The balance sheet, income statement, and statement of cash flows are used for financial accounting, but not for management accounting (A+)

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ACCOUNTING

True or False

The balance sheet, income statement, and statement of cash flows are used for financial accounting, but not for management accounting.

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A good cost accounting system is narrowly focused on a continuous reduction of costs (A+)

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ACCOUNTING

True or False

A good cost accounting system is narrowly focused on a continuous reduction of costs

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Management accounting information focuses on external reporting (A+)

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ACCOUNTING

True or False

Management accounting information focuses on external reporting.

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Linking rewards to performance is a major deterrent to good management performance (A+)

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ACCOUNTING

True or False

Linking rewards to performance is a major deterrent to good management performance

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A budget is a tool used to plan and express strategy (A+)

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ACCOUNTING

True or False

A budget is a tool used to plan and express strategy.

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To take advantage of changing market opportunities, the annual budget should be strictly enforced (A+)

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Solution Guide / Answer Key:

ACCOUNTING

True or False

To take advantage of changing market opportunities, the annual budget should be strictly enforced.

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Employees pay little attention to how their performance is measured (A+)

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ACCOUNTING

True or False

Employees pay little attention to how their performance is measured.

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LHU Corporation makes and sells a product called Product WZ (A+)

LHU Corporation makes and sells a product called Product WZ. Each unit of Product WZ requires 1.7 hours of direct labor at the rate of $7.00 per direct labor-hour. Management would like you to prepare a Direct Labor Budget for June.

The company plans to sell 43,000 units of Product WZ in June. The finished goods inventories on June 1 and June 30 are budgeted to be 600 and 160 units, respectively. Budgeted direct labor costs for June would be:

a) $511,700

b) $506,464

c) $297,920

d) $516,936

Question 2

Balmforth Products, Inc. makes and sells a single product called a Bik. It takes three yards of Material A to make one Bik. Budgeted production of Biks for the next five months is as follows:

February 19,400 units

March 20,900 units

April 17,300 units

May 18,000 units

June 19,900 units

The company wants to maintain monthly ending inventories of Material A equal to 20% of the following month’s production needs. On January 31, this target had not been attained since only 2,500 yards of Material A were on hand. The cost of Material A is $0.70 per yard. The company wants to prepare a Direct Materials Purchases Budget.

The total cost of Material A to be purchased in February is:

a) $49,518

b) $47,768

c) $27,286

d) $40,740

Question 3

The Yost Company makes and sells a single product, Product A. Each unit of Product A requires 1.3 hours of labor at a labor rate of $5.60 per hour. Yost Company needs to prepare a Direct Labor Budget for the second quarter.

If the budgeted direct labor cost for May is $120,120, then the budgeted production of Product A for May is:

a) 21,450 units

b) 18,975 units

c) 16,500 units

d) 27,885 units

Question 4

Shuck Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The direct labor budget indicates that 8,600 direct labor-hours will be required in May. The variable overhead rate is $4.40 per direct labor-hour. The company’s budgeted fixed manufacturing overhead is $102,940 per month, which includes depreciation of $11,050. All other fixed manufacturing overhead costs represent current cash flows. The May cash disbursements for manufacturing overhead on the manufacturing overhead budget should be:

a) $91,890

b) $129,730

c) $37,840

d) $140,780

Question 5

Lunderville Inc. bases its selling and administrative expense budget on budgeted unit sales. The sales budget shows 4,600 units are planned to be sold in December. The variable selling and administrative expense is $5.40 per unit. The budgeted fixed selling and administrative expense is $76,200 per month, which includes depreciation of $7,560 per month. The remainder of the fixed selling and administrative expense represents current cash flows. The cash disbursements for selling and administrative expenses on the December selling and administrative expense budget should be:

a) $24,840

b) $101,040

c) $68,640

d) $93,480

Question 6

Avril Company makes collections on sales according to the following schedule:

25% in the month of sale

65% in the month following sale

6% in the second month following sale

The following sales are expected:

Expected Sales

January $240,000

February $250,000

March $320,000

Cash collections in March should be budgeted to be:

a) $307,200

b) $256,900

c) $280,000

d) $320,000

Question 7

Diltex Farm Supply is located in a small town in the rural west. Data regarding the store’s operations follow:

• Sales are budgeted at $330,000 for November, $310,000 for December, and $320,000 for January.

• Collections are expected to be 70% in the month of sale, 27% in the month following the sale, and 3% uncollectible.

• The cost of goods sold is 75% of sales.

• The company desires to have an ending merchandise inventory at the end of each month equal to 60% of the next month’s cost of goods sold. Payment for merchandise is made in the month following the purchase.

• Other monthly expenses to be paid in cash are $28,000.

• Monthly depreciation is $19,000.

• Ignore taxes.

Statement of Financial Position

October 31

Assets

Cash $22,000

Accounts receivable (net of allowance for uncollectible accounts) $80,000

Merchandise inventory $148,500

Property, plant and equipment (net of $(expression error) accumulated depreciation) $967,000

Total assets $1,217,500

Liabilities and Stockholder’ Equity

Accounts payable $135,000

Common stock $860,000

Retained earnings $222,500

Total liabilities and stockholder’ equity $1,217,500

The net income for December would be:

a) $28,175

b) $49,500

c) $30,500

d) $21,200

Question 8

Carpon Lumber sells lumber and general building supplies to building contractors in a medium-sized town in Montana. Data regarding the store’s operations follow:

• Sales are budgeted at $370,000 for November, $380,000 for December, and $400,000 for January

• Collections are expected to be 62% in the month of sale, 35% in the month following the sale, and 3% uncollectible.

• The cost of goods sold is 75% of sales.

• The company desires to have an ending merchandise inventory equal to 50% of the next month’s cost of goods sold. Payment for merchandise is made in the month following the purchase.

• Other monthly expenses to be paid in cash are $22,600.

• Monthly depreciation is $15,000.

• Ignore taxes.

Statement of Financial Position

October 31

Assets

Cash $16,000

Accounts receivable (net of allowance for uncollectible accounts) $76,000

Inventory $138,750

Property, plant and equipment (net of $601,000 accumulated depreciation) $1,141,000

Total assets $1,371,750

Liabilities and Stockholder’ Equity

Accounts payable $127,000

Common stock $630,000

Retained earnings $614,750

Total liabilities and stockholder’ equity $1,371,750

Accounts payable at the end of December would be:

a) $285,000

b) $150,000

c) $157,500

d) $292,500

Question 9

Which of the following represents the normal sequence in which the indicated budgets are prepared?

a) Direct Materials, Cash, Sale

b) Production, Manufacturing Overhead, Sales

c) Sales, Balance Sheet, Direct Labor

d) Production, Cash, Income Statement

Question 10

Sales forecasts are drawn up after the cash budget has been completed because only then are the funds available for marketing known.

a) True

b) False

Question 11

The production budget is typically prepared prior to the sales budget.

a) True

b) False

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Baxter Video Product’s sales are expected to increase by 20% from $5 million in 2010 (A+ Guaranteed)

12.1 (AFN Equation) Baxter Video Product’s sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were$1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter’s additional funds needed for the coming year.

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Mary Francis has just returned to her office after attending preliminary discussions with investment bankers (A+ Guaranteed)

Mary Francis has just returned to her office after attending preliminary discussions with investment bankers. Her last meeting regarding the intended capital structure of Apex went well, and she calls you into her office to discuss the next steps.

“We will need to determine the required return for our intended project so that we have a decision criteria defined for the project,” she says.

“Do you have the information I need to describe capital structure and to calculate the weighted average cost of capital (WACC)?” you ask.

“I do,” she smiles. “We can determine the target WACC for Apex Printing, given these assumptions,” she says as she hands you a piece of paper.
•Weights of 40% debt and 60% common equity (no preferred equity)
•A 35% tax rate
•Cost of debt is 8%
•Beta of the company is 1.5
•Risk-free rate is 2%
•Return on the market is 11%

“Great,” you say. “Thanks.”

“Be sure to indicate how these costs of capital might be used to determine the feasibility of the capital project,” Mary says. “I want your recommendation about which is more appropriate to apply to project evaluation, too. Let me know what you think.”

“One more thing,” she says as she stands up to signal the end of the meeting. “You did a good job with the explanations you provided Luke the other day. Would you have time to define marginal cost of capital for me so I can include it in my discussions with investors? You seem to have a knack for making things accessible to nonfinancial folks.”

“No problem,” you say. “I’m glad my explanations are so useful!”

To recap, for this assignment, complete the following:
•Describe capital structure.
•Determine the WACC given the above assumptions.
•Indicate how these might be useful to determine the feasibility of the capital project.
•Recommend which is more appropriate to apply to project evaluation.
•Define marginal cost of capital.

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