Variable and Absorption Costing

Advanced Managerial Accounting Winter 2014 Mid-Term Exam Directions: Answer all the questions. Please submit your work in Word or PDF formats only. You can submit an Excel file to support calculations but please “cut and paste” your solutions into the Word or PDF file. Be sure to show how you did your calculations. Also please be sure to include your name at the top of the first page of your file.You can use any sources you wish except for other people. Please cite any sources you use. There is no time limit to complete the exam other than it is due at 11:59 PM Eastern on Sunday February 9th 2014. The exam will count 30 percent toward your course grade. The point value for each question is noted. Question #1 (16 points) List and describe the four standards in the IMA’s Statement of Ethical Practice. As part of your answer be sure to provide an example of an action that violates the standard. Question #2 (14 points) Consider the following information prepared based on a monthly capacity of 50 000 units: Category Cost per Unit Variable manufacturing costs $12.00 Fixed manufacturing costs $1.00 Variable marketing costs $3.00 Fixed marketing costs $2.00 Capacity cannot be added in the short run and the firm currently sells the product for $20 per unit. Consider each of these scenarios independent of each other. a) The company is currently producing 50 000 units per month. A potential customer has contacted the firm and offered to purchase 10 000 units this month only. The customer is willing to pay $18 per unit. Since the potential customer approached the firm there will be no variable marketing costs incurred. Should the company accept the special order? Why or why not? Be specific. b) The company is currently producing 40 000 units per month. A potential customer has contacted the firm and offered to purchase 10 000 units this month only. Since the potential customer approached the firm there will be no variable marketing costs incurred. What is the minimum amount that the firm should be willing to accept for this order? Question #3 (44 points) Consider the following information: Q1 Q2 Q3 Beginning inventory (units) 0 J 1 100 Budgeted units to be produced 20 000 20 000 20 000 Actual units produced 19 000 20 600 Q Units sold A 20 600 R Variable manufacturing costs per unit produced $150 $150 $150 Variable marketing costs per unit sold $20 $20 $20 Budgeted fixed manufacturing costs $500 000 $500 000 $500 000 Fixed marketing costs $200 000 $200 000 $200 000 Selling price per unit $300 $300 $300 Variable costing operating income B $1 978 000 S Absorption costing operating income C K $1 859 000 Variable costing beginning inventory ($) D $165 000 T Absorption costing beginning inventory ($) E L U Variable costing ending inventory ($) F M $75 000 Absorption costing ending inventory ($) G N $87 500 PVV H O V Allocated fixed manufacturing costs I P $480 000 There are no price efficiency or spending variances and any production-volume variance is directly written off to cost of goods in the quarter in which it occurs. Complete the missing figures from the above Table. You need to show your work in order to be eligible for partial credit. Q1 Q2 Q3 A J Q B K R C L S D M T E N U F O V G P H I Question #4 (12 points) a) What is the goal of the EOQ model? b) Why does a firm hold “safety stock?” c) What costs are a firm trying to balance when it decides on how much safety stock to hold? Question #5 (9 points) What are some accounting changes that a firm should make if it decides to implement a JIT inventory management system? Why are those changes necessary? Be specific! Question #6 (5 points) What is the justification for using backflush costing? Be specific!