ACC 302

Second Midterm-Version 1

Name_________________________

Problems: 40 points total. Show all supporting computations 1. (14 points) Hailmark Cards manufactures greeting cards and uses a job order costing system . The firm encountered the following production problems/issues during the current month. I. A batch of 20 boxes of cards (Job 53) was produced with cards that were inch too long for their envelopes. Production costs for each box of cards totaled $8 at the time the error was discovered. The cards were hand trimmed to fit the envelopes incurring an additional total labor cost of $25 for all boxes. a. Assume the problem is considered normal and caused by the general production of all jobs. Prepare the journal entry to record the cost of fixing the cards. MOH Control $25 Wages Payable b.

$25

Assume the problem is considered abnormal. Prepare the journal entry to record the cost of fixing the cards. Loss from Abnormal Rework Wages Payable $25 $25

II. A batch of 40 boxes of Saint Patricks Day cards (Job 54) were printed with special green ink that smudged the blank portion of the card. The normal selling price for the cards was $80 per box. Now the cards will have to be held in inventory until they can be sold at a reduced price of $50 per box. Cost of production for the cards was $70 per box. a. Assume the misprint is considered a normal outcome of the printing process, but is attributable to Job 54. Prepare the journal entry to record this event. Materials ControlCards (Seconds) $2,000 WIP Job 54 $2,000 b. The error is considered abnormal. Prepare the journal entry to record the event. Materials ControlCards (Seconds) $2,000 Loss from Abnormal Spoilage 800 WIP $2, 800 III. The production of cards produces material quantities of paper scrap, common to all jobs, that are sold every six months to a local recycler. The scrap is held in inventory until it can be sold for $0.07 per pound. a. Prepare the journal entry to record the production of 4,000 pounds of paper scrap assuming the production of the scrap is common to all jobs. Materials ControlScrap MOH Control b. $280 $280

Prepare the journal entry to record the sale of the scrap for cash. Cash $280 Materials ControlScrap

$280

2. (18 points) Pet Products Company uses an automated process to manufacture its pet replica products. For June, the company had the following activities: Beginning work in process inventory 4,000 items, 1/8 complete as to conversion costs Units started in production 15,000 units Units completed 17,000 units Ending work in process inventory 2,000 items, 3/4 complete as to conversion costs Cost of beginning work in process, direct materials $10,000 Cost of beginning work in process, conversiom $5,250 Direct material costs, added current period $16,500 Conversion costs, added current period $24,120 Direct materials are placed into production at the beginning of the process and conversion costs are incurred evenly throughout the process. Required: Prepare a production cost worksheet in good form using the FIFO method of process costing. Remember to include a section for the calculation of equivalent units, a section that computes unit costs, and a section that assigns costs appropriately.

Solution is on the next page.

Physical Units WIP, beginning Started during the current period To account for Completed and transferred out From beginning WIP Started and completed this period WIP, ending Accounted for Work done in current period only 4,000 13,000 2,000 19,000 4,000 15,000 19,000

Direct Material

Conversion

3,500 13,000 2,000 13,000 1,500

15,000

18,000

WIP, beginning Costs added in current period Total costs to account for

15,250 40,620

10,000 16,500

5,250 24,120

55,870

26,500

29,370

Costs added in current period Divide by equiv. units of work done Cost per equivalent unit $

16,500 15,000 1.10 $

24,120 18,000 1.34

Assignment of costs: Completed and transferred out WIP Beginning Plus costs added this period Total from beginning inventory Started and completed Total cost completed and tranferred WIP Ending Total costs accounted for $ $ $ 15,250 4,690 19,940 31,720 51,660 4,210 55,870 $ $ 10,000 14,300 24,300 2,200 26,500 $ $ $ 10,000 $ 5,250 4,690 9,940 17,420 27,360 2,010 29,370

a.

Prepare a worksheet in good form to calculate equivalent units if the weighted-average method is used. (Do not continue the worksheetjust do the equivalent unit section).

Physical Units WIP, beginning Started during the current period To account for Completed and transferred out WIP, ending Accounted for Work done in current period only 4,000 15,000 19,000 17,000 2,000 19,000

Direct Material

Conversion

17,000 2,000

17,000 1,500

19,000

18,500

3. (8 points) Mount Carmel Company sells only two products, Carmel Apples and Carmel Corn. Results of operations appear below. Carmel Apples 40,000 $120,00 0 20,000 100,000 Carmel Corn 60,000 $60,000 15,000 45,000

Units Sold Sales ($3.00 and $1.00 each) Variable cost per unit ($0.50 and $.25 each) Contribution Margin Total fixed costs Operating Income

Total 100,000 180,000 35,000 145,000 88,500 85,000

a. Assume that Mount Carmel makes and sells only Carmel Apples. Calculate the firms breakeven point in units and dollars. $60,000/$2.50 =24,000 apples 60,000/.833333 = $72,000 or 24,000 apples X $3.00 = $72,000

b. Assume that Mount Carmel makes and sells both products. Their target operating income is $100,000. How many units will the firm have to sell to earn their target income? Of those total units, how many units will be Caramel Apples and how many will be Caramel Corn?

$160,000/$1.45 = 120,000 apples 40% of 120,000 = 48,000 apples 60% of 120,000 = caramel corn

Multiple Choice: 2 points each. Choose the best answer and enter it on your bubble sheet.
1. When using a process costing system, transferred in costs are: a. c. Added only to the total cost of units transferred out Accounted for by assuming their degree of completion is the same as conversion costs b. Treated similarly to direct materials added at the beginning of the process d. Accounted for by deducting them from total costs in process for the current period 2. I. II. a. b. c. Which of the following statements are true? Process costing systems separate costs into cost categories according to the timing of when costs are introduced into the process If there is no beginning inventory, but there is ending inventory, computation of equivalent units is not necessary under weighted average Only I. is true Only II. Is true Both I. and II. are true

d. Neither I. or II. is true

3.

Atlas Airlines is a small regional carrier. The firm has identified three cost drivers for its operations: number of passengers, number of flights and miles flown. The firm estimates costs as follows: $100 per passenger, $10,000 per flight, and $16 per mile flown. Fixed costs for the airline are estimated at $1,000,000. Passengers pay $700 per ticket. If the airline plans for 2,000 flights and 2,500,000 miles flown, how many passengers will it need to breakeven? a. b. c. 100,000 1,667 60,471

d. None of the above 4. If a firms tax rate increases from 20% to 40%, break-even point: a. b. c. Increases Decreases Remains the same

d. Cannot determine with the information given. 5. At a sales level of 80,000 units, Dilly Company has an operating income of $60,000 and sales of $500,000. The companys degree of operating leverage is 3. If sales increase to 100,000 units, the companys new operating income will be: a. c. $185,000 $180,000 b. $105,000

d. $625,000
6. The breakeven point decreases if: a. The variable cost per unit increases b. Total fixed costs decrease c. The contribution margin per unit decreases d. The selling price per unit decreases Which of the following would be classified as spoilage for accounting purposes? a. Electric switches with poor welds that are run back through the welding operation to remedy all problems b. Defective china plates sold for a reduced price as seconds c. Shavings left over from the production of wood furniture d. Both a. and b. would be counted as spoilage Ernest Inc. has provided the following information regarding its sole product: Selling Price per Unit $40.00 Unit Variable Cost $35.00 The firm incurs total fixed cost each year of $200,000 and desires to make a target net income of $72,000. The firms tax rate is 20%. How many units must be sold to earn the target net income? a. 54,400 b. 58,000 c. 57,000

7.

8.

d. 58,280 9. Bing Company had no beginning work-in-in process inventory and the ending work-in-process inventory is 50% complete as to conversion costs. The number of equivalent units as to conversion costs would be: a. The same as the units completed b. Less than the units completed c. The same as the units placed in process d. Less than the units placed in process

10. A change in sales mix, where a larger-than-planned proportion of high contribution margin percentage items are sold, will: a. increase the breakeven point in sales dollars b. decrease the breakeven point in sales dollars c. leave breakeven point unchanged, but increase sales dollars d. leave breakeven point unchanged and have no effect on sales dollars. 11. Which of the following types of journal entries would have the effect of increasing the cost of a good unit? a. Sale of an immaterial amount of scrap b. Sale of a material amount of scrap c. Abnormal rework d. Normal spoilage attributable to a specific job 12. Zip Company has total fixed costs of $640,000 and a variable cost ratio of 20%. The firms breakeven point in sales dollars is: a. $ 800,000 b. $3,200,000 c. $ 512,000 d. $ 768,000 13. When appropriate, abnormal losses are recorded for: a. Spoilage b. Rework c. Scrap d. All the above e. Only a. and b. above 14. Black, Inc. employs a weighted-average method in its process costing system. Blacks work-in-process inventory on June 30 consists of 40,000 units. These units are 100% complete as to materials and 60% complete with respect to conversion costs. The equivalent unit costs are $5 for material and $7 for conversion costs. What is the total cost of the June 30 work-in-process inventory? a. $480,000 b. $368,000 c. $200,000 d. $288,000 15. Material G is added to a process when the batch is 60% complete. Conversion costs are added evenly. Ending work-in-process contains 5,000 units that are 30% complete. Equivalent units assigned to ending work-in-process for material G would equal: a. 3,000 units b. 1,500 units c. 0

d. 2,100 units

16. If a firm uses a normal costing system it will account for normal spoilage common to all jobs by: a. Adding an allowance for normal spoilage to budgeted manufacturing overhead when the predetermined overhead allocation rate is calculated b. Writing the spoilage off as a loss in the period it is incurred c. Reducing MOH allocated by the cost of normal spoilage d. Treating the cost of the spoilage as an addition to the transfer to finished goods 17. Ace Co.s process generates scrap that is recorded as inventory and then subsequently used as material in another production process. As the scrap is used, the accounting entry will: a. Debit Materials Control-scrap for the value of the scrap b. Debit WIP for the value of the scrap c. Debit Cash for the value of the scrap d. Debit a loss account for the value of the scrap. 18. In its production process, Hern Corp. incurred total production costs for the month of $900,000, of which Hern attributed $60,000 to normal spoilage and $30,000 to abnormal spoilage. Hern should account for this spoilage as: a. Inventoriable cost of $90,000 b. Period cost of $90,000 c. Period cost of $60,000 and inventoriable cost of $30,000 d. Inventoriable cost of $60,000 and period cost of $30,000 19. Zippo is trying to decide whether or not to spend additional funds on an advertising campaign. The firms managers estimate that there is a 10% probability that the ads will cause sales to increase by $50,000, a 30% probability that the ads will cause sales to increase by $40,000, and a 60% probability that the ads will cause sales to increase by $30,000. The expected value of the sales increase is: a. $30,000 b. $40,000 c. $35,000 d. $60,000

20. Process costing is most appropriate when: a. The product is produced in very small batches b. Each job has many unique features c. Products produced are identical or very similar d. Products are very expensive to produce