Question

EKPN Company prepared the following data in its static budget based on 150,000 machine hours: Direct Materials $ 450,000 Direct Labour 225,000 Variable Overhead 1,125,000 Fixed Overhead 2,100,000

Actual Results: Machine Hours 160,000 hours Direct Materials $475,000 Direct Labour 245,000 Variable Overhead 1,150,000 Fixed Overhead 2,110,000


(i). What was the budgeted variable costs per machine hour for variable overhead, rounded to the nearest whole cent? a) $7.03/machine hour b) $7.50/machine hour c) $19.53/machine hour d) $20.83/machine hour


(ii). What is the budgeted Direct Labour cost at the actual level of activity? a) $245,000 b) $240,000 c) $210,938 d) $20,000


(iii). What is the budgeted Fixed Overhead at the actual level of activity? a) $2,100,000 b) $2,110,000 c) $2,240,000 d) $3,260,000


(iv). What was the difference between the actual and budgeted Direct Material costs at the actual level of activity? a) $25,000 unfavourable b) $25,000 favourable c) $5,000 unfavourable d) $5,000 favourable


(v). What possible reason could explain the difference between the actual fixed overhead costs and the budgeted fixed overhead costs? a) EKPN Company’s actual machine hours were greater than the budgeted amount. b) EKPN Company’s actual machine hours were less than the budgeted amount. c) EKPN Company spent more on fixed costs than it expected. d) EKPN Company spent less on fixed costs than expected.


Q#2: 20 Marks

Nick’s Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. The machines would cost a total of $300,000, have an eight-year useful life, and have a total salvage value of $20,000. The company estimated that annual revenues and expenses associated with the machines would be as follows:

Revenues $200,000 Operating expenses: Commissions to game arcades $100,000 Insurance 7,000 Depreciation 35,000 Maintenance 18,000 160,000 Net operating income $ 40,000 Required: 1. Assume that Nick’s Novelties, Inc. will not purchase new equipment unless it provides a payback period of five years of less. Will the company purchase the pinball machines?

2. If Nick’s Novelties, Inc. has a discount rate of 18%, what is the NPV of this investment?






















EKPN Company prepared the following data in its static budget based on 150,000 machine hours: Direct Materials $ 450,000 Direct Labour 225,000 Variable Overhead 1,125,000 Fixed Overhead 2,100,000

Actual Results: Machine Hours 160,000 hours Direct Materials $475,000 Direct Labour 245,000 Variable Overhead 1,150,000 Fixed Overhead 2,110,000


(i). What was the budgeted variable costs per machine hour for variable overhead, rounded to the nearest whole cent? a) $7.03/machine hour b) $7.50/machine hour c) $19.53/machine hour d) $20.83/machine hour


(ii). What is the budgeted Direct Labour cost at the actual level of activity? a) $245,000 b) $240,000 c) $210,938 d) $20,000


(iii). What is the budgeted Fixed Overhead at the actual level of activity? a) $2,100,000 b) $2,110,000 c) $2,240,000 d) $3,260,000


(iv). What was the difference between the actual and budgeted Direct Material costs at the actual level of activity? a) $25,000 unfavourable b) $25,000 favourable c) $5,000 unfavourable d) $5,000 favourable


(v). What possible reason could explain the difference between the actual fixed overhead costs and the budgeted fixed overhead costs? a) EKPN Company’s actual machine hours were greater than the budgeted amount. b) EKPN Company’s actual machine hours were less than the budgeted amount. c) EKPN Company spent more on fixed costs than it expected. d) EKPN Company spent less on fixed costs than expected.


Q#2: 20 Marks

Nick’s Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. The machines would cost a total of $300,000, have an eight-year useful life, and have a total salvage value of $20,000. The company estimated that annual revenues and expenses associated with the machines would be as follows:

Revenues $200,000 Operating expenses: Commissions to game arcades $100,000 Insurance 7,000 Depreciation 35,000 Maintenance 18,000 160,000 Net operating income $ 40,000 Required: 1. Assume that Nick’s Novelties, Inc. will not purchase new equipment unless it provides a payback period of five years of less. Will the company purchase the pinball machines?

2. If Nick’s Novelties, Inc. has a discount rate of 18%, what is the NPV of this investment?

Answer 1

Answer 1 :

Part i)

Budgeted variable cost for variable overhead = 1125000 / 150000 = $7.50 per machine hour

Option b is correct

Part ii)

Budgeted direct labor rate = 225000 / 150000 = $1.5 per hour

Budgeted direct labor cost at actual activity = 1.5 * 160000 = $240000

Option b is correct

Part iii)

Budgeted fixed cost = 2,100,000

Because it is fixed

Option a is correct

Part iv)

Budgeted direct material cost at actual activity = [450000 / 150000 ] * 160000 = 480000

Difference = 4750000 - 480000 = $5000 favorable

Option d is correct

Part v)

Option c is correct

Because it spent more on fixed expenses.

Answer: 2

Part 1

Yes, the pinball machines would be purchased. The payback period is less than the maximum 5 years required by the company.

Payback period	=	Investment required
		Annual cash inflow

Payback period	=	$300,000	=	4	Years
		$75,000

Cash flow = Net income + depreciation = 40000 + 35000 = 75000