ACC
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ReviewforACC320.docxREVIEW QUESTIONS FOR TEST 2
QUESTION 1
The G0-Magic company uses job-order costing system. The following data relate to the first quarter of the company’s fiscal year
a. Materials and supplies purchased on account $690,000
b. Materials issued from store room to production,$700,000 [80% direct materials and 20% indirect materials].
c. Utility costs incurred in the factory $90,000
d. Cost of employee salaries
a. Direct Labour $900,000
b. Indirect cost and support workers in the factory $230,000
c. Marketing salaries $650,000
e. Advertising cost incurred = $800,000
f. Prepaid insurance expired during the quarter , $700,000.[ the ratio of insurance production to admin insurance = 3: 1
g. Rental cost = $360,000 [ selling cost consisits of 25% of the total rental cost
h. Other manufacturing overhead cost incurred during the month is $23,000 [credit]
i. Company applies manufacturing overhead based on direct machine hours . Budgeted cost for machine hours cost is $200,000 and estimated direct machine hours worked during the month are 45000 hours. Actual hours worked was 40,000 hours. Calculate the PR and journalize the applied cost
j. Goods costing to produce =$3,400,000 were completed during the quarter
k. Sales = $6,000,000. Cost to produce it = $4,000,000
l. Collections from customers during the quarter = $5,400,000
m. Cash paid to creditors =$2,500,000
REQUIRED
1. Prepare Journal entries for the quarter
2. Is production cost underallpied or overapplied?
SOLUTION
I. Predetermined Rate = estimated MO/ estimated machine hours
Applied cost = Actual x PR
QUESTION 2
Venus Ltd has identified the following overhead costs and cost drivers for next year
|
Overhead Items |
ESTIMATED( cost) $ |
|
Budgeted machine hours |
34000 |
|
Budgeted overhead cost |
$420,000 |
The following is one of the jobs completed during the year
|
|
Job 120 |
|
Direct materials |
$1600 |
|
Direct Labor |
$2400 |
|
Units completed |
400 |
|
Direct Labour Hours [actual] |
40 |
|
Machine hours actual |
1 |
|
Number of orders |
4 |
|
Machine hours [actual] |
165 |
|
Kilowatt hours |
25 |
|
Actual overhead |
$2250 |
The company uses machine hours to allocate manufacturing overhead
REQUIRED
PART A
1. Calculate the predetermined rate for the plant using functional based costing for the job
2. Calculate the applied cost for Job
3. Calculate total product cost using FBC of the job
4. Calculate the unit cost for job ?
5. Is the overhead over-applied or under-applied
QUESTION 3 ON Project Management
Project information:
Initial investment = $25,000
Yearly CFS
CF1 =$ 5400
CF2 = $ 7500
CF3 =$ 4975
CF4 = $ 4950
CF5 = $13000
1. Payback Period
PBP =5400 + 7500 + 4975 + 4950 = $22,825. This is below $25000 . If we include last cahflow it will be more $25,000 [II]. So we calculate payback period at 4th year
PBP = 4 + {[25000 -22825] / 13000} = 4 + 0.17 = 4.17 years
IMPORTANT
NB PAYBACK PERIOD HAS 2 SHORTCOMINGS
1. NOT CONSIDER TVM
2. NOT CONSIDER THE CFS AFTER PBP
Discounted Pay Back Period [DPBP]
We use the same method as before except that we discount all the cash flows. This means thet this method will solve the TVM problem because the CFS are discounted
Discount Rate = Cost of capital = Required rate of return = 5%
Initial investment = $25,000
Yearly CFS
CF1 =$ 5400/ (1.05) =5143
CF2 = $ 7500/ ( 1.05)^2 =6803
CF3 =$ 4975 / (1.05)^ 3 =4298
CF4 = $ 4950/ (1.05) ^4 =4072
CF5 = $13000 / ( 1.05 ) ^ 5 = 10,186
Total PV = $ 30,502
So we can consider only 4 CFS = 20,316
DPBP = 4 + [25000 – 20316 / 10186] =4.46 years
The DPBP improves PBP from 4.17 to 4.46 years because we considerd the time value of money.
But later CFS issue is not solved . SO NPV will solve it
3. NPV
a. Discount Rate = Cost of capital = Required rate of return = 5%
b. Initial investment = $25,000
c. Yearly CFS
d. CF1 =$ 5400/ (1.05) =5143
e. CF2 = $ 7500/ ( 1.05)^2 =6803
f. CF3 =$ 4975 / (1.05)^ 3 =4298
g. CF4 = $ 4950/ (1.05) ^4 =4072
h. CF5 = $13000 / ( 1.05 ) ^ 5 = 10,186
i. Total PV = $ 30,502
NPV =Total PV – II = 30,502 – 25000 = + $5502
Net Present Value
Net Present Value [NPV] = Total return – Initial investment
Decision Making wih NPV
[NPV should be + ]
Project must be selected if it has a higher +NPV than other projects
-NPV should be rejected
4. Profitability Index = 1 + ( NPV / II ) =
PI = 1 + (5502 /25000) = 1.22
PI is used for ranking projects especially when a company has limited fund to invest in all the viable projects
5. IRR = Internal Rate of return
Step1 make a table and place the NPV already calculated:
|
NPV |
DR |
|
+5502 |
5% |
|
-2069 |
15% |
Step 2
Find the negative NPV by increasing the discount rate. This is done by trial and error
For the –NPV , the DR has to be increased
So increase DR to 15% , NPV = -$2069
WORKING
Initial investment = $25,000
Yearly CFS
CF1 =$ 5400/ (1.15) =4696
CF2 = $ 7500/ ( 1.15)^2 =5671
CF3 =$ 4975 / (1.15)^ 3 =3271
CF4 = $ 4950/ (1.15) ^4 =2830
CF5 = $13000 / ( 1.15 ) ^ 5 = 6463
Total PV = 22,931
Net Present Value [NPV] = Total return – Initial investment = 22931 - 25000 = -2069
Step 3
|
Find IRR IRR = DR s + { [DR b –DR s] x [+NPV / [+NPV - -NPV] = 5 +{ [15 -5] x [(5502 / 5502+2069]) }= 12.26 Calculator === 11.8% When you use financial calculator So very close to the exact number |
|
Why do we have to find the negative and the positive NPV in order to get IRR IRR = DR when NPV is 0 DR low = NPV high DR high = NPV low DR is negatively related to NPV |
