1. State whether the following statements are TRUE or FALSE with a brief explanation (1 sentence) for each of the answers.(2 marks each) (20 Marks)

• If a company undercosts one of its products, then it will overcost at least one of its other products.

It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are known and constant. An activity-based costing system is necessary for costing services that are similar.

The selling price per unit is $30, variable cost per unit $20, and fixed cost per unit is $3. When this company operates above the breakeven point, the sale of one more unit will increase net income by $7. The direct method allocates each support department's costs to operating departments only.

• Full costs of a product are relevant for one-time-only special order pricing decisions.

Cost management is only focused on a continuous reduction of costs. In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle capacity is relevant.

Managers generally have more control over efficiency variances than price variances. A favourable variance can be automatically interpreted as "good news." Solve any two of the following questions. Each carries 10 marks. (20 Marks)

• The Holiday Card Company, a producer of specialty cards, has asked you to complete several calculations based upon the following information:

Income tax rate 30%

Selling price per unit $6.60

Variable cost per unit $5.28

Total fixed costs $46,200.00

• Required:

1. 1. What is the breakeven point in cards?
   2. What sales volume is needed to earn an after-tax net income of $13,028.40?
   3. How many cards must be sold to earn an after-tax net income of $18,480?
   4. What effect, and why, would a decrease in the tax rate have on the company's breakeven point?
   5. A competitor company named Yuletide Card Company has mostly fixed costs as compared to Holiday Card Company, which has a greater proportion of variable costs. Which company has the greater risk of a net loss? Explain why.

• Aunt Ethel's Fancy Cookie Company manufactures and sells three flavours of cookies: Macaroon, Sugar, and Buttercream. The batch size for the cookies is limited to 1,000 cookies based on the size of the ovens and cookie moulds owned by the company. Based on budgetary projections, the information listed below is available:

Macaroon Sugar Buttercream

Projected sales in units 500,000 800,000 600,000

PER UNIT data:

Selling price $0.80 $0.75 $0.60

Direct materials $0.20 $0.15 $0.14

Direct labour $0.04 $0.02 $0.02

Hours per 1000-unit batch:

Direct labour hours 2 1 1

Oven hours 1 1 1

Packaging hours 0.5 0.5 0.5

Total overhead costs and activity levels for the year are estimated as follows:

Activity Overhead costs Activity levels

Direct labour 2,400 hours

Oven $210,000 1,900 oven hours

Packaging $150,000 950 packaging hours

$360,000

Required:

a. Using the ABC system, for the sugar cookie:

1. compute the estimated overhead costs per thousand cookies.

2. compute the estimated operating profit per thousand cookies.

b. Using a traditional system (with direct labor hours as the overhead allocation base), for the sugar cookie:.

1. compute the estimated overhead costs per thousand cookies.

2. compute the estimated operating profit per thousand cookies.

c. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?

d. Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?

• Littrell Company produces chairs and has determined the following direct cost categories and budgeted amounts:

Standard Inputs Standard Cost

Category for 1 output per input

Direct Materials 1.00 $7.50

Direct Labour 0.30 9.00

Direct Marketing 0.50 3.00

Actual performance for the company is shown below:

Actual output: (in units) 4,000

Direct Materials:

Materials costs $30,225

Input purchased and used 3,900

Actual price per input $7.75

Direct Manufacturing Labour:

Labour costs $11,470

Labour-hours of input 1,240

Actual price per hour $9.25

Direct Marketing Labour:

Labour costs $5,880

Labour-hours of input 2,100

Actual price per hour $2.80

Required:

a. What is the combined total of the flexible-budget variances?

b. What is the price variance of the direct materials?

c. What is the price variance of the direct manufacturing labour and the direct marketing labour, respectively?

d. What is the efficiency variance for direct materials?

e. What are the efficiency variances for direct manufacturing labour and direct marketing labour, respectively?

A. State whether the following statements are TRUE or FALSE with a brief explanation (1 sentence) for each of the answers.(2 marks each) (20 Marks) 1. If a company undercosts one of its products, then it will overcost at least one of its other products. 2. It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are known and constant. 3. An activity-based costing system is necessary for costing services that are similar. 4. The selling price per unit is $30, variable cost per unit $20, and fixed cost per unit is $3. When this company operates above the breakeven point, the sale of one more unit will increase net income by $7. 5. The direct method allocates each support department's costs to operating departments only. 6. Full costs of a product are relevant for one-time-only special order pricing decisions. 7. Cost management is only focused on a continuous reduction of costs. 8. In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle capacity is relevant. 9. Managers generally have more control over efficiency variances than price variances. 10. A favourable variance can be automatically interpreted as "good news." B. Solve any two of the following questions. Each carries 10 marks. (20 Marks) 1. The Holiday Card Company, a producer of specialty cards, has asked you to complete several calculations based upon the following information: Income tax rate 30% Selling price per unit $6.60 Variable cost per unit $5.28 Total fixed costs$46,200.00 Required: a. b. c. d. What is the breakeven point in cards? What sales volume is needed to earn an after-tax net income of $13,028.40? How many cards must be sold to earn an after-tax net income of $18,480? What effect, and why, would a decrease in the tax rate have on the company's breakeven point? e. A competitor company named Yuletide Card Company has mostly fixed costs as compared to Holiday Card Company, which has a greater proportion of variable costs. Which company has the greater risk of a net loss? Explain why. 2. Aunt Ethel's Fancy Cookie Company manufactures and sells three flavours of cookies: Macaroon, Sugar, and Buttercream. The batch size for the cookies is limited to 1,000 cookies based on the size of the ovens and cookie moulds owned by the company. Based on budgetary projections, the information listed below is available: Projected sales in units Macaroon 500,000 Sugar 800,000 Buttercream 600,000 PER UNIT data: Selling price $0.80 $0.75 $0.60 Direct materials Direct labour $0.20 $0.04 $0.15 $0.02 $0.14 $0.02 Hours per 1000-unit batch: Direct labour hours Oven hours Packaging hours 2 1 0.5 1 1 0.5 1 1 0.5 Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labour Oven Packaging Overhead costs $210,000 $150,000 $360,000 Activity levels 2,400 hours 1,900 oven hours 950 packaging hours Required: a. Using the ABC system, for the sugar cookie: 1. compute the estimated overhead costs per thousand cookies. 2. compute the estimated operating profit per thousand cookies. b. Using a traditional system (with direct labor hours as the overhead allocation base), for the sugar cookie:. 1. compute the estimated overhead costs per thousand cookies. 2. compute the estimated operating profit per thousand cookies. c. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why? d. Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not? 3. Littrell Company produces chairs and has determined the following direct cost categories and budgeted amounts: Category Direct Materials Direct Labour Direct Marketing Standard Inputs for 1 output 1.00 0.30 0.50 Standard Cost per input $7.50 9.00 3.00 Actual performance for the company is shown below: Actual output: (in units) Direct Materials: Materials costs Input purchased and used Actual price per input Direct Manufacturing Labour: Labour costs Labour-hours of input 4,000 $30,225 3,900 $7.75 $11,470 1,240 Actual price per hour Direct Marketing Labour: Labour costs Labour-hours of input Actual price per hour $9.25 $5,880 2,100 $2.80 Required: a. b. c. d. e. What is the combined total of the flexible-budget variances? What is the price variance of the direct materials? What is the price variance of the direct manufacturing labour and the direct marketing labour, respectively? What is the efficiency variance for direct materials? What are the efficiency variances for direct manufacturing labour and direct marketing labour, respectively