York University: Faculty of Liberal Arts & Professional Studies: School of Administrative Studies ADMS 2510 3.

0: sample Final Exam, based on Fall 2011: QUESTION 1 (13 marks: allow about 25 minutes) Elwoods Enterprises uses a job order costing system to track job costs. Overhead costs are allocated to jobs based on direct labour hours. The manufacturing overhead costs for the year were estimated to be $600,000 and direct labour hours were expected to be 10,000 hours for the year. Direct labour is recorded at $20 per hour. The chart below summarizes the data from the job cost sheets for jobs worked on during October 2011. WAT24 Beginning balance, Oct 1 Direct materials Direct labour $ 4,875 $ 355 $ 360 BEA63 $ 1,875 $ 1,500 $ 520 KYT87 $ 2,600 $ 1,100 $ 300 LON12 $ $ 8,450 $ 1,440 CAM54 $ $ 4,500 $ 1,100 WEL45 $ $ 5,400 $ 1,300

At the end of October, Jobs WAT24 and BEA63 were shipped to the customers, Job KYT87 was complete and awaiting shipment to the customer, and the remaining three jobs were unfinished. A. Calculate the predetermined overhead rate. (2 marks)

B. Calculate the overhead costs allocated to each job for October. (6 marks)

WAT24

BEA63

KYT87

LON12

CAM54

WEL45

C. Calculate the balances for the three accounts: Cost of Goods Sold, Work-in-Process Inventory at 31st October 2011 and Finished Goods inventory at 31st October 2011. (Use the chart below to summarize your totals.) (3 marks) WAT24 $ 4,875 $ 355 $ 360 BEA63 $ 1,875 $ 1,500 $ 520 KYT87 $ 2,600 $ 1,100 $ 300 LON12 $ $ 8,450 $ 1,440 CAM54 $ $ 4,500 $ 1,100 WEL45 $ $ 5,400 $ 1,300

Beginning balance, Oct 1 Direct materials Direct labour

Cost of Goods Sold for October 2011:

Work-in-process inventory at October 31, 2011

Finished Goods inventory at October 31, 2011

QUESTION 1 continued D. Your much younger sister was flicking through your management accountant textbook and was surprised to see so many chapters dedicated to costing. She asked you why you had to learn so many different ways to calculate the cost of things in a business. Explain to her, in simple terms, why it is important for a manager to know the cost of a cost object and why there are several different approaches to costing. (2 marks)

QUESTION 2 (12 marks: allow about 20 minutes) Answer each question separately. A. Calculate the break-even point in sales for a company where: (2 marks) Fixed costs equal Variable cost ratio is $450,000 40%

B. Calculate the number of units that must be sold to provide a profit equal to 10% of sales where: (3 marks) Fixed costs Sales price per unit Variable costs per unit $500,000 $32 $12

C. The Fun Co. makes widgets that sell for $100 each. Variable expenses are $50 per widget and fixed expenses are $50,000 per month. The marketing manager wants to increase sales by advertising on a local TV station. His argument is that spending an additional $25,000 on TV adverts will increase sales from 1,200 per month to 2,000 per month. If he is right, by how much will operating income increase or decrease as a result of the advertising campaign? (4 marks)

D. What does a companys degree of operating leverage mean? Why is this information useful to managers? (3 marks)

Question 3: (10 marks: allow 15 minutes): Canadas Wonderland is considering a new ride at its Vaughan amusement park. The ride would cost $750,000 to buy and another $500,000 to install. At the end of its 10 year life it would not have any salvage value. The expected annual operating income for the ride would be as follows: Ticket revenues: Operating expenses: Salaries: Maintenance: Depreciation: Insurance: Operating income: Required (10 marks): a) Calculate the payback period (2 marks); $100,000 50,000 150,000 25,000 $500,000

$325,000 $175,000

b) Calculate the simple rate of return (3 marks);

c) Calculate the net present value using a cost of capital of 10% (present value tables are attached: show all workings: 5 marks).

Question 4: (10 marks: allow 15 minutes): Charles Co. manufactures widgets. The standard cost of a widget is $69.50 and they are sold for $100 each. Widget: standard cost card: Direct materials: 3.5 kg @ $4.00: Direct labour: 1.5 hours @ $18: Variable manufacturing overhead: 0.1.5 DLH @ $12.00: Fixed manufacturing overhead: 1.5 DLH @ $7 per DLH: Total standard cost:

$14.00 27.00 18.00 10.50 $69.50

The predetermined manufacturing overhead rates were calculated by dividing the budgeted manufacturing overhead by the budgeted labour hours, as follows: Variable manufacturing overhead $180,000 15,000 $ 12 Fixed manufacturing overhead $105,000 15,000 $ 7

Budgeted cost: Budgeted direct labour hours: Overhead recovery rate, per DLH:

Actual results for last year were as follows: Direct materials purchased: 4,000 kg @ $4.10: $16,400 Direct materials used: 3,600 kg Direct labour hours: 20,000 @ $18: $360,000 Variable overhead cost: $250,000 Fixed overhead cost: $125,000 Selling and administrative costs: $140,000 Number of widgets manufactured: 15,000

Required: Calculate the following and write one sentence explaining what each variance means (5 marks each: total 10 marks): a) The material price variance;

b) The fixed overhead production volume variance.

Question 5: (20 marks: allow 30 minutes): Appliance Co. makes appliances. Division A of Appliance Co makes electric motors. Last year they sold 5,000 electric motors to Division B and 20,000 electric motors to outside customers. The selling price was $75 per motor for all customers. The variable cost of producing a motor in Division A was $40, and the fixed cost was $500,000 per year. Division B has received a bid from an importer of electric motors of the same type for $60 each, and they have requested that Division A reduce its selling price to $60 to match that price. Required: A: assume that Division A has a capacity of 25,000 motors per year and that they expect to be able to sell up to 25,000 to outside customers for $75. What will be the likely outcome for Division A and Division B? (6 marks)

B: assume that Division A has a capacity of 30,000 motors per year and that they expect to be able to sell no more than 20,000 to outside customers for $75. What will be the likely outcome for Division A and Division B? (6 marks)

C: List four qualitative factors that Division B should consider in addition to the price of the motors. (4 marks)

D: In determining transfer prices, why do some companies use market and some use cost as the basis. (4 marks)

Question 5: 35 marks RJ Appliance Recycling Inc.

Your accounting and consulting firm has been doing the books for RJ Appliance Recycling since its inception two years ago. It is a small but interesting client. As a management accountant, you have been hired by this client for a management accounting assignment. You are familiarizing yourself with the company and its business.

Recycling has become a major industry in Canada. Governments, particularly municipal governments, have been active in promoting recycling as a means of reducing demands for landfills. Incentives have been provided to facilitate the establishment of viable recycling businesses.

Two years ago, right after graduation, Raj and John established RJ Appliance Recycling with shop space in an industrial mall on the western outskirts of Ottawa. Johns father and Rajs brother became shareholders and board members along with Raj and John. Recycling appliances such as stoves, refrigerators, washers, and dryers are the target of the business.

RJ Appliance Recyclings business model has not changed much in the last two years. Ottawa homeowners and businesses drop off used appliances at the shop. The charge is $20 per appliance payable by the person disposing the appliance. This fee is set by the municipality. Once an appliance is received, it is assessed, and based on the assessment it is sent to one of three possible destinations:

1.

Appliances that are newer and in better condition are reconditioned and then sold as refurbished. These refurbished appliances are inventoried and listed at standard (but negotiable) prices for sale. This accounts for about 10% of the appliances received. Appliances that are generally working, but not capable of being refurbished, are stripped of useful or good parts. The parts are priced at standard (non-negotiable) prices, inventoried and listed for sale. About 20% of the appliances have useful parts. The non-useful components are sorted by type of metal, plastic, etc. and sold for scrap. The other or junk appliances are taken apart, sorted by type of metal, plastic, etc and sold for scrap. About 70% of the received appliances are junked immediately.

2.

3.

Raj and John along with one full-time and two part-time employees assess, refurbish, strip good parts, and junk remaining partial and full appliances. John developed software for listing the available parts. This web-based listing uses manufacturers part numbers to facilitate communicating precise parts availability with homeowners and

appliance repair shops. As a result, there is a rapid movement of most parts. The inventory records indicate where parts are short of inventory, where there are adequate inventories and where there are inventories for many years. Consequently, this system enables the stripping of parts to be done with an awareness of inventory levels and sales potential. Exhibit 1 shows that the second year of business has been profitable. The first year had many startup difficulties, but the second year is more representative of the appliance recycling business. The business model seems to work in general, although the profitability is not satisfactory to the board. You note that employee salaries and wages and rent could be matched with the four revenue streams, but none of the other expenses could be matched with any of the four revenue streams.

The board members are not pleased with overall profitability. They are unhappy that they do not know where the company is profitable and where it is unprofitable. In the future, the board wants the company to be managed more responsibly to ensure a higher level of profitability.

Required:

Complete your assignment using the case approach.

Exhibit 1 Net Income Statement Year 2

Revenue: Disposal fees Refurbished appliances Appliance parts Scrap $300,000 160,000 140,000 105,000 $705,000 Expenses: Employee salaries, wages, benefits Rent Amortization (equipment and vehicles) Utilities Materials and supplies Vehicle expenses (non-amortization) Advertisement Accounting charges Other expenses $310,000 137,000 14,000 31,000 35,000 27,000 24,000 23,000 23,000 $624,000

Net income before expenses

$ 81,000