Constant Growth Valuation

Section I: 9 Multiple Choice Questions (3 marks each, 27 marks in total) :Please circle the single best answer for the multiple-choice questions.1. Which of the following items would be included as part of factory overhead in a microcomputer manufacturer?a. the cost of memory chipsb. wage of computer assemblersc. depreciation of computer assemblersd. salary of marketing directore. all of the above2. Inventoriable costsa. include only the prime costs of manufacturing a product.b. include only the conversion costs of manufacturing a product.c. are expensed when products become part of finished goods inventory.d. are regarded as assets before the products are sold.e. None of the above.3. Once the break-even point is reacheda. The total contribution margin changes from negative to positive.b. Net income will increase by the unit contribution margin for each item sold.c. Variable costs will remain constant in totald. The contribution margin ratio begins to decreasee. None of the above4. Miller manufactures desks. During the most productive month of the year, 3,500 desks are manufactured at a total cost of $84,400. In its slowest month, Miller makes 1,100 desks at a cost of $46,000. February is a regular month. Miller plans to make 2,000 units. What is the total variable costs for Fabruary?a. $60,400b. $55,240c. $48,230d. $32,000e. None of the above.5. Winsor Inc. has planned to increase factory manager salary by 10%. If selling prices and all other cost are held constant, the break-even pointa. decreases at rate higher than 10%b. decreases at a rate lower than 10%.c. increases at rate higher than 10%d. increases at a rate lower than 10%.e. None of the above.6. The following information relates to Glow Ltd.Sales $125,000Cost of goods sold 56,000Operating expenses 25,500Finished goods, beginning inventory 15,000Finished goods, ending inventory 15,000Direct material 10,500Direct labour 19,000Overhead 25,000What is Glow’s cost of goods manufactured?a. $29,500b. $50,500c. $54,500d. $61,500e. None of the above7. Activity based costing may be used in which of the following scenarios?a. For selling and administrative expenses.b. For service related business.c. Both a and b.d. Nether a nor b.8. The process of choosing among competing alternatives is calleda. Controllingb. Decision makingc. Planningd. Performance evaluatione. None of the above.9. Which of the following statement is true?I. A cost driver is a factor that causally affects costs.II. A cost hierarchy is a categorization of costs into different cost pools on the basis ofthe different types of cost drivers or different degrees of difficulty in determiningcause-and-effect relationships.a. Only Ib. Only IIc. Both I and IId. Neither I nor IISection II. Short Answer Questions (18 marks)1. Ruth Reed, divisional controller and certified management accountant, was upset by a recent memo she received from the divisional manager, Paul Chesser. Ruth was scheduled to present the division’s financial performance at headquarters in one week. In the memo, Paul had given Ruth some instructions for this upcoming report. In particular, she has been told to emphasize the significant improvement in the division’s profits over last year. Ruth, however, didn’t believe that there was any real underlying improvement in the division’s performance and was reluctant to say otherwise. She knew that the increase in profits was because of Paul’s conscious decision to produce for inventory.Paul had convinced his plant managers to produce more than they knew they could sell. Paul argued that by doing so reported profits would jump. He pointed out two significant benefits. First, by increasing profits, the division could exceed the minimum level needed so that all the managers would qualify for the annual bonus. Second, by meeting the budgeted profit level, the division would be better able to compete for much needed capital. Ruth had objected but had been overruled. The most persuasive counterargument was that the increase in inventory could be liquidated in the coming year as the economy improved. However, Ruth considered this event unlikely. Based on past experience, she believe that it would take at least two years of improved market demand before the productive capacity of the division was exceeded.Answer the following questions:a. (4 marks) Why does the profit increase when the division produces for more inventory?b. (4 marks) In chapter 1, ethical standards for management accountant were listed. Identify any standards that apply in this situation. Based on this, discuss what should Ruth do?Should she comply with the directive to emphasize the increase in profits? If not, what options does she have?2. DEF company has the following cost data for 2010. The data is collected before the disposition of under- or over-applied overhead.Work in Process Inventory $60,000Finished Goods Inventory $80,000Cost of Goods Sold $200,000Actual overhead $150,000Applied overhead $130,000a. (2 marks) How much is the under-applied or overapplied overhead for 2010?b. (4 marks) Assume that the amount issignificant, prepare the journal entry to dispose of the amount.3. (4 marks) Provide two reasons why overhead might be under-applied/over-applied for DEF company in 2010.Section III. 4 Problems (55 Marks)1. Job Costing (13 marks)Orange Inc. is a manufacturing firm that uses normal job-order costing. On January 1, thebeginning of its fiscal year, the company had the following inventory balances: Raw material$ 20,000; Work in process $25,000; Finished goods $30,000.The company applies overhead cost to jobs on the basis of machine-hours worked. For thecurrent year, the company estimated that it would work 75,000 machine-hours and incur$450,000 in manufacturing overhead cost. The following transactions were recorded for the year:1. Raw materials were purchased on account, $410,000.2. Raw materials were requisitioned for use in production, $380,000 ($360,000 directmaterials and $20,000 indirect materials).3. The following costs were incurred for employee services: direct labor, $75,000; indirectlabor, $110,000; sales commissions, $90,000; and administrative salaries, $200,000.4. Sales travel costs were $17,000.5. Utility costs in the factory were $43,000.6. Advertising costs were $180,0007. Depreciation was recorded for the year, $350,000 (80% relates to factory operations, and20% relates to selling and administrative activities).8. Insurance expired during the year, 10,000 (70% related to factory operations, and theremaining 30% relates to selling and administrative activities).9. Manufacturing overhead was applied to productions. Due to lower than expecteddemand for its products, the company worked 70,000 machine-hours during the year.10. Goods costing $880,000 to manufacture according to their job cost sheets werecompleted during the yearRequired ( A – C):(Show your calculation using T-Account)A) (6 marks) Determine the amount of over or under applied overhead for the yearB) (4 marks) Determine the ending inventory balance of work-in-process.C) (3 marks) Determine the amount of Selling, General & Administrative Costs for the year.72. Process Costing (12 Marks)Halifax Salt company process salt and accounts for production using weighted average processcosting method. Direct material is added at the start of production but labor and overhead costsare incurred evenly throughout. The following data pertain to operations for February:Beginning WIP (75% complete) 8,000 kgStarted in February 200,000 kgEnding WIP (25% complete) 20,000 kgThe cost information is provided below:Direct material ConversionBeginning WIP $4,000 $2,282Incurred in February $48,000 $20,878Required:Calculate the cost transferred out to finished goods inventory and the value of the ending WIP.3. Cost-Volume-Profit Analysis (15 marks)The ABC company produces two products. The marketing department expects that the companycan sell 1,000 units of regular product and 1,100 units of luxury product each month. The company provides the following information:Regular LuxuryUnit sales price $210 $300Unit variable cost $110 $130Monthly fixed cost for FIVE machines used to manufacture both products is $150,000. It takes 1machine hour to produce regular product and 2 hours to produce luxury product. Each machinehas a capacity of 600 hours/month.a. What is the maximum profit that the company can make in January?(7 marks).b. The marketing department figured out in January that the customers are willing to buyluxury product at price $350. Should the company revise its production plan in February?What would be the profit with the new plan?4. ABC Problem (15 Marks)The River Company manufactures a variety of prestige boardroom chairs. Its job-costing systemuses an activity based approach. There are two direct cost categories (direct materials and directlabour) and three indirect cost pools. The cost pools represent the following three activities.Activities Budgeted costs for2011Cost driver used asallocation baseCost allocation rateMaterials handling $200,000 Parts $0.25Cutting 2,000,000 Parts 2.50Assembly 2,000,000 Direct labour hours 25.00Two styles of chairs were produced in February, 2011, the executive char and the chairman chair.Their quantities, direct material costs, and other data for February are as follows:Units produced Direct materialcostsNumber of parts Direct labourhoursExecutive Chair 5,000 $600,000 100,000 7,500Chairman Chair 100 25,000 3,500 500The upstream activities to manufacturing (R&D and design) and downstream activities(marketing, distribution, and customer serve) are analyzed, and the unit costs for these activitiesare:Upstream Activities Downstream ActivitiesExecutive Chair $60 $110Chairman Chair 146 236The direct manufacturing labour rate is $20 per hour. Assume no beginning or ending inventory.Required:1) Compute the unit manufacturing costs of the executive chair and the chairman chair.Executive Chair Chairman Chair2) The company sells the executive chair at the price $500 and the chairman chair at the price $1,200. What is the profit for the company in February?