MIDTERM-40%

EXERCISE 1
Delta Mountain Supplies has been in business for three months. The company was formed by
two
outdoor enthusiasts to produce high quality sleeping bags, which can used in all kinds of weather
conditions. The owners of the company were well skilled in production and had developed an
excellent relationship with a boutique store that specializes in selling outdoor equipment. The
administration work and the accounting have been managed by the brother of one of the owner’s.
The brother had a business degree but no special training in accounting. The owners had just
received the income statement for the latest quarter and were somewhat dismayed by the results.
The company had almost reached its productive capacity for producing sleeping bags and most
of them had been sold. Still, the income statement, presented in exhibit one, showed an operating
loss for the quarter. Believing something was not correct, the owners have hired you to review
the accounting information and to report back to them.
Exhibit One
Delta Mountain Supplies
Income Statement
For the Quarter ended, September 30th
Sales (5,000 sleeping bags) $720,000
Operating expenses:
Selling and administrative salaries $63,000
Travel for sales purposes 45,000
Advertising 98,000
Indirect labour costs 100,000
Raw materials purchased 220,000
Plant supplies 5,000
Direct labour cost 75,000
Plant maintenance 38,000
Depreciation, office equipment 13,000

Rent (90% for the plant, 10% for sales space) 50,000
Insurance (Plant only) 6,000
Depreciation, Plant equipment 65,000
Utilities (80% plant, 20% for sales
32,000
operations)
Total operating expenses 810,000
Operating loss $(90,000)
During the quarter, the company completed 7,000 sleeping bags. The owners completed a
physical
inventory count and valuation on September 30th. The opening and closing inventory values are
as follows:
July 1st September 30th
Raw materials inventory $0 $30,000
Work-in-process inventory $0 $24,000
Finished goods inventory $0 ?
Required:
1. Describe two conceptual errors that the “accountant” made in preparing the income statement
shown in exhibit one
2. Prepare a schedule of the cost of goods manufactured for the quarter ending September 30th.
3. Prepare a corrected income statement for the quarter.
EXERCISE 2
Vance Asbestos Removal Company removes potentially toxic asbestos insulation and related products
from buildings. The company’s estimator has been involved in a long-simmering dispute with the on-site
work supervisors. The on-site supervisors claim that the estimator does not adequately distinguish
between routine work, such as asbestos insulation around heating pipes in older homes, and non-routine
work, which as moving asbestos-contaminated ceiling plaster in industrial buildings. The on-site
supervisors believe that non-routine work is far more expensive than routine work and should bear higher
customer charged. The estimator sums up his position this way: “My job is to measure the area to be
cleared of asbestos. As directed by top management, I simply multiply the square metres by $4,000 per
thousand square metres, that leaves enough cushion to take care of the additional costs of non-routine
work that shows up. Besides, it is difficult to know what is routine and not routine until you actually start
tearing things apart.”
To shed light on this controversy, the company initiated an ABC study of all its costs. Data from the ABC
system follow:

Activity Cost Pool Activity Measure Total Activity

Removing Asbestos Thousands of square metres 500,000 square metres
Estimating and job set-up Number of jobs 200 jobs*
Working on non-routine jobs Number of non-routine jobs 25 non-routine jobs
Other (costs of idle capacity and Not applicable, these costs are
organization-sustaining costs) not allocated to jobs
*The total number of jobs include non-routine jobs as well as routine jobs. Non-routine jobs as well as
routine jobs require estimating and setup work

Wages and salaries $200,000

Disposal fees 600,000
Equipment depreciation 80,000
On-site supplies 60,000
Office expenses 190,000
Licensing and insurance 370,000
Total cost $1,500,000

Distribution of Resource Consumption

Acitivity Cost Pools
Removing Estimating Working Other (%) Total (%)
Asbestos and Job on Non-
(%) Setup (%) routine
Jobs (%)
Wages and salaries 40 10 35 15 100
Disposal fees 70 0 30 0 100
Equipment depreciation 50 0 40 10 100
 On-site supplies 55 15 20 10 100
Office expenses 10 40 30 20 100
Licensing and insurance 50 0 40 10 100
Required:
1. Perform the first stage allocation of costs to the activity pools
2. Compute the activity rates for the activity cost pools
3. Using the activity rates you have computed, determine the total cost and average cost per
thousand square metres of each of the following jobs according to the ABC system:
a. A routine 2,000 square metre asbestos removal job
b. A routine 4,000 square metre asbestos removal job
c. A non-routine 2,000 square metre asbestos removal job
EXERCISE 3

Part I
Hopworks Brewing Company produces craft beer in Vancouver, BC. The Company has fixed
expenses of $367,500 per year and variable expenses of $45 per keg. Each keg sells for $150.
Required:
1. Compute the contribution margin per keg and the contribution margin ratio
2. Find the break-even point in kegs and in dollars using the contribution margin per unit and
contribution margin ratio
3. Find the number of kegs Hopworks needs to sell to earn $52,500 of operating income
4. Find the number of kegs Hopworks needs to sell to earn net income of $44,100, assuming a
tax rate of 25%
Part II
If budgeted/expected sales are 5,000 kegs, what are Hopworks’ margin of safety and operating
leverage?
Part III
If Hopworks can decrease its variable costs to $40 per keg by increasing its fixed costs to
$385,000, how many kegs will it have to sell to generate $52,500 of operating income?
Part IV
Hopworks’ sister company Mountain Cidery produces two types of organic cider – The Old
English and
Mountain Berry. Both ciders are sold in 1L bottle units. The unit information is as follows:
Old English (1L) Mountain Berry (1L)
Sales price $15.75 $18.25
Variable costs $5.50 $8.50
The Old English cider is more popular, so Mountain Cidery sells three Old English bottles for
every one Mountain Berry bottle. The fixed costs are $275,000. How many bottles of each cider
does Mountain Cidery need to sell to break even?
EXERCISE 4
One of your duties as an employee of Zitroe Company is to prepare the cash budget for the
period from 1 January to 30 June 2024.
Please prepare the following:
(a) Forecasted cash received schedule;
(b) Forecasted monthly cash payment schedule; and
(c) Cash budget from 1 January until 30 June 2024.
Use the following information to assist you in preparing that budget:
(i) 80 per cent are credit sales; 80 per cent of credit sales will be collected in the next month; 15
per cent will be collected 60 days after sales and 4 per cent more will be collected 90 days after
sales.
The company had to bear one per cent of credit sales as uncollectible debt (bad debt).
(ii) Purchases made every month are 65 per cent of sales forecasted for the next month. Payment
for these purchases will only be made one month after purchase.
(iii) The company intends to maintain a minimum cash balance of $300,000. The cash balance
on 1 January is $300,000.
(iv) The company expects the delivery of a new machine in the month of April. Payment of
$400,000 will be made after delivery had been done.
(v) Payment for tax of $500,000 will be made in the month of March and June.
(vi) Rental of $100,000 per month. Other cash expenditure is three per cent of sales.
(vii) The depreciation expenses are $150,000 per month.
(viii) Labour expenses are 10 per cent of sales for the next month.
(ix) The company’s board of directors intends to maintain the dividend payment of $450,000 that
will be made in the month of June.
(x) Sales in the month of October are $3,000,000 and $2,000,000 in the months of November and
December 2023.
(xi) Sales forecast for the first seven months in the year 2024 is as follows:
Month Sales ($)
January 3,000,000
February 5,000,000
March 5,000,000
April 6,000,000
May 3,000,000
June 2,000,000
July 2,000,000
(xii) The company will make interest payments in the month of June for $310,000.