1. Direct Materials and Direct Labor Variance Analysis

   Lenni Clothing Co. manufactures clothing in a small manufacturing facility. Manufacturing has 25 employees. Each employee presently provides 40 hours of productive labor per week. Information about a production week is as follows:

   Standard wage per hr.	$12.00
   Standard labor time per unit	12 min.
   Standard number of yds. of fabric per unit	5.0 yds.
   Standard price per yd. of fabric	$5.00
   Actual price per yd. of fabric	$5.10
   Actual yds. of fabric used during the week	26,200 yds.
   Number of units produced during the week	5,220
   Actual wage per hr.	$11.80
   Actual hrs. for the week	1,000 hrs.

   Required:

   a. Determine the standard cost per unit for direct materials and direct labor. Round the cost per unit to two decimal places.

   Direct materials standard cost per unit	$
   Direct labor standard cost per unit
   Total standard cost per unit	$

   b. Determine the price variance, quantity variance, and total direct materials cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

   Direct materials price variance	$
   Direct materials quantity variance
   Total direct materials cost variance	$

   c. Determine the rate variance, time variance, and total direct labor cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

   Direct labor rate variance	$
   Direct labor time variance
   Total direct labor cost variance	$

Part A
In late 2017, the Nicklaus Corporation was formed. The corporate charter authorizes the issuance of 4,000,000 shares of common stock carrying a $1 par value, and 1,000,000 shares of $5 par value, noncumulative, nonparticipating preferred stock. On January 2, 2018, 2,000,000 shares of the common stock are issued in exchange for cash at an average price of $12 per share. Also on January 2, all 1,000,000 shares of preferred stock are issued at $30 per share.

Required:
1. Prepare journal entries to record these transactions.
2. Prepare the shareholders' equity section of the Nicklaus balance sheet as of March 31, 2018. (Assume net income for the first quarter 2018 was $1,300,000.)

Part B
During 2018, the Nicklaus Corporation participated in three treasury stock transactions:

1. On June 30, 2018, the corporation reacquires 150,000 shares for the treasury at a price of $14 per share.
2. On July 31, 2018, 25,000 treasury shares are reissued at $17 per share.
3. On September 30, 2018, 25,000 treasury shares are reissued at $12 per share.

Required:
1. Prepare journal entries to record these transactions.
2. Prepare the Nicklaus Corporation shareholders' equity section as it would appear in a balance sheet prepared at September 30, 2018. (Assume net income for the second and third quarter was $2,750,000.)

Part C
On October 1, 2018, Nicklaus Corporation receives permission to replace its $1 par value common stock (4,000,000 shares authorized, 2,000,000 shares issued, and 1,900,000 shares outstanding) with a new common stock issue having a $.50 par value. Since the new par value is one-half the amount of the old, this represents a 2-for-1 stock split. That is, the shareholders will receive two shares of the $.50 par stock in exchange for each share of the $1 par stock they own. The $1 par stock will be collected and destroyed by the issuing corporation.

On November 1, 2018, the Nicklaus Corporation declares a $0.09 per share cash dividend on common stock and a $0.26 per share cash dividend on preferred stock. Payment is scheduled for December 1, 2018, to shareholders of record on November 15, 2018.

On December 2, 2018, the Nicklaus Corporation declares a 3% stock dividend payable on December 28, 2018, to shareholders of record on December 14. At the date of declaration, the common stock was selling in the open market at $12 per share. The dividend will result in 114,000 (0.03 × 3,800,000) additional shares being issued to shareholders.

Required:
1. Prepare journal entries to record the declaration and payment of these stock and cash dividends.
2. Prepare the December 31, 2018, shareholders' equity section of the balance sheet for the Nicklaus Corporation. (Assume net income for the fourth quarter was $2,250,000.)
3. Prepare a statement of shareholders' equity for Nicklaus Corporation for 2018.

Cash Budget

The controller of Shoe Mart Inc. asks you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

The company expects to sell about 12% of its merchandise for cash. Of sales on account, 65% are expected to be collected in full in the month following the sale and the remainder the following month. Depreciation, insurance, and property tax expense represent $10,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in June, and the annual property taxes are paid in October. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month. All sales and administrative expenses are paid in the month incurred.

Current assets as of January 1 include cash of $50,000, marketable securities of $71,000, and accounts receivable of $153,100 ($116,000 from December sales and $37,100 from November sales). Sales on account in November and December were $106,000 and $116,000, respectively. Current liabilities as of January 1 include a $66,000, 12%, 90-day note payable due March 20 and $10,000 of accounts payable incurred in December for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $4,000 in dividends will be received in January. An estimated income tax payment of $20,000 will be made in February. Shoe Mart's regular quarterly dividend of $10,000 is expected to be declared in February and paid in March. Management desires to maintain a minimum cash balance of $39,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for January, February, and March. Enter an increase in the month's cash balance or an excess cash amount as a positive number. Enter a decrease in the month's cash balance or a cash deficiency as a negative number. Assume 360 days per year for interest calculations.

2. The budget indicates that the minimum cash balance will not be maintained in March. This is due primarily to which of the following causes?

1. Capital expenditures
2. Note repayment
3. Depreciation
4. Income taxes
5. Decreased collection of accounts receivable

Select the correct answer

• I, II, III, IV, and V
• I and II only.
• III, IV, and V only.
• IV and V only.

Buckler Company manufactures desks with vinyl tops. In 2004, a 1,000 desk production run cost for the vinyl used per Model S desk is $27.00 based on 12 square feet of vinyl at a cost of $2.25 per square foot. A production run of 1,000 desks in 2003 resulted in the usage of 12,600 square feet of vinyl at a cost of $2.00 per square foot, a total cost of $25,200.

Resulting from the above production run what is the material volume variance ______, the materials efficiency variance_____, and the materials price variance ______?

SECTION C Case Study (Total 20 marks)
Assessing Control Risks
(A) Kumud Pty Ltd is a major manufacturer of industrial machinery. Detailed below is a
description of its purchasing and payments system.
(i) When the stores department requires items to be purchased, they issue a three-part prenumbered
purchase requisition that needs to be approved by the store’s manager. Copy 1
is sent to the purchasing department, Copy 2 is sent to the accounts payable department
and Copy 3 is filed in the stores department.
(ii) On receipt of an approved purchase requisition, the purchasing department issues a fivepart
pre-numbered purchase order. Copy 1 is sent to the supplier, Copies 2 and 3 are
forwarded to the receiving department, Copy 4 is forwarded to the accounts payable
department and Copy 5 is filed in the purchasing department.
(iii) When goods are received, the receiving department logs in the shipment by stamping
“order received” on its two copies of the purchase order, which then forms its receiving
record. One copy of the receiving record is filed in the receiving department and the other
is forwarded to the accounts payable department.
(iv) The accounts payable department checks that there is a purchase requisition, purchase
order and receiving record for each supplier invoice and then approves it for payment.
(v) The accounts payable department prepares a pre-numbered disbursement voucher and
forwards it along with the supplier’s invoice, purchase requisition, purchase order and
receiving record to the financial accountant.
(vi) The financial accountant prepares a cheque for each supplier, signs the cheque and
records it in the cash disbursements journal. The cheque is immediately mailed to the
supplier. Supporting documentation is returned to accounts payable for filing.
(vii) At the end of the month, the assistant accountant undertakes a sequence check of all
accountable forms. The financial accountant receives the monthly bank statement,
prepares a bank reconciliation and investigates any reconciling items.
11
Required:
(a) Identify any five (5) internal control weaknesses in Kumud’s internal control concerning
the purchases and payments functions. Explain why each one is a weakness.

(b) Explain the process the auditor can use in assessing control risks. ( 3 marks)
(c) What will be your assessment of internal controls relating to Kumud’s purchases and
payments system?

(B) You are the audit senior on the audit of Action Games Ltd (AGL), a large retailer of
computer games. Although each sale is of relatively low value, the company has a very high
sales volume. You have just completed your review of AGL's internal controls over sales for
your audit for the year ended 30 June 2015. Based on your review, you have concluded that
AGL's internal control over sales is excellent. As a result, you have suggested an audit strategy
for sales of extensive testing of the controls and, if they prove to be effective, relying solely on
those controls to gain reasonable assurance that the sales information is fairly stated. However,
your audit manager has asked you whether you have considered the inherent limitations of
internal control in designing your audit strategy.
Required:
(a) Explain the audit manager’s concern.
(b) What would be a more appropriate audit strategy? Justify your answer.

C4) Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in ten-gallon containers, which have the following price and variable costs.

Budgeted fixed overhead in 20x1, the company’s first year of operations, was $340,000. Actual production was 170,000 ten-gallon containers, of which 160,000 were sold. Skinny Dippers, Inc. incurred the following selling and administrative expenses.

Required:

1. 1. Compute the product cost per container of frozen yogurt under (a) variable costing and (b) absorption costing.

2. 2-a. Prepare operating income statements for 20x1 using absorption costing.

3. 2-b. Prepare operating income statements for 20x1 using variable costing.

4. 3. Reconcile the operating income reported under the two methods by listing the two key places where the income statements differ.

5. 4. Reconcile the operating income reported under the two methods using the shortcut method.

Tilson Corporation has projected sales and production in units for the second quarter of the coming year as follows:

Cash-related production costs are budgeted at $6 per unit produced. Of these production costs, 50% are paid in the month in which they are incurred and the balance in the following month. Selling and administrative expenses will amount to $60,000 per month. The accounts payable balance on March 31 totals $190,000, which will be paid in April.

All units are sold on account for $15 each. Cash collections from sales are budgeted at 60% in the month of sale, 25% in the month following the month of sale, and the remaining 15% in the second month following the month of sale. Accounts receivable on April 1 totaled $586,000 ($106,000 from February's sales and $480,000 from March’s sales).

Required:

a. Prepare a schedule for each month showing budgeted cash disbursements for Tilson Corporation.

b. Prepare a schedule for each month showing budgeted cash receipts for Tilson Corporation.

A company has the following accounts and account balances at the end of its first year:
   Accounts payable, $4,000
   Cash, $22,000
   Common stock, Not given
   Dividends, $4,000
   Expenses, $17,000
   Notes payable, $3,000
   Prepaid insurance, $5,000
   Revenues, $28,000
What is the balance of its common stock account at the end of the first year?

Leidenheimer Corporation manufactures small airplane propellers. Sales for year 2 totaled $1,710,000. Information regarding resources for the month follows.
     

In addition, Leidenheimer spent $63,000 on 45 engineering changes with a cost-driver rate of $1,400 and $59,200 on 8 outside contracts with a cost driver rate of $7,400.

Required:   

Management has requested that you do the following:

a. Prepare a traditional income statement.

b. Prepare an activity-based income statement.

You are a Financial Manager for Dexter Manufacturing. Your sales were $1,000,000 in 2010, and $1,000,000 again in 2011. Your accounting department came to you recently and stated that the cash balance is much lower at the end of 2011 than it was in 2010. You calculate your Accounts Receivable and Inventory Turnover for 2011 and noticed that both of these ratios have DROPPED from 2010 to 2011! Describe in a couple paragraphs what has happened to Accounts Receivable and Inventory. Does this help explain why cash is running low in your opinion? What could you suggest to your management team to help improve these 2 ratios and to help increase cash?

The executives at your firm are discussing alternative pricing and cost strategies for one of your major product lines, but the finance manager is out of town at a conference. They have asked you to join the meeting to explain how cost-volume-profit (CVP) planning and sensitivity analysis might be useful in the decision making process. What would your finance manager say about the use of these financial tools?

Discuss how Fiji Hot Bread Kitchen can link the BSC to its reward system to award bonus payments to its employees

10) Universal Leasing leases electronic equipment to a variety of businesses. The company’s primary service is providing alternate financing by acquiring equipment and leasing it to customers under long-term sales-type leases. Universal earns interest under these arrangements at a 10% annual rate.
  
The company leased an electronic typesetting machine it purchased for $30,900 to a local publisher, Desktop Inc. on December 31, 2017. The lease contract specified annual payments of $8,000 beginning January 1, 2018, the beginning of the lease, and each December 31 through 2019 (three-year lease term). The publisher had the option to purchase the machine on December 30, 2020, the end of the lease term, for $12,000 when it was expected to have a residual value of $16,000, a sufficient difference that exercise seems reasonably certain. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Show how Universal calculated the $8,000 annual lease payments for this sales-type lease.
2. Prepare an amortization schedule that describes the pattern of interest revenue for Universal Leasing over the lease term.
3. Prepare the appropriate entries for Universal Leasing from the beginning of the lease through the end of the lease term.
  

Pfizer Company produced and sold 50,000 units of product and is operating at 75% of plant capacity. Unit information about its product is as follows:

     Sales Price                                                $70

     Variable manufacturing cost                    $45

     Fixed manufacturing cost ($500,000 ÷ 50,000) 10        55

     Profit per unit                                            $15

The company received a proposal from a foreign company to buy 15,000 units of Pfizer Company's product for $50 per unit. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. The president of Pfizer Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order.

Instructions

a) Prepare a schedule reflecting an incremental analysis of this special order.

b) Should Pfizer accept/reject this order? Why?

Smoky Mountain Corporation makes two types of hiking boots—the Xtreme and the Pathfinder. Data concerning these two product lines appear below:

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system.

2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):