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Midterm

MGAB03H3 Study Guide - Midterm Guide: Activity-Based Costing, Order Processing, Fixed Cost


Department
Financial Accounting
Course Code
MGAB03H3
Professor
G.Quan Fun
Study Guide
Midterm

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MGTB03 Managerial Accounting – Midterm Exam Review Questions
QUESTION 1
Saito Company manufactures basketballs. The company has a ball that sells for $25. At present,
the ball is manufactured in a small plant that relies heavily on direct labour workers. Thus,
variable costs are high, totaling $15 per ball. Last year, the company sold 30,000 of these balls,
and the fixed costs were $210,000.
Required:
1. Compute (1) the CM ratio and the break-even point in balls, and (b) the degree of operating
leverage at last year’s sales level.
2. Due to an increase in labour rates, the company estimates that variable costs will increase by
$3 per ball next year. If this change takes place and the selling price per ball remains constant
at $25, what will be the new CM ratio and break-even point in balls?
3. Refer to the data in (2) above. If the expected change in variable costs take place, how many
balls will have to be sold next year to earn the same operating income as last year?
4. Refer again to the data in (2) above. The president feels that the company must raise the
selling price of its basketballs. If Saito wants to maintain the same CM ratio as last year,
what selling price per ball must it charge next year to cover the increased labour costs?
5. Refer to the original data. The company is discussing the purchasing a new, automated
machine. The new machine would slash variable costs per ball by 40%, but it would cause
the fixed cost per year to double. If the new machine is purchased, what would be the
company’s new CM ratio and new break-even point in balls?
6. Refer to the data in (5) above.
a. If the new machine is purchased, how many balls will have to be sold next year to earn
the same operating income ($90,000) as last year?
b. Assume the new machine is purchased and that next year the company manufactures and
sells 30,000 balls (the same number as sold last year). Compute the degree of operating
leverage.
c. Determine the annual unit sales volume at which Saito would be indifferent between the
current and the new machines? If demand exceeds this amount, which machine should be
used?
1

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MGTB03 Managerial Accounting – Midterm Exam Review Questions
QUESTION 2
ComTech, Inc. manufactures 2 types of mini computers CT100 and CT200, and applies
overhead costs on the basis of direct labor hours. The anticipated overhead is $710,000.
Information about the company’s products follows.
CT100 CT200
Estimated production volume 2,500 3,125
Direct material per unit $30 $45
Direct labor per unit ($15/hr) $45 $60
Applied overhead ?
ComTech’s overhead of $710,000 can be identified with 3 major activities: order processing
($120,000), machine processing ($500,000), and product inspection ($90,000). These activities
are driven by the number of orders processed, machine hours worked, and inspection hours,
respectively. Data relevant to these activities follow.
CT100 CT200
Orders processed 350 250
Machine hours worked per unit 9.20 8.64
Inspection hours 4,000 11,000
Management is very concerned about declining profitability despite a healthy increase in sales
volume. The decrease in income is especially puzzling because the company recently undertook
a massive plant renovation during which new, highly, automated machinery was installed
machinery that was expected to product significant operating efficiencies.
Required:
1. Assuming use of direct labor hours to apply overhead to production, compute the unit
manufacturing costs of the CT100 and CT200 products if the expected manufacturing
volume is attained.
2. Assuming use of activity-based costing, compute the unit manufacturing costs of the CT100
and CT200 products if the expected manufacturing volume is attained.
3. ComTech’s selling prices are based heavily on cost. By using direct labor hours as an
application base, which product is over-costed and which product is under-costed?
Calculate the selling price for each product, if ComTech wants to have a markup of 50%.
4. Using bullet form, state the benefits and limitations associated with carrying out an activity-
based costing analysis.

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MGTB03 Managerial Accounting – Midterm Exam Review Questions
Question 3:
Regal Millwork, Ltd., produces reproductions of antique residential mouldings at a plant located
in Manchester, England. Since there are hundreds of products, some of which are made only to
order, the company uses a job-order costing system. On July 1, the start of the company's fiscal
year, inventory account balances were as follows:
Raw Materials £10,00
0
Work in Process £4,000
Finished Goods. £8,000
The company applies overhead cost to jobs on the basis of machine-hours. For the fiscal year
starting July 1, it was estimated that the plant would operate 45,000 machine-hours and incur
£99,000 in manufacturing overhead cost. During the year, the following transactions were
completed:
a. Raw materials purchased on account, £160,000.
b. Raw materials requisitioned for use in production, £140,000 (materials costing £120,000
were chargeable directly to jobs; the remaining materials were indirect).
c. Costs for employee services were incurred as follows:
Direct labour £90,00
0
Indirect labour. £60,00
0
Sales commissions £20,00
0
Administrative salaries. £50,00
0
d. Prepaid insurance expired during the year: £18,000 (£13,000 of this amount related to
factory operations, and the remainder related to selling and administrative activities).
e. Utility costs incurred in the factory: £10,000.
f. Advertising costs incurred: £15,000.
3
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