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Determine the indirect labor support costs
Course:- Managerial Accounting
Reference No.:- EM13163299




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1. The globalization of business activity has resulted in which of the following?

a.  Increased corruption and unethical behavior.

b. FASB and IASB working jointly on a project to converge accounting standards.

c.  The requirement that major Canadian companies use International Financial Reporting Standards as of January 1, 2011.

d. All of the above.

e. b and c.

2. Which statement best describes the retained earnings account?

a. The retained earnings account is equal to the cash account less dividends paid.

b. Retained earnings are funds a company has chosen to reinvest in the operations of a business rather than pay out to stockholders in dividends.

c. Retained earnings represent unused cash of the firm.

d. The retained earnings account is the measurement of all distributed earnings.

3. The inventory valuation policy chosen by a particular company assumes a flow of goods that need not have anything to do with the actual order in which its products are sold.  

4. Using FIFO during a period of inflation would result in net income being overstated relative to the LIFO method. 

5. Assume a company accounts for an investment in shares of another company using the equity method. Because the investor can control when and in what amount the investees' dividends are paid, the amount of cash received by the investor as dividends is generally the same as its share of the income reported by the investee each year. 

6. A change in short-term investments from one balance sheet to the next affects cash. 

See Fraser/Ormiston p. 154. Short-term investments are not considered cash and cash equivalents in their nomenclature.

7. If a firm is using financial leverage successfully what would be the impact of doubling operating earnings?

a. The return on equity will double.

b. The return on equity will increase, but not double.

c. The return on equity will more than double.

d. The return on equity will decline by half.

e. None of the above.

8. Management accounting can play a critical role in the service industry because of all the following reasons EXCEPT:

a. firms must be especially sensitive to the timeliness and quality of customer service.

b. many employees have very little contact with customers.

c. customers immediately notice defects and a delay in service.

d. dissatisfied customers may never return.

9. In a management accounting context, "different costs for different purposes" means

a.  external users of accounting information require information that can vary by industry.

b. management requires information that reflects varying decision-making needs.

c.  that there is no universal way to compute the cost of something,

d. All of the above

e. Only b and c.

10. Which of the following is NOT a feature or objective of total-life-cycle costing?

a.  Since 80% of a product's total life costs are committed in the research, development, and engineering cycle, it enables cost savings in manufacturing and post-manufacturing activities.

b. It is a process to manage costs within market research, product design, and product development.

c.  For most products, the majority of the product's total life costs are incurred during the post-sale service and disposal cycle.

d. A breakdown of costs for each stage of the Total Life Cycle will differ, depending on the industry and specific products produced.

11. A challenge with the balanced scorecard is to

a.  find the right mix of financial and nonfinancial measure to perform multiple tasks.

b. identify appropriate remedial actions to be taken when performance falls short.

c.  identify performance measures that align with the company's strategy.

d. communicate the company's strategic objectives.

12. Which of the following management tools are used in the manufacturing cycle of the value chain?

a.  Target costing.

b. Kaizen Costing.

c.  Total-Life-Cycle Costing.

d. All of the above.

e. b and c.

Part B

 1. Outline the effect of 'perspective' on the development of a conceptual framework for financial accounting. Give an example of how a difference in perspective can inform development of accounting standards within such a framework.

 2. What are discretionary expenses and why are they important to the operating success of a firm?

 3. Why might a company want to engage in off-balance sheet financing?

 4. What are the four options that manufacturing and service companies have to transform breakeven or loss customers into profitable ones?

 5. What is budgeting and what is its role?  List the purposes addressed by budgeting and the reasons why organizations prepare budgets.

Part C - PROBLEMS (12 questions worth varying marks: 50 marks in total). Provide responses for each question. Show all your work.

1. A Company purchased equipment for $20,000. Management estimates that the equipment will have a useful life of five years and salvage value of $5,000. Calculate a) net book value of the equipment at the end of the third year using the straight-line method of depreciation; and b) depreciation expense for the second year using the double-declining balance method of depreciation.

2. Analyze accounts receivable and the allowance for doubtful accounts for the following company, and draw some inferences:

  2012   2011

Sales $6,700   $7,500

Accounts receivable, net   202 320

Allowance for doubtful accounts   3    12

3. Analyze the following common size balance sheet:

   2012 2011

Current assets:

Cash 3%  5%

Accounts receivable 20  18

Inventory   35  30

   Total current assets    58  53

Property, plant and equipment 30  40

Other assets    12   7

   Total assets 100% 100%

Current liabilities:

Accounts payable 25%   20%

Short-term debt   38  33

   Total current liabilities 63  53

Long-term debt    22  17

Total liabilities 85  70

Stockholders' equity:

Common stock and paid in capital 14  20

Retained earnings 1  10

  15  30

Total liabilities and stockholders' equity  100% 100%

4. Consider the following information:

Net income   $200

Purchase of property and plant   90

Depreciation expense 50

Payment of cash dividends   25

Cash dividends received on shares recorded as

   equity investments   15

Increase in cash loaned to another company 30

Increase in long-term debt   110

Decrease in inventories 10

Decrease in accounts payable   20

Repurchase of company's shares from a

  major stockholder for cash    100

Calculate cash flow from (used by) operating, investing, and financing activities.

 5. Consider the following information:

Current assets $150,000

Current liabilities 50,000

Accounts receivable, net   80,000

Inventories   40,000

Accounts payable 25,000

Net sales 425,000

Cost of goods sold  258,000

Calculate the company's cash conversion cycle.

 6. Beijing Limited has three divisions: North, Central and South. The following results were for the year ending December 31, 2012:

 

North

 

Central

 

South

Sales

$600,000

 

$750,000

 

$500,000

Variable manufacturing costs

240,000

 

315,000

 

150,000

Variable selling and administrative costs

132,000

 

135,000

 

130,000

Contribution margin

228,000

 

300,000

 

220,000

Avoidable fixed costs

150,000

 

180,000

 

135,000

Unavoidable fixed costs

125,000

 

85,000

 

40,000

Operating income (loss)

($47,000)

 

$35,000

 

$45,000

The Vice-President of Operations is concerned about the North Division's performance and considering whether it should be closed. If the North Division is closed, sales in the Central and South Divisions will drop by 10%. By how much will the company's overall operating income change if the North Division is closed?

7. Light Manufacturing produces a single product that sells for $16. Variable (flexible) costs per unit equal $11.20.  The company expects the total fixed (capacity-related) costs to be $7,200 for the next month at the projected sales level of 20,000 units. In an attempt to improve performance, management is considering a number of alternatives. Suppose Light management believes that a 10% reduction in the selling price will result in a 30% increase in sales. If this proposed reduction in selling price is implemented, what will be the change in profit?

8.  Able Inc. is considering replacing its existing photocopier with a new one. The new system offers considerable operational savings. Information about the existing and new systems is as follows:

 

Existing

New

Original cost

$12,000

$15,000

Annual operating expenses

3,500

2,500

Accumulated depreciation at present

7,000

0

Current salvage value

2,000

15,000

Remaining life

5 years

5 years

Salvage value in 5 years

0

5,000

Annual depreciation

2,000

3,000

Should Able Inc. replace the existing photocopier with the new system?

9. Smith Manufacturing Ltd. applies manufacturing overhead costs to products at a predetermined rate of $100 per direct labor hour. One customer has requested a bid on a special order of 2,000 units of a product.  Estimates for this order are: direct materials $100,000; direct labor of 1,000 labor hours @ $25 per hour.  What is the bid price for one unit of this special order, including Smith's standard mark-up of 20%?

10. Ball TV Ltd. currently sells small televisions for $180 per unit. This product has variable costs of $140. Another company is bringing a competing television to market that will sell for $170. Ball management believes it must lower its price to the same amount to compete in the market. Ball's Marketing division believes that the new entrant will also cause Ball's sales in this market segment to decrease by 10%. Ball's sales are currently 100,000 televisions per year. What is the target cost per unit if the company wants to maintain its same profit margin in total dollars before the change, and the Marketing division is correct?

11. Do-Right Industries developed the following standard costs for direct materials and direct labor to produce gadgets:

Standard quantity

Standard price

Direct materials

0.60 kg.

$25 per kg.

Direct labor

0.20 hours

$18 per hour

 

During May, Do-Right produced and sold 8,000 gadgets using 5,000 kg. of direct materials at an average cost per kg. of $22.50, and 1,560 direct labor hours at an average wage of $18.20 per hour. What are the direct material and direct labour price and quantity variances for May and what are possible causes of these?

 

 

 

12. (5 marks) Complete the following flexible budget and suggest one possible explanation for each of the variances.

 

Master Budget

 

Flexible budget

 

Actual Results

 

Variance

Sales volume (in units)

20,000

 

 

 

18,500

 

 

Sales Revenue

$1,050,000

 

 

 

$972,000

 

 

Variable costs

500,000

 

 

 

477,000

 

 

Contribution margin

550,000

 

 

 

495,000

 

 

Capacity-related (fixed) costs

380,000

 

 

 

385,000

 

)

Operating profit

$170,000

 

 

 

$110,000

 

 

 


 

Part D - CASES (23 marks)

 

1.  (10 marks) AudioFile Products Ltd. is a retailer that sells sound systems.  The company is planning its cash needs for the month of January, 2013.  In the past, AudioFile has had to borrow money during the post-Christmas season to offset a significant decline in sales.  The following information has been assembled to assist in preparing a cash flow forecast for January.

a. January 2013 forecasted income statement:

Sales $200,000

Cost of goods sold   150,000

Gross profit   50,000

Variable selling expenses $10,000

Fixed administrative expenses   20,000    30,000

Forecast net operating income    $ 20,000

 

b. Sales are 10% for cash and 90% on credit.

c. Credit sales are collected over a three-month period with 40% collected in the month of sale, 30% in the following month, and 20% in the second month following sale. November 2012 sales totaled $300,000 and December sales totaled $500,000.

d. 40% of a month's inventory purchases are paid for in the same month. The remaining 60% are paid in the following month. Accounts payable relate solely to inventory purchases. At December 31, these totaled $400,000.

e. The company maintains its ending inventory levels at 60% of the cost of the merchandise to be sold in the following month. The merchandise inventory at December 31, 2012 was $90,000. February 2013 sales are budgeted at $150,000. Gross profit percentage is expected to remain unchanged.

f.   The company pays a $10,000 monthly cash dividend to shareholders.

g. The cash balance at December 31 was $30,000; the company must maintain a cash balance of at least this amount at the end of each month.

h. The company can borrow on its operating loan in increments of $10,000 at the beginning of each month, up to a total loan balance of $500,000. The interest rate on this loan is 1% per month. There is no operating loan at December 31, 2012.

 

Required: Prepare a Cash Flow Forecast for AudioFile for the month of January 2013. Include appropriate supporting schedules.

 

 

 

2. (13 marks) In the past, the Roils Royally Engine Division (Roils) allocated indirect manufacturing costs based on direct labour hours. Recently, management has decided to pilot a system of time-driven activity-based costing (TDABC) to allocate these costs. The division produces three engine models: Basic, Sport, and Heavy Duty. Roils employs 300 employees to perform indirect labour functions, consisting of machine setups, engine inspections and shipping. Each employee is paid $50,000 per year on average, including benefits. On average, each employee works 1,600 hours per year. Each automated production machine is used 1,600 hours per year, including set up time. Once a machine is set up, no labour is necessary to oversee it.

 

The following information has been obtained from the company's records over the past year:

 

 

Basic

Sport

Heavy Duty

Units produced

500,000

150,000

50,000

Direct material cost per unit

$40

$50

$60

Direct labour cost per hour

$30

$30

$30

Direct labour hours incurred

200,000

225,000

40,000

Inspections per engine

2

3

4

Inspection time per engine (hrs.)

.1

.2

.3

Engines packed and shipped per batch

2,000

1,000

500

Individual engine packing time (hrs.)

.25

.3

.4

Additional preparation time per batch (hrs.)

30

20

15

Machine set-ups per year

240

180

60

Labour hours for each machine set-up

30

40

60

Required

a. Determine the indirect labor support costs for each engine using time-driven activity-based costing.

b. Determine the per cent of unused indirect labour compared to available indirect labour hours. Draw conclusions from this analysis.




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