FnEc 220, Practice Test 2: Answer Sheet

Name: _____________________________

I promise, on my honor, that I have neither given nor received improper aid on this test.

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Part 1:

1. Increases because some fixed MOH ends up in inventory.

2. Unit-level, batch-level, product line, facility support

3. {utilities, indirect materials},{setup, material movement},{design, engineering}, {property tax, general management} or anything else that’s correct

4. low volume specialty

5. Any of [easier/faster to build/maintain/gain agreement on models, integrates well with info systems, capture complexity with time equations, scales well, captures capacity utilization]

6. direct labor, MOH

7. large, long-term and illiquid

8. Screening, ranking

9. payback period and accounting rate of return (a/k/a simple rate of return, unadjusted rate of return)

10. Better coal is superior – cash outflow for the scrubber is all in first year

Part 2: (Please show calculations to support your answers.)

1. Weasley’s Wizarding Wheezes

a. Raw materials inventory 3,000 Cash 3,000

b. WIP inventory 900 Manufacturing overhead 100 Raw materials inventory 1,000

c. WIP inventory 1,500 Cash 1,500

d. WIP inventory 4,500 Manufacturing overhead 4,500

e. Ad expense 2,000 Cash 2,000

f. COGS 25 Manufacturing overhead 25

2. Anchor Glass a. Total DL = 50,000 x $0.50 + 1,000 x $20 = $45,000 Rate = $54,000 est. MOH / $45,000 DL = 1.2 or 120% Glasses = $0.25 + $0.50 + 1.2 x $0.50 = $1.35 Anchors = $10 + $20 + 1.2 x $20 = $54

b. Unit-level rate = 75% of 1.2 = 0.9 or 90% Batch-level pool = 25% of $54,000 = $13,500 Batches = 50,000 / 1,000 + 1,000 / 10 = 50 + 100 = 150 Batch rate = $13,500 / 150 = $90 per batch Glasses = $0.25 + $0.50 + 0.9 x $0.50 + $90 / 1,000 = $0.25 + $0.50 + $0.45 + $0.09 = $1.29 Anchors = $10 + $20 + 0.9 x $20 + $90 / 10 = $10 + $20 + $18 + $9 = $57 (As expected, products made in small batches were assigned too much MOH and products made in small batches too little under UBC.)

c. The point is to realize that fewer batches means a smaller batch-level pool. If it doesn’t go away when the batches do it’s not really batch-level overhead. The math is easy. Twice as big a batch means half the batch overhead per anchor. So new cost is $57 - $9 / 2 = $52.50.

FnEc 220, Practice Test 2

Name: _____________________________

Instructions: 1. Put your name on this sheet, in case we need to refer back to it while grading. 2. Put your name on the answer sheet and sign the honor code pledge before turning it in. 3. You may attach additional sheets if necessary to show your calculations. 4. All work on this test must be your own. Use of notes, text, etc. is not permitted. Any information taken from another student’s test is a violation of the honor code. 5. You may use a calculator for arithmetic, but no programming is permitted.

Part 1: Short answer and fill-in-the-blank: (5 points each)

1. Under GAAP, increasing inventory faster than sales generally (increases/decreases/has no effect on) income. (Choose the correct answer and then briefly explain.)

2. The hierarchical product cost model has four levels in which to classify overhead as part of an activity-based cost analysis. What are the four levels?

3. For each of the levels of overhead in the previous question, give an example of a cost that would be classified in that level.

4. If a company does an activity-based cost analysis, they will most likely find that __________ products have been systematically undercosted by the existing units-based costing system.

5. We discussed several advantages of time-driven activity-based costing (TDABC). Briefly describe one of them.

6. When using process costing, __________ and __________ are combined as “conversion costs.”

7. What are the three characteristics of capital budgeting decisions?

8. __________ is the process of determining whether a capital budgeting project meets a minimum threshold of acceptability while __________ is the process of prioritizing the acceptable projects.

9. What are the two undiscounted capital budgeting techniques we studied?

10. Suppose you are an electric utility which needs to reduce your emission from burning coal. You have two options: purchase a scrubber for $5 million which can be depreciated straight-line over its five year life OR purchase a higher grade of coal, which will cost $1 million per year. Which is the least cost solution, or are they equivalent? Briefly explain your answer.

End of Part 1

Part 2: Problems (5 points for each section)

1) Write a journal entry for each of the following transactions at Weasley’s Wizarding Wheezes (a manufacturer of charms and potions). • WWW applies overhead on the basis of direct labor with a 300% burden rate. • Assume all payments are cash – do not use payables or receivables.

a) Materials purchased: $3,000.

b) Materials released to production (90% direct, 10% indirect): $1,000.

c) Direct labor: $1,500.

d) Manufacturing overhead applied based on (c).

e) Advertising: $2,000.

f) Underapplied manufacturing overhead closed out: $25.

2) Anchor Glass (AG) manufactures boat anchors and drinking glasses. • The per unit cost of each product is as follows: Glasses Anchors Direct material $ 0.25 $ 10.00 Direct labor 0.50 20.00 • AG forecasts that during 2011 they will manufacture and sell 50,000 glasses and 1,000 anchors. They further estimate that they will incur $54,000 of manufacturing overhead during the year.

a) Calculate the per unit cost of each product if AG allocates manufacturing overhead on the basis of direct labor.

b) Suppose an activity based costing analysis determines that 75% of the current manufacturing overhead pool consists of unit level overhead while the remaining 25% is batch level. AG manufactures glasses in batches of 1,000 and anchors in batches of 10. Given this new information calculate a more accurate manufacturing cost for each product.

c) Calculate the product cost per anchor if AG produces them in batches of 20 instead of batches of 10.

End of Part 2