Instructor Name

Score on Part 1 NAU ID#

Score on Part 2

Total Score

ACCOUNTING 256

MANAGEMENT ACCOUNTING

FALL SEMESTER, 2008

EXAMINATION #1

VERSION 01

INSTRUCTIONS:

1. Be sure to enter the following information on your computer answer sheet by filling in bubbles and letters where appropriate:

NameNAU ID NumberSection NumberVersion NumberAnswers to all multiple-choice questions

2. Enter your name and NAU ID number on the top of this page.

3. Please circle your answers to the multiple-choice questions on the exam in pencil as well as filling in the bubbles on the computer answer sheet. This helps you as you are reviewing the exam. Grading of the multiple-choice questions will be based exclusively on your computer answer sheet. Failure to make clean erasures may be scored as incorrect answers - so make sure you erase completely.

4. Do not tear this exam apart.

5. You will not be allowed to leave the room and come back once you have begun the exam.

6. Make sure your exam contains 12 pages (including this page).

7. Please take caps with bills off or turn them backwards.

8. If an assumption is required, make a logical and reasonable assumption.

9. Round all computations to the nearest cent (i.e., two decimal places).

Clearly show and label your work on all problems. No partial credit can be awarded if your work is not legible.

PART 1 – MULTIPLE-CHOICE (90 total points)

For each of the following questions choose the BEST possible answer. Each question is worth 3 points.

1. Which of the following would be classified as an internal failure cost on a quality cost report? a. Systems development. b. Returns and allowances arising from quality problems. c. Cost of scrap. d. Final product testing and inspection.

2. If manufacturing overhead is underapplied, then before closing to COGS:a. operating income will be over stated.b. operating income will be under stated.c. cost of goods sold will be over stated.d. Work in process inventory will be overstated.

3. An increase in appraisal costs in a quality improvement program would usually have the following initial effects on external failure costs:

a. Increaseb. Decrease

c.Neither increase nor decrease

d. Cannot be determined

4. Organization-sustaining activities are carried out regardless of how many units are made, how many batches are run, or how many different products are made.

a. True.b. False.

5. Which of the following would be an appropriate cost driver for the costs associated with ordering raw materials for a manufacturing firm?

a. Number of inspections completed.b. Number of purchase orders.c. Number of different types of parts maintained in inventory.d. Number of different types of products produced.

6. Manufacturing overhead includes: a. all direct material, direct labor and administrative costs. b. all manufacturing costs except direct labor. c. all manufacturing costs except direct labor and direct materials. d. all selling and administrative costs.

7. Process costing would best be used for all of the following products except:a. Lumberb. Aluminum cansc. Plastic bowling pinsd. Pencilse. Wedding cakes

2

8. Providing the power required to run production equipment is an example of a:a. Unit-level activity.b. Batch-level activity.c. Product-level activity.d. Organization-sustaining activity.e. None of the above.

9. Relative to job-order costing (i.e., traditional costing) Activity-based costing (ABC):a. tends to increase the number of cost drivers used to assign costs.b. uses a single cost pool.c. usually increases the costs assigned to low-volume, complex products.d. is used in process costing, but not job-order systems.e. a. and c.

10. On which of the following documents would direct labor be recorded in job-order costing?a. Job cost sheetb. Material requisitionsc. WIP inventory accountd. Manufacturing overhead accounte. Both a. and b.

11. One consequence of a change from a push to a properly implemented pull production system can be: a. an increase in work in process inventories. b. a decrease of throughput time.c. an increased mismatch between what is produced and what is demanded by customers. d. an increase in raw materials inventories.

12. All of the following were discussed in your text as important to managing business processes except:a. Theory of constraintsb. Just-in-time inventory controlc. Lean manufacturingd. Six Sigma improvement techniquese. All of the above were discussed.

13. In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:

a. overstate period expenses on the income statement. b. overstate the cost of goods sold on the income statement. c. understate the cost of goods manufactured. d. have no effect on the cost of goods manufactured.

14. Avery Co. uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. For the month of October, Avery’s estimated manufacturing overhead cost was $300,000 based on an estimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual direct labor-hours totaling 110,000 for the month. How much was the overapplied or underapplied overhead?

a. $25,000 overappliedb. $25,000 underappliedc. $5,000 overappliedd. $5,000 underapplied

3

15. The annual insurance premium for the factory building would be a: a. fixed cost, period cost, and indirect cost with regard to units of product. b. fixed cost, product cost, and direct cost with regard to units of product. c. variable cost, product cost, direct cost with regard to units of product. d. fixed cost, product cost, indirect cost with regard to units of product.

16. Consider a manufacturing plant with two processes, where the output from the first process goes directly into the input of the second process. The number of units that can be processed in the first process is 12 per day and the number of units that can be processed in the second process is 10 per day. If both processes operate at full capacity, which of the following statements is true?

a. Over time, inventory levels will increase at the end of the first process.b. Over time, inventory levels will increase at the end of second process.c. Increasing the capacity of the first process will increase the capacity of the entire plant.d. Increasing the capacity of the second process to 11 units will increase the level of inventory.e. None of the above is true.

17. In a manufacturing firm which of the following accounts would be comprised at least partially of direct materials costs?

a. Wages payableb. Work in processc. Manufacturing overheadd. Finished goodse. b. and d.

18. Indirect materials is usually classified as a(n):a. period costb. product costc. prime costd. administrative cost

19. Darrow Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. Last year, the company worked 10,000 direct labor-hours and incurred $80,000 of actual manufacturing overhead cost. If overhead was underapplied by $2,000, the predetermined overhead rate for the company for the year must have been:

a. $7.80b. $8.00c. $8.20d. $8.40

20. Which of the following would NOT usually be considered a period cost?a. Property taxes on factory buildingb. Direct materialsc. Indirect labord. Advertisinge. a., b. and c.

21. What management activity occurs when managers ensure that a plan is actually carried out?a. Planningb. Controllingc. Directing and motivatingd. Regulating

4

22. Which of the following production costs, if expressed on a per unit basis, would be most likely to change significantly as the production level varies?

a. Direct materials. b. Direct labor. c. Fixed manufacturing overhead. d. Responses a. and b. are both correct.

23. If underapplied manufacturing overhead is closed to Cost of Goods Sold, the journal entry would include a debit to:

a. Cost of Goods Soldb. Manufacturing Overheadc. Finished Goodsd. Work-in-Process Inventory

24. When replacing an old machine with a newer model, the depreciation on the old machine is a(n)a. relevant cost.b. sunk cost.c. opportunity cost.d. period cost.

25. Decreasing automation in the factory while increasing direct labor would, in general, result:a. in an increase in the variable costs of production.b. in an increase in the fixed costs of production.c. in a decrease of variable costs as a proportion of total costs.d. b. and c.

26. Which of the following production costs, if expressed as a total, would be most likely to increase as the production level increases?

a. Indirect materials.b. Direct labor.c. Fixed manufacturing overhead.d. Responses a. and b. are both correct.

27. A predetermined overhead rate is used to assign overhead costs to a job because:a. waiting until the period ends to assign costs will not result in accurate overhead allocations.b. actual manufacturing overhead costs consist of many different items, all of which have no relationship to the units produced.c. it provides more timely cost information for decision making.d. overhead costs are impossible to assign at the end of the period.

28. On December 1, Mogro Corporation had $26,000 of raw materials on hand. During the month, the company purchased an additional $60,000 of raw materials. During December, $62,000 of raw materials were requisitioned from the storeroom for use in production. The debit entry(ies) posted to the Raw Materials account for the month of December total:

a. $26,000b. $86,000c. $60,000d. $62,000

5

29. A key difference between Activity-based costing (ABC) and Job-order is that ABC uses a greater number of measures to allocate indirect costs.

a. True.b. False.

30. Thread used in the production of mattresses would be classified as a direct material and as manufacturing overhead.

a. True.b. False.

6

PART 2 - PROBLEMS (110 total points)

1. (5 points) You are a recent graduate in accounting and you have just been hired to work in the accounting department of a large company. Your supervisor has asked you to prepare a report detailing how a proposed accounting regulation will affect your company’s reporting of stock option expenses. This is not a topic that you have studied in depth in your coursework and the proposed regulation is very technical.

a. What standard(s) of professional ethics covers this situation?

b. How should you respond to your supervisor?

c. What risks do you face if you accept the assignment?

2. (15 points) Consider each of the costs in the first column of the table below for an automobile manufacturer. Complete the table by placing an “X” under each heading that identifies the cost involved (each row should have only one “X”).

Cost ItemDirect

MaterialsDirect Labor

Manufacturing Overhead

Period Cost

Steel used in automobilesAssembly department employee wagesUtility costs used in executive buildingTravel costs used by sales personnelCost of shipping goods to customersProperty taxes on assembly plantGlass used in automobilesMaintenance supplies for assembly plantDepreciation on assembly plantPlant manager’s salaryCEO’s salaryDepreciation on executive buildingSalary of marketing executiveTires installed on automobilesAdvertising

7

3. (21 points) Prahm Inc. has provided the following data for August:

Raw materials, beginning balance $19Work in process, beginning balance $33Finished Goods, beginning balance $52

Transactions:(1) Raw materials purchases on account $67(2) Raw materials used in production (all direct materials) $78(3) Direct labor incurred in production $77(4) Manufacturing overhead costs incurred on account $64(5) Manufacturing overhead applied $71(6) Cost of units completed and transferred from Work in Process to Finished Goods $255(7) Finished goods with a cost of $294 were sold for $500 in cash(8) Any overapplied or underapplied manufacturing overhead is closed to Cost of Goods Sold

Record in the T-accounts below the beginning balances and each of the transactions listed above. Place the reference number for each transaction next the entry in the accounts. Finally, determine the ending balances of the inventory accounts.

Raw Materials Inventory Cash Accounts Payable

Wages Payable WIP Inventory Finished Goods Inventory

Manufacturing Overhead Cost of Goods Sold Sales Revenue

8

4. (30 points) Bullie Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, D31X and U75X, about which it has provided the following data:

D31X U75XDirect materials per unit $29.20 $47.40Direct labor per unit $1.10 $23.10Direct labor-hours per unit 0.10 2.10Annual production 35,000 15,000

The company’s estimated total manufacturing overhead for the year is $1,147,650 and the company’s estimated total direct labor-hours for the year is 35,000.

The company is considering using activity-based costing to determine its unit product costs. Data for this proposed activity-based costing system appear below:

Activities and Activity MeasuresEstimated TotalOverhead Cost

Total ofActivity Measures

Assembling products (direct-labor hours) $   140,000 35,000 direct labor hrsPreparing batches (number of batches) 241,150 1,855 batchesAxial milling (machine hours)         766,500 2,555 machine hours Total $1,147,650

Activity measures used by each product:D31X U75X

Direct-labor hours 3,500 31,500Number of batches 560 1,295Machine hours 1,540 1,015

a. Calculate the activity rates for each of the three activity cost pools.

b. Determine the manufacturing overhead cost in total and per unit for the D31X ONLY under the activity-based costing system.

9

c. Calculate the predetermined overhead rate under the traditional costing system.

d. Determine the manufacturing overhead cost in total and per unit for BOTH of the company’s products under the traditional costing system.

e. Assume the unit cost under ABC for one unit of U75X is $39.92. Given your answers to the questions above, which of the two products is undercosted under the traditional system (circle your answer):

D31X U75X

10

5. (12 points) Scanlon Company has a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The following estimates were used in preparing the predetermined overhead rate for the most recent year:

Machine-hours 95,000Manufacturing overhead cost $1,710,000

The company’s cost records revealed the following actual cost and operating data for the year:

Machine-hours 75,000Manufacturing overhead cost $1,687,500Amount of applied overhead in inventories at year-end:Work in process $337,500Finished goods $253,125Amount of applied overhead in cost of goods sold $759,375

a. Compute the company’s predetermined overhead rate for the year

b. Calculate the amount of overhead applied for the year.

c. Calculate the underapplied or overapplied overhead for the year and indicate if the amount is underapplied or overapplied.

d. Was cost of goods sold for the year overstated or understated before adjusting for the over- or underapplied overhead (circle your answer):

Overstated Understated

11

6. (27 points) Nish Corporation has provided the following data for the month of April:Sales $220Raw materials purchases $50Direct labor cost $23Manufacturing overhead cost (actual MOH = applied MOH) $59Selling expense $18Administrative expense $43

Inventories: Beginning EndingRaw materials $26 $35Work in process $18 $22Finished goods $42 $29

a. Prepare a Schedule of Cost of Goods Manufactured in good form for April.

b. Prepare an Income Statement in good form for April.

12

Accounting 256Exam I, Fall Semester, 2008 – Key Version 01

Multiple-choice:

1. c 6. c 11. b 16. a 21. b 26. d2. a 7. e 12. e 17. e 22. c 27. c3. b 8. a 13. b 18. b 23. a 28. c4. a 9. e 14. c 19. a 24. b 29. a5. b 10. a 15. d 20. e 25. a 30. b

P1. a. 2pts: Competence and integrity. b. 2 pts: Discuss the situation with your supervisor and explain that you do not feel comfortable with your current skill set but that you would like to learn the necessary information and would be pleased to work on the project with someone who possesses more experience. c. 1 pt: You could fail to complete the analysis correctly and embarrass yourself and the organization. This would not be a good career move.

P2. 1 point for each correct matching:

Cost ItemDirect

MaterialsDirect Labor

Manufacturing Overhead

Period Cost

Steel used in automobiles XAssembly department employee wages XUtility costs used in executive building XTravel costs used by sales personnel XCost of shipping goods to customers XProperty taxes on assembly plant XGlass used in automobiles XMaintenance supplies for assembly plant XDepreciation on assembly plant XPlant manager’s salary XCEO’s salary XDepreciation on executive building XSalary of marketing executive XTires installed on automobiles XAdvertising X

P3. 1 point for each entry and 1 point for ending balances

Raw Materials Inventory Cash Accounts Payable

BB $19 $78 (2) (7) $500 $67 (1)

(1) 67 64 (4)

EB $ 8

Wages Payable WIP Inventory Finished Goods Inventory

BB $33 BB $52

$77 (3) (2) 78 $255 (6) (6) $255 $294 (7)

(3) 77 EB $13

(5) 71

EB $4

13

Manufacturing Overhead Cost of Goods Sold Sales Revenue

(4) $64 $71 (5) (7) $294 $500 (7)

$7 (8)

(8) $7

P4. a. (3 pts for each rate):Estimated Overhead

CostTotal Expected

Activity Activity RateAssembling products $140,000 35,000 DLHs $4 per DLHPreparing batches $241,150 1,855 batches $130 per batchAxial milling $766,500 2,555 MHs $300 per MH

b. (10 pts) Overhead cost for D31XActivity Rate Activity ABC Cost

Assembling products $4 per DLH 3,500 DLHs $  14,000Preparing batches $130 per batch 560 batches 72,800Axial milling $300 per MH 1,540 MHs  462,000Total $548,800Annual production 35,000Manufacturing overhead cost per unit $15.68

c. (3 pts) Predetermined overhead rate = $1,147,650 ÷ 35,000 DLHs = $32.79 per DLH

d. (3 pts for each product):D31X U75X

Direct labor-hours 0.10 2.10Predetermined overhead rate per DLH $32.79 $32.79Manufacturing overhead cost per unit $3.28 $68.86

Total (35,000 units; 15,000 units) $114,800 $1,032,900

e. (2 pts): D31X

P-5 a. (3 pts) $1,710,000/95,000 MHs = $18 per MH

b. (3 pts) Applied overhead: 75,000 X $18/MH = $1,350,000

c. (4 pts) The amount of underapplied/overapplied overhead is:

Actual overhead $1,687,500Applied overhead (75,000 X $18/MH)   1,350,000 Underapplied overhead $  337,500

d. (2 pts) Understated.

14

P-6 (Approximately 1 pt per line item and 4 pts for form)

a. Schedule of Cost of Goods ManufacturedDirect materials:

Beginning materials inventory........................................... $26Add: Purchases of raw materials........................................   50 Raw materials available for use......................................... 76Deduct: Ending raw materials inventory............................   35

Raw materials used in production.......................................... $  41Direct labor............................................................................ 23Manufacturing overhead........................................................         59 Total manufacturing costs...................................................... 123Add: Beginning work in process inventory...........................         18

141Deduct: Ending work in process inventory............................         22 Cost of goods manufactured.................................................. $119

b. Income StatementSales....................................................................................... $220Cost of goods sold:

Beginning finished goods inventory.................................. $ 42Add: Cost of goods manufactured......................................   119 Goods available for sale..................................................... 161Deduct: Ending finished goods inventory..........................     29   132

Gross margin.......................................................................... 88Selling and administrative expenses:

Selling expenses................................................................. 18Administrative expenses.................................................... 43       61

Net operating income............................................................. $   27

15