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    Management accounting practice problems

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    Study guide questions...attached.

    Question 1
    Knapple Company has a variable cost percentage of 35% on a product that sells for $25 per unit. Fixed costs are $40,000. Knapple wants to know how many units must be sold (a) to break even and (b) to earn a profit of $12,000. Ignore income taxes.

    Question 2
    Baldwin Division earns a contribution margin of $200,000 and has a division margin of $70,000. If Baldwin Division is closed, the firm can eliminate all of the direct division expenses and $110,000 of common expenses. How will closing the division affect the firm's operating income?

    Question 3
    Hankemeier Manufacturing Company has the following budgeted costs for 10,000 units:
    Variable Costs Fixed Costs
    Manufacturing $100,000 $75,000
    Selling & Administrative 50,000 25,000
    Total $150,000 $100,000

    What is the initial selling price needed to obtain a target profit of $50,000 using the manufacturing cost markup method?

    Question 4
    Hankemeier Manufacturing Company has the following budgeted costs for 10,000 units:
    Variable Costs Fixed Costs
    Manufacturing $100,000 $75,000
    Selling & Administrative 50,000 25,000
    Total $150,000 $100,000

    Calculate the markup on variable costs needed to break even.

    Question 5
    Cook River Company management is analyzing the company's standard cost variances for direct materials for the most recent period. The following information was available from company records.
    Actual quantity of materials used 24,000 units
    Budgeted quantity of materials used 22,000 units
    Actual price paid for materials $4 per unit
    Budgeted price paid for materials $6 per unit

    There were no increases or decreases in inventories during the period.
    Calculate the materials quantity variance for the period.

    Question 6
    Budget preparation requires the development of a variety of forecasts. List some of the forecasts that must be made in developing a comprehensive budget.

    Question 7
    Assume the local cable company has the following information available about fleet miles and operating costs for its service department:
    Fleet Miles Operating Costs
    2008 534,000 $266,000
    2009 726,000 $342,800

    Using the high-low method, develop a cost-estimating equation for total annual operating costs.

    Question 8
    If a company has sales of $1,000,000, net income of $120,000, and an asset base of $500,000, what is its return on investment?

    Question 9
    Jordan Company has two service departments, Maintenance Department and Personnel Department, and two producing departments, X and Y. The Maintenance Department costs of $60,000 are allocated on the basis of standard service hours used. The Personnel Department costs of $9,000 are allocated on the basis of number of employees. The direct costs of Departments X and Y are $18,000 and $30,000, respectively. Data on standard service-hours and number of employees are as follows:
    Maint. Dept. Person. Dept. Dept. X Dept. Y
    Standard service hours used 200 100 600 300
    Number of employees 5 15 25 20
    Using the step method, if Personnel Department costs are allocated first, calculate the cost of Maintenance Department allocation to Department X.

    Question 10
    Identify and describe the three strategic positions that lead to business success.

    Question 11
    Cost-Volume-Profit analysis is subject to a number of assumptions. List five assumptions that are necessary to make cost-volume-profit analysis tractable (feasible).

    Question 12
    Briefly describe a contribution income statement and indicate how it differs from a functional income statement.

    Question 13
    The Widrick manufactures 10,000 rolls of cable each period. The cable is used as an input for producing several other products that Widrick manufactures. The full manufacturing costs for a batch of 100 rolls of cable are:
    Direct materials $270
    Direct labor 200
    Variable manufacturing overhead 200
    Average fixed manufacturing overhead 250
    Total $920
    The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the cable. These assets have no other use than for the manufacturing of the cable. An outside supplier has offered to sell Widrick the 10,000 rolls of cable necessary to meet production needs this period for a lump-sum of $75,000. If Widrick accepts this outside supplier's offer, how much better or worse off will the company be?

    Question 14
    Kyle Company has the following sales forecast for the next quarter: April, 2,000 units; May, 2,400 units; June, 2,800 units. Sales totaled 1,600 units in March. The March ending finished goods inventory was 500 units. End-of-month finished goods inventory levels are planned to be equal to 30 percent of the next month's planned sales. Calculate the number of units of inventory Kyle needs to purchase for April?

    Classify the total costs of each of the following as variable, fixed, mixed, or step. Sales volume is the cost driver.

    Question 15
    a. Salary of machine operator who is paid based on number of units produced on the machine
    b. Keyboards purchased from a subcontract supplier in a computer assembly plant
    c. Property taxes
    d. Salaries of quality inspectors when each inspector can evaluate a maximum of 500 units per day
    e. Annual salary for the vice president of manufacturing
    f. Electric power in a factory
    g. Raw materials used in production
    h. Water consumed by the plant, which is based on a flat fee plus actual consumption
    i. Overhead costs in the factory for incidental components such as small screws and rivets.
    j. Fire insurance on factory building

    Question 16
    Jackson Company has two service departments (S1 and S2) and two producing departments (P1 and P2). Department S1 costs are allocated on the basis of number of employees, and Department S2 costs are allocated on the basis of space occupied expressed in square feet. Data on direct department costs, number of employees, and space occupied are as follows:
    S1 S2 P1 P2
    Direct dept. costs $15,000 $22,000 $55,000 $60,000
    Number of employees 20 10 40 50
    Space occupied 2,000 1,000 3,000 5,000
    If Jackson uses the direct method, What is the ratio representing the portion of Department S2 allocated to P2?

    Question 17
    Describe zero-based budgeting.

    Question 18
    Jiork, Inc. had a contribution margin of $23,000 on sales of $40,000 and had fixed costs of $14,000. Calculate its break-even point in sales dollars.

    Question 19
    Briefly explain the nature of the ethical dilemmas that managers and accountants confront, giving examples.

    Question 20
    Jacksonville Products Co. has predicted the following costs for this year for 150,000 units:

    Manufacturing Selling and
    Variable $400,000 $100,000
    Fixed 600,000 300,000
    Total $1,000,000 $400,000
    Calculate the markup on variable costs needed to achieve a target profit of $200,000.

    Question 21
    Match the following principles of financial accounting to their definitions:
    a. Financial statements are linked within and across time
    (1) Revenue recognition principle
    b. Revenue and expenses are recognized when a cash transaction is completed (2) Articulation of financial statements
    c. Revenue is recognized when earned
    (3) Cash basis accounting
    d. Recognizes revenue when earned and expenses when incurred, even if no cash is received or paid (4) Accrual accounting

    Question 22
    The total monthly operating costs of Smoothie Universe are:

    $2,000 + $0.30X, where X = 12 ounce servings

    Calculate the average cost per serving at each of the following monthly volumes: 1,500; 2,000; 3,000; and 5,000, and determine the monthly volume at which the average cost per serving is $0.50.

    Question 23
    Eastern Corp. obtained the following information from its accounting records:

    Sales = $35,000
    Beginning Finished Goods Inventory = $21,000
    Ending Finished Goods Inventory = $23,000
    Cost of Goods Sold = $20,000
    Ending Work-in-Process Inventory = $15,000

    Calculate the Cost of Goods Manufactured for the period.

    Question 24
    Kearns Company had the following functional income statement for the month of November 2006:
    Kearns Company
    Functional Income Statement
    For the Month Ending November 30, 2006
    Sales ($20 x 10,000) $200,000
    Cost of goods sold:
    Direct materials ($4 x 10,000) $40,000
    Direct labor ($3 x 10,000) 30,000
    Variable factory overhead ($2.50 x 10,000) 25,000
    Fixed factory overhead 40,000 - 135,000
    Gross profit $ 65,000
    Selling and administrative expenses:
    Variable ($0.50 x 10,000) $ 5,000
    Fixed 30,000 - 35,000
    Net income $ 30,000
    Calculate Kearns Company's break-even sales in units.

    Question 25
    Nike Inc. has a fiscal year end of May 31. On May 31, 2007, Nike Inc. reported $10,688.3 million in assets and $7,025.4 million in equity. During fiscal 2008, Nike's assets increased by $1,754.4 million while its equity increased by $799.9 million.
    What were Nike's total liabilities at May 31, 2007 and May 31, 2008?

    Question 26
    Packard Company's budgeted sales were 1,000 units at $50 per unit. During 2008 it had actual sales of 900 units at $55 per unit. Budgeted variable costs were $30 per unit. Calculate What is Packard's net sales volume variance.

    Question 27
    The following forecasted sales pertain to Louis Corporation:
    Month Sales
    September $80,000
    October 100,000
    November 60,000
    December 40,000

    Collection pattern:
    65 percent in month of sale
    35 percent in month following sale
    Accounts Receivable (August 31) $14,000
    Finished Goods Inventory (August 31) 15,000
    Louis Corporation has a selling price of $5 per unit and expects to maintain ending inventories equal to 25 percent of the next month's sales. Calculate the budgeted beginning balance in units for finished goods inventory on November 1?

    Question 28
    Explain how budgets provide a basis for performance evaluation.

    Question 29
    Identify Cooper and Kaplan's four categories of activities and provide a brief description of each category.

    Question 30
    Identify the three different cost estimation methods discussed in this course and provide a description of the strengths and weaknesses of each.

    Question 31
    Summertime Clothing Company is in the process of preparing its budget for next year. Cost of goods sold has been estimated at 60 percent of sales. Fabric purchases and payments are to be made during the month preceding the month of sale. Wages (production-related) are estimated at 20 percent of sales and are paid during the month of sale. Other operating costs amounting to 25 percent of sales are to be paid in the month following the month of sales. Additionally, a monthly lease payment of $5,000 is paid to Net World for computer services. Sales revenue is forecasted as follows:
    Month Sales
    March $150,000
    April $170,000
    May $230,000
    June $200,000
    July $250,000
    Calculate the amount of budgeted cash disbursements for the month of May?

    Question 32
    Briefly explain the terms (1) contribution margin and (2) contribution margin ratio and why they are useful (two to three sentences each).

    Question 33
    If net income is $25,000 and operating leverage is 3.00 at the end of the most recent period, a 15% increase in sale will increase net income by what percent and what dollar amount?

    Question 34
    Differentiate among structural, organizational, and activity cost drivers.

    Question 35
    Beginning inventory in February consisted of 5,000 units (60 percent converted) and ending inventory consisted of 10,000 units (30 percent converted). In addition, 25,000 units were started during the period. How many equivalent units for conversion costs were in process February using the weighted average method?

    Question 36
    Compute the missing amounts for Nike Inc. for 2007 and 2008, in the table below:
    ($ millions) 2008 2007
    Total assets $10,688.3
    Contributed capital $ 2,500.9 $ 1,963.1
    Earned capital $ 5,324.7
    Total Liabilities $ 4,617.1 $ 3,662.6
    Liabilities and equity $10,688.3

    Question 37
    During the most recent fiscal period, Kajing LTD had a contribution margin of $50,000 and operating profit of $20,000 on sales of $80,000.
    Calculate Kajing's (a) operating leverage and (b) the amount of its profit for next year assuming sales increase to $96,000.

    Question 38
    Define strategic cost management and briefly discuss the three themes that make up strategic cost management

    Question 39
    Briefly explain the limitation of basic cost-volume-profit analysis as it relates to an organization's sales mix.

    Question 40
    Identify and briefly discuss the three dimensions on which competition takes place.

    Question 41
    The management of Rose Enterprises is analyzing variable overhead variances for the fiscal period just ended. During the period, Rose's management used 2,500 hours of direct labor. It had budgeted to use 4,000 hours of direct labor. Hours of direct labor is the single overhead driver of variable overhead. Variable overhead consists of two items. Indirect labor was budgeted as $3.00 per hour of direct labor. Indirect materials was budgeted as $2.00 per hour of direct labor. Actual variable overhead was $15,000.

    Calculate Rose's variable overhead spending variance.

    Question 42
    What is a sunk cost? Under what circumstances are sunk costs relevant to a decision? Construct an example of a sunk cost. Briefly discuss why you think financial reports for investors and managerial reports for managers may or may not differ in their treatment of sunk costs.

    Question 43
    The management of Rose Enterprises is analyzing variable overhead variances for the fiscal period just ended. During the period, Rose's management used 2,500 hours of direct labor. It had budgeted to use 4,000 hours of direct labor. Hours of direct labor is the single overhead driver of variable overhead. Variable overhead consists of two items. Indirect labor was budgeted as $3.00 per hour of direct labor. Indirect materials was budgeted as $2.00 per hour of direct labor. Actual variable overhead was $15,000. Calculate Rose's variable overhead efficiency variance.

    Question 44
    Briefly explain why changes in technology and prices make cost estimation difficult.

    Question 45
    Orlando Company manufactures a product through a process where all manufacturing costs are added uniformly. Information for October beginning work-in-process follows.

    The following costs were incurred during October:

    During October, 25,000 units were completed. Also, 2,500 units that were 50 percent complete remained in process at the end of the day on October 31.

    Calculate the cost of goods completed and the cost assigned to ending inventory. (Round to the nearest dollar, if necessary.)

    Question 46
    Rutledge Corp. obtained the following information from the Raw Materials Inventory account and purchasing records for the first quarter of the current year:

    Beginning Raw Materials = $5,000
    Ending Raw Materials = $6,000
    Jan. Purchases = $6,000
    Feb. Purchases = $4,000
    Mar. Purchases = $5,000

    Calculate the amount of Raw Materials used for this quarter.

    Question 47
    Fuino Company manufactures and sells specialty items. The following representative direct labor-hours and production costs are provided for a four-month period:
    Month Hrs. Direct Labor Production Costs
    January 1,500 $15,000
    February 2,000 17,500
    March 2,500 20,000
    April 2,000 15,000
    Total 8,000 $67,500

    a = fixed production costs per month
    b = variable production costs per direct labor hour
    n = number of months
    X = direct labor-hours per month
    Y = total monthly production costs
    Σ = Summation
    Using the symbols above, indicate the cost estimation equation based on number of direct labor hours per month, and calculate total monthly production costs for May using the high-low method, during which hours of direct labor are expected to be 2,300 hours.
    Question 48
    Louisiana Mower Manufacturing Company has three divisions. Engine components are transferred from Components to Assembly. Assembled engines are transferred from Assembly to the Mower Division. Costs for each division are given below. Mowers are sold on in a competitive outside market for $250.
    Division Name Components Assembly Mower
    Total variable costs $50 per package of components $10 per engine plus transfer price paid to Components $100 per mower plus transfer price paid to Assembly
    Total division fixed costs $55,000 $55,000 $110,000

    All transfers are made at 100% of absorption cost. This period, Components sends Assembly 10,000 package of engine components. Determine the transfer price Assembly pays Components for engine components.

    Question 49
    Casey Productions needs to know its anticipated cash inflows for the next quarter by month. Cash sales are 10 percent of total sales each month. Historically, credit sales on account have been collected as follows: 60 percent in the month of sale, 30 percent in the month after the sale, and the remaining 10 percent two months after the sale. Sales for the quarter are projected as follows: April, $60,000; May, $50,000; and June, $70,000. Accounts receivable on March 31 were $30,000.

    Calculate the amount of Casey's expected cash collections for June.

    Question 50
    Odoom Merchandising Firm is developing its budgets for Year 2. The Year 1 income statement is as follows:
    Sales (100,000 units) $500,000
    Less Cost of goods sold 300,000
    Gross profit $200,000
    Operating expenses (includes $20,000 of depreciation) 120,000
    Net income $80,000

    Selling prices will increase by 10 percent, and sales volume in units will decrease by 5 percent. The cost of good sold as a percent of sales will increase to 62 percent. Other than depreciation, all operating costs are variable.

    Required: Prepare a budgeted functional income statement for Year 2.

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    The solution answers various Management accounting practice problems.