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Accounting 424 Intermediate Managerial Accounting

Sample Mid Term Examination II

Question 1 (15 marks) Joint cost allocation

ACME Mining Co. is a small coal mining operation. Each tonne of mined coal yields 40% Grade A coal, 40% Grade B coal, and 20% coal tar. Each tonne of coal tar processed yields one vat of coal tar. The entire production is sold to a nearby utility. The work-in-process control account shows that, in February, ACME mined 1,000 tonnes of coal at a cost of $12,000. There are no additional separable costs.

Grade A coal sells for $120 per tonne, Grade B coal sells for $80 per tonne, and coal tar sells for $20 per vat. ACME treats Grade A and Grade B coal as joint products and coal tar as a byproduct. Assume the ACME Mining Co. allocates the joint costs to Grade A and Grade B coal using the sales value at splitoff. The byproduct is recorded in inventory at production time at its expected sales value while the main products are recorded at their respective manufacturing costs. The estimated NRV of the byproduct is deducted from the cost of producing the main joint products.

Required:

a.   Show journal entries at the time of production to record the February mining costs and the

inventory of coal tar. What is the amount of joint cost to be allocated to Grade A and Grade B coal? 5 marks

b.  Allocate the joint costs determined above to the main products, Grade A and Grade B coal,

using the sales value at splitoff. Show the corresponding journal entries for recording the inventory of coal. (In this case the allocation of joint costs determines the inventory values for the main products because there are no further separable processing costs.) 5 marks

c.  Assume that the coal tar is sold for $3,800. Show the journal entries to record the sale. 3 marks

d.  At the time of sale, no sales revenue is recorded for the byproduct. Very briefly explain why.  2 marks

Question 3 (25 marks) Variance analysis

Variance Company’s budget for the year 2014 is shown in the table on the next page along with the actual amounts for the year (all amounts in thousands of dollars).

Required:

a.   Fill in the remainder of the table to show the flexible budget, the sales-volume variance and the flexible budget variances. Label the appropriate columns and provide calculations for the flexible budget amounts you enter. Assume all  variable costs change based on the number of units produced. Label all of the variances you enter as F (favourable) or U (unfavourable) 10 marks

b.   The static-budget variance on total variable costs is highly favourable. Based on  your detailed analysis in part a., and considering only the variable cost categories, 1) what can you conclude at this stage and 2) which variances require further investigation? Explain briefly. 6 marks

 

Actual Results

2014

 

 

 

Static Budget 2014

Units manufactured and sold

8,000

 

 

 

10,000

 

 

Sales Revenue

Variable Costs:

Direct Materials

Direct Labour

Variable Manufacturing Overhead

 

 

 

 

 

$ 246,000

 

 

 

$ 300,000

 

 

 

 

 

$  42,000

 

 

 

$   50,000

120,000

 

 

 

150,000

25,000

 

 

 

20,000

Total Variable Costs

187,000

 

 

 

220,000

Contribution Margin

Fixed Manufacturing Overhead

59,000

 

 

 

80,000

62,000

 

 

 

60,000

Operating Income (Loss)

$ (3,000)

 

 

 

$  20,000

c.   The fixed manufacturing overhead is allocated based on direct labour dollars. Calculate the standard fixed overhead allocation rate, and the spending and the production-volume variances for fixed manufacturing overhead. What is the amount of over-or under-allocated fixed overhead? 6 marks

d.   Assume that Variance Company uses standard costing and has no beginning or ending inventories of work-in-process. What is the cost of goods manufactured for 2014? 3 marks

 

 


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