SAMPLE QUESTIONS

QUESTIONS 1-2:

McMahon Company would like to institute an activity-based costing system to price products. The
company's Purchasing Department incurs costs of $550,000 per year and has six employees. Purchasing
has determined the three major activities that occur during the year.

Allocation # of Total
Activity Measure People Cost
Issuing purchase orders # of purchase orders 1 $150,000
Reviewing receiving reports # of receiving reports 2 $175,000
Making phone calls # of phone calls 3 $225,000

During the year, 50,000 phone calls were made in the department; 15,000 purchase orders were issued;
and 10,000 shipments were received. Product A required 200 phone calls, 150 receiving reports, and 50
purchase orders. Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders.

1. Determine purchasing department cost per unit of product A, if 1,500 units of

Product A and 3,000 units of Product B were manufactured during the year.

2. Determine purchasing department cost per unit of product B, if 1,500 units of

Product A and 3,000 units of Product B were manufactured during the year.

QUESTIONS 3-4:

Erin Sacks, CPA, J.D., provides accounting and tax services to her clients. In 2010, she charged $175 per
hour for accounting and $200 per hour for tax services. Erin estimates the following costs for the year
2011.

Office supplies, advertising and miscellaneous $ 32,000

Computer fees 48,000
Secretary's salary 50,000
Rent 36,000
$166,000

Operating profits declined last year and Ms. Sacks has decided to use activity based costing (ABC)
procedures to evaluate her hourly fees. She has gathered the following information from last year's
records:

Activity Levels
Activity Cost Driver Accounting Tax Services
Office Supplies Hours billed 1,000 1,000
Computer fees Computer hour used 250 750
Secretary's salary Number of clients 32 168
Rent Types of services offered 1 1

Required:

3. Erin wants her hourly fees for the Accounting services to be 150% of their activity-based costs.
What is the fee per hour for this service that Erin must charge?

4. Erin wants her hourly fees for the Tax services to be 200% of their activity-based costs. What is
the fee per hour for this service that Erin must charge?

5. Executive Images Corporation produces two types of wooden bookends: plain and hand-carved.
The following information about the production process is available:
 Plain Hand-Carved
Number produced 120,000 75,000
Machine hours 95,000 25,000
Inspection hours 7,000 35,000
Revenues $4,800,000 $4,400,000
Direct costs $3,800,000 $3,100,000

Total factory overhead is $1,200,000. Of this overhead, $500,000 is related to utilities (cost driver =
machine hours) and the remainder is related to quality control (cost driver = inspection hours).

If the Corporation uses ABC allocation method, what is the profit per unit of “Plain” bookend? Per unit of
“Hand-Carved” bookend?

Q6: Value Pro produces and sells a single product. Information on its costs follow:

Variable costs:

SG&A $2 per unit

Production $4 per unit

Fixed costs:

SG&A $12,000 per year

Production $15,000 per year

In the upcoming year, Value Pro estimates that it will produce and sell 4,000 units. The variable costs per
unit and the total fixed costs are expected to be the same as in the current year. However, it anticipates a
sales price of $16 per unit. What is Value Pro's projected margin of safety (in dollars) for the coming
year?

Q 7. Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single product.
Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by management. The
company projects its income tax rate at 40 percent. What is the maximum amount that Meixner can
expend for variable costs per unit and still meet its profit objective if the sales price per unit is estimated
at $6?
 SOLUTIONS

Q1-2. ANS:
$150,000/15,000 = $10 per purchase order

$175,000/10,000 = $17.50 per receiving report

$225,000/50,000 = $4.50 per phone call

Product A Product B
50 purchase orders  $10 $ 500
100 purchase orders  $10 $1,000
150 receiving reports  $17.50 2,625
400 receiving reports  $17.50 7,000
200 phone calls  $4.50 900
350 phone calls  $4.50 1,575
Total cost $4,025 $9,575

Product A= $4,025/1,500 = $2.68 per unit

Product B= $9,575/3,000 = $3.19 per unit

Q 3-4
Answer:

Total cost Rate per unit Accounting Tax Total

Allocation rates: Cost Driver of cost driver
Office supplies 32,000 2,000 $16 per hour $16,000 $16,000 $32,000
Computer fees 48,000 1,000 $48 per hour 12,000 36,000 48,000
Secretary 50,000 200 $250 per client 8,000 42,000 50,000
Rent 36,000 2 $18,000 per service 18,000 18,000 36,000
Total Cost Allocated $54,000 $112,000 $166,000

b) Tax Services Accounting

Total Cost $112,000 $54,000
Hours Billed 1,000 1,000
Cost Per Hour 112 54
Markup 2 1.5
Billing Rate $224 Per hour $ 81 Per Hour
Q 5 . ANS:
Total FOH $ 1,200,000
Utilities 500,000
Quality Control 700,000

Plain Hand-Carved
Units Produced 120,000 75,000

b)Overhead allocated by activity bases

Direct Costs $ 3,800,000 $ 3,100,000
Overhead
Utilities (allocated by machine hours) 395,833 104,167
Quality costs (allocated by insp hours) 116,667 583,333
Total Production Costs $ 4,312,500 $ 3,787,500
 Revenues $ 4,800,000 $ 4,400,000
less Production Costs 4,312,500 3,787,500
Gross Profit $ 487,500 $ 612,500
Gross Profit per Unit $4.06 $8.17
Q 6: Value Pro produces and sells a single product. Information on its costs follow:

Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs:
SG&A $12,000 per year
Production $15,000 per year
In the upcoming year, Value Pro estimates that it will produce and sell 4,000 units. The variable
costs per unit and the total fixed costs are expected to be the same as in the current year.
However, it anticipates a sales price of $16 per unit. What is Value Pro's projected margin of
safety (in dollars) for the coming year?

Profit at 4,000 units

Gross Sales = $16 * 4,000 units = $64,000
Contribution Margin = $(16 - 6) = $10/unit

Breakeven
10*x - $27,000 = $0  x=2,700 units
Break Even Sales = 2,700*16=$43,200

$(64,000 - 43,200) = $20,800

Q 7. Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single product.
Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by management. The
company projects its income tax rate at 40 percent. What is the maximum amount that Meixner can
expend for variable costs per unit and still meet its profit objective if the sales price per unit is estimated
at $6?
Before Tax Income: $75,000 / 0.60 = $125,000
Fixed Costs: 250,000
Contribution Margin: $375,000

Projected Sales $750,000

less: Contribution Margin 375,000
Variable Costs $375,000

$375,000 / 125,000 units $3/unit