AK/ADMS 1500 A – Summer 2006 Second Mid-Term Examination Monday 26th June, 2006

AK/ADMS 1500 A – Summer 2006 Second Mid-Term Examination Monday 26th June, 2006 Review solutions (take up) at 8:30pm

Question 1: The objective of budgeting is: a) for planning; b) for controlling; c) as a target; d) any or all of the above; e) none of the above

Question 2: The Human Resources Department at Kalimar Inc. has been asked to prepare an operating budget for next year. They have been told that they must justify every proposed expenditure by reference to the tasks that will be carried out, the level of service and the resources necessary. What kind of budget have they been asked to prepare: a) a participative budget; b) an imposed budget; c) a forecast; d) a zero-based budget; e) none of the above.

Question 3: In preparing a budget for Kalimar Inc. what is the most important first step that is necessary before expenses can be budgeted: a) estimating sales levels; b) calculation of employee numbers; c) deciding what level of inflation to expect; d) calculation of cash balances; e) none of the above

Question 4: The Training Department at Kalimar Inc. had a budget of $500,000 in 2006. For 2007 they expect to increase their budget because they are doing 5% more training, and are facing salary and wage increases of 2%. They also plan to reduce their budget by $15,000 by eliminating some under-utilized services. Budgeted cost of the Training Department for 2007 will be: a) $500,000; b) $505,000; c) $507,000; d) $520,000; e) none of the above.

Question 4: The Training Department at Kalimar Inc. had a budget of $500,000 in 2006. For 2007 they expect to increase their budget because they are doing 5% more training, and are facing salary and wage increases of 2%. They also plan to reduce their budget by $15,000 by eliminating some under-utilized services. Budgeted cost of the Training Department for 2007 will be: a) $500,000; b) $505,000; c) $507,000; d) $520,000;= ($500,000 * 1.07) - $15,000 e) none of the above.

The Training Department at Kalimar Inc. had the following budgeted and actual costs in 2005: • Title:Budgeted cost:Actual cost: • Manager: $100,000 $105,000 • 2 receptionists: $ 50,000 $ 52,000 • 5 HR professionals $250,000 $260,000 • Casuals $100,000$ 80,000 • Total : $500,000$497,000 • Based only on the above information, how would you characterize these results? • Question 5: The Training Department was: • reasonably well “in control”; • b) not able to control expenditures accurately; • c) training activities cannot be controlled through a budget; • d) they should have spent less on the manager’s salary; • e) none of the above.

The Training Department at Kalimar Inc. had the following budgeted and actual costs in 2005: Title:Budgeted cost:Actual cost: Manager: $100,000 $105,000 2 receptionists: $ 50,000 $ 52,000 5 HR professionals $250,000 $260,000 Casuals $100,000$ 80,000 Total : $500,000$497,000 Based only on the above information, how would you characterize these results? Question 5: The Training Department was: a) reasonably well “in control”; (they are underspent in total and no individual budget line is more than 5% overspent) b) not able to control expenditures accurately; c) training activities cannot be controlled through a budget; d) they should have spent less on the manager’s salary; e) none of the above.

Question 6: • The Training Department at Kalimar Inc. had agreed to offer 5,000 employee-hours of training courses in 2005. They actually offered 4,500 hours. Considering this, and the information in question 5, they: • had good cost control and were effective; • had good cost control but it is not clear that they were effective; • c) were efficient and effective; • d) had too few HR professionals; • e) had poor cost control because the amount spent per hour of training is too high.

Question 6: The Training Department at Kalimar Inc. had agreed to offer 5,000 employee-hours of training courses in 2005. They actually offered 4,500 hours. Considering this, and the information in question 5, they: • had good cost control and were effective; • had good cost control but it is not clear that they were effective; (budgeted cost: $500,000, actual cost: $497,000 = good cost control: offering 10% fewer training hours likely means that they did not provide the training they were mandated to provide) • c) were efficient and effective; • d) had too few HR professionals; • e) had poor cost control because the amount spent per hour of training is too high.

Question 7: Kalimar Inc. sells packaged meals to caterers, airlines and stores. Sales in 2005 totaled $30 million. In 2006 they expect to increase their prices by 5%, and increase the volume of sales units by 10% also. The sales forecast for 2006 will be: a) $34,650,000; b) $34,500,000; c) $34,050,000; d) $34,000,000; e) none of the above.

Question 7: Kalimar Inc. sells packaged meals to caterers, airlines and stores. Sales in 2005 totaled $30 million. In 2006 they expect to increase their prices by 5%, and increase the volume of sales units by 10% also. The sales forecast for 2006 will be: a) $34,650,000; = ($30,000,000 * 1.05 * 1.10) b) $34,500,000; c) $34,050,000; d) $34,000,000; e) none of the above.

Question 8:Budgeted sales of Kalimar Inc for 2007 are: January: $2,500,000 February: $2,500,000 March: $3,000,000 April: $3,000,000 May: $3,000,000 June: $4,000,000. All sales are on credit terms. The sales made in any given month are expected to be collected as follows: During the month of sale: 10% By the end of the following month: 50% By the end on the month after that: 35% The other 5% turn into “problems” and may never be collected. The budgeted cash collections for the month of April will be: a) $2,675,000; b) $2,800,000; c) $3,000,000; d) $3,230,000; e) none of the above.

Question 8:Budgeted sales of Kalimar Inc for 2007 are: January: $2,500,000 February: $2,500,000 March: $3,000,000 April: $3,000,000 May: $3,000,000 June: $4,000,000. All sales are on credit terms. The sales made in any given month are expected to be collected as follows: During the month of sale: 10% By the end of the following month: 50% By the end on the month after that: 35% The other 5% turn into “problems” and may never be collected. The budgeted cash collections for the month of April will be: a) $2,675,000; 10% * April sales of $3mn = $ 300,000 50% * March sales of $3 mn = 1,500,000 35% * Feb sales of $2.5 mn = 875,000 Total: $2,675,000 b) $2,800,000; c) $3,000,000; d) $3,230,000; e) none of the above.

Question 9: Budgeted sales of Kalimar Inc. for January 2007 are $2,500,000. The contribution margin is budgeted to be 40%. The variable cost for January is budgeted to be: a) $1,000,000; b) $1,500,000;c) $ 500,000; d) nil; e) none of the above.

Question 9: Budgeted sales of Kalimar Inc. for January 2007 are $2,500,000. The contribution margin is budgeted to be 40%. The variable cost for January is budgeted to be: a) $1,000,000; b) $1,500,000;If contribution margin is 40% of sales, then variable cost is 60% of sales. $2,500,000 * 60% = $1,500,000 c) $ 500,000; d) nil; e) none of the above.

Question 10: • The Training Department at Kalimar Inc. had an actual cost of $497,000 for 2003. In relation to volume of products manufactured, this is a: • fixed cost; • b) variable cost; • c) zero-based cost; • d) marginal cost; • e) none of the above.

Question 10: The Training Department at Kalimar Inc. had an actual cost of $497,000 for 2003. In relation to volume of products manufactured, this is a: a) fixed cost; (training costs will not rise or fall in proportion to output; the amount of training done is a managerial decision) b) variable cost; c) zero-based cost; d) marginal cost; e) none of the above.

Question 11: Kalimar Inc. is considering introducing a new line of desserts. These would be sold for $2 each. The ingredient cost $0.60 per unit. The labour cost would also be $0.60 per unit. The additional fixed costs associated with this product would be $240,000 per year. The contribution margin per dessert would be: a) $2.00; b) $1.20; c) $0.80; d) $0.50; e) none of the above.

Question 11: Kalimar Inc. is considering introducing a new line of desserts. These would be sold for $2 each. The ingredient cost $0.60 per unit. The labour cost would also be $0.60 per unit. The additional fixed costs associated with this product would be $240,000 per year. The contribution margin per dessert would be: a) $2.00; b) $1.20; c) $0.80; ($2 – ($0.60 + $0.60) = $0.80) d) $0.50; e) none of the above.

Question 12: • Using the same information as in question 11 above, the number of desserts they would have to sell to break even is: • 300,000; • b) 250,000; • c) 233,333; • d) 225,000; • e) none of the above

Question 12: • Using the same information as in question 11 above, the number of desserts they would have to sell to break even is: • 300,000; • break-even = fixed cost/contribution margin • = $240,000/$0.80 = 300,000 units • b) 250,000; • c) 233,333; • d) 225,000; • e) none of the above;

Question 13: • Using the same information as in question 11 above, number of desserts they would have to sell to make a make a profit of $160,000 is: • 500,000; • b) 540,000; • c) 550,000; • d) it will never be possible to make a profit of $100,000 from this product; • e) none of the above;

Question 13: • Using the same information as in question 11 above, number of desserts they would have to sell to make a make a profit of $160,000 is: • 500,000; (fixed cost + required profit) • /contribution margin = ($240,000 + $160,000) / $0.80 = 500,000 units) • b) 540,000; • c) 550,000; • d) it will never be possible to make a profit of $100,000 from this product; • e) none of the above;

Question 14: Use the same information as in question 11 above. Kalimar Inc is considering running a series of TV ads that would cost $120,000. The number of additional desserts they would have to sell to make the ad campaign worthwhile is: a) 120,000; b) 125,000; c) 140,000; d) 150,000; e) none of the above..

Question 14: Use the same information as in question 11 above. Kalimar Inc is considering running a series of TV ads that would cost $120,000. The number of additional desserts they would have to sell to make the ad campaign worthwhile is: a) 120,000; b) 125,000; c) 140,000; d) 150,000; ($120,000/$0.80 = 150,000) e) none of the above..

Question 15: If the Human Resources Department at Kalimar Inc. prepares a budget based on how many employees and going to be hired or fired, and the HR resources necessary to carry out that work, they are using: a) mixed costs; b) activity-based costing; c) variance analysis; d) cost-volume-profit analysis; e) none of the above.

Question 16: In respect of short-term decision-making, raw material used is: a) always a relevant cost; b) never a relevant cost; c) only a relevant cost in the longer term; d) only a relevant cost if activity-based costing is in use; e) none of the above.

Question 17: The “full cost” of a product will include: a) raw materials; b) direct labour; c) allocated overhead; d) a & b, but not c; e) a, b and c.

Question 18: In respect of short-term decision-making, allocated overhead is: a) never relevant; b) that part of allocated overhead which changes as a result of the decision is relevant, but the rest is not relevant; c) that part of allocated overhead which is fixed cost is relevant, but the variable part is not relevant; d) always relevant; e) none of the above.

Question 19: The Human Resources Department at Ace Manufacturing Inc. uses the bank to process payrolls at a cost of $2 per employee per year. They are considering installing vendor supported new software package and special computer instead at a cost of $35,000. This would be amortized over a five-year useful life, with a residual value of $5,000. In addition to amortization there would be operating costs of $7,500 per year spent on vendor support, operator’s salaries and materials. Corporate overhead of $2,000 would also be added to the department’s costs. On average there are 10,000 employees at Ace. If they go ahead with the change the full cost per employee per year for payroll processing will be: a) $1.35; b) $1.45; c) $1.55; d) $1.66; e) none of the above.

Question 19: The Human Resources Department at Ace Manufacturing Inc. uses the bank to process payrolls at a cost of $2 per employee per year. They are considering installing vendor supported new software package and special computer instead at a cost of $35,000. This would be amortized over a five-year useful life, with a residual value of $5,000. In addition to amortization there would be operating costs of $7,500 per year spent on vendor support, operator’s salaries and materials. Corporate overhead of $2,000 would also be added to the department’s costs. On average there are 10,000 employees at Ace. If they go ahead with the change the full cost per employee per year for payroll processing will be: a) $1.35; b) $1.45; c) $1.55; Depreciation: ($35,000 – $5,000)/5 years = $ 6,000 Operating costs: $ 7,500 Corporate overhead: $ 2,000 Total cost; $ 15,500 Divide by 10,000 employees: $1.55 per employee d) $1.66; e) none of the above.

Question 20. One year after buying the new computer and software (see question 19) a payroll-processing company approaches Ace. They quote a figure of $1.20 per employee per year to carry out the entire payroll function. The computer and software are thought to have no resale value at this time. Relevant costs for assessing this decision include: a) the $1.20 quoted by the payroll-processing specialist; b) the $7,500 of operating costs; c) the depreciation on the computer and software; d) a & b, but not c; e) a, b and c.

Question 20. One year after buying the new computer and software (see question 19) a payroll-processing company approaches Ace. They quote a figure of $1.20 per employee per year to carry out the entire payroll function. The computer and software are thought to have no resale value at this time. Relevant costs for assessing this decision include: a) the $1.20 quoted by the payroll-processing specialist; b) the $7,500 of operating costs; c) the depreciation on the computer and software; d) a & b, but not c; (the depreciation is a sunk cost) e) a, b and c.

Question 21: In the situation described in questions 19 and 20, Ace should: a) accept the offer of $1.20 per employee as it will save them money; b) reject the offer of $1.20 as they should not be spending time on immaterial amounts; c) accept the offer of $1.20 it is the lowest figure mentioned; d) reject the offer of $1.20 as it will be more expensive than doing it in-house; e) none of the above.

Question 21: In the situation described in questions 19 and 20, Ace should: a) accept the offer of $1.20 per employee as it will save them money; b) reject the offer of $1.20 as they should not be spending time on immaterial amounts; c) accept the offer of $1.20 it is the lowest figure mentioned; d) reject the offer of $1.20 as it will be more expensive than doing it in-house; Additional cost of outsourced service: $12*10,000=$120,000 Costs saved: Operating costs: $ 75,000 (depreciation is a sunk cost, corporate overhead does not change: both are irrelevant) Net disbenefit: $ 45,000 e) none of the above.

Question 22: One of the most popular products made by Kalimar Inc. is a Thanksgiving Turkey Dinner, which sells for $5. The ingredient cost is $1.50 per dinner and the labour cost is also $1.50 per dinner. All overhead is fixed. Montreal Catering, which has a contract to supply dinners to a foreign airline operating out of Dorval Airport, offers to buy 5,000 of these dinners, but only if the price is $4 each. There is adequate capacity to make the additional dinners. In order to maximize short-term contribution margin, Kalimar Inc. should: a) reject the offer, as it is below both the normal selling price and the full cost; b) reject the offer as their customers would certainly become upset and they would end up having to reduce the price for all customers; c) accept the offer as $4 is more than the full cost; d) accept the offer as $4 is more than the differential cost;e) none of the above.

Question 22: One of the most popular products made by Kalimar Inc. is a Thanksgiving Turkey Dinner, which sells for $5. The ingredient cost is $1.50 per dinner and the labour cost is also $1.50 per dinner. All overhead is fixed. Montreal Catering, which has a contract to supply dinners to a foreign airline operating out of Dorval Airport, offers to buy 5,000 of these dinners, but only if the price is $4 each. There is adequate capacity to make the additional dinners. In order to maximize short-term contribution margin, Kalimar Inc. should: a) reject the offer, as it is below both the normal selling price and the full cost; b) reject the offer as their customers would certainly become upset and they would end up having to reduce the price for all customers; c) accept the offer as $4 is more than the full cost; d) accept the offer as $4 is more than the differential cost;(differential cost = $1.50 + $1.50 = $3) e) none of the above.

Question 23: Assume for question 24 that instead there is not enough capacity to make the additional dinners. In order to make the additional dinners Kalimar Inc. will have to either cancel sales to existing customers, or rent additional facilities: either would have a cost of $2,000. If Kalimar Inc. accepts the order the contribution margin will increase by: a) $2,000; b) $3,000;c) $4,000; d) $5,000; e) none of the above.

Question 23: Assume for question 24 that instead there is not enough capacity to make the additional dinners. In order to make the additional dinners Kalimar Inc. will have to either cancel sales to existing customers, or rent additional facilities: either would have a cost of $2,000. If Kalimar Inc. accepts the order the contribution margin will increase by: a) $2,000; b) $3,000;(differential revenue: 5,000 * $4 = $20,000 differential cost: variable cost: $3 * 5,000 = $15,000 additional cost $ 2,000 net benefit = $ 3,000 c) $4,000; d) $5,000; e) none of the above.

Question 24: A sunk cost can be best described as: a) an appropriate cost that generates the target profit, given the target volume, selling price, and quality of the product produced; b) a cost that was incurred in the past and that has, therefore, no relevance to decisions about the future; c) a predetermined cost at which a product is expected to be made, a service rendered, etc.; d) a cost incurred to ensure conformance to quality standards; e) a cost that does not change as a result of changes in units of activity.

Question 25: Consideration is being given to subcontracting the work of a company department. Which of the following is probably incorrect? a) Salaries and wages of the department would be saved. b) Head office expenses will probably not be saved c) The decision may change according to when the subcontracting is implemented d) A comparison of total current costs with the potential subcontractors total quote will indicate the extent of any savings. e) A detailed analysis should be made to isolate sunk costs and remove them in making any comparison.

AK/ADMS 1500 A – Summer 2006 Second Mid-Term Examination Monday 26th June, 2006