Common Final Practice Key
1. Utility costs at one of Helker Corporation's factories are listed below:
Management believes that utility cost is a mixed cost that depends on machine-hours.
Required:
Estimate the variable cost per machine-hour and the fixed cost per month using the high-low
method. Show your work! Round off all calculations to the nearest whole cent.
Variable cost = Change in cost  Change in activity
= ($35,138 - $34,762)  (4,780 machine-hours - 4,704 machine-hours)
= $376  76 machine-hours
= $4.95 per machine-hour
Fixed cost element = Total cost - Variable cost element
= $34,762 - ($4.95 per machine-hour  4,704 machine-hours)
= $34,762.00 - $23,284.80
= $11,477.20
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2. The following cost data relate to the manufacturing activities of Newberry Company during
the just completed year:
The company uses a predetermined overhead rate to apply manufacturing overhead cost to
production. The predetermined overhead rate for the year was $15 per machine-hour. A total
of 23,000 machine-hours were recorded for the year.
Required:
a. Compute the amount of underapplied or overapplied manufacturing overhead cost for the
year.
b. Prepare a Schedule of Cost of Goods Manufactured for the year.
b. Schedule of Cost of Goods Manufactured
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3. Alam Company is a manufacturing firm that uses job-order costing. At the beginning of the
year, the company's inventory balances were as follows:
The company applies overhead to jobs using a predetermined overhead rate based on
machine-hours. At the beginning of the year, the company estimated that it would work
45,000 machine-hours and incur $180,000 in manufacturing overhead cost. The following
transactions were recorded for the year:
a. Raw materials were purchased, $416,000.
b. Raw materials were requisitioned for use in production, $420,000 ($380,000 direct and
$40,000 indirect).
c. The following employee costs were incurred: direct labor, $414,000; indirect labor, $60,000;
and administrative salaries, $212,000.
d. Selling costs, $141,000.
e. Factory utility costs, $20,000.
f. Depreciation for the year was $81,000 of which $73,000 is related to factory operations and
$8,000 is related to selling, general, and administrative activities.
g. Manufacturing overhead was applied to jobs. The actual level of activity for the year was
48,000 machine-hours.
h. The cost of goods manufactured for the year was $1,004,000.
i. Sales for the year totaled $1,416,000 and the costs on the job cost sheets of the goods that
were sold totaled $989,000.
j. The balance in the Manufacturing Overhead account was closed out to Cost of Goods Sold.
Required:
Prepare the appropriate journal entry for each of the items above (a. through j.). You can
assume that all transactions with employees, customers, and suppliers were conducted in
cash.
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4. Iron Decor manufactures decorative iron railings. In preparing for next year's operations,
management has developed the following estimates:
Required:
Compute the following items:
a. Unit contribution margin.
b. Contribution margin ratio.
c. Break-even in dollar sales.
d. Margin of safety percentage.
e. If the sales volume increases by 20% with no change in total fixed expenses, what will be
the change in net operating income?
f. If the per unit variable production costs increase by 15%, and if fixed selling and
administrative expenses increase by 12%, what will be the new break-even point in dollar
sales?
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b. CM ratio = Unit CM  Selling price = $29.00 per unit  $50.00 per unit = 58%
Dollar sales to break even = Fixed expenses  CM ratio = $110,000  0.58 = $189,655
(rounded)
Margin of safety percentage = Margin of safety in dollars  Current sales
= $810,345  $1,000,000 = 81.03%
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CM ratio = $26.60  $50.00 = 53.2%
New break-even in dollars = $113,600  0.532 = $213,534 (rounded)
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5. Capp Corporation is a wholesaler of industrial goods. Data regarding the store's operations
follow:
 Sales are budgeted at $350,000 for November, $360,000 for December, and $340,000 for
January.
 Collections are expected to be 60% in the month of sale, 39% in the month following the
sale, and 1% uncollectible.
 The cost of goods sold is 75% of sales.
 The company desires an ending merchandise inventory equal to 40% of the following
month's cost of goods sold. Payment for merchandise is made in the month following the
purchase.
 The November beginning balance in the accounts receivable account is $70,000.
 The November beginning balance in the accounts payable account is $257,000.
Required:
a. Prepare a Schedule of Expected Cash Collections for November and December.
b. Prepare a Merchandise Purchases Budget for November and December.
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6. Thompson Company uses a standard cost system for its single product. The following data
are available:
Actual experience for the current year:
Standards per unit of product:
Required:
Compute the following variances for raw materials, direct labor, and variable overhead,
assuming that the price variance for materials is recognized at point of purchase:
a. Direct materials price variance.
b. Direct materials quantity variance.
c. Direct labor rate variance.
d. Direct labor efficiency variance.
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a. & b. Raw Materials:
Materials price variance = AQ (AP - SP)
= 15,000 yards ($13.00 per yard - $15.00 per yard)
= 15,000 yards (-$2.00 per yard) = $30,000 F
SQ = 12,600 units  1.1 yards per unit = 13,860 yards
Materials quantity variance = (AQ - SQ) SP
= (12,000 yards - 13,860 yards) $15.00 per yard
= (-1,860 yards) $15.00 per yard = $27,900 F
c. & d. Direct Labor:
Labor rate variance = AH(AR - SR)
= 10,200 hours ($10.00 per hour - $9.50 per hour)
= 10,200 hours ($0.50 per hour) = $5,100 U
SH = 12,600 units  0.8 hour per unit = 10,080 hours
Labor efficiency variance = (AH - SH) SR
= (10,200 hours - 10,080 hours) $9.50 per hour
= (120 hours) $9.50 per hour = $1,140 U
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7. Mr. Earl Pearl, accountant for Margie Knall Co., Inc., has prepared the following productline income data:
The following additional information is available:
* The factory rent of $1,500 assigned to Product C is avoidable if the product were dropped.
* The company's total depreciation would not be affected by dropping C.
* Eliminating Product C will reduce the monthly utility bill from $1,500 to $800.
* All supervisors' salaries are avoidable.
* If Product C is discontinued, the maintenance department will be able to reduce monthly
expenses from $3,000 to $2,000.
* Elimination of Product C will make it possible to cut two persons from the administrative
staff; their combined salaries total $3,000.
Required:
Prepare an analysis showing whether Product C should be eliminated.
Since there is a net $800 disadvantage to dropping Product C, it should not be dropped.
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8. Bady Inc. makes a range of products. The company's predetermined overhead rate is $14
per direct labor-hour, which was calculated using the following budgeted data:
Component M3 is used in one of the company's products. The unit cost of the component
according to the company's cost accounting system is determined as follows:
An outside supplier has offered to supply component M3 for $108 each. The outside supplier
is known for quality and reliability. Assume that direct labor is a variable cost, variable
manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing
overhead would not be affected by this decision. Bady chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?
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Direct materials, direct labor, and variable manufacturing overhead are relevant in this
decision. Fixed manufacturing overhead is not relevant since it would not be affected by the
decision. The variable portion of the manufacturing overhead rate is computed as follows:
Variable portion of the predetermined overhead rate = Variable manufacturing overhead 
Direct labor-hours = $100,000  25,000 direct labor-hours = $4.00 per direct labor-hour
The direct-labor hours per unit for the special order can be determined as follows:
Consequently, the variable manufacturing overhead for the special order would be:
Putting this all together:
Because the outside supplier has offered to sell the component for $108.00 each, but it only
costs the company $95.20 to make the component internally, this is not a financially attractive
offer.
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9. Rothery Co. manufactures and sells medals for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 18,000 medals each month; current monthly
production is 17,100 medals. The company normally charges $88 per medal. Cost data for
the current level of production are shown below:
The company has just received a special one-time order for 600 medals at $73 each. For this
particular order, no variable selling and administrative costs would be incurred. This order
would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?
Only the direct materials and direct labor costs are relevant in this decision. To make the
decision, we must compute the average direct materials and direct labor cost per unit.
Since the price on the special order is $73 per medal and the relevant cost is only $48, the
company would earn a profit of $25 per medal. Therefore, the special order should be
accepted.
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10. Block Corporation makes three products that use the current constraint, which is a
particular type of machine. Data concerning those products appear below:
Required:
a. Rank the products in order of their current profitability from the most profitable to the least
profitable. In other words, rank the products in the order in which they should be emphasized.
Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the least
profitable product. Up to how much should the company be willing to pay to acquire more of
the constrained resource?
Resulting ranking of products: FX, JR, ZZ
b. The company should be willing to pay up to $13.80 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product ZZ. By assumption, the other products will already have been
produced up to demand.
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11. (Ignore income taxes in this problem.) Tranter, Inc., is considering a project that would
have a ten-year life and would require a $1,200,000 investment in equipment. At the end of
ten years, the project would terminate and the equipment would have no salvage value. The
project would provide net operating income each year as follows:
All of the above items, except for depreciation, represent cash flows. The company's required
rate of return is 12%.
Required:
a. Compute the project's net present value.
b. Compute the project's internal rate of return to the nearest whole percent.
c. Compute the project's payback period.
d. Compute the project's simple rate of return.
a. Because depreciation is the only noncash item on the income statement, the annual net
cash flow can be computed by adding back depreciation to net operating income.
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b. The formula for computing the factor of the internal rate of return (IRR) is:
Factor of the IRR = Investment required  Annual net cash inflow
$1,200,000  $300,000 = 4.00 Factor
To the nearest whole percent, the internal rate of return is 21%
c. The formula for the payback period is:
Payback period = Investment required  Annual net cash inflow
$1,200,000  $300,000 per year = 4.0 years
d. The formula for the simple rate of return is:
Simple rate of return = Annual incremental net operating income  Initial investment
$180,000  $1,200,000 = 15%
12. (Ignore income taxes in this problem.) Janes, Inc., is considering the purchase of a
machine that would cost $430,000 and would last for 6 years, at the end of which, the
machine would have a salvage value of $47,000. The machine would reduce labor and other
costs by $109,000 per year. Additional working capital of $4,000 would be needed
immediately, all of which would be recovered at the end of 6 years. The company requires a
minimum pretax return of 17% on all investment projects.
Required:
Determine the net present value of the project. Show your work!
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