The Islamic University of Gaza

Faculty of Commerce
Department of Accounting

Advanced Managerial Accounting.

First Term Final Exam (2015/2016).
Master for Accounting and Finance
Master of Business Administration.

Please read the following instructions before answering the questions:

(a) Time Allowed for this exam: Three hours.

(b) Answer Eight Questions only.
(c) For each Question 6.25 Mark.
(d) Use the provided answer book.
(e) Insert your name and student No. below.

Student Name……………………………………………………

Student No………………………………………………………

Prof. Salem Abdalla Helles

3 Jan., 2016
 Question No. (1)

A) Home Run Sports (HRS) manufactures and sells baseballs.

Assume production equals sales. Budget data for February 2015
are as follows:
Current assets $ 400,000
Long-term assets 600,000
Total assets $1,000,000
Production output 200,000 baseballs per month
Target Return on Investment (ROI) 30%
Fixed costs $400,000 per month
Variable cost $4 per baseball
Required:

1. Compute the minimum selling price per baseball necessary to

achieve the target ROI of 30%.
2. Using the selling price from requirement 1, separate the target ROI
into its two components Margin and Turnover.
3. Compute the Residual (RI) of the HRS for February 2015, using
the selling price from requirement 1. HRS uses a required rate of
return of 12% on total assets when computing RI.
4. In addition to his salary, S Ahmed, the manager of HRS, receives
3% of the monthly RI as a bonus. Compute Ahmed's bonus. Why
do you think Ahmed is rewarded using both salary and a
performance-based bonus? Ahmed does not like bearing risk.

B) What is meant by the terms six sigma and Mixed Costs?

Question No. (2)

Open doors, inc., produces two types of doors, interior and exterior,
the company's simple costing system has two direct cost categories
(materials and labor) and one indirect cost pool. The simple costing
system allocates indirect costs on the basis of machine-hours.
Recently, the owners of Open Doors have been concerned about a
decline in the market share for their interior doors, usually their
biggest seller. Information related to Open Doors production for the
most recent year follows:

2
 Interior Exterior
Units sold 3,200 1,800
Selling price $ 125 $ 200
Direct material cost per unit $ 30 $ 45
Direct manufacturing labor cost per hour $ 16 $ 16
Direct manufacturing labor-hours per unit 1.50 2.25
Production runs 40 85
Material moves 72 168
Machine setups 45 155
Machine-hours 5,500 4,500
Number of inspections 250 150

The owners have heard of other companies in the industry that are
now using an activity-based costing system and are curious how an
ABC system would affect their product costing decisions. After
analyzing the indirect cost pool for Open Doors, six activities were
identified as generating indirect costs; production scheduling,
material handling, machine setup, assembly, inspection, and
marketing. Open Doors collected the following data related to the
indirect cost activities:
Activity Activity Cost Activity Cost Driver
Production scheduling $95,000 Production runs
Material handling $45,000 Material moves
Machine setup $25,000 Machine Setups
Assembly $60,000 Machine-hours
Inspection $ 8,000 Number of inspections
Marketing costs were determined to be 3% of the sales revenue for
each type of door.
Required:
1. Calculate the cost of an interior door and an exterior door under the
existing simple costing system.
2. Calculate the cost of an interior door and an exterior door under an
activity-based costing system.
3. Compare the costs of the doors in requirements 1 and 2. Why do the
simple and activity-based costing systems differ in the cost of an interior
and exterior door?

Question No. (3)

A) OL Company manufactures ceramic vases. It uses its standard costing

system when developing its flexible-budget amounts. In April 2015,
2,000 finished units were produced. The following information relates to its
two direct manufacturing cost categories: direct materials and direct
manufacturing labor.
Direct materials used were 4,400 kilograms (kg). The standard
direct materials input allowed for one output unit is 2 kilograms at $15 per
3
 kilogram. OL purchased 5,000 kilograms of materials at $16.50 per
kilogram, a total of $82,500.
Actual direct manufacturing labor-hours were 3,250, at a total cost
of $66,300. Standard manufacturing labor time allowed is 1.5 hours per
output unit, and the standard direct manufacturing labor cost is $20 per
hour.
Required: Calculate the direct materials price variance and quantity
variance, and the direct manufacturing labor rate variance and efficiency
variance. Base the direct materials price variance on a flexible budget for
actual quantity purchased, but base the direct materials efficiency variance
on a flexible budget for actual quantity used.

B) West Gaza Company (WGC) produces three products, A110,

B382, and C657. Unit data for the three products follows:

Product
A110 B382 C657
Selling price $84 $56 70
Variable costs
Direct materials 24 15 9
Labor and other costs 28 27 40
Quantity of Bistide per unit 8 lb. 5 lb. 3 lb.
All three products use the same direct material, Bistide. The demand for
the products far exceeds the direct materials available to produce the
products. Bistide costs $3 per pound and a maximum of 5,000 pounds is
available each month. WGC must produce a minimum of 200 units of
each product.

Required: How many units of product A110, B382, and C657 should
WGC Produce?

Question No. (4)

On May 1, 2015, Bovar Company began the manufacture of a new paging
machine known as Dandy. The company installed a standard costing system to
account for manufacturing costs. The standard costs for a unit of Dandy follow:
Direct materials (3.lb. at $5 per lb.) $15.00
Direct manufacturing labor (1/2 hour at $20 per hour) $10.00
Manufacturing overhead (75% of direct manufacturing labor costs) $7.50
$32.50

The following data were obtained from Bovar’s records for the month of May:

Revenues $125,000
May's purchases of direct materials $68,250
4
 Direct materials price variance $3,250
Direct materials quantity variance $2,500
Direct manufacturing labor rate variance $1,900
Direct manufacturing labor efficiency variance 2,000

Actual production in May was 4,000 units of Dandy, and actual

sales in May were 2,500 units.
The amount shown for direct materials price variance applies
to materials purchased during May.
There was no beginning inventory of materials on May 1, 2015.
Required:
Compute each of the following items for Bovar for the month of May. Show
your computations.
1- Actual quantity of direct materials purchased (in pounds).
2- Actual direct materials price per pound.
3- Actual quantity of direct materials used (in pounds).
4- Actual direct manufacturing labor-hours worked
5- Actual direct manufacturing labor wage rate
Question No. (5)

The DP Company has three product lines of belts—A, B, and C—

with contribution margins of $3, $2, and $1, respectively. The
president foresees sales of 200,000 units in the coming period,
consisting of 20,000 units of A, 100,000 units of B, and 80,000 units
of C. The company’s fixed costs for the period are $255,000.
Required:
1. What is the company’s breakeven point in units, assuming that
the given sales mix is maintained?
2. If the sales mix is maintained, what is the total contribution
margin when 200,000 units are sold? What is the operating
income?
3. What would operating income be if 20,000 units of A, 80,000
units of B, and 100,000 units of C were sold? What is the new
breakeven point in units for the Company and for each product
line, if these relationships persist in the next period?

Question No. (6)

A) Gaza Corporation manufactures and sells three different types of high-

quality sealed ball bearings. The bearings vary in terms of their quality
specifications- primarily with respect to their smoothness and roundness.
They are referred to as fine, Extra-fine, and super-fine bearings.
Machine time is limited. More machine time is required to manufacture
the Extra- fine and super-fine bearings. Additional information is
.provided below
5
 Product
Super-Fine Extra-Fine Fine
$16.00 $10.00 $6.00 Selling price
11.00 6.50 4.00 Variable costs
$5.00 $3.50 $2.00 Contribution margin
0.08 0.04 0.02 Machine hours required
Total fixed costs: $234,000
.Required: Answer each of the following questions

(a) Ignoring the machine time constraint, what strategy would appear
optimal?
(b) What is the contribution margin per unit of limited resource for
each type of bearing?
(c) If additional machine time could be obtained, how should the
additional capacity be used?
B) What is meant by the terms Balance scorecard and transfer
pricing ?

Question No. (7)

A) Brooke Motors (BM) is a small car dealership. On average, it sells

a car for $27,000, which it purchases from the manufacturer for
$23,000. Each month, BM pays $48,200 in rent and utilities and
$68,000 for salespeople’s salaries. In addition to their salaries,
salespeople are paid a commission of $600 for each car they sell.
B M also spends $13,000 each month for local advertisements. Its tax
rate is 40%.
Required
1. How many cars must B M sell each month to break even?
2. BM has a target monthly net income of $51,000. What is its
target monthly operating income? How many cars must be sold
each month to reach the target monthly net income of $51,000?
3.Compute the BM's margin of safety as a percentage.
B)The Express Banquet has two restaurants that are open 24 hrs a
day. Fixed costs for the two restaurants together total $459,000 per
year. Service varies from a cup of coffee to a full meal. The average
sales check per customer is $8.50. The average cost of food and other
variable costs for each customer is $3.40. The income tax rate is 30%.
Target net income is $107,100.
Required: 1. Compute the revenues needed to earn the target net
income.
2. How many customers are needed to break even? To earn net
income of $107,100?
3. Compute net income and degree of operating leverage, if the
number of customers is 170,000.
6
 Question No. (8)

A) Big Burgers (BB) is considering a proposal to invest in a speaker

system that would allow its employees to service drive- through
customers. The cost of the system (including installation of special
windows and driveway modifications) is $40,000 J Sagr, manager
of BB's expects the drive- through operations to increase annual
sales by $25,000, with a 40% contribution margin ratio. Assume
that the system has an economic life of six years, at which time it
will have no disposal value. The required rate of return is 12%.
Required:
1. Compute the payback period. Is this a good measure of profitability?
2. Compute the NPV. Should Sagr accept the proposal? Why or why not.
3. Using the ARR model, compute the rate of return on the initial investment.
4. Compute the profitability index.
B) What is the difference, if any, between the cost indifference
point and the price indifference point?

Question No. (9)

A) Metro Supermarkets has decided to increase the size of its Memphis

store. It wants information about the profitability of individual product
lines: soft drinks, fresh produce, and packaged food. Metro provides the
following data for 2015 for each product line:
Soft Drinks Fresh Produce Packaged
Food
Revenues $317,400 $840,240 $483,960
Cost of goods sold $240,000 $600,000 $360,000
Cost of bottles returned $ 4,800 $ 0 $ 0
Number of Purchase orders placed 144 336 144
Number of deliveries received 120 876 264
Hours of shelf-stocking time 216 2,160 1,080
Item sold 50,400 441,600 122,400
Metro also provides the following information for 2015:
Activity Description of Activity Total Support Cost-Allocation Base
(1) (2) Costs (3) (4)
1. Bottle returns Returning of empty bottles to store $ 4,800 Direct tracing to soft-
drink line
2. Ordering Placing of orders for purchases $ 62,400 624 purchase orders
3. Delivery Physical delivery and receipt of $ 100,000 1,260 deliveries
merchandise
4. Shelf-stoking Stocking of merchandise on store $ 69,120 3,456 hours of shelf-
shelves and ongoing restocking stocking time
5. Customer support Assistance provided to customers, $122,880 614,400 items sold
including checkout and bagging
Total $360,000
7
Required:
1. Metro currently allocates store support costs (all costs other than
cost of goods sold) to product lines on the basis of costs of goods
sold of each product line. Calculate the operating income for each
product line.
2. If Metro allocates store support costs (all costs other than cost of
goods sold) to product lines using an ABC system, calculate the
operating income for each product line.

Question No. (10)

RCC makes and sells artistic frames for picture of weddings,

graduations, and other special events Ali Ahmd , the controller is
responsible for preparing RCC's master budget and has accumulated the
following information for 2015:
2015
January February March April May
Estimated sales in units 10,000 12,000 8,000 9,000 9,000
Selling price $54.00 $51.50 $51.50 $51.50 $51.50
Direct manufacturing labor-hours per unit 2.0 2.0 1.5 1.5 1.5
Wage per direct manufacturing labor-hour $10.00 $10.00 $10.00 $11.00 $11.00

In addition to wages, direct manufacturing labor-related costs include

pension contributions of $0.50 per hour, and employee medical insurance
of $0.40 per hour. The cost of employee benefits paid by RCC on its
employees is treated as a direct manufacturing labor cost.

RCC has a labor contract that calls for a wage increase to $11 per hour on
April 1, 2015. New labor saving machinery has been installed and will be
fully operational by March 1, 2015. RCC expects to have 16,000 frames
on hand at December 31, 2014, and it has a policy of carrying an end-of-
month inventory of 100% of the following month's sales plus 50% of the
second following month's sales.
Required:
Prepare a production budget and a direct manufacturing labor budget for
RCC Company by month and for the first quarter of 2015. Both budgets
may be combined in one schedule. The direct manufacturing labor budget
should include labor-hours, and show the details for each labor cost
category.
Good Luck