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ADMS 3510 (York University)
2013 Fall Mid Term Exam 2 Solutions

Question 1
Scenario 1:
Only the incremental costs and benefits are relevant. In particular, only the
variable manufacturing overhead and the cost of the special tool are
relevant overhead costs in this situation. The other manufacturing
overhead costs are fixed and are not affected by the decision. (5 marks)
Incremental revenue ............................

Incremental costs:
Less Variable costs:
Direct materials ..............................
Direct labour ..................................
Variable manufacturing overhead .....
Special filigree ................................
Total variable cost .............................
Fixed costs:
Purchase of special tool ...................
Total incremental cost ..........................
Incremental operating income ..............
Per
Unit
$349.95
143.00
86.00
7.00
6.00
$242.00
Total
10 bracelets
$3,499.50
1,430.00
860.00
70.00
60.00
2,420.00
465.00
2,885.00
$ 614.50
Even though the price for the special order is below the company's regular
price for such an item, the special order would add to the companys
operating income by $ 614.50 and should be accepted. (2 marks)
Scenario 2:
1.
(3 marks)
(1) Contribution margin per unit.................................
(2) Direct labour cost per unit ....................................
(3) Direct labour rate per hour ...................................
(4) Direct labour-hours required per unit (2) (3) .......
Contribution margin per direct labour-hour (1) (4)
$18 $36 $20

$12 $32 $16
8
8
8
1.5 4.0 2.0
$12 $ 9 $10
2. The company should concentrate its labour time on producing product A:

(2 marks)
Contribution margin per direct labourhour.....................................................

$12
$9
$10
Direct labour-hours available ..................... 3,000 3,000 3,000
Total contribution margin .......................... $36,000 $27,000 $30,000
Although product A has the lowest contribution margin per unit and the
second lowest contribution margin ratio, it has the highest contribution
margin per direct labour-hour. Since labour time seems to be the
companys constraint, this measure should guide management in its
production decisions.
Scenario 3:
Castingard should be processed further:
Sales value after further processing ................. $60,000
Sales value at the split-off point ......................
40,000
Incremental revenue from further processing ...
20,000
Cost of further processing ..............................
13,000
Profit from further processing ......................... $ 7,000
The $10,000 in allocated common costs (1/3 $30,000) will be the same
regardless of which alternative is selected, and hence is not relevant to the
decision.

Question 2 25 Marks
(1) Step-down method: (14 marks) : Allocation 1 mark each
Custodial
Cafeteria Services
Total costs before allocations .............. $320,000

$65,400
Allocations:
Cafeteria (40/500; 60/500; 100/500;
300/500)1 .................................... (320,000)
25,600
Custodial Services (10,000/70,000;
40,000/70,000; 20,000/70,000)2 ....
(91,000)
Machinery Maintenance
(160,000/200,000;
40,000/200,000)3..........................
Total overhead after allocations ........... $
0 $
0
Machinery
Maintenance
$ 93,600
Based on 40+60+100+300=500 employees

Based on 10,000+40,000+20,000=70,000 square metres
3
Based on 160,000+ 40,000 = 200,000 machine-hours
2
3 marks total (1.5 marks each)

Milling predetermined
=
$648,000
overhead rate
160,000 machine hr.
Finishing
predetermined
overhead rate
$413,000
70,000 direct labour hr.
= $4.05 per
machine hr.
= $5.90 per
DLH
Finishing
$416,000 $166,000
38,400
64,000
192,000
13,000
52,000
26,000
(145,000)
$
0
Milling
116,000
29,000
$648,000 $413,000

2a.
The amount of overhead cost assigned to the job would be: (5

marks)
Step-down method:
Milling Department:
2,000 machine-hours $4.05 per machine-hour .......
Finishing Department:
13,000 DLHs $5.90 per DLH ................................
Total overhead cost ..................................................
$ 8,100
76,700
$84,800
b. 3 marks:
The other method is the direct method
The step-down method provides a better basis for computing
predetermined overhead rates than the direct method because it
gives recognition to services provided between service departments.
If this interdepartmental service is not recognized, then either too
much or too little of a service departments costs may be allocated to
a producing department. The result will be an inaccuracy in the
producing departments predetermined overhead rate. The
inaccuracies in the predetermined overhead rate affect bids for jobs.

Question 3:
Part (1)
The income statement currenty used by Denton is not a
good way to reflect breakeven analysis. A better approach
will be using variable costing :
Restatement of Variable Costing Method :
July
Sales - Volume
15,000
Sales - $
900,000
August
20,000
1,200,000
Less : Variable Expenses :

VCOG
VS&A
Total Var Expenses
330,000
45,000
375,000
440,000
60,000
500,000
Contribution Margin :
525,000
700,000
Less : Fixed Costs :

MFG
Selling & Admin
Total Fixed Costs
315,000
245,000
560,000
315,000
245,000
560,000
Net Income
(35,000)
140,000
(2 Marks for comments; 7 marks for restatement each month)
Part (2) :
July
Direct costing
(Net Income)
Add : FC def in inv.
under asborp cost
($ 18 x 2,500)
Less : FC released
from inv under
ab sorp costing
Absorp costing
(Net Income)
August
(35,000)
140,000
45,000
(45,000)
10,000
95,000
As the the ending inventory has gone up at the end of July

(From 0 units to 2,500 units) fixed costs of $ 45,000 has
deferred into inventory in July and this gets reversed in August.
As a result, absorption costing has a higher income in July
and lesser income in August.
Part (3)
Full absorption costing is better for long term decisions
whereas the variable costing is more appropriate for
short term pricing decisions.
Variable costing stresses cost behaviour and promotes
cost volume profit analysis, etc. Net income is not affected
by changing inventory levels. (5 Marks)
$/Unit
60
22
3

Part (4) - Breakeven Analysis :
Absorption
7
10
5
18
Direct
7
10
5
40
22
Var. Selling & Admin

Total Var Cost/Unit
SP/Unit
CM/Unit
3
25
60
35
3
25
60
35
Fixed Costs
Absorption Costing :
Manufacturing
July
August
DM
DL
VOH
FOH
(315000/17500)
Total Prod Cost/Unit
Selling & Admin

Total
Variable Costing :
Manufacturing
Selling & Admin
Total
270,000
(18*15000)
245,000
(Given)
515,000
315,000
245,000
560,000
360,000
(18*20000)
245,000
(Given)
605,000
315,000
245,000
560,000
Breakeven Analysis - Based on the President's comments:

July
August
Variable Costing :
16,000
16,000
(560000/35)
(560000/35)
Absorption Costing :
14,714
17,286
(515000/35)
(605000/35)
The President is correct in saying that the current sales
volume of 15,000 units is less than the breakevn point
as he is thinking that normal
breakeven analysis is based on varable costing method.
(3 Marks for B/E analysis)
(1 Mark for comments)

Question 4:
Part 1: (5 marks)
Both companies view training as important; both companies need to
leverage technology to succeed in the marketplace; and both companies
are concerned with minimizing defects. There are numerous differences
between the two companies. For example, Applied Pharmaceuticals is a
product-focused company and Destination Resorts International (DRI) is
a service-focused company. Applied Pharmaceuticals training resources
are focused on their engineers because they hold the key to the success
of the organization. DRIs training resources are focused on their frontline employees because they hold the key to the success of their
organization. Applied Pharmaceuticals technology investments are
focused on supporting the innovation that is inherent in the product
development side of the business. DRIs technology investments are
focused on supporting the day-to-day execution that is inherent in the
customer interface side of the business. Applied Pharmaceuticals defines
a defect from an internal manufacturing standpoint, while DRI defines a
defect from an external customer interaction standpoint.

Part 2 (15 marks)
Students answers may differ in some details from this solution.
Applied Pharmaceuticals
Financial
Return on
Shareholders Equity
Customer
Customer perception of
first-to-market capability
Internal
Business
Process
Learning
and
Growth
R&D Yield
Customer perception of
product quality
Defect rates
Percentage of job
offers accepted
Dollars invested in
engineering technology
Dollars invested in engineering

training per engineer

Part 2:
Destination Resorts International
Financial
Sales
Customer
Number of repeat customers
Internal
Business
Process
Room
cleanliness
Percentage of
error-free repeat
customer check-ins
Learning
and
Growth
+
Average time to
resolve customer
complaint
Employee
turnover
Number of employees
receiving database
training
Survey of
employee morale

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ADMS 3510 (York University)

2013 Fall Mid Term Exam 2 Solutions

Incremental revenue ............................

$18 $36 $20

2. The company should concentrate its labour time on producing product A:

ADMS 3510 (York University)

Contribution margin per direct labourhour.....................................................

ADMS 3510 (York University)

Total costs before allocations .............. $320,000

Based on 40+60+100+300=500 employees

3 marks total (1.5 marks each)

ADMS 3510 (York University)

The amount of overhead cost assigned to the job would be: (5

ADMS 3510 (York University)

Less : Variable Expenses :

Less : Fixed Costs :

As the the ending inventory has gone up at the end of July

ADMS 3510 (York University)

Var. Selling & Admin

Selling & Admin

Breakeven Analysis - Based on the President's comments:

ADMS 3510 (York University)

ADMS 3510 (York University)

Dollars invested in engineering

ADMS 3510 (York University)

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