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Exam 2 Review Problems Answer Key - Financial Accounting 1 |, Study notes of Financial Accounting

exam 2 Material Type: Notes; Class: Financial Accounting 1 - Introduction; Subject: Accounting; University: SUNY at Albany; Term: Forever 1989;

Typology: Study notes

2010/2011

Uploaded on 05/31/2011

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EXAM 2: REVIEW PROBLEMS – ANSWER KEY
Chapter 5: Relevant Information for Special Decisions
A. Relevant Information
What are the characteristics of Relevant Information?
1. differs among alternatives
2. is future oriented
Describe a sunk cost: has been incurred in past transactions, cannot
be changed, and is not relevant for making current decisions
Do cost behaviors influence the relevance of information? i.e. can
relevant information be variable or fixed? Relevance is an
independent concept- relevant costs can be fixed or variable
B. Special Decisions
What cost hierarchy levels are relevant for Special Decisions?
1. unit level
2. batch level
For Oursourcing?
1. unit level
2. batch level
3. product level
Name 2-3 examples of each type of cost hierarchy level:
Unit-level: 1. Indirect labor 2. Indirect materials_ 3.machine-
related utilities
Batch-level: 1.__materials handling costs_ 2. __set up costs___
Product-level: 1. _supervisor salary___ 2. __engineering/product
design costs
Facility-level: 1. Manuf. blding rent 2. _insurance costs 3. _bldng
depreciation
Problem 1:
(Part 1) The Greener Bean Coffee Co. produces 100,000 pounds of roasted
coffee each year, and has not yet reached capacity. Costs are as follows,
and are based on capacity of 120,000 pounds:
Per Pound Total
Unit Level costs $5 $600,000
Batch Level costs
(5,000 lbs per batch)
$2,500 per batch $60,000
Product Level costs $2 $240,000
Facility Level costs $ 0.50 $ 60,000
The Company has received a Special Order for 10,000 pounds of roasted
coffee.
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EXAM 2: REVIEW PROBLEMS – ANSWER KEY

Chapter 5: Relevant Information for Special Decisions A. Relevant Information What are the characteristics of Relevant Information?

_1. differs among alternatives

  1. is future oriented_ Describe a sunk cost : has been incurred in past transactions, cannot be changed, and is not relevant for making current decisions Do cost behaviors influence the relevance of information? i.e. can relevant information be variable or fixed? Relevance is an independent concept- relevant costs can be fixed or variable B. Special Decisions What cost hierarchy levels are relevant for Special Decisions?
  2. unit level
  3. batch level For Oursourcing?
  4. unit level
  5. batch level
  6. product level Name 2-3 examples of each type of cost hierarchy level: Unit-level: 1. Indirect labor 2. Indirect materials_ 3.machine- related utilities Batch-level: 1.materials handling costs 2. set up costs Product-level: 1. supervisor salary__ 2. __engineering/product design costs Facility-level: 1. Manuf. blding rent 2. _insurance costs 3. _bldng depreciation Problem 1: (Part 1) The Greener Bean Coffee Co. produces 100,000 pounds of roasted coffee each year, and has not yet reached capacity. Costs are as follows, and are based on capacity of 120,000 pounds: Per Pound Total Unit Level costs $5 $600, Batch Level costs (5,000 lbs per batch) $2,500 per batch $60, Product Level costs $2 $240, Facility Level costs $ 0.50 $ 60, The Company has received a Special Order for 10,000 pounds of roasted coffee.

At what selling price per pound will the company be indifferent between accepting and rejecting the special order? $5.50 per pound (Part 2) Use the costs based on capacity (above). Assume the Greener Bean Coffee Co. produces 120,000 pounds of roasted coffee each year, and is at capacity. The Company has received a Special Order for 10, pounds of roasted coffee. If this order is accepted, the company will have to spend an additional $15,000 of costs, due to surpassing capacity. Assuming the Company normally charges customers $8/pound, should the Company accept the special offer at a price of $7.20/pound? Why or why not? Yes, because the differential income (differential revenue – avoidable costs) is $7.00 per pound, therefore, Greener Bean Coffee Co. will still be making a $0.20 profit on each pound of coffee sold. Problem 2: Glassworks Inc. currently outsources all of its colored glass used in building its stained glass mosaic sculptures, to a foreign entity. The each sheet of 9x9 colored glass costs $400. As Glassworks Inc. has changed management and desires to create a more sustainable company, with an emphasis on “local” product offerings, the Company is considering producing the colored glass in house. Management has projected the following annual production costs: Unit-Level material cost $ Unit-Level labor cost $ Unit-Level overhead $ Batch-level set up cost (20 glass sheets per batch) $5, Product-Level supervisory salaries $70, Allocated facility-level costs $5, The company expects an annual need of 200 sheets of colored glass. If the company decides to make the glass, total costs will be: $168,200 total cost$841 per sheet of glass Chapter 6: Cost Management in an Automated Business Environment A. ABC vs. Traditional Costing systems

Cost of goods sold is expected to be 65% of sales. The company would like to have ending inventory each month equal to 35% of the following month's predicted Budgeted sales. The total cost of purchases in February is: $73, (Part 2) All purchases made by Hootz Company are made on account and paid in full in the month following each quarter close. Hootz follows a January 1 – December 31 financial year. Hootz expects April, 2010’s sales to be $140,000. What should Hootz report on its pro forma balance sheet for Accounts Payable for inventory, for the first quarter of 2010 reported on March 31, 2010? $223, Problem 2 The following information is provided for Circle C Company for June 2010. All operating expenses are paid in cash in the month incurred. What would the amount of expected cash outflow for selling and administrative expenses be for January 2010? $116, Chapter 8: Performance Evaluation Problem 1 The following static budget is provided:

What will be the volume variance if 19,000 units are produced and sold? Unfavorable variance of $4,