2336 in the manufacture of each unit. The company wants to plan raw material needs for the third quarter – July, August, and September. The company has the following inventory requirements to keep production and shipments moving: 1.Finished goods inventory on hand at the end of each month must be equal to 8,000 units plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 22,000 units. 2.Raw material inventory on hand at the end of each month must be equal to 40% of the following month’s production needs for raw materials. The raw materials inventory on June 30 for D236 is budgeted to be 129,000 kilograms. 3.The company maintains no work in process inventories. Tony Corporation has the following budgeted sales for the selected six-month period: Budgeted Sales in Units

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July 60,000 August 75,000 September 105,000 October 53,000 November 30,000 December 15,000 Required: a) Prepare a production budget in units for Super Stick for each of July, August, September and October. b) Prepare a raw materials purchase budget in kilograms showing the quantity of D236 to be purchased for each of July, August and September. A) Production Budget July August September October November Budgeted sales in units 60,000 75,000 105,000 53,000 30,000 Add: Finished goods inventory, ending 23,000 (8,000) + (75,000 x . 20) 29,000 (8,000) + (105,000 x . 20) 18,600 (8,000) + (53,000 x . 20) 14,000 (8,000) + (30,000 x . 20) 11,000 (8,000) + (15,000 x . 20) Production required 83,000 104,000 123,600 67,000 41,000 Less: Finished goods inventory, beginning (22,000) (Given) (23,000) (July's Ending inventory) (29,000) (August's Ending inventory) (18,600) (September' s Ending inventory) (14,000) (October's Ending inventory) Units to be produced 61,000 81,000 94,600 48,400 27,000

B RAW MATERIALS BUDGET IN KILOGRAM July August September October Units to be produced 61,000 81,000 94,600 48,400 Multiply by: Kilograms needed per unit 4 4 4 4 Total raw materials needed (kilogram) 244,000 kilograms 324,000 378,400 193,600 Add: Raw materials inventory, ending 129,600 (324,000 x . 40) 151,360 (378,400 x . 40) 77,440 (193,600 x . 40) 373,600 kilograms 475,360 kilograms 455,840 kilograms Less: Raw materials inventory, beginning (129,000) (Given) (129,600) (July's Ending inventory) (151,360) (August' s Ending inventory) Raw material purchases (in kilogram) 244,600 kilograms 345,760 kilograms 304,480 kilograms Question No. 6 (20 minutes) Whittier Company produced 10,000 cases of cookies for the year ended December 31, 2019. It sold 9,500 cases for $20 each. There were no beginning inventories. Variable manufacturing costs were $60,000, and fixed manufacturing costs were $100,000. Selling and administrative expenses were $20,000, (all fixed). a)Prepare an income statement using the variable costing (contribution margin based)

method. b)Prepare an income statement using the absorption costing (IFRS based) method. a) Whittier Company Variable Costing December 31, 2019 Sales Revenue $20 @9,500 190,000 Variable cost of goods sold: Beginning Inventory 0 Add variable manufacturing overhead 60,000 Less ending inventory 500*20 10,000 Variable cost of goods sold 50,000 Variable selling and administrative expenses 0 50,000 Contribution Margin 140,000 Fixed Expenses: Fixed Manufacturing Cost 100,000 Selling and Administrative 20,000 120,000 Net operating Income 20,000 b) Absorption Costing Sales Revenue $20 @9,500 190,000 Cost of goods sold: Beginning Inventory. 0 Add Cost of goods manufactured 200,000 Goods available for sale 200,000 Less ending Inventory 500*$20 10,000 Cost of goods sold 190,000 Gross margin Fixed Manufacturing Costs 95,000 Gross profit. 35,000 Selling and Administrative 20,000 Net Income 15,000 Manufacturing Cost 100,000 Divide by: Units Produced 10,000 Cost/Unit 10 Times unit sold 9,500 Cost of goods sold 95,000

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Question No. 7 (20 minutes) CBA Inc., a manufacturer, has received a special request for 1000 units of its product, widgets, at a price of $ 52.50 per unit. The normal selling price for widgets is $ 60.00per unit. CBA Inc.’s annual capacity of 25,000 units and its current sales are 22,000 units per year. To analyze this special order, Jim Blum, the sales manager, gathered the following budgeted information: Direct material cost per unit $ 2.10 Direct labour per unit 1.75 Variable overhead per unit 0.96 Fixed manufacturing overhead per unit 1.10 Variable selling and administrative per unit 10.96 The variable selling and administrative costs per unit represent commissions and would not be incurred on this special order. a) Calculate the increase or decrease in contribution margin that will occur if the order is accepted. b) Assume CBA Inc.’s current sales are 25,000 units annually. Use incremental/differential analysis to support whether CBA should accept this additional 1,000 unit special order or not. State your conclusion as to whether the special order should be accepted or not and why. a) Note that fixed manufacturing overhead unit shall continue to be incurred regardless of the entity's decision whether to accept the special order or not. Variable selling and administrative per unit will not be incurred in the special order. A. Increase in contribution margin of $47,690. Yes, CBA Inc should accept the special order since there is sufficient capacity and there is an increase in operating income of $47 690 if the special order is accepted. Selling price 52.50 Direct materials 2.1 Direct labor 1.75 Variable overhead 0.96 (4.81)

Contribution margin per unit 47.69 Multiply by special order units 1,000 Increase in Contribution margin $47,690 B. Since the entity is operating capacity, 1000 regular units must be foregone to produce the special order. Computation can also be made as follows, Yes, CBA Inc should accept the special order since there is a increase in operating income of $3 460 if the special order is accepted even though there is an opportunity cost. Selling price 52.50 Direct materials 2.1 Direct labor 1.75 Variable overhead 0.96 (4.81) Contribution margin per unit 47.69 Multiply by special order units 1,000 Contribution margin 47,690 Loss Profit of regular order (44,230) =(60-2.1-1.75-0.96-10.96) x 1,000 units Profit (Loss) $3,460 Question # 8. (20 minutes) Marmidan Corporation distributes a single product. The company’s sales and expenses for last month were as follows:

Sales $ 450,000 Variable expenses 180,000 Contribution margin 270,000 Fixed expenses 216,000 Operating income $ 54,000 Required: a)Calculate the monthly breakeven point in both units. b)Calculate the number of units that must be sold each month to generate a profit of $ 90,000 ? c)Calculate the company’s margin of safety in dollars ? d)Calculate the company’s contribution margin ratio. Use the contribution margin ratio to calculate the effect on operating income if sales increase by $ 50,000 per month and there is no change in fixed expense ? a) Selling Price per unit = $30 Contribution Margin per unit = $18 Fixed Expenses = $216,000 Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit Breakeven Point in unit sales = $216,000 / $18 Breakeven Point in unit sales = 12,000 Breakeven Point in dollar sales = Breakeven Point in unit sales * Selling Price per unit Breakeven Point in dollar sales = 12,000 * $30 Breakeven Point in dollar sales = $360,000 Answer b. Target Profit = $90,000 Required Sales in unit = (Fixed Expenses + Target Profit) / Contribution Margin per unit Required Sales in unit = ($216,000 + $90,000) / $18 Required Sales in unit = 17,000 Total Per unit Sales 510,000 30 Variable 204,000 12 Contribution Margin 306,000 18 Fixed expenses 216,000 Net Operating Income 90,000

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Answer c . Margin of Safety in dollars = Sales - Breakeven Point in dollar sales Margin of Safety in dollars = $450,000 - $360,000 Margin of Safety in dollars = $90,000 Margin of Safety in percentage = Margin of Safety in dollars / Sales Margin of Safety in percentage = $90,000 / $450,000 Margin of Safety in percentage = 20% Answer d. CM Ratio = Contribution Margin per unit / Selling Price per unit CM Ratio = $18 / $30 CM Ratio = 0.60 Increase in Sales = $50,000 Increase in Net Operating Income = CM Ratio * Increase in Sales Increase in Net Operating Income = 0.60 * $50,000 Increase in Net Operating Income = $30,000 9. Question # 9 (10 minutes) Jordan Company operates a highly automated manufacturing business. The company uses a job order costing system and applies manufacturing overhead cost to products on the basis of machine hours recorded to complete each job. For 2020 machine hours were estimated at 4,000 and manufacturing overhead costs were estimated by $ 230,000. Due to a virus production was cut back and a build up of inventory occurred in the company’s warehouse. The company’s cost records indicated the following actual cost and operating data for 2020. Machine hours 3,150 Manufacturing overhead costs $ 228,000 Inventories at yearend Raw materials $ 20,000 Work in Process $ 32,000 Finished goods $ 530,000 Cost of Goods Sold $ 428,000 Required: a) Calculate the predetermined overhead rate for 2020 b) Calculate the under or over applied overhead for 2020 c)Prepare the journal entry to record the under or over applied overhead under IFRS

a) Calculate the predetermined over head rate Total estimated manufacturing overhead Total estimated machine hours 230,000/4,000 = 57.5 per machine hour. b) Calculate the under or over applied overhead for 2020 Manufacturing Overhead applied = Actual machine hours*predetermined overhead rate= 3150*57.50 = 181,125 Manufacturing overhead under applied or over applied = Actual overhead – manufacturing overhead applied = 228,000 – 181,125 = 46,875 c) Prepare the journal entry to record the under or over applied overhead under IFRS Particulars Debit Credit Cost of goods sold 46,875 Manufacturing Overhead (Being Underapplied overhead Transferred to cost of goods sold) 46,875 10. Question # 10 (10 minutes) a). Explain in your own words how managerial accounting differs from financial accounting? (2 marks) b) Explain whether you believe a “top down” or “bottom up” budget process is most desirable for a business and state why? (1 mark) c)Explain what is meant by a “mixed cost”. (1 mark) d)State two reasons why a business should prepare financial budgets? (3 marks) e) Why do businesses use contribution margin analysis for internal decision making rather than IFRS based financial information? (1 mark) f) Explain what is meant by a “period cost”. (1 mark)

g) When is differential analysis used in managerial accounting? ( 1 mark) a) Managerial accounting focuses on organization's internal financial process whereas financial accounting focuses on external financial process. Managerial accounting provides information and analysis for the managers of the company. On the other hand, financial accounting provides information for external users of financial information. b) In my own opinion, top down is more desirable for budgeting process since as compared to the bottom up, this is the much easier and quicker approach in achieving the goal. c) Mixed cost is a type of cost which consists of both fixed and variable cost. Common examples are utilities such as electricity and water since there is a defined fixed based amount identified and you will pay variable rate for any usage above the base amount. d) Budgeting is important because a) budgeting can help you determine your priorities so that you can have a control on your spending which ultimately leads to higher profit b) budgeting can hep you set realistic goals. e) Contribution margin analysis is mostly for internal/managerial use only. Information being used for contribution margin analysis is more helpful and more detailed for managers than that of those IFRS financial information. And also, IFRS is more helpful for external users of financial information. f) Period cost is any cost that cannot be capitalized as prepaid expense, fixed asset or inventory. This is a type of cost that is not directly related to the production process. g) Differential analysis is used in managerial accounting when analyzing different cost and benefits that would arise from an alternative solution. Example, it can be used in making managerial decision on whether to buy or not the product, keeping or dropping the product line or accepting or rejecting an order.

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