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Management accounting: Breakeven, segment margin, cash budget

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1. Acme Company manufactures a variety of industrial products sold throughout the United States. Jim Beam has been manager of Central Division for the past three years. In years 2 and 3, he was able to qualify for an annual bonus of $100,000 by meeting a target growth rate of 10% of gross sales. Income statements for the division (in $thousands):

Year 1 Year 2 Year 3

Gross sales 40,200 45,300 50,500
Returns and allowances 250 310 400
Net sales 39,950 44,990 50,100
COGS 23,170 28,300 33,000
Gross profit 16,780 16,690 17,100

Expenses:
Sales commissions 4,020 4,530 5,050
Manager salary/bonus 250 350 350
Advertising 560 780 975
Other division overhead 2,850 3,290 4,130
General and administrative 8,040 9,060 10,100
15,720 18,010 20,605

Net income/loss 1,060 (1,320) (3,505)

All advertising and other division overhead is local to the division and controlled by the manager. General and administrative expense represents corporate overhead which is allocated at the rate of 20% of gross sales.
Required:
1) Because Central Division is showing increasing losses, a senior vice president has suggested that the division be closed. Comment on the advisability of this plan.
2) Comment on the effectiveness of the bonus plan used by Acme. Provide evidence in support of your comments.
3) How might the bonus plan be revised to be more effective?

2. a. Preston Company has budgeted the following sales for the first four months of next year:

January $500,000
February $540,000
March $470,000
April $320,000

Actual sales for November of this year were $530,000, and for December $620,000. Gross profit is 60% of sales.
The pattern of accounts receivable collection is: 45% in month of sale; 38% in first month following; 14% in second month following; remainder uncollectible.
Preston has a policy of having an ending inventory each month equal to the following month's budgeted cost of sales. Trade accounts payable are paid 60% in the month of purchase and 40% in the following month. Cash operating expenses of $20,000 are paid each month.
Prepare a schedule of budgeted cash receipts and disbursements, by month, for the first quarter of next year.

b. Walden Company has developed a new product that it plans to bring to market. Walden will build a new plant at a cost of $10,000,000 that will have a capacity of 80,000 units per year. Initial budget is for annual production and sales of 50,000 units. Fixed costs are expected to be $4,500,000 per year. Targeted selling price per unit is $360, and manufacturing cost is budgeted at $291/unit. Unit cost consists of: materials, $125; direct labor, $46; overhead (25% variable), $120
1. What is the breakeven sales volume, to the nearest whole unit?
2. What sales volume, to the nearest whole unit, is required to earn ROI of 12%?
3. Assume that, prior to construction, the product is re-engineered. Materials cost would be reduced by 12%, but fixed costs would rise by $600,000/year. What sales volume would have to be exceeded for this re-design to be profitable?

3. Bigelow Company manufactures industrial equipment. Tentative net income before taxes for the current year is $10,000,000. However, the following facts have recently come to your attention. Recompute net income before taxes, giving effect to these items, explaining your reasoning and showing any necessary calculations.
a. Office building rent of $3,000/mo for the last quarter of the year was not paid nor recorded.
b. Bigelow had acquired some trademarks from a competitor a number of years ago for $3,000,000. A recent study show that these trademarks have permanently declined in value to $2,200,000.
c. Bigelow recorded a sale of equipment on December 30 for $1,205,000 and related COGS of $722,000. The contract required installation and testing of the equipment, which was done in January of the following year.
d. The sale of 1,000 units of a standard product was properly recorded, but the related COGS was recorded on a LIFO basis, where FIFO should have been used instead. Inventory records show this activity:

Beginning inventory 200 @ $25
First acquisition 500 @ $27
Second acquisition 600 @ $28
Third acquisition 300 @ $30

e. The beginning balance in Allowance for Bad Debts was $110,000. Write-offs of $95,000 were properly recorded. Aging of the accounts shows that the ending balance should be $117,000, but no entry has been made.
f. On July 1, a large machine was sold with a 3-year service contract. The sale was recorded at the full contract price of $1,000,000, though $300,000 of that related to the service contract. COGS was recorded correctly.

4. Major Mills is a large manufacturer of breakfast cereal. One of its most popular products is Choco-Bombs, which sells at wholesale for $50/case. The cost to produce is $36.30 per case, as follows: Ingredients, $8.40; Packaging, $4.70; Labor, $3.20; Overhead, $20 (30% variable). A large grocery retailer has approached Major Mills with a proposal to create a house-brand version of Choco-Bombs. The retailer offers to purchase 10,000 cases per month of the house brand for one year, after which the contract could be renewed. The retailer will purchase the house brand for $32/case. A slight change in the recipe would reduce ingredients cost by 40 cents per case. Packaging cost would increase by 10 cents per case because of a new ink required. There would be an initial setup cost of $15,000. Because Major Mills has excess capacity of only 9,000 cases per month on the production line, they would lose 1,000 cases per month of sales of Choco-Bombs.
a. Would accepting the retailer's offer be profitable for Major Mills?
b. What other factors should be considered in deciding whether to accept the offer?

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Solution Summary

The following posting helps answer questions about management accounting. Concepts discussed include inventory, acquisition and sales.

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Cost Accounting Level 200: 33 practice exam multi choice questions

1. The budgeted amount of selling and administrative expense for a period can be found here
a. sales budget.
b. cash budget.
c. pro forma income statement.
d. pro forma balance sheet.

2. In multiple-product firms, the product that has the highest contribution margin per unit will
a. generate more profit for each $1 of sales than the other products.
b. have the highest contribution margin ratio.
c. generate the most profit for each unit sold.
d. have the lowest variable costs per unit.

Squeaky Clean is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translate into cost savings) over the existing machine. Information on each machine follows:

Old machine New machine
Original cost $10,000 $20,000
Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 5,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.

3. Refer to Squeaky Clean. The $5,000 of annual operating costs that are common to both the old and the new machine are an example of a(n)
a. sunk cost.
b. irrelevant cost.
c. future avoidable cost.
d. opportunity cost.

4. Refer to Squeaky Clean. The $10,000 cost of the original machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. historical relevant cost.
d. opportunity cost.

5. Refer to Squeaky Clean. The $20,000 cost of the new machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. future irrelevant cost.
d. opportunity cost.

6. Refer to Squeaky Clean. The estimated $500 salvage value of the existing machine in 10 years represents a(n)
a. sunk cost.
b. opportunity cost of selling the existing machine now.
c. opportunity cost of keeping the existing machine for 10 years.
d. opportunity cost of keeping the existing machine and buying the new machine.
7. Refer to Squeaky Clean. The incremental cost to purchase the new machine is
a. $11,000.
b. $20,000.
c. $13,000.
d. $18,000.

Sears Company
Sears Company produces three products: A, B, and C from the same process. Joint costs for this production run are $2,100.

Pounds
Sales price
per lb. at
split-off Disposal
cost per
lb. at
split-off
Further
processing
per pound
Final
sales price
per pound
A 800 $6.50 $3.00 $2.00 $ 7.50
B 1,100 8.25 4.20 3.00 10.00
C 1,500 8.00 4.00 3.50 10.50

If the products are processed further, Mooney Company will incur the following disposal costs upon sale: A, $3.00; B, $2.00; and C, $1.00.

8. Refer to Sears Company. Using a physical measurement method, what amount of joint processing cost is allocated to Product A (round to the nearest dollar)?
a. $700
b. $679
c. $927
d. $494

9. Refer to Sears Company. Using a physical measurement method, what amount of joint processing cost is allocated to Product B (round to the nearest dollar)?
a. $494
b. $679
c. $927
d. $700

10. The contribution margin ratio will always increase when the
a. variable costs as a percentage of net sales increase.
b. variable costs as a percentage of net sales decrease.
c. break-even point increases.
d. break-even point decreases.

12. A cost management system should
a. identify and evaluate new activities.
b. determine whether the organization is effective and efficient.
c. identify the cost of consumed resources within the organization.
d. all of the above.

13. A cost management system should provide information to
a. all functional areas of the organization.
b. only the accounting area of the organization.
c. only the production area of the organization.
d. organizational managers, but not to staff personnel.
14. A manager is attempting to determine whether a segment of the business should be eliminated. The focus of attention for this decision should be on
a. the net income shown on the segment's income statement.
b. sales minus total expenses of the segment.
c. sales minus total direct expenses of the segment.
d. sales minus total variable expenses and avoidable fixed expenses of the segment.

15. Chronologically, the last part of the master budget to be prepared would be the
a. pro forma financial statements.
b. cash budget.
c. capital budget
d. production budget.

16. Under an acceptable method of costing by-products, inventory costs of the by-product are based on the portion of the joint production cost allocated to the by-product
a. but any subsequent processing cost is debited to the cost of the main product.
b. but any subsequent processing cost is debited to revenue of the main product.
c. plus any subsequent processing cost.
d. minus any subsequent processing cost.

17. The cash budget ignores all
a. dividend payments.
b. sales of capital assets.
c. noncash accounting accruals.
d. sales of common stock.

18. The detailed plan for the acquisition and replacement of major portions of property, plant, and equipment is known as the
a. capital budget.
b. purchases budget.
c. commitments budget.
d. treasury budget.

19. Which of the following statements is false concerning a management control system?
a. A management control system may be referred to as a black box.
b. A management control system should serve as a guide to organizations.
c. A management control system should help implement strategies.
d. A management control system is separate from a cost management system.

20. Which of the following would not be considered a sunk cost?
a. direct material cost
b. direct labor cost
c. joint cost
d. building cost

21. Which of the following is a false statement about scrap and by-products?
a. Both by-products and scrap are salable.
b. A by-product has a higher sales value than does scrap.
c. By-products and scrap are the primary reason that management undertakes the joint process.
d. Both scrap and by-products are incidental outputs to the joint process.
22. The split-off point is the point at which
a. output is first identifiable as individual products.
b. joint costs are allocated to joint products.
c. some products may first be sold.
d. all of the above.

23. A product may be processed beyond the split-off point if management believes that
a. its marketability will be enhanced.
b. the incremental cost of further processing will be less than the incremental revenue of further processing.
c. the joint cost assigned to it is not already greater than its prospective selling price.
d. both a and b.

24. The budgeted payment for labor cost each period would be found in the
a. labor budget.
b. pro forma income statement.
c. selling, general, and administrative expense budget.
d. cash budget.

25. Which of the following items would not be found in the financing section of the cash budget?
a. cash payments for debt retirement
b. cash payments for interest
c. dividend payments
d. payment of accounts payable

26. If a firm's net income does not change as its volume changes, the firm('s)
a. must be in the service industry.
b. must have no fixed costs.
c. sales price must equal $0.
d. sales price must equal its variable costs.

27. Break-even analysis assumes over the relevant range that
a. total variable costs are linear.
b. fixed costs per unit are constant.
c. total variable costs are nonlinear.
d. total revenue is nonlinear.

28. Which of the following costs is irrelevant in making a decision about a special order price if some of the company facilities are currently idle?
a. direct labor
b. equipment depreciation
c. variable cost of utilities
d. opportunity cost of production

29. Who of the following are external users of data gathered by a management information system?
Creditors Regulatory Bodies Suppliers

a. yes no yes
b. no no no
c. no yes yes
d. yes yes yes
30. Feedback is reflected in which component of a management control system?
a. sensor
b. assessor
c. effector
d. detector

31. When used for performance evaluation, periodic internal reports based on a responsibility accounting system should not
a. be related to the organization chart.
b. include allocated fixed overhead.
c. include variances between actual and budgeted controllable costs.
d. distinguish between controllable and noncontrollable costs.

32. The pro forma income statement is not a component of the
a. master budget.
b. financial budgets.
c. operating budgets.
d. capital budget.

33. Reactions to information provided by the management control system are
a. formulated in the organization's strategic plan.
b. judgmental, and are based on interpretations and circumstances.
c. assessed by the communications network of the MCS.
d. determined as those activities that will be most efficient and effective given the organization's available technology.

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