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Exam 2019, questions and answers

Accounting (University of Economics Ho Chi Minh City)

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EXAM REVISION

Assessment items
- Mid-term exam (50 multiple choice questions – Managerial accounting - 90 minutes –
Opened book): 20%
- Group assignment (presentation and group report- Financial accounting) - 30%
- Final exam (4 tasks – 2 hours – Opened book): 50%

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Final exam
There will be 4 tasks in the final exam: 1 financial accounting, 3 managerial accounting.

Task 1 – Financial accounting – Chor Ghee Lim will make this revision for financial accounting

Task 2 – Mangerial accounting

- CVP analysis focusing on (1) determining the break-even units, break-even sales, sales/
units to be sold to acchieve a target profit, (2) Operating leverage, (3) Determining the
profit impact of decision, (4) cost behavior (fixed cost and variable costs)

Task 3 – Mangerial accounting

- Using relevant information to make decisions (short-term decision making). We can
have some questions regarding (1) make or buy decision, or (2) special order decision
OR
- Budgeting: We can have questions regarding (1) production budget, (2) material budget,
(3) direct materials budget, or (4) cash collections and cash payment budgets

Task 4 – Managerial accounting

- Activity-based costing: I may require you to caculate unit cost of products or services
using both traditional approach and ABC, then make a comparision between to
approaches.

Note: ROI, RI content is not examable

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CVP ANALYSIS

Question 1
Ryans Music provides individual music lessons in the homes of clients. The following data are
provided with respect to the last 12 months of activity ending 30 June 2015.

Lesson selling price* $ 45

Lesson labour cost 30
Annual fixed costs 18 000
Lesson sheet music costs 3

Required:
a. Assuming selling prices and costs remain the same as for 2015 calculate the number
of lessons that are required to be sold in 2016 to break even.
b. Draw a graph to show the cost volume profit relationships for Ryans Music.
c. If 4000 music lessons were ‘conducted’ in 2016, what profit would be achieved?
d. For 2016, Ryans expects the lesson labour cost to increase by $2 but, because of
local competitive forces, Ryans does not wish to increase the lesson price. With some
careful management, Ryans hopes to reduce annual fixed costs to $15 000. Calculate
the number of music lessons that would need to be performed in order to match the
profit calculated in (c) above.

Solution

a. Break even in units = fixed costs / contribution margin per unit

$18 000 / ($45 – $33 = $12 ) = 1500 lessons

b.

c. (4000 units × $12) – $18 000 = $30 000 profit

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d.
Revised cost structure
Selling price $45 (no change)
Variable costs $35 (increased by $2 per lesson)
Fixed costs $15 000 (decreased by $3000)

Revised contribution margin = $45 – $35 = $10 per lesson

Therefore to earn the same profit ($30 000) Ryan will now need to conduct 4500 lessons instead
of 4000 lessons.
($15 000 + $30 000)/ $10 = 4500 lessons

Question 2

Information for Melong Industries is provided below.

Average selling price per unit $ 10.00

Average variable costs per unit:
Cost per unit 5.00
Selling costs 1.40
Annual fixed costs:
Selling 240 000
Administration 380 000
After-tax profit target 126 000
Tax rate 30%

Required
a. Calculate the before-tax profit.
b. Calculate the number of units that need to be sold in 2015 to reach the after-tax profit
target.
c. If the sales units in 2015 should be 25 per cent less than required to meet the after-tax
profit target, what will the after-tax profit actually be?

Solution

a. The before tax profit is $180 000 = $126 000 / (1 – .3)

b. ($620 000* + $180 000) / ($10.00 – $6.40) = 222 222.2 units

*$240 000 + $380 000

Proof:

Sales (222 222.2 × $10) $2 222 220.00

Less Variable
Costs (222 222.2 × $6.40) $1 422 222.08

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Contribution
Margin $ 799 997.92
Less Fixed Costs $ 620 000.00
Profit pre tax $ 179 997.92
Tax @ 30% $ 53 999.38
Profit after tax $ 125 998.54

c. Sales would reduce to 166 666.65 = (222 222.2 × .75) or 166 666 units

Sales (($222 222.2 x.75) × $10) $1 666 666.50

Less Variable
Costs (($222 222.2 × .75) × $6.40) $1 066 666.56
Contribution
Margin $ 599 999.94
Less Fixed Costs $ 620 000.00
Pre tax –$ 20 000.06

The firm’s breakeven point is ($620 000 / $3.60) = 172 222.22 units— the reduced sales of 166
666.65 units are below the breakeven point – therefore no profit can be generated.

Another way to determine this is to look at the change in contribution margin — if there are 25%
less sales (equal to a 55 555.55 units) then the total contribution will decrease by $199 999.98
(55 555.55 units x $3.60) which is also equal to the decrease in before tax profit ($179 997.92 +
$20 000.06).

Question 3

Nail Transformation has provided the following financial data for the last two financial periods.

2014 2015
Nail services (units) 10 000 15 000
Sales $1 000 000 $1 500 000
Less: Expenses 500 000 650 000
Profit $500 000 $850 000

The Manager, Hilda Polish, is beginning her planning for next year and requires the following
information.
a. Break-even level of sales in both units and sales dollars.
b. New machines are available for fast drying of nails and will cost $200 000 to
purchase and would lead to a reduction in variable costs of $0.50 per service. The
new machines are to be depreciated $40 000 per year. What is the new break-even
point in both units and sales dollars?
c. What level of sales are required in 2016 to maintain the profit at $850 000 if the fast
drying machines are purchased.

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Solution

The first step with this question is to break the $650 000 expenses into its fixed and variable
component.

Change in activity = 5000 nail services

Change in expenses = $150 000

From cost behaviour we know that the change in cost is due to the variable cost component
$150 000/5000 nail services
= $30 variable cost per nail service.

Therefore, if total costs for 10 000 nail services = $500 000 then variable costs = $300 000 (10
000 x $30 = variable costs = $300 000)
 $500 000 less $300 000 gives us a fixed cost of $200 000

Proof for 15 000 units

Total cost = $650 000 less variable costs $450 000 (15 000 x 30) = $200 000 = fixed costs.

Unit cost information

Sales per nail service = 1 000 000/ 10 000 = $100 per nail service
Variable Cost = $30 per nail service
Contribution margin = $70 per nail service.
Contribution margin ratio = 70%

Therefore answer is:

Fixed costs / contribution margin ratio
= $200 000 / (70/100) = $285 714 (rounded)
= $200 000 / .7 = $285 714

b.

Revised fixed costs = $200 000 (refer (a) above) + 40 000 (annual depreciation cost) = $240 000
Revised contribution margin = $70 + .50 = $70.50
Revised contribution margin ratio = $70.5 / $100 = 70.5%

Therefore new breakeven point is:

$240 000 / (70.50/100) = $340 426 (rounded)
= $240 000 / .705 = $340 426

c. Fixed costs + profit / CM ratio

$240 000 + $850 000 / (70.50/100) =

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$1090000 / .705 = $1,546,099 sales dollars

Or

$1,090,000 / $70.50 = 15 461 units (rounded)

RELEVANT INFORMATION

Question 1 (Make or buy)

Saguaro Systems produces and sells speakers and CD players. The following information about
the costs related to the systems has been collected.

Selling price per unit $ 70 Production costs per unit

Total fixed overhead 360 000 Direct materials $22
Direct labour 16
Variable overhead 2

Saguaro Systems normally produces 25 000 of these systems per year.

The managers have recently received an offer from a Mexican company to produce these
systems for $48 each. The managers estimate that $260 000 of Saguaro Systems’ fixed costs
could be eliminated if it accepts the offer.

Required:
a. Perform a quantitative analysis for the decision.
b. Identify as many uncertainties as you can for this decision.
c. Prepare a brief report to management on your recommendations.

Solution

a.

Costs Make Buy

Direct materials (25 000 × $22) $550 000
Direct Labur (25 000 × $16) $400 000
Variable Overhead (25 000 × $2) $50 000
Fixed Overhead $360 000 $100 000
Purchase Price (25 000 × $48) $1 200 000

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Costs $1 360 000 $1 300 000

$60 000 benefit to outsource

b.
1. The estimate of fixed cost savings — if this is understated then the outsourced option is more
financially attractive, if overstated then the opposite
2. Guarantee of supply for the time period needed by Saguaro
3. The quality of the product and whether it will match Saguaro’s production quality
4. The contract price of $48. What is the likelihood of this increasing in the near future?

c. Prepare a brief report to management on your recommendations.

The report to management will focus on the findings of the financial analysis (part a) and discuss
the uncertainties identified in part (b) above.

Question 2 (Special order with spare capacity)

The Cone Head House sells ice-cream cones in a variety of flavours. Financial data for a recent
week are shown below.

Revenue (1000 cones @ $2.00) $2 000

Cost of ingredients 600
Rent 350
Store attendant 650
Profit 400

The Cone Head’s manager received a call from a university student club requesting 100 cones to
be picked up in three days. The cones could be produced in advance by the store attendant during
slack periods, and then stored in the freezer. Each cone requires a special plastic cover that costs
$0.10.

Required:
a. Discuss the quantitative information relevant to this decision.
b. Calculate the minimum price per cone for this special order.
c. Explain why the Cone Head House’s manager might be willing to sell cones at the
minimum selling price you calculated in part (b).

Solution

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a. Relevant quantitative information is the revenue per cone and the variable cost per
cone as these will vary if sales volume increases – the costs of rent and the store
attendant are irrelevant as the level of costs will not change regardless of the decision
made.

b. If the store has spare capacity then the minimum selling price is equal to the variable
cost - in this example the minimum price would be

1. Cost of ingredients ($600/1000) = $0.60 per cone

2. Special plastic cover = $0.10
Therefore minimum selling price = $0.70

Proof:
Sales (100 x $0.70) $70.00
Less variable costs
(100 x ($0.60 + .10)) $70.00
Contribution Nil

c. The cone is below the current selling price, however the store has spare capacity which will
not impact on current sales, therefore there is no lost contribution margin to consider. The Cone
Head manager may consider that the University is a potential future customer and see the current
order as a way to introduce the product into this market.

Question 3 (Make or buy)

The management of SouthPak Company (SouthPak) has asked for your assistance in deciding
whether to continue manufacturing a part or to buy it from an outside supplier. The part,
called AlphaB, is a component of SouthPak’s finished product. An analysis of the accounting
records and the production data revealed the following information for the year ending June
2015.

1. The production department produced 70 000 units of AlphaB.

2. Six employees are assigned to the production department and work full-time (1920
hours each per year) producing AlphaB. Each employee is paid $20 per hour.
3. The cost of materials per AlphaB unit is $4.
4. Manufacturing costs directly applicable to the production of AlphaB are:

Indirect labour $15 000

Utilities 3 000
Depreciation 3 600
Rates and insurance 2 000

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All of the above costs will be eliminated if AlphaB is purchased.

5. The lowest price for AlphaB from an outside supplier is $8 per unit. Delivery costs
will be $0.80 per unit, and a part-time dispatch employee at $17 000 per year will be
required.
6. If AlphaB is purchased, the excess space will be used to store SouthPak’s finished
product. Currently, SouthPak rents storage space at approximately $1.60 per unit stored
per year. Approximately 9000 units per year are stored in the rented space.

Required:
Should SouthPak make or buy the part? Show all calculations.

Solution

Costs Make Buy

Direct Labour (24 000 hrs × $12) $288 000
Direct Material (70 000 units × $4) $280 000
Purchase Costs (70 000 × $8) $560 000
Delivery costs (70 000 × .8) $56 000
Part-time dispatch employee $17 000
Savings in storage space (9000 units × $1.60) ($14 400)
Direct Fixed Costs $23 600
Costs $591 600 $618 600
Additional costs to outsource $27 000

SouthPak should continue to make AlphaB.

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BUDGETING

Question 1
From the following data for Acoustic Sales, calculate the receipts from accounts receivable for
September, October and November of 2016.

Actual Estimated
July August September October Novembe
r
Credit sales $108 000 $92 000 $96 000 $104 000 $95 000

Credit sales are normally settled according to the following pattern: 20 per cent in the month of
the sale, 50 per cent in the month following the sale, and the remainder in the second month
following the sale.

Acoustic sales receipts from accounts receivable for three months ending 30 November
2016:

Solution
September October November
July $108 000 $32 400
(108 000 x .3)
August $92 000 $46 000 $27 600
(92 000 x .5) (92 000 x .3)
September $96 000 $19 200 $48 000 $28 800
(96 000 x .2) (96 000 x .5) (96 000 x .3)
October $104 000 $20 800 $52 000
(104 000 x .2) (104 000 x .5)
November $95 000 $19 000
(95 000 x .2)
$97 600 $96 400 $99 800

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Question 2

Aussie Manufacturing has projected sales of its product for the next six months as follows.

January 40 units
February 90 units
March 100 units
April 80 units
May 30 units
June 70 units

The product sells for $100, variable expenses are $70 per unit, and fixed expenses are $1500 per
month. The finished product requires three units of raw material and 10 hours of direct labour.
The company tries to maintain an ending inventory of finished goods equal to the next two
months of sales, and an ending inventory of raw materials equal to half of the current month’s
usage.

Required
a. Prepare a production budget for February, March and April.
b. Prepare a forecast of the units of direct materials required for February, March and
April.
c. Prepare a direct labour hours budget for February, March and April.

Solution:

a. Production Budget
February March April
Desired ending inventory 180# 110 100
Planned sales 90 100 80
Total units needed 270 210 180
Planned beginning inventory 190% 180 110
Production requirements 80 30 70

#desired ending inventory next 2 months sales = March Sales (100) + April Sales (80)
%planned beginning inventory this month’s sales plus next month’s sales = February (90) +
March (100)

b. Direct Materials Unit Forecast

February March April
a
Desired ending inventory 120 45 105
Planned usageb 240 90 210

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Total units needed 360 135 315

Planned beginning inventoryc 150 120 45
Materials acquisitions 210 15 270
a
Current production × 3 units direct materials × 0.5 to reflect 3 direct materials
units per product, and half of this month’s production for ending inventory
balance.
b
Current production × 3
c
Prior month’s production × 3 × .5;
January production was change in finished goods inventory plus January sales, or
(100 + 90) – (40 + 90) + 40 = 100 units.

c. Labor Requirements Budget

February March April
a
Labor hours needed 800hrs 300hrs 700hrs
a
Current production × 10hrs – refer production budget A

Question 3

S. Kane Pty Ltd produces and sells two types of batteries, the heavy-duty HD-300 and the long-
life LL-340. The 2015 sales budget for the two products is as follows.

Quarter HD-300 LL-340

1 7000 12000
2 9000 20000
3 10000 22000
4 12000 40000

The beginning inventory on 1 January 2015 is expected to be 4200 units of HD-300 and 7200
units of LL-340. Management desires an ending inventory each quarter equal to 60 per cent of
the next quarter’s sales. Sales in the first quarter of 2016 are expected to be 30 per cent higher
than sales in the same quarter in 2015.

Required
Prepare separate quarterly production budgets for each product for 2015.

Kane Pty Ltd.

Quarter 1 Quarter 2 Quarter 3 Quarter 4
HD-300 Sales 7 000 9 000 10 000 12 000
Desired ending 5 400 6 000 7 200 5 460#
inventory
Required units 12 400 15 000 17 200 17 460
Less beginning 4 200 5 400 6 000 7 200

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inventory
Production 8 200 9 600 11 200 10 260
required

LL-340 Sales 12 000 20 000 22 000 40 000

Desired ending 12 000 13 200 24 000 9 360#
inventory
Required units 24 000 33 200 46 000 49 360
Less beginning 7 200 12 000 13 200 24 000
inventory
Production 16 800 21 200 32 800 26 360
required
Calculation of ending inventory for Quarter 4
# HD-300 – Quarter 1 – 2016 Sales = 7000 x 1.3 = 9100 x .6 = 5460
#LL-340 – Quarter 1 – 2016 Sales = 12 000 x 1.3 = 15 600 x .6 = 9360

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ACTIVITY BASED COSTING

Question 1

Princess Industries has employed a new accountant, Nick Gee, who has expressed concern about
the cost of the products. To further understand the costs, Nick has undertaken an activity analysis
of the indirect costs. His findings are as follows.

Activity Cost Cost driver

Receipt of materials $100 000 Material receipts
Machining 300 000 Machine hours
Deliveries 50 000 Number of deliveries
Machine set-up 100 000 Machine set-ups
Engineering 150 000 Engineering advice slips
Packaging 100 000 Cartons packed

The products’ use of the cost driver is estimated to be as follows.

Standard Specialised
Material receipts 200 500
Machine hours 50 000 25 000
Number of deliveries 500 1 000
Set-ups 200 750
Engineering advices 100 150
Cartons packed 400 600

Required:
a. Calculate the activity cost rate for each activity.
b. Calculate the product cost based on the activity analysis.

Solution
a. Activity Cost Rates

Activity Allocation Formula** Activity Cost Rate

Receipt of Material $100 000 / 700 material receipts $142.85 per receipt
Machining $300 000 / 75 000 machine hours $4 per machine hour

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Deliveries $50 000 / 1500 deliveries $33.33 per delivery

Machine Setup $100 000 / 950 setups $105.26 per setup
Engineering $150 000 / 250 engineering advices $600 per engineering
advice
Packaging $100 000 / 1000 cartons packed $100 per carton packed
$800 000 to be allocated

** remember that the total amount of the cost driver is used.

b. Allocation of Costs

Activity Standard Specialised

Receipt of Material $28 570 $71 425
(200 receipts × $142.85) (500 receipts × $142.85)
Machining $200 000 $100 000
(50 000 hrs × $4) (25 000 hrs × $4)
Deliveries $16 665 $33 330
(500 deliveries × $33.33) (1000 deliveries × $33.33)
Machine Setup $21 052 $78 945
(200 setups × $105.26) (750 setups × $105.26)
Engineering $60 000 $90 000
(100 engineering advices × (150 engineering advices ×
$600) $600)
Packaging $40 000 $60 000
(400 cartons packed × $100) (600 cartons packed × $100)
Amount allocated $366 287 $433 700
Total allocated -= $799 987

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Question 2
A housekeeping support department budgets its costs at $40 000 per month plus $12 per hour.
The estimated and actual hours for November provided by the housekeeping support department
to three operating departments are:
Estimated hours Actual hours
spent cleaning spent cleaning
Department A 1 600 1 500
Department B 1 400 1 600
Department C 2 000 1 800
Total 5 000 4 900

Required:
a. Calculate the support department’s allocation rate if estimated hours is the allocation
base.
b. Calculate the support department’s allocation rate if actual hours is the allocation
base.
c. Discuss one advantage and one disadvantage for each type of allocation rate.

Solution
a. Estimated total cost = fixed costs + (variable costs × cost driver)
= $40 000 + (5000 hours cleaning × $12)
= $40 000 + $60 000 = $100 000
=> allocation formula = $100 000 / 5000 cleaning hours = $20 per cleaning hour

b.
Assume that the actual costs are the same as the costs in part a., the formula will change as
follows: $100 000 / 4900 cleaning hours = $20.41 (rounded)

c.

Allocation Base Advantage Disadvantage

Estimated Known in advance of Gives rise to variances if budget
activity taking place can estimates not accurate

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therefore prepare cost

estimates
Actual More accurate assignment of Not known until end of period
cost

Question 3

Windows R Us manufactures two product ranges: the standard range and the special range.
During July, 300 standard windows and 50 specialised windows were manufactured and
indirect production costs of $73 000 were incurred. An analysis of indirect costs reveals the
following activities:

Activity Cost driver Total Cost

Materials handling Number of requisitions $25 000
Machine set-ups Number of set-ups 27 000
Quality inspections Number of inspections 21 000
Total $73 000

The cost driver volume for each product was as follows:

Cost driver Specialised Standard Total

Number of requisitions 400 600 1 000
Number of set-ups 150 300 450
Number of inspections 200 400 600

Required:
a. Calculate the indirect activity cost rate for each activity.
b. Allocate the indirect manufacturing overhead costs for July to the products using the
activity cost rates calculated in a.
c. Write a memo to the managing director of Windows R Us explaining the benefits of
activity-based costing.

Solution

a.
Activity Allocation Formula** Activity Cost Rate
Materials handling $25 000 / 1000 requisitions $25 per requisition
Machine set-ups $27 000 / 450 set-ups $60 per set-up
Quality Inspections $21 000 / 600 inspections $35 per inspection

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Amount to be allocated $73 000

** remember that the total amount of the cost driver is used.

b.
Allocation of Costs

Activity Specialised Standard

Materials handling $10 000 $15 000
(400 x $25) (600 x $25)

Machine set-ups $9000 $18 000

(150 x $60) (300 x $60)
Quality Inspections $7000 $14 000
(200 x $35) (400 x $35)
Amount allocated $26 000 $47 000
Per window $26 000 / 50 = $520 $47 000/300 = $156.66

c.

The use of activity based costing to assign overhead costs has enabled Windows R Us to
allocated the costs based on each product’s use of the resource. This has been achieved by
aligning the costs with the activities involved in the manufacture of the windows. We can
identify from b. above that the specialized window makes more use of the resources at $520 per
window, in contrast to the standard window which only costs $156.66 per window. If the costs
had been evenly distributed amongst all 350 units we would have had a situation whereby the
standard window was subsidizing the specialized window. The activity analysis also provides
the opportunity for cost management as we are able to identify the attribute (cost driver) of the
activity which causes the cost to be incurred. For example, management would be able to look at
the operational processes to identify why so many inspections are required for the specialized
window, if these can be reduced there may be opportunity for cost savings. Similar analysis can
be undertaken for each of the activities.

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