Management Accounting
1. Explain how knowledge of managerial accounting can assist a manager with regard to the following concerns:
a. He is deciding whether to push through with a project.
b. He is determining whether a branch is profitable or not.
c. He is deciding whether to process a certain product further before selling.
d. He would like to show to the Board of Directors how the business is financially performing and how cash is being used.
e. He would like to plan for the year so that he will be prepared to deal with shortage of cash fund.
2. Gold Company's comparative balance sheet and income statement for last year appear below:
Statement of Financial Position
Ending Beginning
Balance Balance
Cash $ 70,000 $ 38,000
Accounts receivable 76,000 52,000
Inventory 24,000 42,000
Prepaid expenses 8,000 16,000
Long-term investments 260,000 210,000
Plant and equipment 530,000 510,000
Accumulated depreciation ( 398,000) ( 350,000)
Total assets $570,000 $518,000
Accounts payable $ 32,000 $ 54,000
Accrued liabilities 34,000 25,000
Taxes payable 4,000 11,000
Bonds payable 160,000 200,000
Deferred taxes 38,000 25,000
Common stock 150,000 120,000
Retained earnings 152,000 83,000
Total liabilities and owners’ equity $570,000 $518,000
Income Statement
Sales $610,000
Cost of goods sold 310,000
Gross margin 300,000
Selling and administrative expense 190,000
Net operating income 110,000
Income taxes 33,000
Net income $ 77,000
The company declared and paid $8,000 in cash dividends during the year.
Required:
Construct in good form the operating activities section of the company's statement of cash flows for the year using the direct method.
3. Diamond Company is considering purchasing a machine that would cost $756,000 and have a useful life of 8 years. The machine would reduce cash operating costs by $132,632 per year. The machine would have a salvage value of $151,200 at the end of the project.
Compute:
a. Net present value
b. Internal rate of return
c. Profitability index
d. Payback period
e. Simple rate of return
f. Should the company purchase the machine? Why or why not?
4. Pearl, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:
Product F Product G Product H
Selling price $50 $80 $70
Variable costs $40 $50 $55
Fixed costs $15 $20 $12
Milling machine time (minutes) 4 2 5
Fixed costs are applied to the products on the basis of direct labor hours.
Demand for the three products exceeds the company's productive capacity. The milling machine is the constraint, with only 2,400 minutes of milling machine time available this week.
Required:
a. Given the milling machine constraint, which product should be emphasized? Support your answer with appropriate calculations.
b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of milling machine time?
5. Emerald, Inc, produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows:
Sales $540,000
Variable expenses 360,000
Contribution margin 180,000
Fixed expenses 120,000
Net operating income $ 60,000
The company produced and sold 120,000 kilograms of product during the month. There was no beginning or ending inventories.
Required:
a. Given the present situation, compute
1) The break-even sales in kilograms.
2) The break-even sales in dollars.
3) The sales in kilograms that would be required to produce net operating income of $90,000.
4) The margin of safety in dollars.
b. An important part of processing is performed by a machine that is currently being leased for $20,000 per month. The company has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease.
1) Should the company choose the lease or the royalty plan?
2) Under the royalty plan compute break-even point in kilograms.
3) Under the royalty plan compute break-even point in dollars.
4) Under the royalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000.
6. Selected data about Ruby Company's manufacturing operations at two levels of activity are given below:
Number of units produced 10,000 15,000
Total manufacturing costs $157,000 $225,000
Direct material cost per unit $4 $4
Direct labor cost per unit $6 $6
Required:
a. Using the high-low method, estimate the cost formula for manufacturing overhead. Assume that both direct material and direct labor are variable costs.
b. What is the purpose of knowing the cost formula?
7. Jade Company manufactures and sells premium tomato juice by the gallon. The company just finished its first year of operations. The following data relates to this first year:
Number of gallons produced 75,000
Number of gallons sold 70,000
Sales price $3.00 per gallon
Unit product cost under variable costing $1.45 per gallon
Total contribution margin $84,000
Total fixed manufacturing overhead cost $63,000
Total fixed selling and administrative expense $10,500
Required:
a. Using the absorption costing method, prepare the company's income statement for the year.
b. Using variable costing method, prepare the company’s income statement for the year.
c. For decision making purpose, which is the better method? Why?
8. Platinum Corporation belongs to the rubber tire trading industry. Its most recent balance sheet and income statement appear below:
Statement of Financial Position
December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash $ 30 $ 110
Accounts receivable 210 260
Inventory 190 170
Prepaid expenses 70 70
Total current assets 500 610
Plant and equipment, net 810 740
Total assets $1,310 $1,350
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 140 $ 150
Accrued liabilities 30 30
Notes payable, short term 40 40
Total current liabilities 210 220
Bonds payable 190 240
Total liabilities 400 460
Stockholders’ equity:
Preferred stock, $100 par value, 5% 100 100
Common stock, $2 par value 400 400
Additional paid-in capital–common stock 130 130
Retained earnings 280 260
Total stockholders’ equity 910 890
Total liabilities & stockholders’ equity $1,310 $1,350
Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) $1,260
Cost of goods sold 770
Gross margin 490
Selling and administrative expense 400
Net operating income 90
Interest expense 26
Net income before taxes 64
Income taxes (30%) 19
Net income $ 45
Required:
A. Compute the following for Year 2:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover. e. Average collection period.
f. Inventory turnover.
g. Average sale period
B. What can you say about the company’s short-term liquidity?
C. If the industry average in terms of collection period is 45 days, and inventory turnover is 6 times, how is the company performing compared to the industry?
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