(1) 2014-15 Term 2 (10 to 12 February, 2015): Test 1

Time allowed for this test is 75 minutes (1 hour and 15 minutes)

Q1

HL Ltd collected the following data for the past 10 months:

Period Selling Costs $ Sales $ Period Selling Costs $ Sales $

Jan $32,000 $95,000 Jun $42,260 $152,000

Feb $31,800 $97,000 Jul $31,000 $98,000
Mar $37,000 $126,000 Aug $34,000 $102,000
Apr $39,000 $125,000 Sep $43,000 $150,000
May $40,000 $148,000 Oct $39,800 $133,000

Use the high-low method to estimate the variable and fixed selling costs.

Workings and Answer

Sales Selling costs

H: June $152,000 $42,260

L: Jan $95,000 $32,000

Difference $57,000 $10,260

VC per
$0.18
$ sale
FC $14,900

To reduce variable costs by 20%, HL is considering outsourcing the sales

administration to a service firm, which will charge a monthly fee of $18,000.
Existing fixed costs remain unchanged.

What is your advice to HL?

Workings and Answer

may not be achievable based on historical trend

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QUESTIONS 2, 3 and 4

RG Ltd. uses the Step Method to allocate support departments costs to operating
departments. Overhead are then applied to products using pre-determined
departmental overhead rates and variances are resolved using the Proportional method.

At the beginning of the year, RG Ltd. prepared the budget for the year as follows:
Support Depts Operating Depts
HR Maintenance Machining Assembly
Budgeted Overhead $150,000 $48,000 $275,000 $430,000
before allocation
Direct labour hours 20,000 74,500
Machine hours 70,000 10,000
No. of employees 15 25 40 60
Sqm Space occupied 5,000 10,000 75,000 25,000

Q2 Show ALL relevant workings to allocate the support departments costs to the
operating departments.

Workings and Answers

Sequence of allocation

Allocation of support departments costs

Support Depts Operating Depts

HR Maintenance Machining Assembly
Budgeted Overhead $150,000 $48,000 $275,000 $430,000
before allocation
From __________ -$150,000 150k * 150k * 150k *
25/125 40/125 60/125
= 30,000 = 48,000 = 72,000

Subtotal $0 $78,000

From ___________ -$78,000 78k * 78k *

75/(75+25) 25/(75+25)
= $58,500 = $19,500

Budgeted Overhead
$0 $0 $381,500 $521,500
after allocation

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Q3 There were no WIP and Finished Goods inventories at the beginning of the year.
During the year, $178,200 direct materials were used in production. Below are
more details about the actual costs and resources used by the operating
departments to carry out the jobs during the year:
Machining Assembly
Overhead costs including $370,000 $514,800
allocation from Support Depts
Direct labour hours 18,000 DLH 71,500 DLH
(Wage rate = $10 per DLH)
Machine hours 74,000 MH 8,000 MH

All the jobs started in the year were completed and delivered to customers except
for Job J5354 that was still incomplete at the end of the year.

J5354
Direct materials used $22,750
Direct labour hours. Includes 25% 10,000 DLH
worked during overtime that is due to
scheduling issues. Overtime premium
is 50% of normal wages
Machine hours 5,000 MH

Compute the predetermined overhead rates for the Machining and Assembly
Departments.

Answer and Workings

POR of Machining Dept = _______________________

$381,500/70,000MH = $5.45 per MH

POR of Assembly Dept = ________________________

$521,500/74,500 DLH = $7 per DLH

Show ALL relevant workings to compute the cost of Job5354.

Answer and Workings

Cost of Job 5354 $220,000

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Q4 Complete the following control accounts in the General Ledger: Manufacturing
Overhead account, WIP account, COGS account (after resolving overhead
variances). Round your answers to the nearest whole numbers.

Answer and Workings

Manufacturing Overhead

Facilities

WIP

Bal $217,886

COGS

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Q5
CY Ltd sells two products. The preliminary budget information for next year follows:

Product C Product Y
Sales $200,000 $800,000
Variable cost $250,000 $100,000

Total fixed cost for the year is budgeted at $260,000.

Assuming sales mix remains unchanged, determine the sales of Product C and
Product Y for the company to achieve a margin of safety of 80% of sales.

Answer
Product C: _________________________

Product Y: _________________________

Workings

Product C Product Y Total

Sales $200,000 $800,000 $1,000,000
Variable cost $250,000 $100,000 $350,000
CM -$50,000 $700,000 $650,000

CMR of company = 0.65

FC = $260,000
BE% = $260/650 = 0.4
BE$ = 0.4 * $1m = $400,000

At $R sales, to achieve MOS of 20%, BE% = 80%

$400K/$R = 80%
$R = $2,000,000
Product C = $200K/$1000K* $2m = $400,000
Product Y = $800K/$1000K* $2m = $1,600,000
00/$8,000,000 = 0.6175

Breakeven sales of company = $2,778,750/0.6175 = $4,500,000 comprising:

Sale of Product A = 0.25 * $4.5m = $1,125,000

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Q6
Ace Ltd uses normal costing. Manufacturing overheads are allocated based on
planned production of 1,200 units. All over- or under-applied overheads are written
off to cost of goods sold. The CEO proudly announced net profit of $8,500 for the
year:

Qty $ $
Sales Revenue 1,000 units $100,000
Begin Inventory 500 units $32,500
Production 1,500 units $97,500
Ending Inventory 1,000 units $65,000
Overapplied Overhead -$13,500
Cost of goods sold $51,500
Gross Profit $48,500
S&GA (all fixed) $40,000
Net Profit $8,500

Complete the table to compute the net profit if variable costing is used.

Answer

Net Profit $8,500

(Absorption Costing)
Reconciled as follows:

Change in inventory (1,500 units-1,000 units) -$22,500

x
FOHR ($45)

Net Profit/(Loss) -$14,000

(Variable Costing) Net loss

Workings

VC per unit = $20 for checking:

($100-$20) * 1,000 units (1,200 * $45) - $40,000 = -$1,000

Which method would be more appropriate for performance evaluation? Why?

Answer

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Q7
FX Ltd produces three products. Key information from its 2015 budget is given in the
table below:

A B C
Sales price per unit $150 $680 $320
Raw materials (kg per unit) 5 20 8
Direct labour (hr per unit) 2 10 5
Material costs per kg $8
Direct labour cost per hr $12
Budgeted Sales Qty (no. of units) 10,000 500 5,000
Batch size (no. of units per batch) 200 10 50
No. of customers 15 20 5

Budgeted overhead for the year is $1m and it is estimated that 20% is driven by direct
labour hours, 70% by batches and 10% by number of customers.

A customer wanted to buy 200 units of A and 5 units of B.

Compute the customer margin.

Answer

Activity rates (DLH) =

Activity rates (Batches) =
Activity rates (Customers) =

Product A Product B Total

Customer margin $7,900

Workings

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Workings

The customer can be persuaded to increase his order but he wants to maintain the
same product mix as the original order. What is the minimum order that you would
want the customer to place? Recompute the customer margin based on your
recommendation.

Workings and Answer

Minimum order: ______________ Product A and ____________ Product B

Product A Product B Total

Customer margin $7,900

End of Test

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