Mid Term Examination Spring 2020

Course : ACC 516 Managerial Accounting Full Mark : 100

Level : Masters Pass Mark : 60
Program : MBA Time : 3 hrs.

Read the instructions clearly before you start. Try to be direct, original and specific with your answers as far as
possible. Manage your time thoughtfully so that you are able to complete the paper within the set timeframe. The
figures enclosed in brackets indicate the full marks for the respective questions.

Answer ALL questions.

1. Exclusive Ltd. produces customized products for exclusive customers and hence employs job order costing.
The factory overhead is allocated on the basis of machine hours. Total factory overhead is estimated to
be NRs. 2,500,000 for the current fiscal year. Exclusive Ltd. estimates its total machine hours for the year
as 10,000 hours. The company produces two kinds of products – (a) Luxury and (b) Ultra Luxury.
The following information is for the month of March, 2020.
 Finished Goods Inventory on March 1, 2020 for Ultra Luxury was NRs. 55,000.
 Materials purchased during the month amounted to NRs. 250,000. Materials issued to Ultra Luxury
amounted to NRs. 70,000 and Luxury was issued materials of NRs. 55,000.
 During the month, the direct labor rate was NRs. 100 per hour. Labor and machine hours recorded for
the month of March, 2017 were as follows.
Job Direct Labor Hours Machine Hours
Ultra Luxury 230 250
Luxury 170 150
 During March, indirect material used was NRs. 7000, indirect labor costs incurred were NRs. 16,000,
insurance amounted to NRs. 10,500 (all relates to factory operations) and depreciation on factory
equipment amounted to NRs. 35,000.
 Ultra Luxury and Luxury were completed during March and transferred to finished goods. Ultra
Luxury was sold for NRs. 300,000 in March.
Requirements:
a. Show the workings for predetermined Overhead [2]
b. Prepare Job Cost Sheet for Ultra Luxury and Luxury [10]
c. Calculate Under-applied or Over-applied Overhead [3]

2. Hamro Life Insurance Company Ltd. sells life insurance policies. The company sells its products through
agents. Agents are paid a commission of 25 percent of the premium collected. Hamro Life Insurance
Company Ltd.’s budgeted income statement for 2020/21 is as follows.
Premium Collection 2,000,000,000
Policy Related Costs:
Variable 500,000,000
Fixed 250,000,000

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 Gross Margin 1,250,000,000
Selling and Admin Expenses
Commissions 500,000,000
Fixed Marketing Expenses 70,000,000
Fixed Administration Expenses 20,000,000
Net Operating Income 660,000,000
Less: Fixed Interest Expenses 40,000,000
Income Before taxes 620,000,000
Less: Taxes @ 25% 155,000,000
Net Income 465,000,000
After the profit plan was completed for the coming year, Hamro Life Insurance’s agents demanded that
the commissions be increased to 30 percent of the premium. This demand was the latest in a series of
actions that Krishna Sapkota, the company’s CEO, believed had gone too far. He asked Ram Kumar, the
most sales-oriented officer in his insurance company, to estimate the cost to Hamro Life Insurance of
employing its own sales force. Kumar’s estimate of the additional annual cost of employing its own sales
force, exclusive of commissions, has been presented in the following table. Under this arrangement, Sales
Personnel would receive a commission of 15 percent of the selling price in addition to their salary.
Salaries:
Sales Manager 100,000,000
Sales Personnel 50,000,000
Travel and Entertainment 20,000,000
Fixed Marketing Costs 130,000,000
Total 300,000,000
Requirements:
a. Calculate Hamro Life Insurance’s estimated break-even point in sales Rs. for 2020/21 under the
following conditions.
(i) If the events that are represented in the budgeted income statement take place. [4]
(ii) If the company employs its own sales force. [4]
b. If Hamro Life Insurance continues to sell through agents and pays the increased commission of 30
percent of the selling price, determine the estimated volume in sales Rs. for 2017/18 that would
be required to generate the same net income as projected in the budgeted income statement. [6]
c. Determine the estimated volume in sales Rs. that would result in equal net income for 2017/18
regardless of whether the company continues to sell through agents and pays a commission of 30
percent of the selling price or employs its own sales force. [6]

3. Cincinnati Cycle Company produces two subassemblies, JY-63 and RX-67, used in manufacturing
motorcycles. The company is currently using an absorption costing system that applies overhead based on
direct-labor hours. The budget for the current year ending December 31, 2019 is as follows:

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 CINCINNATI CYCLE COMPANY
Budgeted statement of gross margin for 2019
Particulars JY-63 RX-67 Total
Sales in units 5,000 5,000 10,000
Sales revenue 3,400,000 4,400,000 7,800,000
Cost of goods manufactured and sold:
Beginning finished-goods inventory 480,000 600,000 1,080,000
Add: Direct material 2,000,000 3,500,000 5,500,000
Direct labor 370,370 185,186 555,556
Applied manufacturing overhead* 1,088,050 544,026 1,632,076
Cost of goods available for sale 3,938,420 4,829,212 8,767,632
Less: Ending finished-goods inventory 480,000 600,000 1,080,000
Cost of goods sold 3,458,420 4,229,212 7,687,632
Gross margin (58,420) 170,788 112,368
*Applied on the basis of direct-labor hours
Machining : 849,056
Assembly : 433,962
Material handling : 113,208
Inspection : 235,850
Total : 1,632,076
Jay Rexford, Cincinnati Cycle’s president, has been reading about a new type of costing method called
activity-based costing. Rexford is convinced that activity-based costing will cast a new light on future
profits. As a result, Jack Canfield, the company’s director of cost management, has accumulated cost pool
information for this year shown on the following chart. This information is based on a product mix of
5,000 units of JY-63 and 5,000 units of RX-67.
Cost Pool Information for 2019
Cost Pool Activity JY-63 RX-67
Direct Labor Direct Labor Hours (per product line) 10,000 5,000
Material Handling Number of Parts (per unit) 5 10
Inspection Inspection Hours (per product line) 5,000 7,500
Machining Machine Hours (per product line) 15,000 30,000
Assembly Assembly Hours (per product line) 6,000 5,500
In addition, the following information is projected for the next calendar year, 2020.
Particulars JY-63 RX-67
Sales (in units) 5,100 4,900
Beginning Inventory, Finished Goods (in units) 800 600
Ending Inventory, Finished Goods (in units) 700 700
On January 1, 2020, Rexford is planning to increase the prices of JY-63 to $710 and RX-67 to $910.
Material costs are not expected to increase in 2018, but direct labor will increase by 8 percent, and all

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 manufacturing overhead costs will increase by 6 percent. Due to the nature of the manufacturing process,
the company does not have any beginning or ending work-in-process inventories.
Cincinnati Cycle Company uses a just-in-time inventory system and has materials delivered to the
production facility directly from the vendors. The raw-material inventory both at the beginning and the
end of the month is immaterial and can be ignored for the purposes of a budgeted income statement.
The company uses the first-in, first-out (FIFO) inventory method.
Requirements
a. Explain how activity-based costing differs from traditional product-costing methods. [2]
b. Using activity-based costing, calculate the total cost for 2020 for these activity cost pools –
Material Handling, Inspection, Machining, and Assembly. (For the total costs, round to the nearest
dollar.) Then, calculate the pool rate per unit of the appropriate cost driver for each of the four
activities. [8]
c. Prepare a table showing for each product line the estimated 2018 cost for each of these cost
elements – Direct Material, Direct Labor, Machining, Assembly, Material Handling, and Inspection.
(Round to the nearest dollar.) [5]
d. Prepare a budgeted statement showing the gross margin for Cincinnati Cycle Company for 2018,
using activity-based costing. The statement should show each product and a total for the company.
Be sure to include detailed calculations for the cost of goods manufactured and sold. (Round each
amount in the statement to the nearest dollar.) [5]

4. Cheesy Company processes and packages cream cheese. The following data have been compiled for the
month of April. Conversion activity occurs uniformly throughout the production process.

Work in process, April 1 : 15,000 units

Cost of Direct Material (100% complete) : 27,000

Cost of Conversion (20% complete) : 3,500
Balance in Work in Progress on April 01 : 30,500

Units Started during April : 110,000

Units Completed during April and transferred out to Finished Goods Inventory : 85,000

Work in process, April 30:

Direct material : 100% complete

Conversion : 25% complete

Costs Incurred during April:

Direct Material : 197,000

Conversion costs:

Direct Labor : 72,800

Applied Manufacturing Overhead : 95,600

Total Conversion Costs : 168,400

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 Requirements:
Prepare schedules to accomplish each of the following process-costing steps for the month of April. Use
both the Weighted Average as well as FIFO method of process costing.
a. Analysis of Physical Flow of Units [5]
b. Calculation of Equivalent Units [5]
c. Computation of Unit Costs [10]
d. Analysis of Total Costs [5]

5. You just started a summer internship with the successful management consulting firm of Kirk, Spock, and
McCoy. Your first day on the job was a busy one, as the following problem, related to Alderon
Enterprise, a client, was presented to you.
Alderon Enterprises is evaluating a special order it has received for a ceramic fixture to be used in
aircraft engines. Alderon has recently been operating at less than full capacity, so the firm’s management
will accept the order if the price offered exceeds the costs that will be incurred in producing it. You have
been asked for advice on how to determine the cost of two raw materials that would be required to
produce the order, as detailed below.
a. The special order will require 900 gallons of endor, a highly perishable material that is purchased as
needed. Alderon currently has 1,500 gallons of endor on hand, since the material is used in virtually
all of the company’s products. The last time endor was purchased, Alderon paid 11.00 per gallon.
However, the average price paid for the endor in stock was only 10.50. The market price for endor is
quite volatile, with the current price at 12.00. If the special order is accepted, Alderon will have to
place a new order next week to replace the 900 gallons of endor used. By then the price is expected
to reach 13 per gallon.
Comment on each of the cost figures mentioned in the preceding discussion. What is the real cost of
endor if the special order is produced? [5]
b. The special order would also require 1,400 kilograms of tatooine, a material not normally required in
any of Alderon’s regular products. The company does happen to have 1,900 kilograms of tatooine on
hand, since it formerly manufactured a ceramic product that used the material. Alderon recently
received an offer of 28,000 from Solo Industries for its entire supply of tatooine. However, Solo
Industries is not interested in buying any quantity less than Alderon’s entire 1,900-kilogram stock.
Alderon’s management is unenthusiastic about Solo’s offer, since Alderon paid 40,000 for the
tatooine. Moreover, if the tatooine were purchased at today’s market price, it would cost 22.00 per
kilogram. Due to the volatility of the tatooine, Alderon will need to get rid of its entire supply one
way or another. If the material is not used in production or sold, Alderon will have to pay 2,000 for
each 500 kilograms that is transported away and disposed of in a hazardous waste disposal site.
Comment on each of the cost figures mentioned in the preceding discussion. What is the real cost of
tatooine to be used in the special order? [5]

6.
Following are the balances of Inventories on
Particulars 1 July 2019 30 June 2020
Finished Goods 470,000 540,000
Work in Process 280,000 320,000
Material 180,000 270,000
During the year
Sales 1,500,000
Material Purchases 750,000
Labor Cost (5% indirect) 500,000

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 Indirect Material 4,500
Building 30,00,000
Factory Building Insurance 85,000
Factory Building Rental 270,000
Depreciation on Factory building 160,000
Depreciation on Office furniture 13,000
Depreciation on Factory equipment 26,000
Other Manufacturing Overheads 180,000
Selling and Administrative expense 300,000
Utilities 42,000
Cost of Idle time 8,000
Overtime Premium 4,000
Additional Information:
 Utilities cost is shared between factory and office on the ratio of 2:3.
You are required to prepare the schedule of Cost of Goods Manufactured for the year ended 30 June
2020. [10]

All the Best!!!

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