CAT-T7 MOCK EXAM PAPER QUESTIONS & ANSWERS
Time allowed – 3 hours.
All four questions are compulsory and must be answered.
QUESTION 1
Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The
assignment basis for support costs has been direct labor dollars. For 20X1, Come-On-In
compiled the following data for the two products:
Deluxe Standard
Sales units #50,000 #400,000
Sales price per unit $650.00 $475.00
Direct material and labor costs per unit $180.00 $130.00
Manufacturing support costs per unit $ 80.00 $120.00
Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for
more decorative door products in the deluxe product line. The CFO suggested that an ABC
analysis could be valuable to help evaluate a product mix and promotion strategy for the next
sales campaign. She obtained the following ABC information for 20X1:
Activity Cost Driver Cost Total Deluxe Standard
Setups # setups $ 500,000 500 400 100
Machine-related # of machine hours $44,000,000 600,000 300,000 300,000
Packing # shipments $ 5,000,000 250,000 50,000 200,000
Required:
a. Using the current system, what is the estimated
1. total cost of manufacturing one unit for each type of door?
2. profit per unit for each type of door?
(3+3 =6 marks)
b. Using the current system, estimated manufacturing overhead costs per unit are less for the
deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely
explanation for this?
(4 marks)
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CAT-T7 MOCK EXAM PAPER QUESTIONS & ANSWERS
c. Review machine-related costs above. What is a likely explanation for machine-related costs
being so high? What might explain why total machining hours for the deluxe doors
(300,000 hours) are the same as for the standard doors (300,000 hours)?
(3+3 =6 marks)
d. Using the activity-based costing data presented above,
1. compute the cost-driver rate for each overhead activity.
2. compute the revised manufacturing overhead cost per unit for each type of entry
door.
3. compute the revised total cost to manufacture one unit of each type of entry door.
(3+3+3 =9 marks)
e. Is the deluxe door as profitable as the original data estimated? Why or why not?
(3+3 =6 marks)
f. What considerations need to be examined when determining a sales mix strategy?
(3 marks)
g. Explain how activity-based costing systems can provide more accurate product costs than
traditional cost systems.
(6 marks)
(Total 40 marks)
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CAT-T7 MOCK EXAM PAPER QUESTIONS & ANSWERS
QUESTION 2
PART A
Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling
price of an arrangement is $30 and the average cost of each sale is $18. A new mall is
opening where Karen wants to locate a store, but the location manager is not sure about the
rent method to accept. The mall operator offers the following three options for its retail
store rentals:
1. paying a fixed rent of $15,000 a month,
2. paying a base rent of $9,000 plus 10% of revenue received, or
3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of
$25,000.
Required:
a. For each option, compute the breakeven sales and the monthly rent paid at break-even.
b. Beginning at zero sales, show the sales levels at which each option is preferable up to
5,000 units.
(6 +6 = 12 marks)
PART B
Auto Tires has been in the tire business for four years. It rents a building but owns all of its
equipment. All employees are paid a fixed salary except for the busy season (April - June),
when temporary help is hired by the hour. Utilities and other operating charges remain fairly
constant during each month except those in the busy season.
Selling prices per tire average $75 except during the busy season. Because a large number
of customers buy tires prior to winter, discounts run above average during the busy season.
A 15% discount is given when two tires are purchased at one time. During the busy months,
selling prices per tire average $60.
The president of Auto Tires is somewhat displeased with the company's management
accounting system because the cost behavior patterns displayed by the monthly breakeven
charts are inconsistent; the busy months' charts are different from the other months of the
year. The president is never sure if the company has a satisfactory margin of safety or if it is
just above the breakeven point.
Required:
a. What is wrong with the accountant's computations?
b. How can the information be presented in a better format for the president?
(4 +4 = 8 marks)
(Total 20 marks)
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CAT-T7 MOCK EXAM PAPER QUESTIONS & ANSWERS
QUESTION 3
PART A
Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200 equal size
lots.
As the lots are sold, they are cleared at an average cost of $5,000.
Storm drains and driveways are installed at an average cost of $8,000 per site.
Sales commissions are 10 % of selling price.
Administrative costs are $850,000 per year.
The average selling price was $160,000 per lot during 20x2 when 50 lots were sold.
During 20x3, the company bought another 2,000-acre island and developed it exactly the same
way. Lot sales in 20x3 totaled 300 with an average selling price of $160,000. All costs were
the same as in 20x2.
Required:
Prepare income statements for both years using both absorption and variable costing methods.
(6 +6 = 12 marks)
PART B
Maloney Corporation manufactures plastic water bottles. It plans to grow by producing high-
quality water bottles at a low cost that are delivered in a timely manner. There are a number of
other manufacturers who produce similar water bottles. Maloney believes that continuously
improving its manufacturing processes and having satisfied employees are critical to
implementing its strategy.
Required:
(i) Is Maloney’s strategy one of product differentiation or cost leadership? Explain briefly.
(2 +2 = 4 marks)
(ii) Identify at least one key element that you would expect to see included in the balanced
scorecard
a. for the financial perspective.
b. for the customer perspective.
c. for the internal business process perspective.
d. for the learning and growth perspective.
(1 +1+1+1 = 4 marks)
(Total 20 marks)
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CAT-T7 MOCK EXAM PAPER QUESTIONS & ANSWERS
QUESTION 4
PART A
The Laramie Factory produces expensive boots. It has two departments that process all the
items. During January, the beginning work in process in the tanning department was 40%
complete as to conversion and 100% complete as to direct materials. The beginning inventory
included $6,000 for materials and $18,000 for conversion costs. Ending work-in-process
inventory in the tanning department was 40% complete. Direct materials are added at the
beginning of the process.
Beginning work in process in the finishing department was 60% complete as to conversion.
Beginning inventories included $7,000 for transferred-in costs and $10,000 for conversion
costs. Ending inventory was 30% complete.
Additional information about the two departments follows:
Tanning Finishing
Beginning work-in-process units 5,000 4,000
Units started this period 14,000 ?
Units transferred this period 16,000 18,000
Ending work-in-process units ? 2,000
Material costs added $18,000 ?
Conversion costs 32,000 $19,000
Transferred-out cost 50,000 ?
Required:
Prepare a production cost worksheet using weighted-average costing for the finishing
department.
(12 marks)
PART B
(i) Distinguish between a ‘forecast’ and a ‘budget’.
(2 marks)
(ii) Bass Foundry Ltd has decided that the labour standards for each unit produced are 3
hours of assembly labour at $9.75 per hour and 2.5 hours of finishing labour at
$12.15 per hour. During May, the company produced 700 units using 1,890 hours of
assembly labour and 2,100 hours of finishing labour. The company’s direct labour
cost was $18,673 for assembly labour and $25,799 for finishing labour.
Required:
Calculate the labour rate and efficiency variances for the assembly labour and the finishing
labour.
(2 +2 = 4 marks)
(iii) What have research studies found with respect to budgets and staff behaviour?
(2 marks)
(Total 20 marks)
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