BUSI 3413 INTERMEDIATE MANAGERIAL ACCOUNTING

UNIT EXERCISES

TABLE OF CONTENTS
Unit 1 Study Exercises.............................................................................................................................................2
Unit 2 Study Exercises.............................................................................................................................................4
Unit 3 Study Exercises.............................................................................................................................................6
Unit 4 Study Exercises.............................................................................................................................................8
Unit 5 Study Exercises...........................................................................................................................................11
Unit 6 Study Exercises...........................................................................................................................................13
Unit 7 Study Exercises...........................................................................................................................................15
Unit 8 Study Exercises...........................................................................................................................................18
Unit 9 Study Exercises...........................................................................................................................................20
Unit 10 Study Exercises.........................................................................................................................................23
Unit 1 Study Exercises
Question 1.1 (Total: 27 marks)
Bichette Soda Company operates many bottling plants around the globe. At its Mississauga
plant, where nine different brands are bottled, the following costs were incurred in the current
year to produce 15,000,000 cans of soft drink:

a. Development costs of adding the new product "Pop Plus" amounted to $614,000.
b. Material handling costs of inspecting and handling concentrate, bottles, packages, and
so forth amounted to $433,500. These costs are allocated to each production run.
c. Incoming materials purchase costs that can be directly traced to individual products
being canned and packaged. These costs are purely variable with output level and
amounted to $2,213,000.
d. Executive salaries and other central administration overhead amounted to $423,000.
e. Plant overhead including costs related to: supervision, safety, energy and plant
insurance amounted to $623,000.
f. The cost of cleaning and calibrating equipment for each production run amounted to
$171,500.

Required
1. Classify each of the preceding costs as output unit-level, batch-level, product-
sustaining, or facility-sustaining.
2. Compute the cost per unit for the total manufacturing cost.

Question 1.2 (Total: 37 marks)

Alejandro Kirk Manufacturing produces two types of entry doors: Deluxe and Standard. The
assignment basis for support costs has been direct labour dollars. For 2021, Alejandro Kirk the
following data for the two products:

Deluxe Standard
Sales units 50,000 400,000
$475.00
Sales price per unit $650.00
Direct material and labour costs per unit $180.00 $130.00
Manufacturing support costs per unit $80.00 $120.00
 Last year, Alejandro Kirk Manufacturing purchased an expensive robotics system to allow for
more decorative door products in the deluxe product line. The CFO suggested that an ABC
analysis could be valuable to help evaluate a product mix and promotion strategy for the next
sales campaign. She obtained the following ABC information:

Activity Cost Driver Cost Total Deluxe Standard

Setups # of setups $500,000 500 400 100
Machine # of machine $4,000,000 600,000 300,000 300,000
related hours
Packing # of $5,000,000 250,000 50,000 200,000
shipments

Required
1. Using the current traditional (simple) costing system, determine the estimated:
a. total cost of manufacturing one unit for each type of door
b. profit per unit for each type of door
2. Using the activity-based costing data presented above,
a. compute the cost driver rate for each overhead activity
b. compute the revised manufacturing overhead cost per unit for each type of
entry door
c. compute the revised total cost to manufacture one unit of each type of entry
door

Question 1.3 (Total: 15 marks)

Springer Energy Inc. produces food products for people active in sports. The following
budgeted volume and costs has been provided for one of their post-workout beverages:

Budgeted production 65,000 units

Selling price $4.00 per unit

Direct material costs $1.30 per unit

Direct labour costs $0.20 per unit
Fixed manufacturing costs $19,500
Variable manufacturing costs $0.25 per unit
 Variable administrative costs $0.01 per unit
Fixed administrative costs $3,900

Required
What is the inventoriable cost per drink under each of the following methods?

1. absorption costing
2. variable costing
3. throughput costing

Question 1.4 (Total: 21 marks)

Gurriel Corporation manufactures and sells laptop computers and uses standard costing. For
the month of October there was no beginning inventory, there were 1,500 units produced and
1,250 units sold. The manufacturing variable cost per unit is $770 and the operating cost per
unit was $625. The fixed manufacturing cost is $450,000 and the fixed operating cost is
$75,000. The selling price per unit is $1,850.

Required
1. Prepare the income statement for Gurriel Corporation for October under variable
costing.

Unit 2 Study Exercises

Question 2.1 (Total: 24 marks)
TeleTube Inc. manufacturers TVs. Unfortunately, some of the company's data was misplaced by
an IT error. Use the following information to replace the lost data:

Sales-
Actual Flexible Flexible Volume Static
Analysis Results Variances Budget Variances Budget
Units Sold 112,500 112,500 103,125
Revenues $42,080 $1,000 F (A) $1,400 U (B)
Variable Costs (C) $200 U $15,860 $2,340 F $18,200
Fixed Costs $8,280 $860 F $9,140 $9,140
Operating
Income $17,740 (D) $16,080 (E) $15,140

Required
 1. What are the respective flexible-budget revenues (A)?
2. What are the static-budget revenues (B)?
3. What are the actual variable costs (C)
4. What is the total flexible-budget variance (D)?
5. What is the total sales-volume variance (E)?
6. What is the total static-budget variance?

Question 2.2 (Total: 28 marks)

The following data for the Golden Garden Company (GGC) pertains to the production of 2,500
garden spades during April. The spade consists of a wooden handle and a metal forged tool that
comes in contact with the ground.
Direct Materials (all materials purchased were used):
 Standard cost: $1.00 per handle and $3.50 per metal tool
 Total actual cost: $11,350.
 Materials flexible-budget efficiency variance was $650 unfavourable.

Direct Manufacturing Labour:

 Standard cost is 5 garden spades per hour at $20.00 per hour.
 Actual cost per hour was $21.00
 Labour efficiency variance was $400 favourable.

Required
1. What is the standard direct material amount per garden spade?
2. What is the standard cost allowed for all units produced?
3. What is the total direct materials flexible-budget variance?
4. What is the direct material flexible-budget rate variance?
5. What is the total actual cost of direct manufacturing labour?
6. What is the labour rate variance for direct manufacturing labour?

Question 2.3 (Total: 22 marks)

Rose Apothecary manufactures individual shampoos for hotel/motel clientele. The fixed
manufacturing overhead costs for 2021 will total $576,000. The company uses good units
finished for fixed overhead allocation and anticipates 300,000 units of production. Good units
finished average 92 percent of total units produced. During January, 20,000 units were
produced. Actual fixed overhead cost per good unit averaged $2.82 in January.

Required
1. Determine the fixed overhead rate for 2021.
 2. Determine the fixed overhead static-budget variance for January.
3. Determine the fixed overhead production-volume variance for January.
4. Determine the fixed overhead rate variance for January.
Question 2.4 (Total: 26 marks)
OG Anunoby Corporation produces a special line of basketball hoops in batches. To manufacture
a batch of the basketball hoops OG Anunoby Corporation must setup the machines and moulds.
Setup costs are batch-level costs because they are associated with batches rather than
individual units of products. A separate Setup Department is responsible for setting up machines
and moulds for different styles of basketball hoops

Setup overhead costs consist of some costs that are variable and some costs that are fixed with
respect to the number of setup hours. The following information pertains to January.

Static-budget Actual
Amounts Amounts
Basketball hoops produced and sold 30,000 28,000
Batch size (number of units per batch) 200 250
Setup hours per batch 5 4
Variable overhead cost per setup hour $10 $9
Total fixed setup overhead costs $22,500 $21,000

Required
1. Calculate the efficiency variance for variable setup overhead costs.
2. Calculate the rate variance for variable setup overhead costs.
3. Calculate the flexible-budget variance for variable setup overhead costs.
4. Calculate the rate variance for fixed setup overhead costs.
5. Calculate the production-volume variance for fixed setup overhead costs.

Unit 3 Study Exercises

Question 3.1 (Total: 16 marks)
Kim's Convenience store has a variable demand. On a given day, demand ranges from 270 to
330 customers a day who average purchasing 5 items each. The average daily demand is 300
customers. The convenience store currently operates 12 hours a day. Each order takes
approximately 2 minutes.
Required
1. What is the average customer waiting time, in minutes?
2. What is the cycle time for an order?
3. What is the waiting time if the average daily demand remains at 300 customers?
Question 3.2 (Total: 15 marks)
Fit-For-A-King Inc. manufactures foam products for several upholstery companies. This company
has two workstations, mixing/heating and cutting/assembly. The mixing/heating station is
limited by the capacity of the equipment. Cutting/assembly is limited by the speed of the cutting
machine workers. Cutting/assembly normally lags behind mixing/heating. Because the demand
has increased in recent months, management is considering adding another person to
cutting/assembly. This would increase the department's costs by $4,000 a month. If the person
is moved from mixing/heating, that department's cost would decline by $3,000. By keeping
mixing/heating laborer’s the same, the department can increase production on-call by 10
percent. Current idle time in mixing/heating averages one-half person a day for a net cost of
$1,400 a month.
Required
1. What is the net effect of moving the employee from mixing/heating to
cutting/assembly?
2. What is the net effect if a new employee is hired for cutting/assembly?

Question 3.3 (Total: 24 marks)

Sneaky Snacky Squirrel Inc. has a budget of $900,000 in 2021 for prevention costs. If it decides
to automate a portion of its prevention activities, it will save $80,000 in variable costs. The new
method will require $40,000 in training costs and $100,000 in annual equipment costs.
Management is willing to adjust the budget for an amount up to the cost of the new equipment.
The budgeted production level is 150,000 units.
Appraisal costs for the year are budgeted at $600,000. The new prevention procedures will save
appraisal costs of $50,000. Internal failure costs average $15 per failed unit of finished goods.
The internal failure rate is expected to be 3% of all completed items. The proposed changes will
cut the internal failure rate by one-third. Internal failure units are destroyed. External failure
costs average $54 per failed unit. The company's average external failures average 3% of units
sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and
there are no ending inventories.

Required
1. What is the net change in the budget of prevention costs if the procedures are
automated in 2021? Will management agree with the changes?
2. How much will internal failure costs change if the internal product failures are
reduced by 1/3 with the new procedures?
3. How much do external failure costs change if all changes are as anticipated with the
new prevention procedures? Assume all units produced are sold and there are no
ending inventories.
Question 3.4 (Total: 45 marks)
Safety First Inc. produces baby products, including car seats for children from 0-2 years
old. The company is worried because one of its competitors has recently come under
public scrutiny because of product failure. Historically, Safety First Inc’s only problem
with its car seats was stitching in the straps. The problem can usually be detected and
repaired during an internal inspection. The cost of the inspection is $5.00 per car seat,
and the repair cost is $1.00 per car seat. All 200,000 car seats were inspected last year,
and 5% were found to have problems with the stitching in the straps during the internal
inspection. Another 1% of the 200,000 car seats had problems with the stitching, but the
internal inspection did not discover them. Defective units that were sold and shipped to
customers needed to be shipped back to Safety First and repaired. Shipping costs are
$8.00 per car seat, and repair costs are $1.00 per car seat. However, the out-of-pocket
costs (shipping and repair) are not the only costs of defects not discovered in the
internal inspection. Negative publicity will result in a loss of future contribution margin
of $100 for each external failure.

Required
1. Calculate appraisal cost.
2. Calculate internal failure cost.
3. Calculate out-of-pocket external failure cost.
4. Determine the opportunity cost associated with the external failures.
5. What are the total costs of quality?
6. Safety First is concerned with the high up-front cost of inspecting all 200,000 units. It
is considering an alternative internal inspection plan that will cost only $3.00 per car
seat inspected. During the internal inspection, the alternative technique will detect
only 3.5% of the 200,000 car seats that have stitching problems. The other 2.5% will
be detected after the car seats are sold and shipped. What are the total costs of
quality for the alternative technique?
7. What factors other than cost should Safety First consider before changing inspection
techniques?

Unit 4 Study Exercises

Question 4.1 (Total: 19 marks)
Hotel+ is considering building a budget hotel that offers clean small rooms with bathrooms. The
company anticipates that 120 rooms will rent for 39,600 room-nights per year. The market price
 for equivalent rooms is $60 per night. Hotel+ estimates that the capital cost will be $6,500,000
and the company would like an annual return of 10%. Following are the estimated annual
operating costs:

Variable operating costs $ 21 per room night

Fixed costs:
Salaries and wages $ 420,000
Building maintenance 89,000
General administration 280,000
Total fixed costs $ 789,000

Required
1. What is the full cost per room-night?
2. Can Hotel+ meet the targeted return on investment based on the estimated costs and
revenue? Show your calculations.
3. A tour operator has offered $30 per night for 20 rooms during a time of the year that
there is likely to be at least that many rooms vacant. Should Hotel+ accept this offer?
Show your calculations.

Question 4.2 (Total: 15 marks)

The Blue Jays are evaluating ticket prices for its baseball games. Studies show that Friday and
Saturday night games average more than twice the fans of games on other days. The following
information pertains to the stadium's normal operations per season:

Average fans per game (all games) 2,500 fans

Average fans per Friday and Saturday night games 3,500 fans
Number of home games per season 30 games
Stadium capacity 3,500 seats
Variable operating costs per operating hour $2,000
Marketing costs per season for basketball $138,750
Customer-service costs per season for basketball $25,000

The stadium is open for 5 operating hours on each day a game is played. All employees work by
the hour except for the administrators. A maximum of one game is played per day and each fan
has only one ticket per game.
 Required
1. What is the unit cost when establishing a long-run price for ball games assuming all
tickets are priced the same?

Question 4.3 (Total: 30 marks)

Lemon Lime Ltd. forecast sales of 42,000 units and production of 40,000 units. Other budget
information related to the company for the year included:

Direct manufacturing labour $171,900

Variable manufacturing overhead 83,500
Direct materials 52,300
Variable selling expenses 23,000
Fixed administrative expenses 190,000
Fixed manufacturing overhead 240,000

The standard costs remained the same as in the previous year.

Lemon Lime Ltd. is considering various cost bases. The company management require a 15%
return on an investment of $2,500,000. The company wants this cost built into all cost base
options.

Required
1. Compute the cost-plus price per unit using direct costing.
2. Compute the cost-plus price per unit using absorption costing.
3. Compute the cost-plus price per unit using the full product cost.

Question 4.4 (Total: 36 marks)

Celebration Greeting Cards Incorporated is starting a new business venture and are in the
process of evaluating its product lines. Information for one new product, traditional parchment
grade cards, is as follows:
 Sixteen times each year, a new card design will be put into production. Each new design
will require $600 in setup costs.
 The parchment grade card product line incurred $75,000 in development costs and is
expected to be produced over the next four years.
  Direct costs of producing the designs average $0.50 each.
 Indirect manufacturing costs are estimated at $50,000 per year.
 Customer service expenses average $0.10 per card.
 Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50.
 Sales units equal production units each year.

Required
1. What are the estimated life-cycle revenues?
2. What is the estimated life-cycle operating income if the product life cycle is one year?
3. What is the estimated life-cycle operating income per year for the years after the first
year if all of the development costs are charged to the first year?
4. What is the total estimated life-cycle operating income?

Unit 5 Study Exercises

Question 5.1 (Total: 20 marks)
For each of the following balanced scorecard measures,
A – Financial
B – Customer
C – Internal Business Process
D – Learning and Growth

Required
Match with the appropriate perspective:
1. Number of new customers
2. Percentage of defective product units
3. Number of patents
4. Customer profitability
5. Customer cost per unit
6. Return on assets
7. Average job-related training hours per employee
8. Product cost per unit
9. Employee turnover rate
 10. Percentage of processes with real-time feedback

Question 5.2 (Total: 18 marks)

Xplornet Ltd. is an internet service provider. The company had 14,000,000 subscribers in 2021,
and employed 18 customer service representatives. During 2021 each customer service
representative worked 7 1/2 hours per day for 236 days at a fixed annual salary of $42,000.
The company received 110,000 telephone calls from its customers in 2021 that lasted fifteen
minutes on average.
Required
1) Calculate the cost of unused customer service capacity in 2021 with the assumption that
customer service costs are engineered costs.

Question 5.3 (Total: 62 marks)

Following a strategy of product differentiation, R2D2 Corporation makes a high-end computer
monitor, BB8. R2D2 Corporation presents the following data for the years 1 and 2:

Units of BB8 produced and sold 5,000 5,500

Selling price $400 $440
Direct materials (kilograms) 15,000 15,375
Direct materials costs per kilogram $40 $44
Manufacturing capacity for BB8 (units) 10,000 10,000
Total manufacturing conversion costs $500,000 $550,000
Manufacturing conversion costs per unit of $50 $55
capacity
Selling and customer-service capacity 60 58
(customers)
Total selling and customer-service costs $180,000 $181,250
Cost per customer of selling & customer-service $3,000 $3,125
capacity
R2D2 Corporation produces no defective units but it wants to reduce direct materials usage
per unit of BB8 in Year 2. Manufacturing conversion costs in each year depend on production
capacity defined in terms of BB8 units that can be produced. Selling and customer-service costs
depend on the number of customers that the customer and service functions are designed to
support. Neither conversion costs nor customer-service costs are affected by changes in actual
 volume. R2D2 Corporation has 46 customers in Year 1 and 50 customers in Year 2 . The
industry market size for high-end computer monitors increased 5% from Year 1 to Year 2. Of
the $40 increase in unit selling price, $10 was attributable to a general increase in prices.

Required
1) What is the operating income for Year 1?
2) What is the operating income in Year 2?
3) What is the change in operating income from Year 1 to Year 2?
4) What amount is the revenue effect of growth component?
5) What amount is the cost effect of growth component?
6) What is the change in operating income as a result of the growth component?
7) What amount is the revenue effect of price recovery component?
8) What amount is the cost effect of price recovery component?
9) What is the change in income as a result of the price recovery component?
10) What is the amount of the productivity component?
11) The change in operating income from cost leadership.
12) The change in operating income due to industry wide effects.
13) The effect of product differentiation on operating income and a summarization of the
change in operating income between Year 1 and Year 2.

Unit 6 Study Exercises

Question 6.1 (Total: 24 marks)
For each item listed, select the appropriate purpose of cost allocation from the list below. A
purpose may be used more than once.
A - To provide information for economic decisions
B - To motivate managers and other employees
C - To measure income and assets for reports to external parties
D - To justify costs or compute reimbursement amounts

Required
1. To encourage simpler product design
2. To cost inventories for reporting on a company's tax return
 3. To encourage the sales department to focus on high-margin products
4. To evaluate a make or buy decision
5. To cost inventories for the balance sheet
6. To decide whether to add or delete a product line
7. To decide on an appropriate selling price for a special-order product
8. To cost a product at a fair price for government contracts

Question 6.2 (Total: 32 marks)

The Lawn Patrol Corporation has two divisions, the Lawnmower Division and the Landscaping
Division, which both operate under one plant. The following data apply to the coming budget
year:

Budgeted costs of the operating the plant for 4,000 to 8,000 hours:
Fixed operating costs per year $280,000
Variable operating costs $15 per hour
Practical capacity 7,000 hours per year
Budgeted long-run usage per year:
Lawnmower Division325 hours × 12 months = 3,900 hours per year
Landscaping Division150 hours × 12 months = 1,800 hours per year

Assume that practical capacity is used to calculate the allocation rates. Further assume that
actual usage of the Lawnmower Division was 350 hours and the Landscaping Division was 200
hours for the month of June.

Required
1. If a single-rate cost allocation method is used, what amount of operating costs will be
budgeted for the Lawnmower Division each month? For the Landscaping Division each
month?
2. For the month of June, if a single-rate cost allocation method is used, what amount of
cost will be allocated to the Lawnmower Division? To the Landscaping Division?
Assume actual usage is used to allocate operating costs.
3. If a dual-rate cost allocation method is used, what amount of operating costs will be
budgeted for the Lawnmower Division each month? For the Landscaping Division each
month?
4. For the month of June, if a dual-rate cost allocation method is used, what amount of
cost will be allocated to the Lawnmower Division? To the Landscaping Division?
Assume budgeted usage is used to allocate fixed operating costs and actual usage is
used to allocate variable operating costs.
Question 6.3 (Total: 23 marks)
Dad’s Diner is a fast-food restaurant that sells burgers and hot dogs in a 1960s environment.
The fixed operating costs of the company are $5,000 per month. The controlling shareholder,
interested in product profitability and pricing, wants all costs allocated to the burgers and hot
dogs. The following information is provided for the operations of the company:

Burgers Hot Dogs

Sales for March 4,000 2,400
Sales for April 6,400 2,400

Required
1. What amount of fixed operating costs is assigned to the burgers and hot dogs when
actual sales are used as the allocation base for March? For April?
2. Hot dog sales for March and April remained constant. Did the amount of fixed
operating costs allocated to hot dogs also remain constant for March and April?
Explain why or why not. Comment on any other observations.

Question 6.4 (Total: 21 marks)

Krum Lawn Equipment has five departments, of which Casting and Finishing are producing
departments. Maintenance, Product Movement, and Inspection are service departments. The
distribution of the service departments is as follows:
Service Costs Services provided to:
Maint. Prod. Move. Insp. Cast. Finish.
Maintenance $84,000 5% 25% 50% 20%
Product movement 160,000 10% 5 45 40
Inspection 38,000 15 5 20 60

Required
1. Use the direct method to allocate the service departments' costs. Prepare a schedule
showing the total costs allocated to each department.

Unit 7 Study Exercises

Question 7.1
(Total: 18 marks)
 DNA Ltd. produces two main products, A and B; and, a byproduct, C. There were no beginning
inventories. During April, it incurred $275,000 of joint costs, which are allocated to main
products using the physical output method. Additional information follows:

Product Units Produced Units Sold Unit Sales Price

A 12,000 9,600 $22
B 18,000 15,300 38
C 6,000 5,200 3

Required:
a. Assuming DNA recognizes byproduct revenue at the time of sale, what is the total
value of ending inventory?

Question 7.2
(Total: 12 marks)
Chemical X, Inc. processes pine rosin into three products; turpentine, paint thinner, and spot
remover. During June the joint costs of processing were $280,000. Production and sales value
information for the month were as follows:
Product Units Produced Sales Value at Splitoff Point
Turpentine 3,000 litres $30,000
Paint thinner 3,000 litres 25,000
Spot remover 1,500 litres 12,500

Required:
a. Determine the amount of joint cost allocated to each product if the physical
measure method is used.

Question 7.3
(Total: 22 marks)
Farmer Company processes 40,000 pounds of direct materials to produce two products, Apples
and Apple Sauce. Apple Sauce, a byproduct, sells for $9 per pound, and Apples, the main
product, sells for $50 per pound. The following information is for July:

Production Sales Beginning Inventory Ending Inventory

Apple Sauce 8,700 8,000 0 700
Apples 25,500 24,900 300 900

The manufacturing costs totaled $260,000; beginning inventory $3,200.

Required:
 a. Prepare a July income statement assuming that Farmer Company recognizes the
byproduct revenue at the time of sale. The company uses FIFO for the inventory
flow assumption.
b. Prepare the journal entry to record the byproduct sales.

Question 7.4
(Total: 18 marks)
The Dairy Company produces three products from a joint processes using whole milk: butter,
cheese, and cream. The joint costs amount to $24,000 per batch of output. Each batch totals
50,000 liters: 25% butter, 25% cheese, 50% cream. All products are processed further without
gain or loss in volume. Separable costs are butter, $0.50 per liter; cheese, $2.00 per liter;
cream, $0.25 per liter. The selling prices per liter are respectively: $3.50, $6.00, $4.00.

Required:
a. How much joint cost per batch should be allocated to cream, assuming that joint
costs are allocated on a physical measure basis?
b. If joint costs are assigned on a net realizable value basis, how much joint cost should
be allocated to cheese?
c. An organic grocer has offered to buy all of the cheese produced at $5.50 per liter.
Traditionally 90% of the cheese production is sold. How much better or worse off
financially is the company from accepting this offer?

Question 7.5
(Total: 30 marks)
North West Coal Mining Company (NWCMC) mines coal, puts it through a one-step crushing
process, and loads the bulk raw coal onto river barges for shipment to customers.
NWCMC’s management is currently evaluating the possibility of further processing the raw
coal by sizing and cleaning it and selling it to an expanded set of customers at higher prices.
The option of building a new sizing and cleaning plant is ruled out as being financially
infeasible. Instead, John Snow, a mining engineer, is asked to explore outside contracting
arrangements for the cleaning and sizing process. John puts together the following summary:

Selling price of raw coal $27 per tonne

Cost of producing raw coal $22 per tonne
Selling price of sized and cleaned coal $36 per tonne
Annual raw coal output 10,000,000 tonnes
Percentage of material weight loss in sizing/cleaning coal 6%

Incremental Costs of Sizing and Cleaning

 Processes
Direct labour $800,000 per year
Supervisory personnel 200,000 per year
Heavy equipment: rental, operating, maintenance 25,000 per month
costs
Contract sizing and cleaning 3.50 per tonne of raw coal
Outbound rail freight 240 per 60-tonne rail car
John also learns that 75% of the material loss that occurs in the cleaning and sizing process can
be salvaged as coal fines, which can be sold to steel manufacturers for their furnaces. The sale
of coal fines is erratic and NWCMC may need to stockpile it in a protected area for up to one
year. The selling price of coal fines ranges from $15 to $24 per tonne and costs of preparing
coal fines for sale range from $2 to $4 per tonne.
Required:
a. Prepare an analysis to show whether it is more profitable for NWCMC to continue
selling raw bulk coal or to process it further through sizing and cleaning. (Ignore coal
fines in your analysis.)
(24 marks)
b. How would your analysis be affected if the cost of producing raw coal could be held
down to $20 per tonne?
(6 marks)

Unit 8 Study Exercises

Question 8.1
(Total: 18 marks)
T2 Manufacturing Ltd. manufactures electrical parts. Data for two of the company's customers
is as follows:

Customer 1 Customer 2
Revenues at list price $592,500 $102,000
Units sold 75,000 10,000
Unit list price $7.90 $10.20
Cost of goods per unit $5.10 $6.25
Sales discounts $11,850 $1,020
Customer-specific costs
Order-taking $13,600 $1,500
Product-handling $14,100 $1,350
Delivery $9,400 $1,290

Required:
a. Prepare a comparative income statement in gross margin format with one column
for each customer; present customer-specific costs as period expenses.
Question 8.2
(Total: 12 marks)
Rocky Volcano Chocolate operates two stores, one in Edmonton and another in St. John’s. The
following income statements were prepared for the most recent year:

Edmonton St. John’s

Net sales $3,780,000 $960,000
Variable costs:
Cost of goods sold 1,512,000 528,000
Sales commission 189,000 48,000
Utilities 17,200 15,300
Contribution margin $2,061,800 $368,700
Fixed costs:
Annual building lease 84,000 39,000
Salaries 380,000 180,000
Allocated corporate overhead 750,000 250,000
Amortization of store equipment & leasehold improvements 60,000 30,000
Operating income (loss) $787,800 $(130,300)

The store equipment and leasehold improvements have no market value. The building leases
can be cancelled without penalty.
Required:
a. Calculate the dollar value of sales required for each store to break-even assuming
that all of the fixed costs are to be covered?
b. Should management close the St. John’s store? Assume that corporate overhead
would be reduced by $100,000 if the St. John’s store is closed.

Question 8.3
(Total: 18 marks)
APL manufactures athletic clothing, including shoes. Because of strict production
specifications, the manufacturing department often has spoiled items. If the spoiled items are
less than or equal to 5 percent of a job's total then the items are treated as normal spoilage.
During March job #101 for 100 pairs of shoes had 7 spoiled items. The spoiled items were
detected immediately before they were packaged. The marketing manager believes the
spoiled items can be sold for $20 each. They had a cost at point of detection of $75 each.
These costs included $25 for direct manufacturing labour, $45 for direct materials, and $5 for
factory overhead.
 Required:
a. Make the necessary journal entry, or entries, to record the spoiled units. If the
spoilage is normal it is assigned to an overhead control account. Assume the spoiled
units can be sold for $20 each.
b. Make the necessary journal entry, or entries, to record the rework cost. If the
spoilage is normal it is assigned to an overhead control account. Assume the spoiled
units can be reworked for $20 each: direct materials $5; labor $12; manufacturing
overhead $3.

Question 8.4
(Total: 20 marks)
Pepper Potts Pottery manufactures ceramic products. All direct materials are included at the
inception of the production process. For March, there was no beginning inventory in the
processing plant. Direct materials totaled $155,000 for the month. Work-in-process records
revealed that 2,500 tons were started in March and that 1,500 tons were finished; 500 tons
were spoiled as expected. Ending work-in-process units are complete in respect to direct
materials costs. Spoilage is not detected until the process is complete.

Required:
Determine the following:
a. What are the costs assigned to completed units when spoilage units are recognized
and when they are not recognized in the cost per equivalent unit?
b. What are the costs transferred out if spoilage units are recognized and if they are
ignored?

c. What are the amounts allocated to the work-in-process ending inventory when
spoilage units are recognized and when spoilage units are ignored?

Question 8.5
(Total: 32 marks)
Downward Dog Yoga is a manufacturer of yoga apparel. It produces all of its products in one
department. The information for the current month is as follows:

Beginning work-in-process 20,000 units

Units started 40,000 units
Units completed 50,000 units
Ending work-in-process 8,000 units
Spoilage 2,000 units

Beginning work-in-process direct materials $12,000

 Beginning work-in-process conversion $4,000
Direct materials added during month $60,000
Direct manufacturing labour during month $20,000
Beginning work-in-process was half complete as to conversion. Direct materials are added at
the beginning of the process. Factory overhead is applied at a rate equal to 50 percent of
direct manufacturing labour. Ending work-in-process was 60 percent complete. All spoilage is
normal and is detected at end of the process.
Required:
a. Prepare a production cost worksheet assuming that spoilage is recognized and the
weighted-average method is used.

Unit 9 Study Exercises

Question 9.1 (Total: 28 marks)
Deep Sea Drilling Corp. has two divisions, Refining and Production. The company's primary
product is Clean Oil. Each division's costs are provided below:

Refining: Variable costs per litre of oil $30

Fixed costs per litre of oil $24

Production: Variable costs per litre of oil $6

Fixed costs per litre of oil $4

The Production Division is able to sell the oil to other areas for $24 per litre. The Refining
Division has been operating at a capacity of 80,000 litres a day, using oil from the Production
Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000
litres of oil, on average, from the Production Division and 30,000 litres, on average, from other
suppliers at $40/litre.

Required
1. What is the transfer price per litre assuming the method used is 175% of variable
costs?
2. What is the transfer price per litre from the Production Division to the Refining
Division assuming the method is 120% of full costs?
3. What is the transfer price per litre from production to refining if the market price
method of pricing is used?
 4. What is the Production Division's operating income per 200 litres of oil reported
under the 175% of variable costs method?
5. What is the Refining Division's operating income if 150 litres of oil are sold at
$110 /litre and 200 litres are transferred in? Assume the transfer price is based on
175% of variable costs.

Question 9.2 (Total: 18 marks)

Organic Food Company recently acquired an sunflower oil processing company that has an
annual capacity of 2,000,000 litres and that processed and sold 1,400,000 litres last year at a
market price of $4 per litre. The purpose of the acquisition was to furnish oil for the Cooking
Division. The Cooking Division needs 800,000 litres of oil per year. It has been purchasing oil
from suppliers at the market price. Production costs at capacity of the sunflower oil company,
now a division, are as follows:

Direct materials per litre $1.00

Direct processing labour 0.50
Variable processing overhead 0.24
Fixed processing overhead based on capacity 0.40
Total $2.14

Management is trying to decide what transfer price to use for sales from the newly acquired
company to the Cooking Division. The manager of the Sunflower Oil Division argues that $4, the
market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14
should be used, or perhaps a lower price as fixed overhead cost should not be relevant. Any
output of the Sunflower Oil Division not sold to the Cooking Division can be sold to outsiders for
$4 per litre.

Required
1. Compute the operating income for the Sunflower Oil Division using a transfer price
of $4.
2. Compute the operating income for the Sunflower Oil Division using a transfer price
of $2.14.

Question 9.3 (Total: 24 marks)

Sun Rise Grocers (SRG) orders most of its items in lot sizes of 10 units. Average annual demand
per side of chicken is 720 units per year. Ordering costs are $25 per order with an average
purchasing price of $100. Annual inventory carrying costs are estimated to be 40 percent of
the unit cost.

Required
 1. Determine the economic order quantity.
2. Determine the annual cost savings if the shop changes from an order size of 10
units to the economic order quantity.
3. Since the shelf life is limited the Sun Rise Grocers must keep the inventory moving.
Assuming a 360-day year, determine the optimal lot size under each of the
following: (1) a 20-day shelf life and (2) a 10-day shelf life.

Question 9.4 (Total: 30 marks)

Sweet Tunes Ltd. makes musical instruments. One of their products is a ukulele that has an
annual demand of 3,000 units. The setup cost for each production batch is $900; it costs $15 to
carry a ukulele in inventory for one year.

Required
1. What is the total annual relevant batch set up and carrying cost if the company uses
the economic order quantity? Assume that setup costs are the same as ordering
costs.
2. The company is switching to a just-in-time system. The average order size is 200
ukuleles. What is the total annual relevant batch set up and caring cost?
Compare the Enterprise Resource Planning EOQ model with the JIT model. What are the advantages and
disadvantages of each?

Unit 10 Study Exercises

Question 10.1
(Total: 33 marks)
Sleepy Owl Company allows its divisions to operate as autonomous units. Their results for the
current year were as follows:

Pillow Blanket Bed Sheet

Revenues $2,250,000 $500,000 $4,800,000
Current assets 800,000 152,500 1,435,000
Capital assets 1,000,000 400,000 1,750,000
Current liabilities 350,000 75,000 540,000
Net operating income 220,000 60,000 480,000
After-tax income 143,000 39,000 312,000
Weighted average cost of capital 8.5% 8.5% 8.5%

Required:
 a. Return on sales
b. Return on investment based on total assets employed
c. Economic value added
d. Residual income based on net operating income

Question 10.2
(Total: 18 marks)
Provide the missing data for the following situations:

Red Division White Division Green Division

Sales A $10,000,000 E
Net operating income $240,000 $500,000 $288,000
Total assets B C $1,600,000
Return on investment 0.16 0.10 F
Return on sales 0.05 D 0.14
(3 marks each)

Question 10.3
(Total: 15 marks)

A multinational corporation established a division in Germany as a subsidiary corporation, with

an initial investment in total assets of 13 million €'s, which cost the company $19,240,000
Canadian at the time. The company sent an experienced manager to run the division, and gave
her a target of 12% required rate of return, promising a bonus if this was met and/or
exceeded.
After one year, the subsidiary manager was pleased to report an 18% ROI.
You have been able to determine the following data pertaining to the subsidiary:
 Exchange rate at end of year was $1.42 Canadian to the Euro
 Operating income was earned evenly throughout the year
 The exchange rate changed approximately evenly throughout the year
Required:
a. Calculate the subsidiary's income in €'s. (3 marks)
b. Calculate the subsidiary's return on investment in Canadian dollars. (6 marks)
c. Calculate the subsidiary's residual income in Canadian dollars. (6 marks)
Question 10.4
(Total: 34 marks)
Big Machines Corp. has two divisions. Division Y manufactures components that can be sold in
the external market place or transferred to Division Z for further processing. The following
data relate to Division Y's component product.

Variable manufacturing costs/unit $925

Fixed costs/unit at capacity $275
Selling price/unit $1,800
The capacity of the plant is 2,500 units per year.
Division Z has offered to purchase 350 units from Division Y at a price of $1,600/unit, which is
the market price of the component. The manager of Division Y has refused this offer stating
that it would only return a rate of 25.00%, when the divisional target return on sales is 28.00%.
The Division Y manager also states that additional fixed costs of $195,000 would be required to
produce the 350 units.
The corporate required rate of return is 18% of assets and the existing asset base in Division Y
is $2,500,000.
Required:
a. How many units must Division Y sell in order to achieve its required ROR? What
profit margin would be earned at this level of sales?
(8 marks)

b. Assume Division Y currently sells 2,000 units to the external market and can accept
Division Z's offer without affecting its external sales. Evaluate the refusal of Division
Z's offer from the standpoint of the corporation as a whole and from Division Y
manager's perspective.
(18 marks)

c. Assume Division Y currently sells 2,000 units to the external market and can accept
Division Z's offer without affecting its external sales. Calculate Division Y's residual
income with and without the sale to Division Z.
(8 marks)