Question 1

Financing Charges and Net Present Value
The president of the company is not convinced that the interest expense should be excluded from the calculation of the net present value. He points out that, "Interest is a cash flow. You are supposed to discount cash flows. We borrowed money to completely finance this project. Why not discount interest expenditures?" The president is so convinced that he asks you, the controller, to calculate the net present value including the interest expense.
How can you adjust the net present value analysis to compensate for the inclusion of the interest expense?

Accepted Answer

Financing Charges and Net Present Value 
There are probably many possible ways of examining this problem. From a theoretical perspective, of course, interest expense 
This problem is best solved via the incremental method.  Baltic should purchase the new machine.

Question 2

Basic Overhead Variances
Derf Company applies overhead on the basis of direct labor hours. Two direct labor hours are required for each product unit. Planned production for the period was set at 9,000 units. Manufacturing overhead for the period is budgeted at $135,000, of which 20 percent is fixed. The 17,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $136,500.
Required:
Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.

Accepted Answer

Basic Overhead Variances 
Expected overhead = $135,000 [$27,000 (fixed) + $108,000 (variable)]
Expected volume = 9,000 units or 18,000 direct labor hours (dl hrs)
Overhead rate = $135,000 ÷ 18,000 dl hrs = $7.50 per dl hr
Variable overhead rate = $108,000 ÷ 18,000 dl hrs = $6 per dl hr
Flexible budget = $27,000 + $6 per dl hr × direct labor hours

Question 3

Transfer Prices and Capacity
Jefferson Company has two divisions: Jefferson Bottles and Jefferson Juice. Jefferson Bottles makes glass containers, which it sells to Jefferson Juice and other companies. Jefferson Bottles has a capacity of 10 million bottles a year. Jefferson Juice currently has a capacity of 3 million bottles of juice per year. Jefferson Bottles has a fixed cost of $100,000 per year and a variable cost of $0.01/bottle. Jefferson Bottles can currently sell all of its output at $0.03/bottle.
Required:
a. What should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions will make appropriate decentralized planning decisions?
b. If Jefferson Bottles can only sell 5 million bottles to outside buyers, what should Jefferson Bottles charge Jefferson Juice for bottles so that both divisions will make appropriate decentralized planning decisions?

Accepted Answer

Transfer Prices and Capacity 
a. Jefferson Bottles should charge Jefferson Juice the opportunity cost of providing the bottles. The opportunity cost to Jefferson Bottles of selling to Jefferson Juice is the market price, or $0.03/bottle.
b. Jefferson Bottles can sell 5 million bottles it currently makes, but there is no apparent market for further bottles. If there were further demand, the company would be making more bottles because the bottles provide a positive contribution margin per unit. Therefore, the opportunity cost of making more bottles is the variable cost or $0.01/bottle, which should be used as the transfer price.

Question 4

Transfer Pricing in Universities
The Eastern University Business School teaches some undergraduate business courses for students in the Eastern University College of Arts and Science (CAS). The 6,000 undergraduates generate 2,000 undergraduate student course enrollments in business courses per year. The B-school and CAS are treated as profit centers in that their budgets contain student tuition revenues as well as costs. The deans have discretion to set tuition and salaries and determine hiring as long as they operate with no deficit (revenues = expenses). Undergraduate tuition is $12,000 per year and each student takes eight courses per year. Average undergraduate financial aid amounts to 20% of gross tuition. The current transfer price rule is gross tuition per course less average financial aid.
This transfer price rule gives net tuition to the B-school as a revenue and deducts an equal amount from the CAS budget. The CAS dean argues that the current system is grossly unfair. CAS must provide costly services for undergraduates to maintain a top-rated undergraduate program. For example, career counseling, academic advising, sports programs, and the admissions office are costs that must be incurred if undergraduates are to enroll at Eastern. Therefore, the CAS dean argues, the average cost of these services per undergraduate student course enrollment should be deducted from the tuition transfer price. These undergraduate student services total $9.6 million per year.
Required:
a. Calculate the current revenue the B-school is receiving from undergraduate business courses. What will it be if the CAS dean's proposal is adopted?
b. Discuss the pros and cons of the CAS dean's proposal.
c. As special assistant to the B-school dean, prepare a response to the proposed tuition transfer pricing scheme.

Accepted Answer

The answer of Transfer Pricing in Universities
The Eastern University Business...

Question 5

Monitoring Computer Use
Samson Company is an engineering firm. Many of the employees are engineers who are working individually on different projects. Most of the design work takes place on computers. The computers are connected by a network and employees can also "surf" the internet through their desk top computers.
The president is concerned about productivity among his engineers. He has acquired software that allows him to monitor each engineer's computer work. At anytime during the day, the president can observe on her screen exactly what the different engineers are working on. The engineers are quite unhappy with this monitoring process. They feel it is unethical for the president to be able to access what they are working on without their knowledge.
Describe the pros and cons of monitoring through observing the computer work of the engineers.

Accepted Answer

The answer of Monitoring Computer Use
Samson Company is an engineering...

Question 6

Variable and Absorption Costing
Varilux manufactures a single product and sells it for $10 per unit. At the beginning of the year there were 1,000 units in inventory. Upon further investigation, you discover that units produced last year had $3.00 of fixed manufacturing cost and $2.00 of variable manufacturing cost. During the year Varilux produced 10,000 units of product. Each unit produced generated $3.00 of variable manufacturing cost. Total fixed manufacturing cost for the current year was $40,000. There were no inventories at the end of the year.
Required:
Prepare two income statements for the current year, one on a variable cost basis and the other on an absorption cost basis. Explain any difference between the two net income numbers and provide calculations supporting your explanation of the difference.

Accepted Answer

The answer of Variable and Absorption Costing
Varilux manufactures a single...

Question 7

Overhead Variances
The following information is for the third quarter of this year:  Required:
Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.

Accepted Answer

The answer of Overhead Variances
The following information is for the...

Question 8

Cost Allocation and Contingency Fees
A lawyer allocates overhead costs based on his hours working with different clients. The lawyer expects to have $200,000 in overhead during the year and expects to work on clients' cases 2,000 hours during the year. In addition he wants to pay himself $50 per hour for working with clients. The lawyer, however, does not bill all of his clients based on covering overhead costs and his own salary. Some clients pay her on contingency fees. If the lawyer works with a client on a contingency fee basis, the lawyer receives half of any settlement for his client. During the year the lawyer works 1,200 hours that are billable to clients. The remaining hours are worked on a contingency basis. The lawyer wins $300,000 in settlements for his clients of which he receives half. Actual overhead was $210,000,
What does the lawyer earn during the year after expenses?

Accepted Answer

The answer of Cost Allocation and Contingency Fees
A lawyer allocates...

Question 9

Product Profitability and Mix - Calculating Variable Overhead
Sportway Inc. is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. About 60 percent of Sportway's products are purchased from other companies and the remainder are manufactured by Sportway. The company has a plastics department that is currently manufacturing molded fishing tackle boxes. Sportway is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available workstations. Presented below are the selling price and costs associated with Sportway's tackle boxes.  Because Sportway believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68 per box delivered to Sportway's facility.
Bart Johnson, Sportway's product manager, has suggested that the company could make better use of its plastics department by manufacturing skateboards. To support his position, Johnson has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Johnson believes that Sportway could expect to sell 17,500 skateboards annually at $45 per skateboard. Johnson's estimate of the costs to manufacture the skateboards follows.  In the plastics department, Sportway uses direct labor hours as the application base for manufacturing overhead. Included in manufacturing overhead for the current year is $50,000 of factorywide, fixed manufacturing overhead that has been allocated to the plastics department. For each product that Sportway sells, regardless of whether the product has been purchased or is manufactured by Sportway, a portion of the selling and administrative cost is fixed at $6 per unit. Total selling and administrative costs for the purchased tackle boxes would be $10 per unit.
Required:
Prepare an analysis based on the data presented that will show which product or products Sportway Inc. should manufacture and/or purchase to maximize the company's profitability. Show the associated financial impact. Support your answer with appropriate calculations.

Accepted Answer

The answer of Product Profitability and Mix - Calculating Variable...

Question 10

Materials Quantity Variance: Solving for Actual Quantity
Todco planned to produce 3,000 units of its single product, Teragram, during November. The standard specifications for one unit of Teragram include six pounds of material at $0.30 per pound. Actual production in November was 3,100 units of Teragram. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120.
Required:
Based on these data, calculate how many pounds of material were used in the production of Teragram during November.

Accepted Answer

The answer of Materials Quantity Variance: Solving for Actual Quantity
Todco...

Question 11

Job Cost Flows
The job cost sheet for 1,000 units of toy trucks is:  All of the materials for the job were purchased on 4/10. The batch of 1,000 toy trucks is sold on 7/10.
What are the costs of this job order in the raw materials account, the work-in-process account, the finished goods account, and the cost of goods account on 4/30, 5/31, 6/30 and 7/31?

Accepted Answer

The answer of Job Cost Flows
The job cost sheet for...

Question 12

Overhead Variances
Overhead is applied on the basis of direct labor hours. Three direct labor hours are required for each product unit. Planned production for the period was set at 8,000 units. Manufacturing overhead for the period is budgeted at $204,000, of which 30 percent is fixed. The 26,200 hours worked during the period resulted in production of 8,500 units. Manufacturing overhead cost incurred was $220,500.
Required:
Calculate the following three overhead variances:
a. Overhead volume variance.
b. Overhead efficiency variance.
c. Overhead spending variance.

Accepted Answer

The answer of Overhead Variances
Overhead is applied on the basis...

Question 13

ROI and Residual Income
The following investment opportunities are available to an investment center manager:  Required:
a. If the investment manager is currently making a return on investment of 16 percent, which project(s) would the manager want to pursue?
b. If the cost of capital is 10 percent and the annual earnings approximate cash flows excluding finance charges, which project(s) should be chosen?
c. Suppose only one project can be chosen and the annual earnings approximate cash flows excluding finance charges. Which project should be chosen?

Accepted Answer

The answer of ROI and Residual Income
The following investment opportunities...

Question 14

Describe ABC
Required:
a. What is activity-based costing and how does it differ from traditional absorption costing?
b. Describe the advantages and disadvantages of activity-based costing systems.

Accepted Answer

The answer of Describe ABC
Required:
a. What is activity-based costing and...

Question 15

Choosing Performance Measures
Jen and Barry opened an ice cream shop in Eugene. It was a big success, so they decide to open a ice cream shops in many cities including Portland. They hire Dante to manage the shop in Portland. Jen and Barry are considering two different sets of performance measures for Dante. The first set would grade Dante based on the cleanliness of the restaurant and customer service. The second set would use accounting numbers including the profit of the shop in Portland.
What are the advantages and disadvantages of each set of performance measures?

Accepted Answer

The answer of Choosing Performance Measures
Jen and Barry opened an...

Question 16

Linking Decision Rights and Knowledge
Professional football teams have both a coach and a general manager. The general manager is usually responsible for the general operations of the organization and maintains the decision rights for selecting personnel on the football team. The coach is responsible for the training of the football team and making decisions on game day. Many coaches have been unhappy with their relationship with the general manager and feel they should have more decision rights in choosing the players on the team. Some of the top coaches are now insisting on also being general managers.
What are the advantages and disadvantages of separating the duties of the coach and general manager with respect to selecting members of the football team?

Accepted Answer

The answer of Linking Decision Rights and Knowledge
Professional football teams...

Question 17

Fixed, Variable, and Average Costs
Midstate University is trying to decide whether to allow 100 more students into the university. Tuition is $5000 per year. The controller has determined the following schedule of costs to educate students:  The current enrollment is 4200 students. The president of the university has calculated the cost per student in the following manner: $30,600,000/4200 students = $7286 per student. The president was wondering why the university should accept more students if the tuition is only $5000.
Required:
a. What is wrong with the president's calculation?
b. What are the fixed and variable costs of operating the university?

Accepted Answer

The answer of Fixed, Variable, and Average Costs
Midstate University is...

Question 18

Cost-volume-profit of a Make/buy Decision
Elly Industries is a multiproduct company that currently manufactures 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have affixed monthly cost of $150,000 and a capacity to produce 84,000 units per month. If Elly were to buy Part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40 percent of its present amount. The variable production costs of Part MR24 are $11 per unit.
Required:
a. If Elly Industries continues to use 30,000 units of Part MR24 each month, it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier's unit price is less than how much?
b. If Elly Industries can obtain Part MR24 from an outside supplier at a unit purchase price of $12.875, what is the monthly usage at which it will be indifferent between purchasing and making Part MR24?
Source: CMA adapted

Accepted Answer

The answer of Cost-volume-profit of a Make/buy Decision
Elly Industries is...

Question 19

Opportunity Cost of Purchase Discounts and Lost Sales
Winter Company is a medium-size manufacturer of disk drives that are sold to computer manufacturers. At the beginning of 2010, Winter began shipping a much-improved disk drive, Model W899. The W899 was an immediate success and accounted for $5 million in revenues for Winter in 2010.
While the W899 was in the development stage, Winter planned to price it at $130. In preliminary discussions with customers about the W899 design, no resistance was detected to suggestions that the price might be $130. The $130 price was considerably higher than the estimated variable cost of $70 per unit to produce the W899, and it would provide Winter with ample profits.
Shortly before setting the price of the W899, Winter discovered that a competitor was reading a product very similar to the W899 and was no more than 60 days behind Winter's own schedule. No information could be obtained on the competitor's planned price, although it had a reputation for aggressive pricing. Worried about the competitor, and unsure of the market size, Winter lowered the price of the W899 to $100. It maintained the price although, to Winter's surprise, the competitor announced a price of $130 for its product.
After reviewing the 2010 sales of the W899, Winter's management concluded that unit sales would have been the same if the product had been marketed at the original price of $130 each. Management has predicted that 2011 sales of the W899 would be either 85,000 units at $100 each or 60,000 units at $130 each. Winter has decided to raise the price of the disk drive to $130 effective immediately.
Having supported the higher price from the beginning, Sharon Daley, Winter's marketing director, believes that the opportunity cost of selling the W899 for $100 during 2010 should be reflected in the company's internal records and reports. In support of her recommendation, Daley explained that the company has booked these types of costs on other occasions when purchase discounts not taken for early payment have been recorded.
Required:
a. Define opportunity cost and explain why opportunity costs are not usually recorded.
b. Winter Company's management is considering Sharon Daley's recommendation to book the opportunity costs and have them reflected in its internal records and reports. If one were to record a nonzero opportunity cost, calculate the dollar amount of the opportunity cost that would be recorded by Winter Company for 2010 and explain how this cost might be reflected on its internal reports.
c. Explain the impact of Winter Company's selection of the $130 selling price for the W899 on 2011 operating income. Support your answer with appropriate calculations.
Source: CMA adapted

Accepted Answer

The answer of Opportunity Cost of Purchase Discounts and Lost...

Question 20

Transfer Pricing in the Presence of Divisional Interdependencies
Prior to 1997, PepsiCo, a major soft drink company, had a restaurant division consisting of Kentucky Fried Chicken, Taco Bell, and Pizza Hut. The only cola beverage these restaurants served was Pepsi. Assume that the major reason PepsiCo owned fast food restaurants is an attempt to increase its share of the cola market. Under this assumption, some Pizza Hut patrons who order a cola at the restaurant and are told they are drinking a Pepsi will switch and become Pepsi drinkers instead of Coke drinkers on other purchase occasions. However, studies have shown that some customers refuse to eat at restaurants unless they can get a Coke.
PepsiCo sells Pepsi Cola to non-PepsiCo restaurants at $0.53 per gallon. This is the market price of Pepsi-Cola. Pepsi-Cola's variable manufacturing cost is $0.09 per gallon and its total (fixed and variable) manufacturing cost is $0.22 per gallon. PepsiCo produces Pepsi-Cola in numerous plants located around the world. Plant capacity can be added in small increments (e.g., a half-million gallons per year). The cost of additional capacity is approximately equal to the fixed costs per gallon of $0.13.
Required:
What transfer price should be set for Pepsi transferred from the soft drink division of PepsiCo to a PepsiCo restaurant such as Taco Bell? Justify your answer.

Accepted Answer

The answer of Transfer Pricing in the Presence of Divisional...

Exam 1: Accounting for Decision Making and Control

Overhead Variances The following information is for the third quarter of this year: Required: Calculate the following three overhead variances: a. Overhead volume variance. b. Overhead efficiency variance. c. Overhead spending variance.

Describe ABC Required: a. What is activity-based costing and how does it differ from traditional absorption costing? b. Describe the advantages and disadvantages of activity-based costing systems.