SCHOOL OF ACCOUNTING & FINANCE

AF102: INTRODUCTION TO ACCOUNTING &

FINANCIAL MANAGEMENT PART II
(PRINT MODE)
FINAL EXAMINATION – SEMESTER 1, 2015

Time Allowed 3 hours plus 10 minutes reading

100 marks (Weight: 55% of overall course grade)

INSTRUCTIONS
1. This test has TWO (2) compulsory sections.
SECTION QUESTION MARKS
A MULTIPLE CHOICE – 30 Questions 45
B PROBLEM SOLVING (3 Questions) 55
TOTAL 100

2. Answer all questions in the answer booklet provided.

3. Non-programmable calculators may be used, but are not provided.

1
SECTION A MULTIPLE CHOICE QUESTIONS 45 Marks

1. Which of the following is an irrelevant cost?

a. An avoidable cost
b. An incremental cost
c. A sunk cost
d. An opportunity cost

2. Which of the following is not a true statement?

a. Incremental analysis might also be referred to as differential analysis.
b. Incremental analysis is the same as CVP analysis.
c. Incremental analysis is useful in making decisions.
d. Incremental analysis focuses on decisions that involve a choice among
alternative courses of action.

3. It costs Garner Company $12 of variable and $5 of fixed costs to produce one
bathroom scale which normally sells for $35. A foreign wholesaler offers to
purchase 3,000 scales at $15 each. Garner would incur special shipping costs of
$1 per scale if the order were accepted. Garner has sufficient unused capacity to
produce the 3,000 scales. If the special order is accepted, what will be the effect
on net income?
a. $6,000 increase
b. $6,000 decrease
c. $9,000 decrease
d. $45,000 increase

4. When will the elimination of a product line have no effect on the company’s
overall profit?
a. When the avoidable fixed costs equal the product line’s contribution margin
b. When the unavoidable fixed costs equal the product line’s contribution margin
c. When there are no fixed costs incurred by the product line
d. When the product line contribution margin is negative

5. All of the following are correct statements about the target price except it
a. is the price the company believes would place it in the optimal position for its
target audience.
b. is used to determine a product's target cost.
c. is determined after the company has identified its market and does market
research.
d. is determined after the company sets its desired profit amount.

6. All of the following are correct statements about the cost-plus pricing approach
except that it
a. is simple to compute.
b. considers customer demand.
c. includes only variable costs in the cost base.
d. will only work when the company sells the quantity it budgeted.
7. Carlos Consulting Inc. provides financial consulting and has collected the
following data for the next year’s budgeted activity for a lead consultant.
Consultants’ wages $90,000
Fringe benefits $22,500
Related overhead $17,500
Supply clerk’s wages $18,000
Fringe benefits $4,000
Related overhead $20,000
Profit margin per hour $20
Profit margin on materials 15%
Total estimated consulting hours 5,000
Total estimated supply costs $168,000
The material loading charge is
a. 15%.
b. 25%.
c. 40%.
d. 55%.

8. Which of the following organizations would most likely not use time-and-material
pricing?
a. Automobile repair company
b. Engineering firm
c. Custom furniture manufacturer
d. Public accounting firm

9. All of the following are correct statements about the market-based approach
except that it
a. assumes that the transfer price should be based on the most objective inputs
possible.
b. provides a fairer allocation of the company's contribution margin to each
division.
c. produces a higher company contribution margin than the cost-based approach.
d. ensures that each division manager is properly motivated and rewarded.

10. In the cost-plus pricing approach, the desired ROI per unit is computed by
multiplying the ROI percentage by
a. fixed costs.
b. total assets.
c. total costs.
d. variable costs.

11. The following per unit information is available for a new product of Red Ribbon
Company:
Desired ROI $ 20
Fixed cost 40
Variable cost 60
Total cost 100
Selling price 120
Red Ribbon Company's markup percentage would be
a. 17%.
b. 20%.
c. 33%.
d. 50%.
12. The direct materials and direct labor budgets provide information for preparing
the
a. sales budget.
b. production budget.
c. manufacturing overhead budget.
d. cash budget.

13. An overly optimistic sales budget may result in

a. increases in selling prices late in the year.
b. insufficient inventories.
c. increased sales during the year.
d. excessive inventories.

14. Which of the following expenses would not appear on a selling and administrative
expense budget?
a. Sales commissions
b. Depreciation
c. Property taxes
d. Indirect labor

15. The purpose of the departmental overhead cost report is to

a. control indirect labor costs.
b. control selling expense.
c. determine the efficient use of materials.
d. control overhead costs.

16. A static budget

a. should not be prepared in a company.
b. is useful in evaluating a manager's performance by comparing actual variable
costs and planned variable costs.
c. shows planned results at the original budgeted activity level.
d. is changed only if the actual level of activity is different than originally
budgeted.

17. A static budget is appropriate in evaluating a manager's performance if

a. actual activity closely approximates the master budget activity.
b. actual activity is less than the master budget activity.
c. the company prepares reports on an annual basis.
d. the company is a not-for-profit organization.

18. What is the primary difference between a static budget and a flexible budget?
a. The static budget contains only fixed costs, while the flexible budget contains
only variable costs.
b. The static budget is prepared for a single level of activity, while a flexible
budget is adjusted for different activity levels.
c. The static budget is constructed using input from only upper level
management, while a flexible budget obtains input from all levels of
management.
d. The static budget is prepared only for units produced, while a flexible budget
reflects the number of units sold.
19. Boland Manufacturing prepared a 2013 budget for 120,000 units of product.
Actual production in 2013 was 130,000 units. To be most useful, what amounts
should a performance report for this company compare?
a. The actual results for 130,000 units with the original budget for 120,000 units.
b. The actual results for 130,000 units with a new budget for 130,000 units.
c. The actual results for 130,000 units with last year's actual results for 134,000
units.
d. It doesn't matter. All of these choices are equally useful.

20. A department has budgeted monthly manufacturing overhead cost of $540,000

plus $3 per direct labor hour. If a flexible budget report reflects $1,044,000 for
total budgeted manufacturing cost for the month, the actual level of activity
achieved during the month was
a. 528,000 direct labor hours.
b. 168,000 direct labor hours.
c. 348,000 direct labor hours.
d. Cannot be determined from the information provided.

21. Management by exception

a. causes managers to be buried under voluminous paperwork.
b. means that all differences will be investigated.
c. means that only unfavorable differences will be investigated.
d. means that material differences will be investigated.

22. The difference between a budget and a standard is that

a. a budget expresses what costs were, while a standard expresses what costs
should be.
b. a budget expresses management's plans, while a standard reflects what actually
happened.
c. a budget expresses a total amount, while a standard expresses a unit amount.
d. standards are excluded from the cost accounting system, whereas budgets are
generally incorporated into the cost accounting system.

23. Hofburg’s standard quantities for 1 unit of product include 2 pounds of materials
and 1.5 labor hours. The standard rates are $2 per pound and $7 per hour. The
standard overhead rate is $8 per direct labor hour. The total standard cost of
Hofburg’s product is
a. $14.50.
b. $17.00.
c. $22.50.
d. $26.50.

24. Scorpion Production Company planned to use 1 yard of plastic per unit budgeted
at $81 a yard. However, the plastic actually cost $80 per yard. The company
actually made 3,900 units, although it had planned to make only 3,300 units. Total
yards used for production were 3,960. How much is the total materials variance?
a. $48,600 U
b. $4,860 U
c. $3,960 F
d. $900 U
25. A favorable variance
a. is an indication that the company is not operating in an optimal manner.
b. implies a positive result if quality control standards are met.
c. implies a positive result if standards are flexible.
d. means that standards are too loosely specified.

26. If a payback period for a project is greater than its expected useful life, the
a. project will always be profitable.
b. entire initial investment will not be recovered.
c. project would only be acceptable if the company's cost of capital was low.
d. project's return will always exceed the company's cost of capital.

27. The capital budgeting technique that indicates the profitability of a capital
expenditure is the
a. profitability index method.
b. net present value method.
c. internal rate of return method.
d. annual rate of return method.

28. If a project costing $80,000 has a profitability index of 1.00 and the discount rate
was 12%, then the present value of the net cash flows was
a. $80,000.
b. less than $80,000.
c. greater than $80,000.
d. undeterminable.

29. Performing a post-audit is important because

a. managers will be more likely to submit reasonable data when they make
investment proposals if they know their estimates will be compared to actual
results.
b. it provides a formal mechanism by which the company can determine whether
existing projects should be terminated.
c. it improves the development of future investment proposals because managers
improve their estimation techniques by evaluating their past successes and
failures.
d. all of these.

30. Carr Company is considering two capital investment proposals. Estimates

regarding each project are provided below:
Project Soup Project Nuts
Initial investment $400,000 $600,000
Annual net income 30,000 46,000
Net annual cash inflow 110,000 146,000
Estimated useful life 5 years 6 years
Salvage value -0- -0-

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1
Periods 9% 10% 11% 12%
5 3.890 3.791 3.696 3.605
6 4.486 4.355 4.231 4.111

The annual rate of return for Project Soup is

a. 7.5%. b. 15.0%.
c. 27.5%. d. 55%.
SECTION B PROBLEM SOLVING QUESTIONS 55 MARKS
QUESTION 31 INCREMENTAL ANALYSIS 10 MARKS

A recent accounting graduate from Marvel State University evaluated the operating
performance of Fanning Company's four divisions. The following presentation was made
to Fanning's Board of Directors. During the presentation, the accountant made the
recommendation to eliminate the Southern Division stating that total net income would
increase by $60,000. (See analysis below.)
Other Three Divisions Southern Division Total
Sales $2,000,000 $480,000 $2,480,000
Cost of Goods Sold 950,000 400,000 1,350,000
Gross Profit 1,050,000 80,000 1,130,000
Operating Expenses 800,000 140,000 940,000
Net Income $ 250,000 $ (60,000) $ 190,000

For the other divisions, cost of goods sold is 80% variable and operating expenses are
70% variable. The cost of goods sold for the Southern Division is 30% fixed, and its
operating expenses are 75% fixed. If the division is eliminated, only $15,000 of the fixed
operating costs will be eliminated.

Instructions
Do you concur with the new accountant's recommendation? Present a schedule to
support your answer.

QUESTION 32 BUDGETARY PLANNING 25 MARKS

(A) Cruises, Inc. has budgeted sales revenues as follows:
June July August
Credit sales $135,000 $125,000 $ 90,000
Cash sales 90,000 255,000 195,000
Total sales $225,000 $380,000 $285,000

Past experience indicates that 60% of the credit sales will be collected in the month of
sale and the remaining 40% will be collected in the following month. Purchases of
inventory are all on credit and 70% is paid in the month of purchase and 30% in the
month following purchase. Budgeted inventory purchases are:
June $300,000; July 240,000; August 105,000

Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000
each month, (b) dividends of $103,000 will be paid in July, and (c) purchase of
equipment in August for $30,000 cash.

The company wishes to maintain a minimum cash balance of $20,000 at the end of each
month. The company borrows money from the bank at 6% interest if necessary to
maintain the minimum cash balance. Borrowed money is repaid in months when there is
an excess cash balance. The beginning cash balance on July 1 was $50,000.

Instructions
(A) Prepare a cash budget for the months of July and August. Prepare separate schedules
for expected collections from customers and expected payments for purchases of
inventory. 15 Marks

(B) What is participatory budgeting? What are its potential benefits and disadvantages?
10 Marks
QUESTION 33 STANDARD COSTING 20 MARKS

Actual results for 2013 are presented below:

1. Direct materials purchases were 246,000 pounds of aluminum which cost
$1,020,900.
2. Direct materials used were 220,000 pounds of aluminum.
3. Direct labor costs were $575,260 for 58,700 direct labor hours actually worked.
4. Total manufacturing overhead was $352,000.
5. Actual production was 114,000 baseball bats.

Instructions
(a) Compute the following variances: (10 MARKS)
1. Direct materials price.
2. Direct materials quantity.
3. Direct labor price.
4. Direct labor quantity.
5. Total overhead variance.
(b) Prepare the journal entries to record the transactions and events in 2013.
(10 MARKS)

~ THE END ~
 FORMULAE

1. Materials price variance = (AQ × AP) – (AQ × SP)

2. Materials Quantity variance = (AQ × SP) – (SQ × SP)
3. Direct labor price variance = (AH × AR) – (AH × SR)
4. Direct labor quantity variance = (AH × SR) – (SH × SR)
5. Total overhead variance = Actual overhead – Overhead applied
6. Annual rate of return = Expected annual net income / Average investment
7. Cash payback period = Cost of capital investment / Annual cash inflow
8. Profitability index = Present value of net cash flows / Initial investment
9. Net present value = Present value of net cash flows – Capital investment
10. Markup Percentage = Desired ROI per unit / Total Unit Cost
11. Target selling price per unit = Total unit cost + (Total unit cost × Markup %)
12. Minimum transfer price = Variable cost + Opportunity cost
 AF102 SECTION A

Multiple Choice Answer Sheet

Name:____________________________ ID Number: ____________________

Circle only one answer per question.

If you circle more than one answer, you will receive a mark of zero for that
question.
If you change your mind, cross out your original answer and circle your new
answer.
1 A B C D
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