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Question 1 (14 points)

Nutley has a production department called PCPC. In 2021, PCPC produces 2,000 units. The cost
information of PCPC is as follows (Monetary values given in in e):

2p 1a Calculate the manufacturing overhead costs in 2021.

2p 1b PCPC applies manufacturing overhead on the basis of 125% of direct labor cost. Calculate the
amount of over- or under-applied overhead and indicate it is over- or under-applied.

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6p 1c Independent of your answers in a. and b., assume that the manufacturing overhead cost is
100,000, calculate the cost of sales at PCPC in 2021.

4p 1d PCPC has set the direct material I’s standard for its product.Standard costs for one unit of output:
Material I, 10 units of input at e2.3 per unit
PCPC had the following results in July: Units produced: 200 units
Material I purchased and used in July: 1900 units at e2.5

Compute the price and quantity variances for direct material I in July and indicate that they
are favorable or unfavorable.

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Question 2 (15 points)

Shenzhen Child Safety Products, Ltd. manufactures a child’s car seat. It is produced in three separate
departments: Molding, Assembling, and Finishing. The following information was obtained for the
Molding Department for the month of June. (Monetary values given in Chinese Yuan)

The Molding Department added the following 810,000 of costs:

The Molding Department completed and transferred out 4,000 units to the Assembling Department.
At June 30, 2,000 units were still in WIP. The degree of completion of WIP at June 30 was as follows:
Direct materials: 80%
Direct labour: 75%
Manufacturing overhead: 45%
The company uses weighted-average processing cost method.
3p 2a Compute the numbers of equivalent units for direct materials, direct labour, and manufacturing
overhead, respectively, in the Molding Department in June.

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6p 2b Compute the direct material cost per equivalent unit, direct labour per equivalent unit, and
manufacturing overhead cost per equivalent unit, respectively, in the Molding Department.

6p 2c Shenzhen Child Safety Products, Ltd. has two service departments: maintenance and general
factory administration(G&A). The company has decided to allocate the service departments costs to
production departments. The maintenance department costs are allocated on the basis of the size
of the area, and G&A department costs are allocated on the basis of the number of labour hours.
The following data appear in the company records for the current period:

Use the step method (start with Maintenance) to allocate the service department costs to
the production departments.

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Question 3 (20 points)

Cardiff Enterprises released the following figures from its records for the past two years:

There is no inventory in the beginning of Year 1.

6p 3a Prepare statements of income for year 2 using absorption costing.

6p 3b Prepare statements of income for year 2 using variable costing.

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2p 3c Comment on the two operating profit figures. Write a brief comment explaining why the operating
profits are different or the same.

3p 3d Suppose Cardiff uses variable costing. Compute the break-even point in units (rounded to the
nearest integer).

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3p 3e Suppose Cardiff uses variable costing and there is a tax rate of 30%. How many units must Cardiff
sell to earn a target after-tax income of 800,000 (rounded to the nearest integer).

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Question 4 (14 points)

ValOil Corporation plans to invest in oil-field equipment. The company’s investment analyst has made the
following estimates: (Monetary values given in Norwegian Krone, kr.)

Suppose that ValOil Corporation uses straight line depreciation of their equipment.
4p 4a Calculate the net cash flow in year 1 and 4, respectively, if ValOil Corporation invests in oil-field
equipment.

4p 4b Calculate the net present value of the oil-field equipment investment (Round to two decimal
places).

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2p 4c Would the project be financially viable if the new equipment had a zero salvage value? Explain
why.

Assume that the income tax rate is 28%. Please answer the following d. and e. by considering the
income tax.
2p 4d Calculate the net cash flow in year 1.

After ValOil Corporation invests in oil-field equipment, the market value of its equity will reach to kr. 2
million. The interest rate on ValOil’s kr. 1 million of long-term debt is 10%. The cost of equity capital is
14%.
2p 4e Calculate ValOil’s weighted-average cost of capital (round to two decimal places).

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Question 5 (12 points)

Klauer manufactures windows for the home-building industry. It has two divisions. The frame division
produces the window frames, and the glass division installs the glass and hardware.
The frame division can sell 10,000 units of frames per year directly to outside homebuilders for e400 per
unit. The glass division needs 5,000 units of frames to produce 5,000 units of windows per year. If the
glass division does not obtain 5,000 units from the frame division, it purchases them for e420 each from
the outside suppliers. It can sell 5,000 units of windows per year to the market for e950 per unit.
The unit-level cost of the window is detailed as follows: (Monetary values given in e)

2p 5a Assume that the frame division has excess capacity. Use the general rule to compute the transfer
price for window frames.

2p 5b Assume that the frame division has capacity that is limited to 10,000 units per year. Use the
general rule to compute the transfer price for window frames.

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The frame division has total assets of e3,000,000, and the window division has total assets of e2,500,000.
The frame division is considering the acquisition of a new asset that will expand its capacity from
10,000 to 15,000 units. The new investment has a cost of e600,000 and the annual fixed costs in the
frame division will increase from e100,000 to e110,000. All depreciation is included in the annual fixed
costs. The new investment does not change the unit-level cost. Ignore taxes.
Assume that the frame division sells 5,000 units to the window division at the transfer price.
4p 5c If there is a negotiated transfer price of e350, what is the frame division ROI (Return On
Investment) after acquisition of the new asset? (Round to two decimal places).

4p 5d If the frame division insists on using the general rule to set the transfer price, and the manager
of the frame division prefers a higher ROI, would he suggest investing in the new asset? Explain
why (hint: you can compare ROI in two situations).

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Question 6 (25 points)

CarreFive Group is a retailing company. The financial statement for CarreFive Group at the start of 2021
was as follows

The following is a summary of the transactions that took place during the year of 2021 (in millions
of euros):
1. Cash received from trade receivables amounted to 15;
2. Inventories were purchased on credit for 86;
3. Inventories were purchased for 32 cash;
4. Credit sales revenue amounted to 48 (cost 14);
5. Cash sales revenue amounted to 247 (cost 128);
6. Property and equipment are depreciated at 12% a year using the reducing balance method;
7. Electricity of 1.6 was paid. The electricity bill for the year of 2021 is for 1.8.

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7p 6a Open ledger accounts and record all transactions in the ledger accounts (no need to balance the
accounts at the end of the period)

(Some ledger accounts’ titles have been given as follows)

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6p 6b Prepare the trial balance

(Some ledger accounts’ titles have been given as follows)

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6p 6c Prepare the income statement as of December 31st, 2021

6p 6d Prepare the statement of financial position as of December 31st, 2021.

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