SOLUTION: Practice Midterm

ACCTG 523, B1, Winter 2022

PART A

1) Swansea Manufacturing currently produces 3,000 tires per month. The following per unit
data for 3,000 tires apply for sales to regular customers:

Direct materials $38

Direct materials 14
Variable manufacturing overhead 19
Fixed manufacturing overhead 20
Total manufacturing costs 91

The plant has capacity for 5,000 tires and is considering expanding production to 4,000 tires.
What is the total cost of producing 4,000 tires? (2 marks)

a) $364,000
b) $344,000
c) $209,000
d) $288,000
e) $264,000

Answer
Total fixed manufacturing OH = $20 x 3,000 units = $60,000
Total cost of producing 4,000 tires
= Total variable cost + Total Fixed cost
=[($38+ $14 + $19) × 4,000 units] + $60,000 = $344,000

2) Sherwood Company’s total overhead costs for past four months are presented:

Month Direct Labour Hours Total Overhead Costs ($)

September 100,000 390,000
October 80,000 340,400
November 135,000 485,600
December 140,000 483,200

Using the high-low method, the total overhead cost function of Sherwood Company can be
expressed as [Y=total overhead costs; X=direct labour hours] (2 marks)

a) Y= $129,200+$2.64*X
b) Y= $2.38+$150,000*X
c) Y= $150,000+$2.38*X
d) Y= $2.64+$129,200*X
e) Y = $129,200 +$2.38*X

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Answer
Highest activity 140,000 483,200

Lowest activity 80,000 340,400

b=(483,200-340,400)/(140,000-80,000)=$2.38/DLH

340,400=a+2.38*80,000, or a=340,400-190,400=$150,000

Y= $150,000+$2.38*X

3) The controller at TelCo is examining her books. She determines that at the breakeven point
of 5,000 units, variable costs total $4,000 and fixed costs total $7,000. Therefore, 5,001st
unit sold will contribute ________ to profits. (2 marks)

a) $0.80
b) $0.60
c) $1.40
d) $2.20
e) $2.0

Answer
Breakeven units = FC/CM per unit. CM per unit = $7,000/5,000 units = $1.40.

After FC is covered, sale of every unit contributes $1.4 (CM/unit) to the profit.

4) In 2018, First Dakota Company had operating income under absorption costing that was
$6,500 lower than its operating income under variable costing. The company sold 9,000
units in 2018, and its variable costs were $10 per unit, of which $6 was variable selling
expense. If fixed production overhead cost is $5 per unit under absorption costing every
year, how many units did the company produce in 2018? (2 marks)

a) 9,000 units
b) 10,300 units
c) 7,900 units
d) 7,700 units
e) 1,300 units

Answer

Total change in inventory = $6,500/$5 (FMOH/unit) = 1,300 units

Since operating income under absorption costing is lower than that under variable costing,
production< sales. Since sales = 9,000 units, production = 9000 -1,300 = 7,700 units.

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5) Products might consume overhead in different proportions due to (2 marks)

a) all of the answers provided

b) differences in product volume
c) differences in setup times
d) differences in product complexity
e) none of the answers provided

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 PART B

QUESTION 1

i) Write two reasons a consulting firm like Hammond and Jarrett might use a normal costing
system rather than an actual costing system. (4 marks)

a) Budgeted rates are normally used because actual costs may not be available until
sometime after a job is completed. Decisions about billing a client for services rendered
generally must be made immediately after the job is completed.

b) Also, actual costs may reflect short-run changes in the environment that may distort the
billing process. Budgeted costs are affected by weekly or monthly fluctuations and,
therefore, offer a stable comparison and assignment of costs throughout the accounting
cycle.

ii) Describe three signs that help indicate when ABC systems are likely to provide the most
benefits to a company. (3 marks)

a. The company uses large amounts of indirect resources in its production

processes,
b. The company has significant diversity in products, production processes, and
customers, and/or
c. The company faces significant competition, especially from more focused
competitors.

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QUESTION 2

Direct Materials
1/1/2020 Beginning DM inventory 348,000
purchase of DM 3,140,000
12/31/2020 End DM inventory 32,000 [i]
DM used 3,456,000

Direct Labour 1,698,800 [iii]

MOH
Leasing costs-plant 375,000
Depreciation-equipment 979,000
Property taxes-equipment 32,000
Fire insurance-equipment 16,200
Repairs and maintenance-
plant 25,000
Coolants & lubricants-
equipment 22,000
Indirect manufacturing labor 275,000
Total MOH 1,724,200 [ii]

Total Manufacturing Costs 6,879,000

1/1/2020 Beginning WIP inventory 107,000 [iv]

12/31/2020 End WIP inventory 96,000
COGM 6,890,000

1/1/2020 Beginning FG inventory 672,000

FG Available for sale 7,562,000 [ v]

End FG balance 562,100 [vi]

COGS 6,999,900

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QUESTION 3

i) Compute the predetermined overhead rate under the current method of allocation. (4 marks)

The company expects to work 45,000 direct labour hours during the current year, computed as
follows:

Product Gx01: 35,000 units x 1 hr. 35,000 hours

Product Gx02: 4,000 units x 2.5 hrs. 10,000 hours
Total direct labor hours 45,000 hours

Using these hours as a base, the predetermined overhead rate (POHR) using direct labor
hours would be: POHR = $450,000 / 45,000 DLHs = $10.00/DLH

ii) Using the predetermined overhead rate calculated in part (i), determine the unit costs of
Product GX02 and Product GX02 for the current year. (5 marks)

Using this overhead rate, the unit product cost of each product would be:

Product Product
Gx01 Gx02
Prime Costs (DM+DL) $22 $45
Manufacturing Overhead:
Product Gx01-one hour $10
Product Gx02-2.5 hours ___ $25
Total $32 $70

iii) Currant Corporation has spent some time reviewing its overhead costs. It has realized that
overhead costs can be attributed to four major activities. These activities and the amount of
overhead cost that could be attributable to each for the current year are given below:

Expected Activity
Estimated Product Product
Activity Cost Pools Overhead Costs Gx01 Gx02
Machine setups required $180,000 791 1,009
Purchase orders issued $40,200 500 100
Machine-hours required $111,800 5,600 11,600
Maintenance requests $118,000 976 912
issued
$450,000

Using an activity-based costing approach, determine the unit costs of Product GX01 and
Product GX02. Please show details to receive full marks. (11 marks)

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 Activity cost pool Overheads Gx01 Gx02 Total expected Rate ($)
($) activity
Machine setups 180,000 791 1009 1800 100/setup
Purchase orders 40,200 500 100 600 67/order
Machine hours 111,800 5600 11600 17200 6.5/hour
Maintenance requests 118,000 976 912 1888 62.5/request
450,000

The overhead cost attributable to each product is (only have to show product GX02):

Activity costs Gx01 Gx02

(=activity rate X actual activity)
Machine setups 79,100 100,900
Purchase orders 33,500 6,700
Machine hours 36,400 75,400
Maintenance requests 61,000 57,000
Total MOH 210,000 240,000

MOH per unit is

= $210 ,000 / 35,000 units = $6.00 per unit for Product Gx01

= $240,000 / 4,000 units= $60.00 per unit for Product Gx02

Using activity-based costing, the unit product cost of each product would be (only have to show
product B):

Unit costs Gx01 Gx02

Prime costs (DM+DL) 22 45

MOH 6 60
$28 $105

iv) Consider product Gx02. Using specific information (quantitative and qualitative) provided in
the question, explain why the product has different costs under the traditional costing system
and the ABC system. (6 marks)

The reasons for Product GX02 having different costs under the traditional costing system and
the ABC system are as follows:

a) Product cost difference under different costing systems arise from the difference in MOH
applied under two approaches. Compared to the traditional costing approach, MOH

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 under ABC approach decreases by 40% for GX01 but increases by 140% for GX02. [see
Table A]

b) Each product’s relative OH consumption with respect to the units produced differs
substantially under ABC and traditional costing system. For example, although Gx02
comprises only 10% of total production, this product consumes 53% of the total
overhead costs (240,000/450,000=53%). In contrast, under traditional costing system,
Gx02 is allocated only 23% of total overhead costs (10,000/45,000 DLH=22%). [See
Table B].

c) A very large portion of total MOH are non-unit-based activities (machine set ups,
purchase orders and maintenance requests) = 338,200/450,000= 75% [see Table C]

TABLE A

MOH MOH

Under Traditional Costing under ABC approach

approach

GX01 $10 $6 Decrease by 40%

GX02 $25 $60 Increase by 140%

TABLE B

Number of units MOH under ABC MOH under traditional

(35,000:4,000) (210,000: 240,000) costing (350,000:100,000)
GX01 90% 47% 78%
GX02 10% 53% 22%
100% 100% 100%

TABLE C

Unit-based Non-unit based

activity cost activity cost Total
GX01 36,400 173,600 210,000
GX02 75,400 164,600 240000
111,800 338,200 450,000
25% 75% 100%