BUSN 278 Week 8 Final Exam (GRADED A) Questions and Answer solutions | 100% Correct

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1. (TCO 1) A common starting point in the budgeting process is . (Points : 5) expected future net income past performance to motivate the sales force a clean slate, with no expectations 2. 2. ( ... TCO 2) “Groupthink” is a primary disadvantage of which qualitative forecasting method? (Points : 5) Executive opinions Sales force polling Delphi method Consumer surveys 3. 3. (TCO 3) Which of the following is not an example of a seasonal variation? (Points : 5) Increased restaurant sales on Fridays & Saturdays Increased retail sales in the fourth quarter Increased sales of jet skis in the summer Increased sales esulting from a special promotion 4. 4. (TCO 4) Which of the following statements regarding the risk associated with & D activities is incorrect? (Points : 5) The amount of time between the R & D activity & the cash flows from the roject does not affect risk. Greater risk is associated with creating new products than with improving existing roducts. Risk increases as the time between the R & D activity & the cash flows from the project increases. Assessing risk is a vital part of research & development. 5. 5. (TCO 5) Program budgeting does not include . Points : 5) controlling programming budgeting planning 6. 6. (TCO 6) The payback period technique . (Points : 5) should be used as a final screening tool can be the only basis for the capital budgeting decision is relatively easy to compute & understand considers the expected profitability of a project 7. 7. (TCO 6) The profitability index is computed by dividing the . (Points : 5) total cash flows by the initial investment present value of cash inflows by the present value of each outflow initial investment by the total cash flows initial investment by the present value of cash flows 8. 8. (TCO 6) A company projects annual cash inflows of $90,000 each year for the next 5 years if it invests $450,000 in new equipment. The equipment has a 5-year life & an estimated salvage value of $150,000. What is the accounting rate of return on this investment? (Points : 5) 6.7% 13.3% 20% 33.3% 9. 9. (TCO 6) If an asset costs $210,000 & is expected to have a $30,000 salvage value at the end of its 10-year life, & generates annual net cash inflows of $30,000 each year, the payback period is . (Points : 5) 5 years 6 years 7 years 8 years 10. 10. (TCO 6) Selma Inc. is comparing several alternative capital budgeting projects as shown below. Projects A B C Initial Investment $40,000 $60,000 $80,000 Present value of cash inflows $60,000 $55,000 $100,000 Using the profitability index, rank the projects, starting with the most attractive. (Points : 5) A, C, B A, B, C C, A, B C, B, A 11. 11. (TCO 6) Cleaners, Inc. is considering purchasing equipment costing $30,000 with a 6-year useful life. The equipment will provide cost savings of $7,300 & will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return. What is the approximate net present value of this investment? (Points : 5) $13,800 $1,794 $886 $2,748 12. 12. (TCO 7) Which of the following is not an operating budget? (Points : 5) Selling & administrative expense budget Direct materials budget Pro forma balance sheet Pro forma income statement 13. 13. (TCO 7) If the required materials to be purchased are 18,000 pounds, the production needs are three times the direct materials purchases, & the beginning direct materials are three & a half times the direct materials purchases, what are the desired ending direct materials in pounds? (Points : 5) 45,000 9,000 27,000 18,000 14. 14. (TCO 8) Which of the following is not a cause of profit variance? (Points : 5) Changes in sales price Changes in sales mix Changes in sales volume All of the above are causes of profit variance. 15. (TCO 9) A static budget is appropriate in evaluating a manager's performance if . (Points : 5) actual activity closely approximates the master budget activity actual activity is less than the master budget activity the company prepares reports on an annual basis the company is a not-for-profit organization 16. 16. (TCO 9) If costs are not responsive to changes in activity level, how are they best described? (Points : 5) Mixed Flexible Variable Fixed 17. 17. (TCO 9) At the high level of activity in November, 7,000 machine hours were run & power costs were $12,000. In April, a month of low activity, 2,000 machine hours were run & power costs amounted to $6,000. Using the high-low method, what is the estimated fixed cost element of power costs? (Points : 5) $12,000 $6,000 $3,600 $8,400 18. 18. (TCO 10) What is the method used to determine whether the budgeting process is operating effectively? (Points : 5) Budget evaluation Budget review Budget appraisal Budget audit 5. (TCO 8) Eastern Company’s budgeted & actual sales for 2009 were as follows. Produc t Budgeted Sales Actual Sales A B 35,300 units at $2.00 per unit 32,700 units at $2.60 per unit 27,900 units at $5.00 per unit 29,200 units at $4.70 per unit Part (a): Calculate the sales volume variance. Part (b): Calculate the sales price variance. Part (c): Calculate the total sales variance. (Points : 30) a) Sales volume variance = (Actual units sold - Budgeted units sold) x Budgeted price per unit Units Actual Units Budgeted Units Difference x Budgeted Price Sales Volume Variance A 32700 35300 (2600) 2 (5200) B 29200 27900 1300 5 6500 Favorable Sales Volume Variance 1300 b) Sales Price Variance = (Actual Price - Standard Price) x Actual Units Sold Units Actual Price Standard Price Difference x Actual Units Sold Sales Price Variance A 2.6 2 0.6 32700 19620 B 4.7 5 (0.3) 29200 (8760) Favorable Sales price Variance 10860 c) Total Sales Variance = Sales Volume Variance + Sales Price Variance = 1300 + 10860 = 12160 (favorable) 3. (TCO 6) Yappy Company is considering a capital investment of $320,000 in additional equipment. The new equipment is expected to have a useful life of 8 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income & cash inflows are expected to be $25,000 & $65,000, respectively. Yappy requires a 10% return on all new investments. Part (a): Compute each of the following. 1: Payback period 2: Net present value 3: Profitability index 4: Internal rate of return 5: Accounting rate of return (b): Indicate whether the investment should be accepted or rejected. (Points : 30) 1: Payback period. Payback Period = Initial Investment/Avg Annual Cash flow Payback Period = $320,000.00/$65,000.00 Payback Period = 4.92 years 2: Net present value. The Net Present Value (NPV) Years Cash Inflows 10% PV Factor 10% PV Yr0 ($320,000) 1 -$320,000 Yr1 65,000 0.9091 $59,091 Yr2 65,000 0.8264 $53,719 Yr3 65,000 0.7513 $48,835 Yr4 65,000 0.6830 $44,396 Yr5 65,000 0.6209 $40,360 Yr6 65,000 0.5645 $36,691 Yr7 65,000 0.5132 $33,355 Yr8 65,000 0.4665 $30,323 Net Present Value $26,770 3: Profitability index = NPV + Initial Investment ÷ Initial Investment = ($26,770+$320,000)/$320,000 4: Internal rate of return. = 1.08 Profitability Index Cost of Equip $26,770 Yr 1 Inflow $70,000 PV Annuity Factor 0.3824 Scanning the 8-year line, a factor of 4.9231 represents an IRR of approximately 12% 5: Accounting rate of return. Avg Accounting Profit/Initial Investment/2 ARR = $25000 x 2/$320,000 ARR = 0.1563 or 15.63% b) Based on the results project should be accepted as it has positive net present value & also it has a significant average accounting ratio. The profitability index is also significant for the company. 4. (TCO 7) Farris Co.’s projected sales are as follows. August $240,000 Septembe r $270,000 October $330,000 Farris estimates that it will collect 30% in the month of sale, 50% in the month after the sale, & 18% in the second month following the sale. Two percent of all sales are estimated to be bad debts. How much are Farris Co.'s budgeted cash receipts for October? (Points : 30) In month of sales 30% In first month after sale 50% In second month after sales 18% October collections August Sales $240,000 × 18% = $43,200 September Sales $270,000 × 50% = $135,000 October Sales $330,000 × 25% = $82,500 Total collections $260,700 6. (TCO 9) Herbart Company gathered the following information on power costs & factory machine usage for the last 6 months. Power Cost Factory Machine Hours January $24,400 13,900 February 30,300 17,600 March 29,000 16,800 April 22,340 13,200 May 19,900 11,600 June 14,900 6,600 Using the high-low method of analyzing costs, answer the following s & show computations to support your ansers. Part (a): What is the estimated variable portion of power costs per factory machine hour? Part (b): What is the estimated fixed power cost each month? Prt (c): If it is estimated that 10,000 factory machine hours will be run in July, what is the epected total power cost for July? (Points : 30) As) a) Variable power cost per factory machine hour = $30,300 - $14,900/17,600 - 6600 = $1.4 b) Total Variable power cost = $1.4 x 17600 = $24,640 Fied Cost = Total Cost - Total Variable Cost = $30,300 - $24,640 = $5,660 c) Machine VC Hurs per Hr 10000 X $1.40 = $14,000 + $5,660 (Fixed Cost) $19,660 = Estimated total power costs for July 2. (TCO 9) Understanding how costs behave can help managers plan operations & choose between various courses of action. Part (a): Identify & describe the three types of cost behavior, including examples of each. Part (b): As a manager, which cost behavior would you prefer & why? (Points : 20) Ans) a) -Fixed Costs: Fixed costs are those which do not change with the level of activity within the relevant range. These costs will incur even if no units are produced. For example rent expense, straight-line depreciation expense, etc. Fixed cost per unit decreases with increase in production. Following example explains this fact: Total Fixed Cost $30,000 $30,000 $30,000 ÷ Units Produced 5,000 10,000 15,000 Fixed Cost per Unit $6.00 $3.00 $2.00 -Variable Costs: Variable costs change in direct proportion to the level of production. This means that total variable cost increase when more units are produced & decreases when less units are produced. Although variable in total, these costs are constant per unit. For example Total Variable Cost $10,000 $20,000 $30,000 ÷ Units Produced 5,000 10,000 15,000 Variable Cost per Unit$2.00 $2.00 $2.00 -Mixed Costs: Mixed costs or semi-variable costs have properties of both fixed & variable costs due to presence of both variable & fixed componets in them. An example of mixed cost is telephone expense because it usually consists of afixed component such as line rent & fixed subscription charges as well as variable cost chargd per minute cost. Another example of mixed cost is delivery cost which has a fixed component of depreciation cost of trucks & a variable component of fuel expense.Since mixed cost figures are not useful in their raw form, therefore they are split into their fixe & variable components by using cost behavior analysis techniques such as High-Low Method,Scatter Diagram Method & Regression Analysis. b) As a manager i would prefer mixed costs or semi-variable costs as it consist the blend of both fixed & variable costs. It is of some importance to understand the mix of these elements of a cost, so that you can predict how costs will change with different levels of activity. Typically, a portion of a mixed cost may be present in the absence of all activity, in addition to which the cost may also increase as activity levels increase. Mixed costs are common in a corporation, since many departments involve a certain amount of baseline fixed costs in order to support any activities at all, & also incur variable costs to provide varying quantities of services above the baseline level of support. Thus, the cost structure of an entire department can be said to be a mixed cost. This is also a key concern when developing budgets, since some mixed costs will vary only partially with expected activity levels, & so must be properly accounted for in the budget. 1. (TCO 7) At Lakeside Manufacturing, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, & sales personnel determine the likely sales volume. Al Talbott, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending inventory of work in process. As the accounting manager, write a memo to Mr. Talbott, explaining why the ending inventory figure should be extremely accurate, with as little slack as possible. (Points : 20) Ans) To: Al Talbott, Production manager From: Leonard Russo, Accounting manager Date: February 25, 2014 Subject: Importance of the accuracy of ending inventory The ending inventory plays a dominant part in the building of financial statements of the company. If the ending inventory is incorrect, it can impact many different areas of your business & profitability. Because of this, focusing on getting the inventory correct should be one of your top priorities as a business owner. Cost of Goods Sold: When the amount of inventory at the end of an accounting period is overstated, it has a direct impact on the cost of goods sold. The cost of goods sold can be found on the income statement & is used when calculating gross profit. To calculate the cost of goods sold, you take the beginning inventory, add purchases & then subtract ending inventory. If the ending inventory is overstated, it makes the cost of goods sold appear lower than it really is. Overstatement of Income: When the cost of goods sold is affected by the overstatement of ending inventory, it also has an impact on income. To calculate the income, the cost of goods sold is subtracted from the revenue. If the cost of goods sold is too low compared to what it should be, this makes the net income appear larger than it actually is. When this happens, it increases the tax liability for the company. You will then essentially pay taxes on income that you should not have to. Balance sheet: The amount of current assets will also be affected by the overstatement or understatement of the ending inventory of work in process. The balance sheet will not remain in a balanced state & till it is corrected. Impact on Investment: When ending inventory is quoted incorrectly, it also can make an impact on investments in the company. If the inventory is overstated & it makes the cost of goods sold look better, this could make the company seem like a better investment than it actually is. Because of this, investors may try to jump on board & buy up the stock. This could drive up the price of the stock & create equity for investors even though nothing actually changed. Inventory Management: Because of the many factors that can be affected by a misstatement of inventory, it is critical to manage inventory correctly. When running a business, check your inventory regularly & implement processes that are designed to keep inventory levels relatively consistent. For example, implementing an automated inventory system can help you order just the right amount of inventory at all times. This will minimize the amount of cash tied up in inventory & help you focus on what is important. I hope that i prove my point & clear the concept in a better way. [Show More]

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