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Midterm

MGT223h5s Midterm Feb 2013 2713_Solutions(1).pdf

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Department
Management
Course
MGT223H5
Professor
Minlei Ye
Semester
Winter

Description
Answers for the Multiple Choice Questions 1 2 3 4 5 6 7 8 9 10 D B D B A B C B A B PART II SHORT-ANSWER QUESTIONS (11 marks) 1. What are the three major elements of product costs in a manufacturing company? What are prime costs and conversion costs? What is the difference between total manufacturing costs incurred and the cost of goods manufactured? (4 marks) Answer: The three major elements of product costs in a manufacturing company are direct materials, direct labour, and manufacturing overhead. Prime costs consist of direct materials and direct labour. Conversion costs consist of manufacturing overhead and direct labour Total manufacturing costs are the total costs of direct materials, direct labour and manufacturing overhead incurred in the current period for products that are both complete and partially complete at the end of the period. Cost of goods manufactured represents the direct materials, direct labour and manufacturing overhead costs for goods completed during the period. Cost of goods manufactured = Total manufacturing costs + beginning WIP – ending WIP. 2. What are unit-level, batch-level, product-level, customer-level, and organization-sustaining activities? What type of costs should not be assigned to products in an activity-based costing system and why? (7 marks) Answer: Unit-level activities are performed for each unit that is produced. For example (e.g.), providing power to run processing equipment. Batch-level activities are performed for each batch regardless of how many units are in the batch. E.g., the cost of setting up a machine for batch processing Product-level activities must be carried out to support a product regardless of how many batches are run or units produced. E.g., designing a product, Customer-level activities must be carried out to support customers regardless of what products or services they buy. E.g., sales calls, catalogue mailings Organization-sustaining activities are carried out regardless of the company’s precise product mix or mix of customers. E.g., heating the factory, cleaning executive offices, Organization-sustaining costs and the costs of idle capacity should not be assigned to products. These costs represent resources that are not consumed by the products. 2 Section III 4 Problems (70 marks) Problem 1 Cost Behavior (22 marks) Solutions: 1. Determine which expenses (or costs) are variable, fixed, or mixed. (4 marks) The cost of goods sold for this company is a variable cost and is $56 per unit. The Shipping Expense and the Salaries and Commissions Expense are mixed. Advertising expenses and other expenses are constant for each of the months shown and are therefore fixed. 2. Does the cost formula of a mixed cost always apply to all the historical data relating to this cost? Please explain why. What is the major disadvantage of the high–low method? (4 marks) No, because it uses only two data points to generate the cost formula and ignores other data. The major disadvantage of the high-low method is that it uses only the highest and lowest levels of activity points. If either of these points is an extreme value (well above or well below normal activity levels), the cost estimation model may not be accurate. 3. By use of the high-low method, separate each mixed expense into its variable and fixed components. State the cost formula for each mixed expense. (7 marks) Shipping expense: Variable rate = Change in costs/Change in units Variable rate = ($71,000 - $56,000)/(6,000 - 4,500) Variable rate = $10 per unit Fixed cost: High units: $71,000 - $10 6,000 = $11,000 Low units: $56,000 - $10 4,500 = $11,000 Cost formula for Shipping expense: Y= 11,000 + 10X 3 Salaries and commissions: Variable rate = Change in costs/Change in units Variable rate = ($180,500 - $143,000)/(6,000 - 4,500) Variable rate = $25 per unit Fixed cost: High units: $180,500 - $25 6,000 = $30,500 Low units: $143,000 - $25 4,500 = $30,500 Cost formula for Salaries and commissions: Y= 30,500 +25 X 4. Compute the company's total contribution margin for June. (7 marks) Total CM = Sales revenue – total variable expenses Total variable expenses include COGS, variable components of shipping expense, and variable components of salaries and Commission. Advertising expenses and other expenses are fixed costs. Total variable expenses: COGS: 294,000 Variable components of shipping expenses: 10 5,250=52,500 Variable components of Salaries and Commission: 25 5,250 = 131,250 Total variable expenses = $ 477,750 Total CM = $735,000 – 477,750 = $257,250 4 Problem 2 Process costing (13 marks) Solutions 1. Determine the equivalent units of production for the forming
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