- Group 1 -

International
Business
Administration

Written exam
General information

Course: Management Accounting Group: 1

Course code: BAB01 Type of exam: Closed book

Date: December 7, 2007 Time: 9.30 - 12.30 hrs.

Total number of pages

14
(including front page):

Instructions
• Write down your student name, student number and date on the separate answer-sheet. Check
that the group indicated in the answer sheet corresponds with the group of your exam. Indicate
your answers in pencil.
• All questions must be answered. An unanswered question will be regarded as an incorrect
answer.
• It is permitted to use a normal calculator, not a graphical or programmable one.
• It is not permitted to use a dictionary.

Additional information
• Total number of multiple choice questions: 30. We will correct for the gamble chance of 25%
(based on 4 possible answers).
• Number notation: thousands are separated with a comma, fractions with a dot. Examples:
10,000 = ten thousand
4.83 = 4 83/100 (said - 4 point 8 3, or 4 and 83 hundredths)
• Do not waste too much time if you have trouble working out a question, just resume with the next
questions.
• Beware! During the exam we control for fraud. Also using a mobile phone or similar
communication devices will be regarded as fraud.

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Question 1
Which of the following statements is true?

a. Service firms have little need for determining the cost of their services.
b. The concept of product costing is relevant only for manufacturing firms.
c. Service companies use cost information for planning and control purposes.
d. Mining and petroleum companies have no inventoriable costs.

Answer: c

Question 2

On which information is the assignment of direct labor cost to individual jobs based on?

a. Actual total payroll cost divided equally among all jobs in process
b. Estimated total payroll cost divided equally among all jobs in process
c. The actual time spent on each job multiplied by the wage rate
d. The estimated time spent on each job multiplied by the wage rate

Answer: c

Question 3
Department IPX is the first step in the firm’s manufacturing process. Data for the current quarter’s
operations are as follows:

Number of units

Beginning work in process (70% complete) 30,000

Units started this quarter 580,000
Units completed this quarter and transferred out 550,000
Ending work in process (60% complete) 60,000

Materials are added at the beginning of the process. Conversions costs (labor and capital costs) are
incurred uniformly. The firm uses FIFO method of inventory accounting.

How many equivalent units of conversion costs were used in the current quarter in Department IPX?

a. 540,000
b. 560,000
c. 565,000
d. 570,000

Answer: c

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Units Materials Conversion Costs

Beginning Work-In-Process
(70% complete) 30,000 0 30% × 30,000 = 9,000
Units started this quarter 580,000
Units to account for 610,000

Units completed this quarter

and transferred out 550,000
Ending Work-In-Process
(60% complete) 60,000 60,000 60% × 60,000 = 36,000
Units accounted for 610,000

Units completed this quarter 550,000

less: Beginning Work-In-Process (30,000)
Units started and completed
this quarter 520,000 520,000 100% × 520,000 = 520,000
Total equivalent units 580,000 565,000

Question 4

Which of the following statements about costing is correct?

a. Costs that are not directly traceable to a particular department are known as uncontrollable
costs.
b. If a product cost is neither direct labor nor direct materials, then it must be manufacturing
overhead.
c. Direct material cost plus conversion cost is known as prime cost.
d. Costs that are controllable in the long run are also controllable in the short run.

Answer: b

Question 5

Varilux produces a single product and sells it for €10 per unit. At the beginning of the year, there were
1,000 units in inventory. Upon further investigation, you discover that units produced last year had a
€3 of fixed manufacturing costs and €2 of variable manufacturing costs. During the current year,
Varilux produced 10,000 units of product. Each unit generated €3 of variable manufacturing costs.
Total fixed manufacturing cost for the current year was €40,000. Selling and administrative costs
consisted of €12,000 of variable costs and €18,000 of fixed costs. There were no inventories at the
end of the current year.

What is the net income for the current year under absorption costing in relation to variable costing?

a. €2,000 more.
b. €3,000 less.
c. €4,000 more.
d. €4,000 less.

Answer: b

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Varilux
Income Statements (Absorption and Variable Costing)
Current Year (in 000's)

Absorption Variable
Costing Costing
Revenues (1,000 + 10,000) x €10 €110 €110
Less: Cost of goods sold:
Beginning inventory (1,000 units) (5) (2)
This period (10,000) 70* 30

Gross margin 35 78

Less: Fixed factory overhead (40)

Selling and administrative costs (30) (30)

Net income € 5 € 8

* 10,000 × €3 + €0,000

In this problem absorption costing produces a lower net income figure than variable costing.
The reason for this is that sales exceed current year production. Under variable costing only
this year's fixed costs are on the income statement. Under absorption costing not only are this
year's fixed costs on the income statement but also some of the prior year's fixed costs because
beginning inventories under absorption costing contain some prior-year fixed costs. The
difference in net income is €3,000 and results from the fixed costs in the beginning inventory
written off this period under absorption costing. It is the 1,000 units in beginning inventory times
the €3 of fixed cost per unit.

Question 6

The following statements refer to absorption and variable costing.

I. The fixed-overhead volume variance under variable costing does not exist.
II. Under variable costing, the level of production determines the break-even.
III. Under absorption costing, both level of sales and level of production determine the break-
even point.

Which of the previous statement(s) is(are) correct?

a. I only
b. II only
c. I and III only
d. II and III only

Answer: c.

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Question 7

Which costs have no obvious relationship to levels of output activity, but are determined as part of the
periodic planning process?

a. Discretionary fixed costs

b. Committed fixed costs
c. Capacity costs
d. Engineered costs

Answer: a

Question 8

The Morton Company processes unprocessed goat milk up to the split-off point where two products,
condensed goat milk and skim goat milk result. The following information was collected for the month
of October:

Direct Materials processed: 65,000 gallons (shrinkage was 10%)

Production: condensed goat milk 26,100 gallons

skim goat milk 32,400 gallons

Sales: condensed goat milk €3.50 per gallon

skim goat milk €2.50 per gallon

The costs of purchasing the 65,000 gallons of unprocessed goat milk and processing it up to the split-
off point yield a total of 58,500 gallons. Joint costs were €72,240. There are no beginning and ending
inventory balances.
Condensed goat milk may be processed further to yield 19,500 gallons (the remainder is shrinkage) of
a medicinal milk product, Xyla, for an additional processing cost of €3 per usable gallon. Xyla can be
sold for €18 per gallon.
Skim goat milk can be processed further to yield 28,100 gallons of skim goat ice cream, for an
additional processing cost per usable gallon of €2.50. The product can be sold for €9 per gallon.

Using estimated net realizable value, what amount of the €72,240 of joint costs would be allocated
respectively to Xyla and the skim goat ice cream?

a. €41,971 and €30,269

b. €44,471 and €27,769
c. €32,796 and €39,444
d. €36,120 and €36,120

Answer: b

XYLA Skim Goat Total

Sales 19,500 x €18 = €351,000 28,100 x €9 = €252,900 €603,900
Less: Sep cost 19,500 x €3 = € 58,500 28,100 x €2.50 = € 70,250
Est. NRValue €292,500 €182,650 €475,150
Weighting .6156 .3844
Jt costs allocated €72,240 x .6156 = €44,471 €72,240 x .3844 = €27,769

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The following information applies to Question 9 and Question 10

At its Rotterdam plant, Milan Pasta produces two types of pasta: spaghetti and fettuccine. The two
pastas are produced on the same machines, with different settings and slightly different raw materials.
The fettuccine requires more inspection time. The total daily cost of inspection is €500. Here are the
daily production data for the two products:

Spaghetti Fettuccine
Pounds produced 6,000 2,000
Machine minutes per pound 0.20 0.40
Inspection hours per product line 8 24

Question 9

What is the inspection cost per pound of fettuccine using traditional absorption costing with number of
machine hours as the allocation base?
a. 10.00 Euro cents
b. 14.00 Euro cents
c. 15.25 Euro cents
d. 16.00 Euro cents

Answer: a

Traditional absorption costing based on machine hours:

Spaghetti Fettuccine Total

Pounds produced 6,000 2,000
Machine minutes per pound 0.2 0.4
Machine minutes per day 1,200 800 2,000
Percent of time 60% 40% 100%

Inspection cost €300 €200 €500

Inspection cost/lb. €0.05 €0.10

Fettuccine’s inspection cost per pound of €0.10 is twice as high as spaghetti’s of €0.05
because fettuccine takes twice as much machine time per pound as spaghetti (0.4 minutes
per pound vs. 0.2 minutes).

Question 10

What is the inspection cost per pound of fettuccine using activity-based costing?

a. 12.00 Euro cents

b. 14.50 Euro cents
c. 18.75 Euro cents
d. 20.00 Euro cents

Answer : c

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Activity-based costing using inspection time.

Spaghetti Fettuccine Total

Inspection hours 8 24 32
Percent inspection time 25% 75% 100%

Inspection cost €125 €375 €500

Pounds produced 6,000 2,000
Inspection cost/lb. €0.0208 €0.1875

Fettuccine’s per pound inspection cost is higher under ABC than absorption costing (€0.1875
vs. €0.10), whereas spaghetti’s inspection cost falls from €0.05 to €0.0208.

Question 11
Which of the following statements is correct?

a. Reengineering involves searching continually for marginal improvements in operations.

b. Activity analysis does not involve the root causes of events that trigger activities.
c. Customer profitability analysis is used in identifying non-value-added activities and pursuing
continuous improvement.
d. Any analysis of an investment in advanced manufacturing systems must consider the costs
and benefits of the equipment over the entire life of the equipment.

Answer: d

Question 12
Gotham University offers only high-tech graduate-level programs. Gotham has two principal operating
departments, Engineering and Computer Sciences, and two support departments, Facility and
Technology Maintenance and Enrollment Services. The base used to allocate facility and technology
maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is
number of credit hours for a department. The Facility and Technology Maintenance budget is
€350,000, while the Enrollment Services budget is €950,000. The following chart summarizes
budgeted amounts and allocation-base amounts used by each department:

Services Provided: (Annually)

Computer F&T Enrollment
Budget Engineering Sciences Maintenance Service
F&T
Maintenance €350,000 1,000 2,000 Zero 5,000
(in hours)
Enrollment
Service €950,000 24,000 36,000 2,000 Zero
(in credit hrs)

Using the step-down method, what amount of F&T Maintenance and Enrollment Service cost will be
allocated to Computer Sciences if the service department with the higher percentage of
interdepartmental support service is allocated first?

a. €87,500 from F&T Maintenance and €701,250 from Enrollment Services

b. €102,500 from F&T Maintenance and €600,250 from Enrollment Services
c. €124,750 from F&T Maintenance and €508,125 from Enrollment Services
d. €75,000 from F&T Maintenance and €372,000 from Enrollment Services

Answer: a

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F&T Maintenance provided to enrollment services = 5,000/8,000

Enrollment services provided to maintenance = 2,000/62,000
F&T Maintenance provides the greatest amount of service to support departments, so it is
allocated first.

F&T Maintenance €350,000 to Enrollment Services = €350,000 x 5/8= €218,750

to Engineering = €350,000 x 1/8= € 43,750
to Computer Science = €350,000 x 2/8= € 87,500

Enrollment Service costs of €950,000 + €218,750 = €1,168,750

are allocated to Engineering and Computer Science
to Engineering = €1,168,750 x 24/60 = €467,500
to Computer Science = €1,168,750 x 36/60 = €701,250

Question 13
Which of the following statements is correct?

a. In a one-time special order situation, if the price offered by the potential buyer is less than the
absorption cost per unit, then the producer should not accept the special offer.
b. When capacity is constrained, relevant costs equal incremental costs plus opportunity costs.
c. A company is considering adding a fourth product to use available capacity. A relevant factor
to consider is that corporate costs can now be allocated over four products rather than only
three.
d. When a firm maximizes profits it will simultaneously maximize opportunity costs.

Answer: b

Question 14

Elly Industries is a multiproduct company that manufactures 30,000 units of part Alpha each month.
The facilities now being used to produce part Alpha have a fixed monthly cost of €150,000 and a
capacity to produce 84,000 units per month. If Elly were to buy part Alpha from an outside supplier,
the facilities would be idle, but its fixed costs would continue at 40 percent of its present amount. The
variable production costs of part Alpha are €11 per unit.

If Elly Industries continues to use 30,000 units of part Alpha each month, it would realize a net benefit
by purchasing part Alpha from an outside supplier only if the supplier’s unit price is less than what
amount?

a. €12.00
b. €14.00
c. €15.25
d. €16.00

Answer: b

Each month Elly incurs €150,000 of fixed cost to have capacity to produce 84,000 units. They
are only using 30,000 units of that capacity now. If they outsource part Alpha, they will
continue to incur 40% of the fixed costs, or €60,000. However, they save €90,000 (€150,000 -
€60,000). Besides saving the fixed costs they save €330,000 of variable costs (€11 × 30,000)
or a total cost savings of €420,000. To be indifferent between outsourcing and continuing to
produce, the outside price must be €14 (€420,000 ÷ 30,000). An alternative way to solve the
problem and get the same answer is:

40% of Fixed Cost Fixed Cost

Outside Price + = Variable Cost +
30,000 Units 30,000 Units

P = €11 + (€150,000/30,000) – (€150,000x40%)/30,000

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The following information applies to Question 15 through 16:

For many years, Lehigh Corp. has used a straightforward cost-plus pricing system, marking its goods up
25 percent of total cost. The company has been profitable; however, it has recently lost considerable
business to foreign competitors that have become very aggressive in the marketplace. These firms
appear to use target costing. An example of Lehigh’s problem is typified by item DC66, which has the
following unit-cost characteristics:

Direct material €90

Direct labor €225
Manufacturing overhead €150
Selling and administrative expenses €75

The current market price for an identical product of comparable quality is €585, which is significantly
below what Lehigh is charging.

Question 15

What is Lehigh’s current selling price of item DC66?

a. €575
b. €600
c. €625
d. €675

Answer: d

Direct material……………………………... € 90
Direct labor………………………………… 225
Manufacturing overhead………………… 150
Selling and administrative expenses…. 75
Total cost………………………………. €540
Markup (€540 x 25%)……………………... 135
Selling price………………………………... €675

Question 16

If Lehigh used target costing for item DC66, by how much must costs be reduced if the company desires
to meet the market price and maintain its current rate of profit on sales?

a. €48
b. €58
c. €72
d. €80

Answer: c

Lehigh’s markup is €135, which is 20% of the current €675 selling price (€135 ÷ €675). To achieve a
20% rate of profit on a €585 selling price, the company must reduce its costs by €72 [540 – (1-
0.2)x585).

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Question 17

Which of the following will increase a company's breakeven point?

a. Increasing variable cost per unit

b. Increasing contribution margin per unit
c. Reducing its total fixed costs
d. Increasing the selling price per unit

Answer: a

Question 18
Amy Laura is opening a snowboard rental store. She rents snowboards for skiing on a weekly basis
for €75 per week including the boots. The skiing season is 20 weeks long. Laura can buy a
snowboard for €550, rent it for a season, and sell it for €250 at the end of the season. The store rent is
€7,200 per year. During the off-season, Laura sublets the store for €1,600. Salaries, advertising, and
office expenses are €26,000 per year. On average, 80 percent of the boards in any given week are
rented. After each rental, the boards must be resurfaced and the boots deodorized. Labor costs (not
included in the €26,000) and materials to prepare the board and boots to be rented again cost €7.00.
How many boards must Laura purchase in order to breakeven?

a. 34 boards
b. 40 boards
c. 48 boards
d. 55 boards

Answer: b

Fixed costs:
Store rent (net of sublet: €7,200 - €1,600) €5,600
Salaries, advertising and office expenses 26,000
31,600

Contribution margin per board per year:

Revenue per week €75
Refurbishing cost (7)
Contr. margin per board per week €68
x number of weeks 20
Seasonal contr. margin from 100% rental €1,360
x likelihood of rental 0.8
Expected seasonal contr. margin per board €1,088

Net cost per board (€550 - €250) €300

Net contr. per board per year €788

BEP = €31,600/€788 = 40.10 ≅ 40 boards

Question 19
Which of the following statements is correct?

a. A company with a high degree of operating leverage is at lesser risk during downturns in the
economy.
b. If a company has a degree of operating leverage of 2.0, that means a 20% increase in sales
will result in a 40% increase in variable costs.
c. If a company desires to increase its safety margin, it should increase its sales volume.
d. In multiproduct situations when sales mix shifts toward the product with the lowest contribution
margin, the breakeven quantity will decrease.

Answer: c

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Question 20
Allison Company manufactures and sells television sets. Assembly Division (AD) buys television
screens from the Screen Division (SD) and assembles the TV sets. The SD, which is operating at
capacity, incurs an incremental manufacturing cost of €80 per screen. The SD can sell all its output to
the outside market at a price of €120 per screen, after incurring a variable marketing and distribution
cost of €5 per screen. If the AD purchases screens from outside suppliers at a price of €120 per
screen, it will incur a variable purchasing cost of €3 per screen. Allison division managers can act
autonomously to maximize their own division’s operating income.

What is the minimum transfer price at which the SD manager would be willing to sell screens to AD?

a. €112
b. €115
c. €120
d. €123

Answer: b

The minimum transfer price that the SD would demand from the AD is the net price it could obtain
from selling its screens on the outside market: €120 minus €5 marketing and distribution cost per
screen, or €115 per screen. The SD is operating at capacity. The incremental cost of manufacturing
each screen is €80. Therefore, the opportunity cost of selling a screen to the AD is the contribution
margin the SD would forego by transferring the screen internally instead of selling it on the outside
market.

Contribution margin per screen = €115 – €80 = €35

Using the general guideline,

Minimum transfer Incremental cost per Opportunity cost per

= screen inccurred up to + screen to the
price per screen
the point of transfer selling division

= €80 + €35 = €115

Question 21
When excess capacity exists, what is the opportunity-cost component of the transfer price in the general
transfer-pricing formula?

a. Zero.
b. Goal congruent.
c. Equal to variable costs incurred to the point of transfer.
d. Equal to full costs incurred to the point of transfer.

Answer: a

Question 22
What is the managerial objective of a company which favors the residual income approach in its
performance measurement and evaluation system?

a. Concentrate on maximizing an absolute amount of dollars

b. Concentrate on maximizing a percentage return
c. Maximize the investment turnover ratio

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d. Maximize return on sales

Answer: a

Question 23

When machine-hours are used as an overhead cost-allocation base, what is the MOST likely cause of
a favorable variable overhead spending variance?
a. Excessive machine breakdowns
b. The production scheduler efficiently scheduled jobs
c. A decline in the cost of energy
d. Strengthened demand for the product

Answer: c

The following information applies to Question 24 through 26:

The following data are available for a manufacturing department for the current year (U = unfavorable
variance; F = favorable variance). The department makes a single product that requires three hours of
labor units of finished product. The budgeted volume for the year was 30,000 direct labor hours.

Overhead efficiency variance €4,000 U

Budgeted fixed overhead €900,000
Number of units produced 11,000 units
Standard direct labor wage rate €15 per direct labor hour
Total overabsorbed (or overapplied) overhead variance €92,000 F
Direct labor efficiency variance €15,000 U

Question 24

What is the overhead rate per direct labor hour of the manufacturing department?

a. €30
b. €32
c. €34
d. It cannot be calculated because not enough information is provided.

Answer: c

Expected volume = 30,000 direct labor hours (BV)

Standard volume, SV = 33,000 direct labor hours (11,000 × 3) (SV)

Direct Labor Efficiency Variance = (AV – SV) × WS

€15,000 = (AV – 33,000) × 15

Actual number of direct labor hours = AV = 34,000 hours

OH Eff. Variance = VOHR x (AV – SV)

€4,000 U = VOHR (34,000 – 33,000)

Variable Overhead Rate,VOHR = €4/direct labor hour

Overhead Rate, OHR = (FOH + VOH × BV)/BV

= (€900,000 + €4 × 30,000)/30,000 = €34

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Question 25

What was the actual overhead of the manufacturing department?

a. €1,030,000
b. €1,100,000
c. €1,180,000
d. It cannot be calculated because not enough information is provided.

Answer: a

OH Volume Variance = Flexible Budget @ Standard volume – OH absorbed

= €900,000 + €4 × 33,000 – €34 × 33,000

= €90,000 F

OH Spending Var. = Total OH Var. – OH Efficiency Var. – OH Vol. Var.

= €92,000 F + €4,000 U – €90,000 F = €6,000 F

Actual Overhead: Spending Variance = AOH – flexible budget @ Actual volume

€6,000 F = AOH – (€900,000 + 4 × 34,000)

AOH = €1,030,000

Question 26

What was the direct labor wage rate variance of the manufacturing department?

a. €30,000 F
b. €40,500 F
c. €20,200 U
d. It cannot be calculated because not enough information is provided.

Answer: d.

Question 27

MagicLand is a new set of children’s action toys consisting of 3 separate sold pieces: Matt, Kim and
the flying carpet (FC). The FC can be used by itself or it can hold either Matt or Kim or both. With male
and female action figures, MagicLand toys are targeted at both boys and girls aged 6 to 10.
MagicLand is sold to wholesalers who sell to toy stores. Here are budgeted and actual sales data for
the first quarter:

Matt Kim FC
Standard sales price €8.00 €8.00 €12.00
Standard quantity 24,000 20,000 6,000

Actual sales price €7.50 €8.20 €11.80

Actual quantity 23,000 22,000 7,000

What is the mix variance for the product Kim?

a. €8,000 favorable
b. €9,600 favorable
c. €10,500 favorable
d. €11,200 favorable

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Answer: b

52,000 x (22,000/52,000 – 20,000/50,000) x €8.00 = €9,600

Question 28

What is the process of following up only on significant cost variances?

a. Variance proration
b. Management by exception
c. Balanced scorecard
d. Budgetary slack

Answer: b.

Question 29

If the ending inventory of material is greater than beginning inventory, on which information is the
direct-material price variance based on?

a. Standard quantity allowed for actual production

b. Quantity used
c. Quantity purchased
d. Goods actually produced

Answer: c

Question 30

What is the first step in designing a management control system?

a. Evaluating management's performance

b. Establishing organizational goals
c. Preparing financial statements
d. Distinguishing between profit centers and cost centers

Answer: b

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