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1 University of Alberta School of Business Department of Accounting, Operations and Information Systems Accounting 424 Sample Midterm II Exam Instructor: Stringer Last Name First Name I.D. Number INSTRUCTIONS Read these instructions carefully 1. This is a closed-book exam. You may use a non-programmable calculator. 2. Check that you have a complete exam (a total of 9 pages, including this one). 3. Answer questions in the space provided. Please write neatly. 4. Carefully read the question and its requirements in their entirety before answering. 5. Please round all numbers to no less than two (2) decimal places, unless otherwise indicated. 6. Clearly show and label all calculations to facilitate the awarding of marks. Explicitly state any special assumptions that you make in answering a question. 7. If you un-staple the exam, you are responsible for ensuring that all pages are handed in. 8. Please stop writing when you are instructed to. Failure to cease writing or discussing your exam with others before handing it in, may result in a zero (0) being awarded for your exam. 9. You will have 80 minutes to write the midterm exam. There are a total of 70 marks available. QUESTION MARKS AVAILABLE MARKS AWARDED TOTAL 70

2 Question 1: (15 marks) Gether Corporation manufactures appliances. It has four divisions: Refrigerator, Stove, Dishwasher, and Microwave Oven. Each division is located in a different city and the head office is located in Mississauga, Ontario. Head office incurs a total of $14,255,000 in costs, none of which are direct costs of any of the divisions. Revenues, costs, and facility space for each division are as follows: Refrigerator Stove Dishwasher Microwave Oven Revenue $10,900,000 $18,800,000 $11,500,000 $6,780,000 Direct costs 5,700,000 10,400,000 6,200,000 3,220,000 Segment margin 5,200,000 8,400,000 5,300,000 3,560,000 Square meters of floor space occupied 130,000 90,000 80, ,000 Gether wants to allocate the indirect costs of headquarters on the basis of either square metres or segment margin for each division. Required (Parts A, B & C): A. Allocate the indirect headquarters costs to each division, first using square meters of space and then using segment margin as the allocation base. Calculate the division operating margins after each allocation in dollars and as a percentage of revenues. (11 marks) Page 2 of 9

3 B. Which allocation base do you prefer? Why? (2 marks) C. Should any of the divisions be dropped based on your calculations? Why or why not? (2 marks) Page 3 of 9

4 Question 2: (24 marks) Perfumes Unlimited Inc. buys bulk flowers and processes them into perfumes in a two-stage process. Their highest-grade perfume, Seduction, and a residue that is processed into a mediumgrade perfume, Romance, come from a certain mix of petals. In July, the company used 25,000 pounds of petals. The first stage is a joint process, Reduction, that reduces the petals to Seduction and the residue. This first stage had the following costs: $400,000 direct materials. $220,000 direct labour. $180,000 overhead and other costs. The additional costs of producing Romance in the second stage, Pressing, were as follows: $44,000 direct materials. $100,000 direct labour. $80,000 overhead and other costs. For July, total production equalled 10,000 ounces of Seduction and 42,000 ounces of Romance. There was no beginning inventory on July 1, nor were there uncompleted units. Packaging costs incurred for each product as completed were $120,000 for Seduction and $308,000 for Romance. The sales price of Seduction is $180 an ounce; Romance sells for $63 per ounce. Required (Parts A & B): A. Allocate joint costs using the estimated net realizable value method. (Note: Packaging and additional processing costs must be subtracted from revenue to compute net realizable values.) (13 marks) Additional space is provided on the next page for your calculations. Page 4 of 9

5 B. Allocate joint costs using the constant gross margin NRV method. (Note: Packaging and additional processing costs must be subtracted from revenue to compute net realizable values.). (11 marks) Page 5 of 9

6 Question 3: (24 marks) Better Corporation manufactures automobile headlight lenses. At the beginning of the year, the following budgeted standards were established for the manufacture of a single batch of lenses (100 lenses per batch): Input Amount Direct material 100 $2.00 per kg. $200 Direct labour 5 $18 per hr. 90 Manufacturing overhead: Fixed overhead $4 per direct labour hour 20 Variable overhead $6 per direct labour hour 30 Total budgeted cost per batch of 100 headlight lenses $340 Expected production volume per month is 5,000 direct labour hours. In January, 105,000 lenses were produced. There were no beginning inventories. Betterton recognizes and records all variances as early as possible. The following costs were incurred in January: Fixed manufacturing overhead $39,000 Variable manufacturing overhead $20,000 Direct labour 5,400 hours $99,900 Direct material used 102,000 kg. Direct material purchased 110,000 kg. $209,000 Required (Parts a & b): a. Prepare a complete variance analysis of (18 marks): a) Variable manufacturing overhead spending and efficiency variances b) Fixed manufacturing overhead spending and production-volume variances c) Direct labour price (wage-rate) and efficiency variances d) Direct materials price and efficiency variances Note: There is additional space on the next page for your calculations. Page 6 of 9

7 Question 3, continued Page 7 of 9

8 Question 3, continued b. Susan Phipps (your boss and a non-accountant) asks you to explain in non-technical terms the meaning of each variance. Prepare notes to Susan to explain the results of your calculations such that she can follow up on these variances as necessary. (6 marks) Page 8 of 9

9 Question 4: (7 marks) Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand for Regulars exceeds Computer Products' production capacity, which is limited by available machine-hours and direct manufacturing labour hours. The maximum demand for Special keyboards is 80 per month. Management desires a product mix that will maximize the contribution toward fixed costs and profits. Direct manufacturing labour is limited to 1,600 hours a month and machine hours are limited to 1,200 a month. The Regular keyboards require 20 hours of labour and 8 machine hours. Special keyboards require 34 labour hours and 20 machine hours. Required (Parts A & B): A. What is the appropriate linear programming objective to maximize Computer Products total contribution margin. Let R represent Regular keyboards and S represent Special keyboards. (2 marks) B. What are the appropriate linear programming constraint functions based on the information given in the question. (5 marks) Page 9 of 9