Finance AW46

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I. (12; 4,6,2 points)
The MNH Company uses one overhead rate for the entire plant. Estimated overhead for the coming year is $450,000 and the activity level (denominator level) is estimated at 15,000 direct labor hours (DLH). Two jobs worked on this year were Job #3, which consisted of one hundred (100) plain chairs, and Job #7, which consisted of twenty (20) fancy customized chairs. Data for each job are presented below.
Job #3 Job #7
Direct material $29,000 $ 1,900
Direct labor (@$100/hr) $ 6,000 $ 5,000
Overhead applied ? ?
The President of MNH Co. has just learned about activity-based costing (ABC) and is interested in how it might change the costs assigned to each job. After some deliberation the cost accounting group has decided that the single pool of overhead costs ($450,000) could be broken down into three smaller, more homogeneous cost pools: set-up activity, design activity, and material handling activity. The cost drivers selected for each activity are, respectively, number of set-up hours, number of design changes, and number of material loads transported. This information was presented as follows.
Set-up Design Mat. Hand.
Activity Activity Activity
Cost $100,000 $300,000 $50,000
Set-up hrs 20,000
# of design changes 25,000
No. of loads 5,000
Job #3 Job #7
Set-up hrs 20 10
Design changes 30 400
No. of loads 20 5


1. Under the old system (one oh rate) compute the following
a. The overhead rate
b. The overhead applied to each job
c. The total cost of each job
d. The cost per chair for each job
2. Under the new system compute
a. The overhead rates
b. The overhead applied to each job
c. The total cost of each job
d. The cost per chair for each job
3. Compare and evaluate the two systems of overhead allocation. Be as specific as possible.
II. (8 points)
Bill Smith worked for the ABC Company and his performance was measured against his flexible budget. He was given the following two planning budgets at the beginning of the year.
10,000 units 40,000 units
Variable production costs $60,000 $240,000
Electricity costs 90,000 330,000
Rent & insurance 50,000 50,000
Total $200,000 $620,000
Last month Bill’s department produced 22,000 units and incurred the following costs: Variable production costs were $140,000, electricity costs were $196,000, and the rent and insurance costs were $31,000.


Evaluate Bill’s performance, supporting your conclusions quantitatively where possible.
III. (8 points)
A new company expects that for the first four months sales will be as follows.
Jan $40,000 $60,000
Feb 80,000 80,000
Mar 130,000 300,000
Apr 270,000 400,000
The company expects to collect credit sales in the following manner: seventy percent (70%) in the month of sale, twenty percent (20%) one month later, and the remaining ten percent (10%) two months later.


Compute the expected cash collections for the month of April. SHOW ALL YOUR WORK.
IV. (12 points)
The MH Toy Company produces toy scooters that consist of one set of handlebars, a platform and two aluminum alloy wheels. In order to standardize parts the Company has designed the product so that the nuts and bolts used to attach the parts (the wheels and the handlebars) to the platform are all the same. It takes two nuts and two bolts to attach the handlebars; each wheel needs one nut and one bolt to be attached to the platform.
The Company has budgeted sales of scooters for the first six months of 2015 as follows
Jan 12,000 units
Feb 17,000
Mar 20,000
May 6,000
June 15,000
The finished goods inventory on Dec 31, 2014 is 2,000 units. The parts inventory on 12/31/14 includes 2,500 nuts. For the year 2015 the Company has decided that each month’s finished goods ending inventory should be 20% of the next month’s demand, while the parts ending inventory should be 10% of the next two month’s demand.

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1. Prepare a production budget for scooters for the months of March, April and May (do each month separately).
2. Prepare a purchases budget for nuts for the month of March.
V. (20 points)
Standard Prime Costs per Widget
Direct material 3 lbs @ $ 25 = $ 75
Direct labor 8 hrs @ $15 = 150
Total prime costs $275
The ABC Co. produced 500 widgets during the month of January, which was the first month the company was in business. The company purchased 1,700 pounds of raw material for a total price of $51,000. At month end there were 250 pounds of raw material left in inventory. The workers took 4,200 hours for the month’s production and received on average $17 .00 per hour.


1. Compute the material price variance.
2. Compute the material quantity variance.
3. Compute the rate variance.
4. Compute the efficiency variance.
5. Compute the direct labor budget variance..
VI. (12 points)
The Singapore division of a Canadian telecommunications company uses standard costing for its machine-based production of telephone equipment. Data regarding production during June are as follows
Variable manufacturing overhead costs incurred $127,000
Variable manufacturing overhead cost rate $8 per standard machine-hour
Fixed manufacturing overhead costs incurred $485,000
Fixed manufacturing overhead budgeted $480,000
Denominator level in units (normal capacity) 40,000
Standard machine-hour allowed per unit of output 0.40
Units of output 42,000
Actual machine-hours used 15,800
Ending work-in process inventory 0


1. Compute the variable spending and efficiency variances.
2. Compute the fixed spending and volume variances.
VII. (8 points)
Fixed overhead is budgeted at $24,000. The company actually produced 4,500 widgets in 10,000 direct labor hours. The total spending variance is $2,000 favorable; standard time per widget is set at two (2) direct labor hours. The total overhead rate is $10 per DLH. The volume variance is equal to $3,000 favorable.


1. What was the level of actual spending?
2. How much is the efficiency variance (label it)?
3. What is the variable overhead rate?
4. What was budgeted normal capacity?
VIII. (15; 10, 5 points)
Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells these computers to various electronics retailers to market under store brand names. It manufactures two computers, the Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, included memory, and included hard drive capacity. The following information is available
Costs per unit Lightning 2.0 Lightning 2.4
Direct materials $ 40 $ 75
Direct labor 100 125
Variable overhead 200 250
Fixed overhead 120 150
Total cost per unit $460 $600
Price $620 $900
Units sold 10,000 7,000
The average wage rate is $25 per hour. The plant has a capacity of 100,000 direct labor-hours.


a. A nationwide discount chain has approached Hi-Speed with an offer to buy 2,000 Lightning 2.0 computers and 3,000 Lightning 2.4 computers if the price is lowered to $400 and $600, respectively, per unit. If Hi-Speed accepts the offer, how many direct labor-hours will be required to produce the additional computers? How much will the profit increase (or decrease) if Hi-Speed accepts this proposal? Prices on regular sales will remain the same.
b. Suppose that the customer has offered instead to buy 3,000 of L2.0 and 4,000 of L2.4 at the above special prices. How much will the profits change if the order is accepted? Assume that the company cannot increase its production capacity to meet the extra demand. (N.B. Time is the scarce resource).
IX. (5 points)
The M&H Co. manufactures “faces,” each one composed of one plain cookie and eight chocolate chips. Management has decided that the April ending inventory for chocolate chips should be 130,000 chips, while the beginning inventory on April 1 would be targeted at 40,000 chips. Estimated sales of “faces” for March and May are 15,500 and 18,750 units, respectively; the company desires to keep an ending inventory of “faces” equal to 20% of next month’s estimated sales. If the company has correctly projected a need to purchase 600,000 chocolate chips during the month of April, how many “faces” did the company expect to sell during April?

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