Student Name: _________________________ Student Number: ________________________ Section: Monday ____ Tuesday ____ Wednesday ____ Thursday ____

Saturday ____ York University Atkinson College Department of Administrative Studies Final Examination AK/ADMS 2510.03 Course Directors: Date: Time: Weighting: Larry Blair, Forbes Cavanagh, Lynne MacInnis, and Paul Roy December 20, 1995 7:00 pm - 10:00 pm 50% of final grade Fall 1995

Instructions: 1. This is a closed-book examination and no collaboration is allowed among students. 2. Put your name, student number, and section at the top of the page. 3. Answer all questions. The marks and minutes are indicated for each question. There are a total of 100 marks and you have been given 180 minutes for completion. 4. All questions are to be completed on the examination paper using the reverse side of a page if necessary. 5. Show calculations. 6. Small, noiseless, battery operated calculators are permitted. 7. There are a total of 13 pages. Count and ensure that you have all pages. 8. In preparing your responses, you may remove the staple from the examination paper, but assemble the pages in order when you have finished. 9. You may write with a pencil or pen. 10. Circle the name of your instructor at the top of the page. Good luck. Question 1 _______ 2 _______ 3 _______ 4 _______ 5 _______ Total ________/100

Question 1 (20 marks - 36 minutes) Barnes, Inc., produces Canadian flags for department stores. The raw materials account includes both direct and indirect materials. The account balances at the beginning and end of August 1994 are as follows: August 1 $14,000 20,500 7,000 August 31 $15,300 18,800 5,200

Raw Materials Inventory Work in Process Inventory Finished Goods Inventory

During the month, Barnes purchased $46,000 of raw materials; direct materials used in August were $34,400. Factory payroll costs for March were $85,200, of which 72 percent was related to direct labour. Overhead charges for depreciation, insurance, utilities, and maintenance were $55,300 for the month. Required: a. Determine total overhead for August. (Hint: Include indirect material.) b. Prepare a schedule of the cost of goods manufactured. c. Prepare a schedule of the cost of goods sold.

Question 2 (20 marks - 36 minutes) Travelglobe Ltd. is considering replacing its reservation machines. Presently they use the Air Canada Pegasus system, the new system would be a Sabre system from American Air Lines. Following are the relative costs.

Net book value (today) Unit cost (original) Operating charges monthly Bookkeeping monthly Maintenance monthly Value of system in five years Additional working capital

Keep Pegasus $ 5,000 14,000 400 1,000 300 1,000 0

New Sabre $ 0 12,000 300 500 200 2,000 1,000

Travelglobe pays tax at 30% and the tax depreciation (i.e., the CCA rate), not shown above, is 20% per year. Regardless of which choice is made, in three years the business will be sold and the equipment will be sold. Financing costs of 12%.

The Pegasus can be sold today for $2,000. Which choice is better? (Show calculations) PVTS =
cdt 1+0.5 k d+k 1+k

sdt d +k

(1 + k)n

Where c = the capital cost of the asset d = CCA rate t = the firms marginal tax rate k = the cost of capital s = the salvage value of the asset n = the life of the asset

Question 3 (20 marks - 36 minutes) Big Jim's Accounting Emporium provides two types of services: tax and financial accounting. All company personnel can perform either service equally well. In efforts to market its services, Big Jim's relies heavily on radio and billboard advertising. Information on Big Jim's projected operations for 1996 follows: Revenue per billable hour Variable cost of professional labour per billable hour Material costs per billable hour Allocated fixed costs per year Projected billable hours for 1996 Taxes $ 30 20 1 100,000 12,000 Financial Accounting $ 25 15 2 200,000 8,000

Required: a. What is Big Jim's projected profit or (loss) for 1996? b. If $1 spent on advertising could increase either tax services revenue by $20 or financial accounting services revenue by $20, on which service should the advertising dollar be spent? c. If $1 spent on advertising could increase tax services billable time by one hour or financial accounting services billable time by one hour, on which service should the advertising dollar be spent?

Question 4 (20 marks - 36 minutes) For many years, E1ectro Inc. manufactured a single product called a "basic-controller". Three years ago, the company automated a portion of its plant and at the same time introduced a second product called a "super-controller". The super-controller has become increasingly popular, and the company is now producing 10,000 units of it each year compared to 40,000 units of the basic-controller. The super-controller is a more complex product, requiring one hour of direct labour time per unit to manufacture and extensive machining in the automated portion of the plant. The basic controller requires only .75 per hour of direct labour time per unit and only a small amount of machining. Overhead costs are assigned to products on a basis of direct labour hours. Despite the popularity of the company's new super-controller, profits have declined steadily since a portion of the plant was automated. Management is beginning to believe that a problem may exist with the company's costing system. Unit costs for materials and labour for the two products are as follows: Basic Controller $70.00 $18.00 Super-Controller $96.00 $24.00

Direct Materials Direct Labour ($24* 0.75 and 1.0 hours)

For 1996, the company estimates that it will incur $2,000,000 in manufacturing overhead costs and produce units of the two controllers as stated above. Required: a. Compute the predetermined overhead rate for 1996, assuming that the company continues to apply overhead cost to products on a basis of direct labour hours. Using this rate and other data from the problem, determine the cost to manufacture one unit of each product. b. Assume that the company's overhead costs can be traced to four activity centres. These activity centres, their cost drivers, and estimated data relating to each centre for 1996 are given below: (B.C. = Basic controller) (S.C. = Super Controller) Traceable Activity Centre and Cost Driver Costs Parts Inventory (# part types) $360,000 Purchase Orders (# orders) 180,000 Quality Control (# tests) 460,000 Machine Related (machine hours) 1,000,000 Total Overhead Cost $2,000,000 Expected # Events or Transactions Total B.C. S.C. 450 150 300 2,000 1,600 400 11,500 5,000 6,500 20,000 8,000 12,000

Determine the amount of overhead cost per event or transaction for each of the four activity centres.

c. i.

ii. d.

Using activity-based costing and the data from Part b above, do the following: Determine the total amount of overhead cost assignable to each product for 1996. After these totals have been computed, determine the amount of overhead cost per unit for each product. Compute the total cost to manufacture one unit of each product. Look at the data you have computed in Part c above. In terms of overhead cost, what factors make the super-controller more costly to produce than the basic-controller? Is the super-controller as profitable as the company thinks it is? Explain.

Question 5 (20 marks - 36 minutes) "Now this doesn't make any sense at all," Mr. Mac, vice president finance for BigMac Company. "Our sales have been steadily rising over the last several months, but profits have been going in the opposite direction. In September, we finally hit $2,240,000 in sales, but the bottom line for the month drops off to a $140,000. Why aren't profits more closely correlated with sales?" The statements to which Mr. Mac was referring are shown on the next page. Hal Ham, a recent university graduate who has just been hired by BigMac Company, has stated to Mr. Mac that the contribution approach, with variable costing, is a much better way to report profit data to management. "The contribution approach is a particularly good method to use when production is not moving in the same direction as sales," said Mac. Sales and production data for the last quarter follow: Production in units Sales in units July 85,000 70,000 August 80,000 75,000 September 60,000 80,000

Additional information about the company's operation is given below. a. b. Five thousand units were in inventory on July 1. Fixed manufacturing overhead costs total $1,608,000 per quarter and are incurred evenly throughout the quarter. The fixed overhead cost is applied to units of product on the basis of a budgeted production volume of 80,000 units per month. Variable selling and administrative expenses on the statements above are fixed. The company uses a FIFO inventory flow. Work in process inventories are nominal and can be ignored.

c. d.

"I know production is somewhat out of step with sales" said Carol Car, the company's controller. "But we had to build inventory early in the quarter in anticipation of a strike in September. Since the union settled without a strike, we then had to cut back production in September in order to work off the excess inventories. The income statements you have are completely accurate." Required: a. b. Prepare an income statement for each month, using the contribution approach with variable costing. (8 marks) Compute the monthly break-even point under (5 marks): i. Variable costing ii. Absorption costing Explain to Mr. Mac why profits have moved erratically over the three-month period shown in the absorption costing statements above and why profits have not been more closely correlated with changes in sales volume. (4 marks) Reconcile the variable costing and absorption costing net income (loss) figures for each month. Show all computations, and show how you derive each figure used in your reconciliation. (3 marks) 7

c.

d.

Question 5 (continued) BIGMAC COMPANY MONTHLY INCOME STATEMENTS July Sales (@ $28) Less cost of goods sold: Beginning inventory Cost applied to production: Variable manufacturing costs (@ $9) Fixed manufacturing overhead Costs of goods manufactured Goods available for sale Less ending inventory Costs of goods sold Under-applied or (over-applied) fixed overhead cost Adjusted cost of goods sold Gross margin Less selling and administrative expenses Net income $1,960,000 80,000 765,000 595,000 1,360,000 1,440,000 320,000 1,120,000 (35,000) 1,085,000 875,000 620,000 $ 255,000 $ August $2,100,000 320,000 720,000 560,000 1,280,000 1,600,000 400,000 1,200,000 -1,200,000 900,000 650,000 250,000 September $2,240,000 400,000 540,000 420,000 960,000 1,360,000 80,000 1,280,000 140,000 1,420,000 820,000 680,000 $ 140,000

Present Value Tables