ACCT434 Advanced Cost Management: Week 4 Midterm Exam (Version 3)

Reminder: There are several versions of this week’s questions, please make sure you have reviewed and compared our questions with your questions.

ACCT434 Advanced Cost Management
Week 4 Cost Allocation - Midterm Exam (Version 3)

1. (TCO1) ABC systems create (Points : 5)
one large cost pool .
homogenous activity-related cost pools.
activity-cost pools with a broad focus.
activity-cost pools containing many direct costs.

2. (TCO 1) Merriman Company provides the following ABC costing information:
Activities Total Costs Activity-cost drivers
Account inquiry hours $400,000 10,000 hours
Account billing lines $280,000 4,000,000 lines
Account verification accounts $150,000 40,000 accounts
Correspondence letters $ 50,000 4,000 letters
Total costs $880,000

The above activities are used by Department A and B as follows:
Department A Department B
Account inquiry hours 2,000 hours 4,000 hours
Account billing lines 400,000 lines 200,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,000 letters 1,600 letters

How much of the inquiry cost will be assigned to Department A? (Points : 5)
$80,000
$400,000
$160,000
None of the above

3. (TCO 2) A master budget (Points : 5)
includes only financial aspects of a plan and excludes nonfinancial aspects.
includes broad expectations and visionary results.
is an aid to coordinating what needs to be done to implement a plan.
should not be altered after it has been agreed upon.

4. (TCO 2) White planned to use $82 of material per unit but actually used $80 of material per unit, andplanned to make 1,200 units but actually made 1,000 units.

The sales ¬volume variance is (Points : 5)
$2,000 favorable.
$14,000 unfavorable.
$16,400 unfavorable.
$2,400 favorable.

5. (TCO 3) Which of the following does NOT represent a cause ¬and ¬effect relationship? (Points : 5)
It makes sense that if a complex product has a large number of parts, it will take longer to assemble
than a simple product with fewer parts.
Material costs increase as the number of units produced increases.
A company is charged 40 cents for each brochure printed and mailed.
Utility costs increase at the same time that insurance costs increase.

6. (TCO 4) Relevant costs of a make-or-buy decision include all of the following EXCEPT (Points : 5)
fixed salaries that will not be incurred if the part is outsourced.
current direct material costs of the part.
special machinery for the part that has no resale value.
material-handling costs that can be eliminated.

7. (TCO 5) Constraints may include (Points : 5)
the availability of direct materials in manufacturing.
linear square feet of display space for a retailer.
direct labor in the service industry.
All of the above

8. (TCO 5) Jensen Company has relevant costs of $80 per unit to manufacture Part A. A current supplier offers to make Part A for $70 per unit. If capacity is constrained, the opportunity cost of buying Part A from the supplier is (Points : 5)
0.
$10,000.
$70,000.
indeterminable.

9. (TCO 3) The cost components of an air conditioner include $35 for the compressor, $11.50 for the sheet-molded compound frame, and $80 per unit for assembly. The factory machines and tools cost is $55,000. The company expects to produce 1,500 air conditioners in the coming year. What cost function best represents these costs? (Points : 5)
y = 1500 + 126.5X
y = 1,500 + 55,000X
y = 55,000 + 126.50X
y = 55,000 + 1,500X

10. (TCO 4) Sunk costs (Points : 5)
are future costs.
are past costs.
have future implications.
are relevant to all decisions.

Essays
1. (TCO 1) Trustme Vehicle Rental Corporation has two departments, Car Rental and Truck Rental. Central costs may be allocated to the two departments in various ways.
Car Rental Truck Rental
Number of Vehicles in fleet 700 300
Number of employees 150 50
Sales $1,500,000 $750,000
1. If administrative expense of $125,000 is allocated on the basis of number of employees, the amount allocated to the truck rental department would be
2. If administrative expense of $125,000 is allocated on the basis of number of employees, the amount allocated to the car rental department would be
3. If advertising expense of $150,000 is allocated on the basis of sales, the amount allocated to the car rental department would be
4. If advertising expense of $225,000 is allocated on the basis of sales, the amount allocated to the truck rental department would be
5. If the facility lease expense of $350,000 is allocated on the basis of vehicles in the fleet, the amount allocated to the truck rental department would be
(Points : 25)

2. (TCO 2) Favata Company has the following information:
Month Budgeted Sales
June $60,000
July 51,000
August 40,000
September 70,000
October 72,000

In addition, the cost of goods sold rate is 70% and the desired inventory level is 30% of next month's cost of sales.

Prepare a purchases budget for July through September. (Points : 25)

3. (TCO 3) As part of his job as cost analyst, Max Thompson collected the following information concerning the operations of the Machining Department:
Observation Machine-hours Total Operating Costs
January 4,000 $45,000
February 4,600 49,500
March 3,800 45,750
April 4,400 48,000
May 4,500 49,800

a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
b. If June's estimated machine-hours total 4,200, what are the total estimated costs of the Machining Department?
(Points : 25)

4. (TCO 5) Kirkland Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are:
Direct materials 0.60
Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Total $6.40
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.

a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much? (Points : 25)
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