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Huc Acc201-Revision Questions May Intake, 2022
Huc Acc201-Revision Questions May Intake, 2022
REVISION QUESTIONS
QUESTION 1
The ABC Company supplies the DEF Company with 45 000 units of part A-123 per year.
The DEF Company's estimated ordering costs are $200 per order and estimated carrying
costs are $2 per unit per year.
ABC sets up and runs the component each time DEF orders it, incurring a setup cost of
$2 000 each time. ABC prefers not to carry an inventory of part A-123 because of space
limitations, and its managers have given some thought to offering DEF quantity discounts
if it would order larger amounts less frequently.
Required:
(a) If the DEF Company uses an EOQ model, what quantity would it have been
accustomed to order?
(b) Calculate the largest quantity discount per unit that ABC could offer DEF to induce
them to order only twice per year and leave ABC with the same income that it
currently earns.
(c) Determine whether the discount you calculated in (b) would be large enough to
induce DEF to buy only twice per year, assuming that any discount would not affect
DEF's carrying cost of $2 per unit per year.
(d) Suppose that the DEF Company engages a new manager who is opposed to rational
techniques such as the EOQ model because of the "information demands of rational
decision models." He prefers to follow simple heuristic methods and advocates a
policy that "inventory should be ordered 4 times a year."
Calculate the effect of such a policy on DEF's annual inventory costs (excluding
purchase outlay) for part A-123 compared with using the order quantity calculated in
part (a).
ANSWER:
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ABC current set-up costs = O(D/Q) = $2000(45 000/3000) = $30 000
DEF's annual inventory costs (excl purchase outlay) ordering twice per year
Therefore DEF would incur additional costs of $22 900 - $6000 = $16 900
2
If inventory is to turn over 4 times per year the order quantity is 1/4 of annual
demand, ie. 1/4(45 000) = 11 250
Annual IC
Therefore adopting the new manager's policy would cost DEF an additional $6050
per year. [$12 050 - $6000]
QUESTION 2
Industrial Drums Ltd produces standard size containers used in industry. The price of containers
was set by adding a margin to costs as follows:
Direct materials and direct labour are considered variable costs. The factory services are
considered to be all fixed costs and the allocation rate is established by dividing the budgeted
expense costs of $250 000 by the plant capacity of 100 000 direct labour hours. For the past few
years production has averaged 40 000 units of product, but it is expected that full utilisation will
be achieved in the coming year. The price of $95 is well established in the industry.
In quoting for a government tender which called for 10 000 special containers, the cost
accountant estimated the direct materials cost to be $5.00 lower than the standard product, but
that labour would be about the same. he therefore quoted a price of $90.00 per unit.
The technical sales manager thought that the chances of winning the contract would be prejudiced
by the method of applying the mark-up on the special order. In the manufacture of the standard
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product the mark-up represented 2 hours at $10 per hour, or 26.67 per cent of factory cost. in the
special order the cost accountant had used the same base, but the margin now represented about
28.6% of factory cost. The sales manager maintained that the mark-up should be reduced to
something below $20.
Required:
(a) Comment on the general method employed in setting prices.
(b) Indicate whether you agree or disagree with the inclusion of factory services and the $20
mark-up in computing the unit price on the special contract. Justify your answer with
relevant calculations.
(c) Would it have made any difference in the pricing decision if the excess capacity could not be
used in producing the standard product, and if so, how should the price have then been
determined?
ANSWER:
(a) Perhaps the established price of $95 was erroneously set. The method used may
produce profits, but may not maximise them. However, given an established price, the
company procedure for quoting prices on special jobs is certainly reasonable and
acceptable.
(b) The company is right in including overhead (factory services) and the $20 mark-up, and
the sales manager’s argument is irrelevant. The most important factor is the market
situation. The idle capacity can be used to produce and sell 10,000 standard products at
a contribution or incremental income of $40 ($30 variable income + $10 factory services)
for each unit. The percentage mark-up is greater because the variable cost on the
special order is lower. The following illustrates the situation:
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(c) If the idle capacity has no alternative use and if the special order price will have no effect
on the price of the standard product, then the company should bargain for as high a
price as possible, using $60 as the minimum price below which it will not go.
QUESTION 3
Daily demand is stable and 12 000 units are sold per year
Required:
(b) Calculate the annual cost saving if the order size calculated in (a) were adopted.
(d) Suppose that the supplier became less reliable and order lead time took on the following
characteristics:
days frequency
3 0.2
4 0.4
5 0.3
6 0.1
How many times per year would a stockout be likely to occur if the order size and re-order
point calculated in (a) and (c) were used?
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(e) Given the information in (d) what re-order point would need to be adopted to avoid having
any stockouts, and what would be the extra annual cost involved?
ANSWER:
(b) $300
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(c) 192 units
(d) 4 times
On average, lead time would exceed 4 days 40% of the time. With order size of
1,200 and annual turnover of 12,000, 10 orders per year would be required. The
likely result would be 0.4(10) or 4 stockouts per year.
To avoid stockouts orders would have to be placed when stock level was sufficient
for 6 days, ie. 6(48) or 288 units.
QUESTION 4
Rollergame Ltd is planning the manufacture of a new roller bearing, part number NL86325.
Company plans are formulated on the basis of 250 working days per year. For inventory
management purposes the following estimates relative to the new product have been prepared:
(i) Daily sales in units Probability
40 0.5
50 0.3
60 0.1
70 0.1
(ii) Annual carrying cost per unit $0.40.
(iii) Set-up time to manufacture the part is 6 hours for each of the five machines involved in the
process, and the operators of these machines who are paid at an hourly rate of $5.89 effect
all necessary adjustments. Manufacturing overhead for the department is charged at the rate
of $8.00 per machine hour, for every hour that a machine is committed to a particular job
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irrespective of whether the machine is actually running or not. Other costs associated with a
stock replenishment order for the part are not significant and may be ignored.
(iv) Depending on the work load of the department at the time a requisition for replenishment of
the stock of part number NL86325 is issued from the finished goods store, the elapsed time
until the new stock is received could be as low as 15 days or as high as 20 days with the
following probability estimates:
(v) Estimated unit cost for part number NL86325, exclusive of set-up costs, is $3.00.
(vi) The part can be manufactured at the rate of 1000 per day by the production department.
Required:
(a) Calculate the economic size for each production run.
(b) When should the requisition for replenishment of stock of the part be issued from the
finished goods store (based on expected values)?
(c) How would your answer to (b) change to take account of the following comments by the
chief executive?:
'I am prepared to accept stock-out situations that arise because sales during the time taken to
meet a requisition order are higher than usual, but if sales do occur at the expected level, you
people should be able to order in such a way that at least 9 times out of 10 the new batch will
be on the shelves before a stock-out occurs. At the same time, you know we don't want to be
holding larger stocks than necessary.'
(d) What is the extra annual cost of using the re-order point calculated in (c) in preference to that
calculated in (b)? Explain.
(e) If the re-order point calculated in (c) were used, what rate of stock turnover would be
achieved for this part?
ANSWER:
8
= 30 x $13.89
= $416.70
K = $0.40 (given)
= 17 days
= 912 units
(d) $38.40
Whilst Q/2 might be a reasonable expression of the average holding of stock using
the reorder point of 816, the more conservative policy regarding stockouts amounts
to holding a safety stock of 912-816 or 96 units. The average holding would be
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better represented by Q/2 + 96. Therefore the extra annual cost is 96K = 96(0.4) =
$38.40.
As stated in (d) the average holding of stock using 912 as the reorder point is Q/2 +
96 = 5000/2 + 96 = 2596
QUESTION 5
Direct labor 15
Markup (50%) 62
Required:
c. Which costs are relevant for making the decision regarding this one-time-only special
order? Why?
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d. For Axle and Wheel Manufacturing, what is the minimum acceptable price of this one-
time-only special order?
e. For this one-time-only special order, should Axle and Wheel Manufacturing consider a
price of $100 per unit? Why or why not?
ANSWER
a. $124
c. Relevant costs for decision making are those costs that differ between alternatives,
which in this situation are the incremental costs. The incremental costs total $72 = Variable
costs ($33 + $15 + $24).
d. The minimum acceptable price is $72 = Variable costs ($33 + $15 + $24), which are the
incremental costs in the short term.
e. Yes, because this price is greater than the minimum acceptable price of this special
order determined in (d).
QUESTION 6
Squash Equipment Pty Ltd manufactures an economy squash racquet. The following is
an extract from last year’s reported results:
Required:
(a) What was the selling price last year?
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(d) The company is considering raising its selling price this year to $115. At this price its
sales volume is expected to fall by 10%. The company’s cost structure remains
unchanged. Should it raise the price to $115? What is the effect on profit?
(e) If the company wishes to maintain its sales volume of 40 000 units it must reduce
its selling price this year to $95. The manager insists on maintaining the 16% target
rate of return on investment. If fixed costs cannot be reduced, what is the target
variable cost per unit required to meet the target rate of return, given the proposed
selling price of $95?
ANSWER:
(a) $108
ROI = P/I
P = ROI *I= 0.16*$2M= $320,000
TC= $100*40,000= $4,000,000
SALES = TC + P = $4,320,000
SP = $4.32M/40,000 = $108.00
(b) 8%
(c) $72
1.5VC=SP
VC=SP/1.5= $108/1.5= $72.00
(d)
(E )
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REDUCED SP $95
REDUCED INVESTMENT $1,600,000
TARGET PROFIT [16%x$1.6M] $256,000
SALES REVENUE [$95*40,000] $3,800,000
TC = SALES - PROFIT $3,544,000
TVC=TC-FC $2,424,000
VC PER UNIT $60.60
QUESTION 7
Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buy the
motors from Jinx Motors for $1,250 each. Southwestern's plant can manufacture the motors
for the following costs per unit:
Total $1,300
If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead applied
will not be avoided.
Required:
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ANSWER:
Variable costs:
Total 950,000
∙ Quality controls:
∙ Delivery:
∙ Reputation:
∙ Term:
∙ Facilities:
QUESTION 8
Suntan Oils manufactures a variety of suntan lotions and creams. All of its current
products are marketed in PVC containers with a single hole under the cap. The contents
are accessed by shaking and/or squeezing the container.
Suntan Oils has been concerned by the prevalence of skin cancer in the community, and
plans to release a new product, Sunstop, which would completely screen out all injurious
rays of the sun. They wish to market it, however, in a squirter bottle with a trigger,
because its protection is better if it is sprayed on, rather than spread on by hand.
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Sunstop will be sold by the manufacturer in 1-dozen lots for $80. The following costs
have been estimated, based on an annual volume of 5000 dozen:
Per Dozen
Direct materials $30
Direct labour 20
Manufacturing overhead 10
Total $60
Suntan Oils has excess capacity to produce Sunstop. The manufacturing overhead charge
includes an allocation of $25 000 of current fixed overhead.
Required:
(a) Should Suntan Oils make or buy the squirter container?
(b) The container manufacturer is prepared to give a discount of 16.67% on all container
sales in excess of 5000 dozen in any one year. At what volume of annual production
of Sunstop would Suntan Oils be indifferent between making and buying the squirter
containers?
ANSWER:
Direct labour 20
Variable overhead 5
15
Total $55
This is 50 cents per dozen less than the cost of buying squirter containers.
Therefore Suntan Oils should make the container.
0.5x = 5000
x = 10 000.
QUESTION 9
A restaurant is deciding whether it wants to update its image or not. It currently has a cozy
appeal with an outdated decor that is still in good condition, menus and carpet that need to be
replaced anyway, and loyal customers.
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c. and qualitative considerations.
ANSWER:
b. Costs that are not differential include replacing the menus and the carpet since they need to
be replaced whether the image is updated or not.
c. Qualitative considerations include whether the restaurant will lose that cozy appeal it
currently has, if the restaurant needs to be closed for renovations it may result in loss of
customers, and new customers may not be the type of customer they want to attract.
QUESTION 10
Mitchell Company needs 10 000 units of a certain part to be used in its production cycle. The
following are the unit costs which would be incurred in making the part:
57.00
Supplica Company would sell Mitchell an equivalent part for $53.00 per unit. If Mitchell buys the
part from Supplica Mitchell could not use the released facilities in another manufacturing
activity. Sixty percent of the fixed overhead allocated will continue regardless of what decision is
made.
Required:
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(a) Costs to make:
Direct materials $6.00
Direct labour 24.00
Variable overhead 12.00
Fixed overhead [40% x $15] 6.00
Per unit $48.00
QUESTION 11
Easylife Electrical Goods manufactures a range of washing machines, clothes dryers and
dishwashers. One component is common to the product range; every product has the same
electric motor which is manufactured in the Motor Division of Easylife. Ten thousand motors are
produced annually.
These electric motors are transferred to the Assembly Division at full cost of production of $75,
calculated as follows:
Factory overhead 20
$75
The factory overhead is allocated using direct labour hours as the cost driver. Budgeted annual
fixed overhead for the Motor Division amounts to $150 000, consisting of $100 000 incurred by
the Motor Division plus $50 000 of general plant-wide fixed charges which are allocated to each
division.
Management of Easylife have been approached by a salesman from the Hiroshima Electric
Company. The salesman has offered to supply Hiroshima electric motors of equivalent
performance for $72 each, in sufficient numbers to satisfy Easylife's requirements.
Required:
(a) Should Easylife continue to manufacture its own electric motors or purchase them from
Hiroshima and hence close down the Motor Division?
(b) Suppose that Hiroshima make an alternative offer to sell the electric motors to Easylife for
$65 each, but there would be no warranty on the motors. Consequently, in the event of a
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motor failure in the 12-month warranty period for its products, Easylife would have to
purchase a replacement from Hiroshima at a reduced price of $50. Easylife estimates that 5%
of motors purchased may fail during the warranty period.
Calculate the annual net advantage or disadvantage to Easylife from accepting this offer.
State any qualitative factors which should be taken into account when considering such an
offer.
(a) Make
$ $
Purchase 10,000 motors @ $72 720,000
Costs avoided if motors not made:
Variable manufacturing costs/motor
Direct materials 25
Direct labour 30
Variable overhead $50,000/10,000 5
Total variable costs per motor 60
Number of motors 10,000
Total variable costs 600,000
Avoidable fixed costs* 100,000
Total costs avoided by buying 700,000
Advantage in manufacturing $20,000
* The $50,000 general overhead would be incurred whatever the decision and so is not relevant. The
$100,000 would be avoidable if Easylife bought the motors outside.
Easylife should continue to manufacture its own motors. Annual production costs
would be $20 000 lower.
Qualitative Factors:
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QUESTION 12
Management is considering producing one of two proposed new products, Product A or Product
B. Both products have the same unit contribution margin of $4 and the same incremental fixed
costs of $400 000 per annum. Sales volumes, however, are uncertain, but the following
probability distributions of sales have been estimated:
225 000 0 0.1
Required:
(d) What is the probability of making a loss on (i) Product A? (ii) Product B?
(e) What is the probability of making a profit on (i) Product A? (ii) Product B?
(g) Would management be indifferent between selecting either product? Explain your answer.
E(XA) = 50,000(0.1)+75,000(0.2)+100,000(0.3)+125,000(0.3)+150,000(0.1)
= 102,500 units
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E(XB) = 50,000(0.2)+75,000(0.3)+100,000(0.2)+125,000(0.1)
+150,000(0.1)+225,000(0.1)
= 102,500 units
= $4(102,500)-$400,000
= $10,000
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(g) Although both products have the same BEP and the same expected profit, the
variance of the distributions is different. Product A has a lower probability of a loss,
and the higher probability of a profit. On the other hand, Product B offers the
opportunity for the largest profit of $500,000 with probability of 0.1.
Management is unlikely to be indifferent between the two products, and the one
chosen will depend on attitudes towards risk. A risk-averse manager would select
Product A, while a risk seeker would go for B.
QUESTION 13
Spoilage can be a significant cost for many organizations. Discuss when spoilage might happen
and how the costs of normal spoilage get allocated.
Answer:
Spoilage may occur at various stages of the production process. In general, the cost of spoiled
units is equal to the all costs incurred in producing the spoiled units up to the point of inspection.
The costs of normal spoilage are allocated to units in ending work-in-process inventory.
QUESTION 14
Michael Roberts is a cost accountant and business analyst for Darby Design Company (DDC),
which manufactures expensive brass doorknobs. DDC uses two direct cost categories: direct
materials and direct manufacturing labor. Roberts feels that manufacturing overhead is most
closely related to material usage. Therefore, DDC allocates manufacturing overhead to
production based upon pounds of materials used.
At the beginning of 2020, DDC budgeted annual production of 410,000 doorknobs and
adopted the following standards for each doorknob:
Input Cost/Doorknob
Manufacturing overhead:
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Standard cost per doorknob $27.30
Required:
1. For the month of April, compute the following variances, indicating whether each is
favorable (F) or unfavorable (U):
a. Direct materials price variance (based on purchases)
b. Direct materials efficiency variance
c. Direct manufacturing labor price variance
d. Direct manufacturing labor efficiency variance
e. Variable manufacturing overhead spending variance
f. Variable manufacturing overhead efficiency variance
g. Production-volume variance
h. Fixed manufacturing overhead spending variance
2. Can Roberts use any of the variances to help explain any of the other variances? Give
examples.
SOLUTION
1. Columnar presentation of the variances for Darby Design Company (DDC) for April 2020.
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Flexible Budget:
Direct (12,900 $10) (12,900 $9) (9,000 $9) (32,000 0.3 $9)
$12,900 U $5,400 F
Direct
$148,000 U $140,800 F
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Flexible Budget: Allocated:
Variable
$28,900 U $2,400 F
Overhead
$16,500 U $9,100 U
*
Denominator level (Annual) in pounds of material: 410,000 × 0.3 = 123,000 pounds
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Monthly budgeted FOH: $1,722,000 / 12 = $143,500
2. The direct materials price variance indicates that DDC paid more for brass than they had
planned. If this is because they purchased a higher quality of brass, it may explain why they
used less brass than expected (leading to a favorable material efficiency variance). In turn,
because variable manufacturing overhead is assigned based on pounds of materials used, this
directly led to the favorable variable overhead efficiency variance. The purchase of a better
quality of brass may also explain why it took less labor time to produce the doorknobs than
expected (the favorable direct labor efficiency variance). Finally, the unfavorable direct labor
price variance could imply that the workers who were hired were more experienced than
expected, which could also be related to the positive direct material and direct labor efficiency
variances.
QUESTION 18
LC Company produces handbags from leather of moderate quality. It distributes the product
through outlet stores and department store chains. At LC’s facility in Ipoh, direct materials
(primarily leather hides) are added at the beginning of the process, while conversion costs are
added evenly during the process. Given the importance of minimizing product returns, spoiled
units are detected upon inspection at the end of the process and are discarded at a net disposal
value of zero.
LC uses the weighted-average method of process costing. Summary data for April 2017 are as
follows:
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Physical Units Direct Conversion
Materials Costs
Total costs added during April 2017 $97,560 $111,408
Required:
1. For each cost category, calculate equivalent units. Show physical units in the first column of
your schedule.
2. Summarize the total costs to account for; calculate the cost per equivalent unit for each cost
category; and assign costs to units completed and transferred out (including normal spoilage),
to abnormal spoilage, and to units in ending work in process.
SOLUTION
Weighted-Average Method of Process Costing with Spoilage,
LC Company for April 2017
1. Summary of the Flow of Physical Units and Compute Output in Equivalent Units
(Step 1) (Step 2)
Equivalent Units
Physical Direct Conversion
Flow of Production Units Materials Costs
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Work in process, endingc (given) 2,160
a
Normal spoilage is 10% of good units transferred out: 10% × 10,800 = 1,080 units. Degree of completion of normal spoilage
b
Total spoilage = Beg. units + Units started - Good units transferred out – Ending units = 2,400 + 12,000 - 10,800 - 2,160 = 1,440;
Abnormal spoilage = Total spoilage – Normal spoilage = 1,440 – 1,080 = 360 units. Degree of completion of abnormal spoilage
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2. Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-
Process Inventory
Total
Production Direct Conversion
Costs Materials Costs
Work in process, beginning (given) $ 34,572 $21,240 $ 13,332
Costs added in current period (given) 208,968 97,560 111,408
Total costs to account for $243,540 $118,800 $124,740
Assignment of costs
Good units completed and transferred out (10,800 units)
Costs before adding normal spoilage $186,300 (10,800d $8.25) + (10,800 d $9.00)
Normal spoilage (1,080 units) 18,630 (1,080d $8.25) + (1,080d $9.00)
(A) Total costs of good units completed and transferred out 204,930
(B) Abnormal spoilage (360 units) 6,210 (360d $8.25) + (360d $9.00)
(C) Work in process, ending (2,160 units): 32,400 (2,160d $8.25) + 1,620d $9.00)
(A) + (B) + (C) Total costs accounted for $243,540 $118,800 + $124,680
d
Equivalent units of direct materials and conversion costs calculated in 1 .
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