Marker’s Comments
Question 2
•
•
Most common problem was in part b where many students did not know how to use
operating leverage to calculate the change in net income that would result from a change
in sales. Many prepared a new income statement for 12,000 unit sales.
In part d many students did not identify the fact that significant fluctuations in units sales
would cause higher fluctuations in net income for Company B since it has the higher
operating leverage factor.
Question 3
•
•
In part a, Over 50% prepared a new variable costing income statement for September
and October instead of using the reconciliation approach (see solution).
Part b was poorly done. Most students attempted to reconcile absorption costing net
income to variable costing net income instead of reconciling the difference between
September and October absorption costing net income.
Question 4
•
•
In part a, the most common mistake was to use the quantity of fertilizer used instead of
purchased in calculating the materials price variance.
Some students did not clearly link the reasons stated in part c to the specific variances
calculated in parts a or b.
Question 5
•
•
•
Some students forgot to include the cash operating costs in part b.
Some students neglected to include the $12,000 paid for insurance as a cash disbursement
(although it was clearly a cash disbursement since part of it was debited to a prepaid
insurance)
Some students incorrectly calculated the 2% discount on inventory purchases.
Question 6
•
Some students used static budget units sales instead of actual unit sales for part a.
1
•
Question 1 (30 marks: 36 minutes)
1 mark each except for questions with an “*” which are worth 2 marks each.
1. A formal budget program will almost always result in:
a. Higher sales.
b. More cash inflows than outflows.
c. A detailed plan against which actual results can be compared.
d. Decreased expenses.
2. Which of the following would likely depict the logical order for preparing (1) a production
budget, (2) a cash budget, (3) a sales budget, and (4) a direct-labour budget?
a. 3-4-1-2
b. 3-1-4-2
c. 3-1-2-4
d. None of the above.
3. Consider the following statements about budgetary slack:
i. Managers build slack into a budget so that they stand a greater chance of receiving
favourable performance evaluations.
ii. Budget slack can be used by managers to guard against uncertainty and unforeseen
events.
iii. Budget slack can be used by managers to guard against cuts to their budget by top
management in the resource allocation process.
Which of the above statements are (is) true?
a. i, ii and iii
b. i and ii
c. i and iii
d. ii and iii
4. Consider the following statements about using the size of a variance (% or dollars) as a
method for deciding whether or not to investigate.
i. It is a simple method.
ii. It incorporates past trends in variances.
iii. It incorporates the cost of conducting the investigation.
iv. It incorporates the benefits resulting from the investigation.
Which of the above statements are (is) true?
a. i, and ii
b. i only
c. ii only
d. None of the above statements is true.
2
5. Consider the following statements about absorption costing:
i. It makes net income closer to cash flow.
ii. The approach is consistent with CVP analysis.
iii. It results in better matching of costs with revenues.
iv. Net income is unaffected by changes in inventory levels.
Which of the above statements are (is) false?
a. All of the above statements are false.
b. iii only.
c. i and ii.
d. i, ii and iv.
*6.
Blue Company’s variable expenses are 80% of sales. At a sales level of $800,000, the
company’s degree of operating leverage is 4. At this level of sales, fixed expenses equal
which of the following?
a. $40,000
b. $160,000
c. $120,000
d. None of the above.
Contribution margin is $800,00 x .2 = $160,000; Net Income = $160,000/4 = $40,000; Fixed
expenses thus are $160,000 - $40,000 = $120,000
7. All of the following would be possible reasons for a variance between flexible budget amounts
and actual results except:
a. direct material prices were different than expected
b. the amount of labour used per unit of output was different than expected
c. the actual volume of activity was different than expected
d. the amount of material used per unit of output was different than expected
*8.
Royale Diaper Company Ltd. sells disposable diapers for $0.20 each. Variable costs are
$0.05 per diaper while fixed costs are $75,000 per month for volumes up to 850,000
diapers and $112,500 for volumes above 850,000 diapers. The flexible budget would
reflect monthly operating income for 800,000 diapers and 900,000 diapers of:
a. $22,500 and $7,500, respectively
b. $60,000 and $45,000, respectively
c. $45,000 and $22,500, respectively
d. $7,500 and $60,000, respectively
[(800,000 x ($.20 - $.05))- $75,000]; [(900,000 x ($.20 - $.05))- $112,500]
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 9 and 10 BELOW.
Flowers Shrubs
Sales
$15,000 $28,000
Operating income
$ 2,000 $ 2,000
Average operating assets
$ 20,000 $40,000
3
*9.
What is the return on investment for the Shrubs Division?
a. 2.00%
b. 5.00%
c. 7.14%
d. None of the above.
$2,000/$40,000
*10. If the required return is 20% on all investments, what is Flowers’ residual income?
a. $2,000
b. $4,000
c. ($4,000)
d. None of the above.
$2,000 – ($20,000 x .20) = ($2,000)
11. All of the following are advantages of using Return on Investment (ROI) to evaluate the
performance of managers except:
a. ROI can be used to evaluate investment centers of different sizes.
b. ROI incorporates many of the factors under the control of investment center
managers.
c. Managers cannot manipulate any of the elements included in the ROI
calculation.
d. ROI encourages managers to maximize both profit margin and asset turnover.
*12. Coleman Inc. anticipates sales of 100,000 units, 96,000 units and 102,000 units in July,
August and September respectively. Company policy is to maintain an ending finished
goods inventory equal to 40% of the following month’s sales. How many units should the
company plan to produce in August?
a. 98,400
b. 104,400
c. 93,600
d. None of the above.
(96,000 x .6) + (102,000 x .4)
*13. One-half of Vern’s sales are cash sales and the other half are sales on account. All sales on
account are subject to the following collection pattern: 20% in the month of sale; 70%
collected in the first month after sale; and 10% in the second month after sale. If total sales
for October, November and December are budgeted at $280,000, $240,000 and $200,000
respectively, what will Vern’s budgeted accounts receivable balance be on December 31?
a. $218,000
b. $92,000
c. $80,000
d. None of the above.
4
Uncollected credit sales from November ($240,000 x .5 x .1) + Uncollected credit sales
from December ($200,000 x .5 x .8). All October credit sales have been collected by
December 31.
14. Which of the following situations cannot occur together during the same accounting period?
Assume direct labour hours are used to allocate overhead to products.
a. Unfavourable labour rate variance and favourable labour efficiency variance.
b. Unfavourable labour efficiency variance and favourable materials quantity variance.
c. Favaourable labour efficiency variance and unfavourable variable overhead
efficiency variance.
d. None of the above, all of these situations are possible.
15. The production manager decided to reduce direct labour costs by using more unskilled
labourers in the overall mix of labour (skilled and unskilled). In addition to the direct labour
rate variance, which of the following variances could plausibly be affected by this decision?
i. Direct labour mix variance.
ii Direct materials quantity variance
iii Variable overhead spending variance
iv Direct labour yield variance.
a.
b.
c.
d.
All of the above.
i, ii, and iii
i, ii and iv
i and iv
*16. Best Company had an unfavourable direct-labour efficiency variance of $5,000 for the
month of November. The actual wage rate was $.50 more than the standard rate of $20. If
the company’s standard hours allowed for November production totaled 5,000, how many
hours were actually worked during November?
a. 4,750
b. 5,250
c. 5,000
d. None of the above.
SR(AH – SH) = direct labour efficiency variance; $20(AH – 5,000) = $5,000; AH =
5,250.
17. Which of the following statements about static budgets and flexible budgets is true?
a. A static budget is based on planned costs and revenues while the flexible budget is
based on actual costs and revenues.
b. A static budget is based on planned activity levels while a flexible budget is
based on actual activity levels.
c. Static budgets are more accurate than flexible budgets.
d. None of the above statements are true.
5
18. Consider the following statements about standard costing:
i. Standard cost variance reports may be produced too late to be of use to management.
ii. Standard costing can result in too little emphasis on quality or customer satisfaction.
iii. Standard costing may cause managers to take actions not in the best interests of the
company.
iv. Standards may always be out of date if the company is striving to continuously
improve performance.
Which of the above may be a problem with standard costing?
a. i, ii and iii
b. i, ii and iv
c. i, iii and iv
d. All of the above can be problems with standard costing.
19. Which of the following statements about the balanced scorecard is false?
a. It should be consistent with the company’s strategy.
b. It should contain both financial and non-financial performance measures.
c. It commonly has three categories: financial, customer and internal business
processes.
d. It should not have too many performance measures.
*20. The manufacturing cycle efficiency for ABC Company when the processing time is 5 hours
and inspection, waiting and move time are one hour each is:
a. .60
b. .63
c. .75
d. .88
5/(5+1+1+1)
*21. Bowden Company used 1.5 square meters of material for each wetsuit they produced in July
2004. Data from the past 60 months indicates average actual usage of 1.7 square meters of
material per wetsuit with a standard deviation of .05. How many standard deviations apart is 1.5
meters from the average usage of 1.7 meters, and should a variance investigation be conducted?
a. 4 and no
b. 4 and yes
c. .2 and no
d. .2 and yes
(1.5-1.7)/.05 = 4; 95% of all observations are within +/- 1.96 standard deviations of the
mean so this variance should be investigated.
6
Question 2 (14 marks: 17 minutes)
Sales price per unit
Variable costs per unit
Contribution margin per unit
Fixed costs
Company A
$50
$30
$20
$150,000
Company B
$50
$8
$42
$400,000
Required:
a. Calculate the operating leverage factor for both Company A and Company B when sales
for each company are 10,000 units. (4 marks)
b. Using the operating leverage factors calculated in part a., calculate net income for each
company if sales increase from 10,000 units to 12,000 units. (6 marks)
c. At what level of unit sales will net income be the same for Company A and Company B?
(2 marks)
d. Briefly explain which of these two companies you would prefer if unit sales are expected
to fluctuate significantly from year to year. (2 marks)
Question 2 Response:
a. 4 marks
Company A: $20 x 10,000 = $200,000/($200,000-$150,000)
.5
.5
.5
.5
4
Company B: $42 x 10,000 = $420,000/($420,000-$400,000)
21
.5
.5
.5
.5
b. 6 marks (to get full marks, the operating leverage factor had to be used to calculate the
net income that would result from the 20% sales growth)
Sales growth = 20% (12,000/10,000)
.5
.5
Company A: 4 x 20% = 80% increase in sales; $50,000 + ($50,000 x .8) = $90,000
.5 .5
.5
.5
.5
or $50,000 x 1.8 = $90,000
Company B: 21 x 20% = 420% increase in sales; $20,000 + ($20,000 x 4.2) = $104,000
.5 .5
.5
.5
.5
or $20,000 x 5.2 = $90,000
c. 2 marks
Indifference point: $20x - $150,000 = $42x - $400,000; x = 11,363.60
.5
.5
.5
.5
or
$30x + $150,000 = $8x + $400,000; x = 11,363.60
d. 2 marks
Prefer Company A since it has lower operating leverage factor (1), therefore earnings will be less
sensitive to fluctuations in unit sales (1).
7
Question 3 (17 marks: 20 minutes)
Staedtler Company manufactures overhead markers for educational uses. Operating results for
the two most recent months are presented below:
Selling price per box
Production (boxes)
Sales (boxes)
Variable manufacturing cost per box1
Fixed manufacturing overhead
Variable selling and admin. Costs
Fixed selling and admin. Costs
1
September
$50
3,000
2,500
$7
$42,000
$25,000
$20,000
October
$50
2,100
2,500
$7
$42,000
$25,000
$20,000
Direct materials, direct labour and variable manufacturing overhead.
Based on these operating results, the controller prepared the following summary income
statements using absorption costing (there was no finished goods inventory as at September 1).
Sales
Cost of goods sold
Gross margin
Variable selling and admin. Costs
Fixed selling and admin. Costs
Net income
September
$125,000
52,500
$72,500
25,000
20,000
$27,500
October
$125,000
64,500
$60,500
25,000
20,000
$15,500
Required:
a. Calculate the difference, if any, between the absorption costing net income shown
above and net income calculated using variable costing for both September and
October. Be sure to indicate for each month whether variable costing net income will be
higher or lower than absorption costing net income. Note: you are not required to
prepare a variable costing income statement. (14 marks)
b. The president of Staedtler Company can’t understand why absorption costing resulted
in September net income of $27,500 and October net income of $15,500 when sales
were 2,500 boxes for both months. Reconcile the difference. (3 marks)
8
Question 3 Response:
a. 14 marks
September
Ending inventory: 3,000 – 2,500 = 500
1
1
Fixed overhead rate: $42,000/3,000 $14/box
1
1
Deferred overhead: 500 x $14 = $7,000
Variable costing income will be lower (1)
October
Release of September deferral: 1 for carry-fwd from Sept.
New deferral at month-end:
Ending inventory:
500 (Sept. balance) – (2400-2100) = 100
1
1
1
October overhead rate $42,000/2,100 = $20
1
1
Deferred overhead 100 x $20
1 for correct NI effect
1 for correct NI effect
($7,000)
2,000
($5,000)
Variable costing net income will be higher than absorption costing (1)
Could also have calculated the income differences by calculating the variable costing income
statements for both September and October (or just one month and state the other would be the
same since sales were 2,500 boxes each month). Full marks were given for this approach if
amounts were calculated correctly and then compared to the absorption costing net income.
Sales (2,500 x $50)
Variable cost of sales (2,500 x 7)
Variable selling & admin.
Contribution margin
Fixed overhead
Fixed selling & admin.
Net income
September
$125,000
17,500
25,000
$82,500
45,000
20,000
$20,500
October
$125,000
17,500
25,000
$82,500
45,000
20,000
$20,500
9
b. 3 marks
September income higher due to effect of fixed overhead deferral:
October income lower due to release of September deferral:
October income lower due to effect of fixed overhead deferral:
$7,000
$7,000
($2,000)
$12,000
1 for each item: .5 for correct amount; .5 for getting the income effect correct.
10
Question 4 (15 marks: 18 minutes)
Mark Allen has owned and operated a lawn maintenance and fertilization company for several
years. The following data relates to Mark’s most recent year of operations when he had a total of
55 clients:
•
•
•
•
•
•
•
Each client requires a total of six applications of fertilizer for the year.
Mark purchased 15,000 pounds of fertilizer at $.40 per pound.
Actual usage of fertilizer was 11,550 pounds.
At the beginning of the year, Mark had to hire a new employee to spread the fertilizer as
the employee who had done this job for several years left the company. Because of a tight
labour market Mark had to pay the new employee $11.50 per hour.
For the year, the new employee worked a total of 165 hours applying fertilizer.
Based on prior experience and information from colleagues in the lawn maintenance
business, Mark had developed the following standards at the beginning of the year:
o Fertilizer costs: $.45 per pound:
o Fertilizer usage: 40 pounds per application
o Wage rate: $9 per hour
o Labour time for each application of fertilizer: 40 minutes
Customer complaints about the quality of their lawns (i.e., lack of “greenness” and excess
weeds) were up significantly compared to any year Mark could remember.
Required:
a. Calculate the direct material price and quantity variances. (5.5 marks)
b. Calculate the direct labour rate and efficiency variances. (5.5 marks)
c. Based on the variances you calculated in parts a. and b., identify possible reasons why
customer complaints about the quality of their lawns may have increased significantly.
(4 marks)
Question 4 Response:
a. 5.5 marks
Direct Materials Price Variance:
15,000 (.40 - .45) = $750 favourable
1
.5 .5
.5
(.5 out of 1 if used 11,550 instead of 15,000)
Direct Materials Quantity Variance:
.45 (11,550 – (40 x 6 x 55) = $742.50 favourable
.5
.5
.5 .5 .5
.5
11
Question 4 Response:
b. 5.5 marks
Direct labour rate variance:
165 ($11.50-$9.00) = $412.50 unfavourable
.5
.5
.5
.5
Direct labour efficiency variance:
$9 (165 –(40 x 6 x 55)/60) = $495 favourable
.5 .5 .5 .5 .5 .5
.5
c. Possible reasons that customer complaints have increased:
2 marks for each valid reason stated to a maximum of 4
•
•
•
May have purchased lower quality fertilizer (given price variance above) which may not
have been as effective
Favourable material quantity variance suggests they may have used too little fertilizer
Favourable labour efficiency variance suggests employee may have worked too fast
12
o Question 5 (15 marks: 18 minutes)
Oryx Inc. manufactures golf clubs. The following information about anticipated transactions in
January and February of 2005 has been gathered from their accounting records:
•
•
•
•
•
•
•
•
50% of all sales are credit sales, the other half are cash sales. 60% of credit sales are
collected in the month of sale, 35% in the following month. The remaining 5% is usually
not collected.
All raw materials purchases are made during the last week of the month and paid, net of a
2% discount, the first week of the following month.
During February, Oryx Inc. plans to pay cash for new production equipment totaling
$40,000 and will sell old production equipment for $2,000 cash.
On February 28 Oryx Inc. will repay a note payable and the accumulated interest. The
note is for $15,000 and will have been outstanding 75 days when it is paid on February
28. The annual interest rate on the note payable is 10%.
During February Oryx Inc. plans to declare a cash dividend of $10,000 to be paid on
March 31.
On February 1, Oryx. Inc. will pay its’ annual property insurance expense of $12,000.
Only $1,000 of this amount will be expensed in February, the remainder will be debited
to prepaid insurance.
On February Oryx Inc. will receive cash interest of $508.22 from one of its short-term
investments.
Cash on hand, February 1 is expected to be $20,000.
Additional data:
Expected Activity
Total Sales
Raw materials purchases
Cash operating costs
January
$200,000
$190,000
$31,000
February
$300,000
$200,000
$24,000
Required:
a. Calculate total cash collections from all sources during February. (6 marks)
b. Calculate total cash disbursements for February. (6 marks)
c. If Oryx Inc. has a target ending cash balance for its operating account of $20,000 each
month, how much will they have to borrow in February? (3 marks)
Question 5 Response:
13
Question 5 Response:
a. Total cash collections (6 marks)
Cash sales:
February $300,000 x .5
.5
.5
Collection of credit sales:
January $200,000 x .5 x .35
.5
.5 1
Feburary $300,000 x .5 x .60
.5
.5 1
Equipment sales
.5
Cash interest
.5
Total cash collections:
$150,000
$35,000
$90,000
$2,000
$508.22
$277,508.22
b. Total cash disbursements (6 marks)
January purchases $190,000 x .98 $186,200
.5
1
Purchase of production equipment $40,000 .5
(award 1 mark if they show this net
of sale of old equipment)
Loan repayment .5
Interest $15,000 x .1 x 75/365
.5
.5
1
Insurance expense 1
Cash operating costs .5
Total
$ 15,000
$ 308.22
$12,000
$24,000
$277,508.22
c. (3 marks)
Opening cash balance .5
Collections
1
Disbursements
1
Balance Feb 28:
No borrowings required .5
$20,000
$277,508.22
($277,508.22)
$20,000
14
Question 6 (9 marks)
Read Cycle produces two types of bikes: Road and Mountain. Budgeted and actual data for 2004
were as follows:
Price per unit
Variable costs per unit
Unit Sales
Static Budget
Actual
Mountain
Road Mountain
Road
$900 $2,400
$975
$2,100
$660 $1,770
$714
$1,749
1,500 1,800
2,400
1,600
Market Data for 2004:
Expected total market sales of bikes: 75,000 Mountain Bikes; 112,500 Road Bikes
Actual total market sales of bikes: 120,000 Mountain Bikes; 100,000 Road Bikes
Required:
a. Calculate the sales price variance. (4 marks)
b. Calculate the market share variance. (5 marks)
Question 6 Response:
a. (4 marks)
Sales price variance
Mountain ($975-$900) x 2,400 =
$180,000 favourable
.5 .5
.5
.5
Road
($2,100 - $2,400) x 1,600 = $480,000 unfavourable .5
.5
.5
.5
$300,000
b. (5 marks)
Market share variance:
Mountain [2,400 – (120,000 x (1500/75,000)) x $340] = $0
.5
.5
.5
.5
.5
Road
[1,600 – (100,000 x (1800/112,500)) x $630] = $0
.5
.5
.5
.5
.5
15
Bonus Question (4 marks)
Section 1
Answer any two (maximum) of the following, excluding any question pertaining to a
presentation made by your group.
1. According to an empirical study presented by Ho, Wong, Du and Chang, what is the
number one obstacle in implementing activity based costing?
Lack of top management support.
2. According to a study presented by Leung, Ng, Tang and Fung, which company did Xerox
use as a benchmark for improving operations and productivity?
L.L. Bean
3. According to an academic study presented by Chaput, Greig, Lou and Gurnami, what is
one reason companies utilize zero based budgeting?
•
•
•
•
To better allocate resources
To improve decision making
To facilitate planning
To reduce costs or personnel
4. According to an academic study presented by Catarino, Dai, Gothi, Muzyczka and
Persaud, what is one issue that separates successful implementations of the balanced
scorecard from unsuccessful implantations?
•
•
•
•
•
•
Strategy maps
Dialogues
Roles
Interfaces
Incentives
IT solutions
5. According to a practitioner article presented by Fung, Ho, Li and Man, the United States
Marine Corps implemented activity based management in two distinct steps. Identify one
of those steps.
•
•
ABC modeling
ABC analysis
16
Section 2
Answer any two (maximum) of the following, excluding any question pertaining to a
presentation made by your group.
1. According to academic research presented by Lee, To, Wong and Luong what is the main
reason companies do not implement activity based costing?
Lack of management support
2. According to an academic study presented by Leslie, Madill and Tao, how can activity
based management lower employee morale?
By highlighting that some of the activities that they do are non-value added.
3. According to Cheng, Cheung, Hsieh and Kan, what is the goal of zero based budgeting?
Optimal allocation of limited resources.
4. According to a study presented by Lawrence, Lau and Lau, what was one reason that
Dupont and General Motors were unsuccessful in attempting to implement a balanced
scorecard?
•
•
•
•
•
Lacked patience
Poor analysis
Political problems
Infrastructural problems
Focus problems
5. According to a study presented by Chan, Jayenthiran, Lee and Leung, approximately how
long did it take Bell Canada to implement their benchmarking program?
36 months
17
Section 3
Answer any two (maximum) of the following, excluding any question pertaining to a
presentation made by your group.
1. According to the presentation by Thornton, Soede, Yeung and Harris, why did RONA
implement activity based management?
•
•
Inaccuracies in determining costs
Acquisitions in 2000/2001 led to an increase in the number of suppliers being dealt
with
2. According to Cheung, Tseng, Piett and Nicholson, which company was among the first to
start using the benchmarking approach?
Xerox
3. According to a study presented by Yuen, Wan and Lee what was one outcome of Texas
Instruments and the State of Georgia resulting from the use of zero based budgeting?
Reduction in costs
Unnecessary activities eliminated
4. According to practitioner research presented by Chan, Chow, Do and Wang, what was one
benefit realized by the CPA firm that implemented the balanced scorecard?
Reduced turnover in CPA firms
Enhanced efficiency and productivity
Formed business leaders for the future
5. According to a study presented by Cheng, Gomes, Hussain and Wong, on customer
profitability analysis, what does “share of wallet” indicate?
Basic indicator of customer profitability
18
Section 4
Answer any two (maximum) of the following, excluding any question pertaining to a
presentation made by your group.
1. According to a study presented by Gupta, Bondy-Denomy, Banow, D’Andrade and Chan,
what is a characteristic of a successful implementation of activity based management?
•
•
•
Commitment and support
Technical competence
Effective change management
2. According to a research study presented by Chan, Lin, Tang, Wong and Wung, what is one
reason some small – medium enterprises do not use benchmarking?
•
•
Lack of time/resources
Skeptical of logic or benefits of the approach
3. According to a practitioner article presented by Cheung, Kole, Ho, Toprak and Yam, what
was one of the “lessons learned” by Unilever HPC-NA in implementing a balanced
scorecard?
•
•
•
Early involvement from many people including top management
Align with compensation
Link key initiatives to BSC
4. According to the presentation by Cho, Choi, Lee, Lo and Park, what was one reason Jimmy
Carter used zero based budgeting?
•
•
•
•
Increase resource allocation
Involvement of those committed to improvements
Reduction in time spent on budgeting
Reduce risks of conflicts
5. According to a case study of an industrial cleaning firm presented by Lee, Lee, Lun, Wong
and Wu, why did the firm implement customer profitability analysis?
•
Years of slow profitability growth and sales