TEST BANK for Finance Applications and Theory 6th Edition By Marcia Cornett 6th edition. by ACADEMIAMILL

Chapter 01 – 6e Cornett 1)

Which of the following statements about managerial accountants is false?

A) Managerial accountants more and more are considered "business partners." B) Managerial accountants often are part of cross-functional teams. C) An increasing number of organizations are segregating managerial accountants in separate managerial-accounting departments. D) In a number of companies, managerial accountants make significant business decisions and resolve operating problems. E) The role of managerial accountants has changed considerably over the past decade.

2) Which of the following is not an action performed in combination with information to pursue the goals of managerial accounting? A) Identify. B) Measure. C) Invent. D) Interpret. E) Analyze.

Which of the following is correct regarding the changing role of managerial accounting?

A) The managerial accountant is crunching more numbers than ever before in leadingedge companies. B) The managerial accountant has been transformed into a financial historian in progressive companies. C) Managerial accountants are typically isolated in separate departments. D) Forward-looking goals have transformed managerial accountants into business advisors. E) Managerial accountants rarely have the title of analyst or take on leadership roles.

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Which of the following statements best characterizes managerial accountants of the past? A) They carried the job title of ‘analysts’. B) They were isolated into separate departments. C) They were located in operating departments and worked with other managers. D) They often took on leadership roles. E) They worked in teams.

5) Transformation of the role of the managerial accountant within leading-edge companies has been A) from analyst to number cruncher. B) from number cruncher to trusted advisor. C) from team leader to support department employee. D) from business partner to financial historian. E) from value creator to number cruncher.

6) The day-to-day work of management teams will typically comprise all of the following activities except: A) decision making. B) planning. C) cost minimizing. D) directing operational activities. E) controlling.

7) Which of the following functions is best described as choosing among available alternatives?

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A) Decision making. B) Planning. C) Directing operational activities. D) Controlling. E) Budgeting.

8) Which of the following managerial functions involves a detailed financial and operational description of anticipated operations? A) Decision making. B) Planning. C) Directing operational activities. D) Controlling. E) Measuring.

9) Which of the following involves the coordination of daily business functions within an organization? A) Decision making. B) Planning. C) Directing operational activities. D) Controlling. E) Motivating.

10) Wembley Company has set various goals, and management is now taking appropriate action to ensure that the firm achieves these goals. One such action is to reduce outlays for overhead, which have exceeded budgeted amounts. Which of the following functions best describes this process?

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A) Decision making. B) Planning. C) Coordinating. D) Controlling. E) Organizing.

11)

In pursuing its goals, an organization does all of the following except: A) Acquire resources. B) Hire personnel. C) Engage in an organized set of activities. D) Focus on reducing the budget. E) Engage in management team activities to make the best use of resources and people.

12) Which of the following business models considers financial, customer, internal operating, and other measures in the evaluation of performance? A) Deterministic simulation. B) Balanced scorecard. C) Payoff matrix. D) Decision tree. E) Chart of operating performance (COP).

13)

Which of the following perspectives is normally absent in a balanced scorecard? A) Financial. B) Customer. C) Internal operations. D) Learning and innovation/growth. E) None of these choices are correct.

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14) Managerial accounting activity comprises a set of tools, systems and perspectives that add value to an organization by supporting five major objectives. Which one of these is not a supporting objective? A) Provide information for decision making and planning. B) Assist managers in directing and controlling operational activities. C) Motivate managers and other employees toward the organization’s goals. D) Assess an organization’s competitive position and long-term managerial efforts . E) Focus on activities that occur at the top level of the organization.

15) Because managerial accounting reports rarely solve decision problems, what function does a managerial accountant use to assist managers in understanding issues contained within the information produced? A) Internal business solution function. B) Learning and growth function. C) Theoretical capacity function. D) Customer function. E) Attention directing function.

16)

Which of the following is not an objective of managerial accounting? A) Providing information for decision making and planning. B) Assisting in directing and controlling operations. C) Maximizing profits and minimizing costs. D) Measuring the performance of managers and subunits. E) Motivating managers toward the organization's goals.

17)

The role of managerial accounting information in assisting management is a(n):

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A) financial-directing role. B) attention-directing role. C) planning and controlling role. D) organizational role. E) problem-solving role.

18) to:

Employee empowerment involves encouraging and authorizing workers to take initiatives

A) improve operations. B) reduce costs. C) improve product quality. D) improve customer service. E) all of the answers are correct.

19) The process of encouraging and authorizing workers to take appropriate initiatives to improve the overall firm is commonly known as: A) planning and control. B) employee empowerment. C) personnel aggressiveness. D) decision making. E) problem recognition and solution.

20)

Managerial accounting: A) focuses only on historical data. B) is governed by GAAP. C) focuses primarily on the needs of personnel within the organization. D) provides information for parties external to the organization. E) focuses on financial statements and other financial reports.

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21)

Managerial accounting:

A) is unregulated. B) produces information that is useful only for manufacturing organizations. C) is based exclusively on historical data. D) is regulated by the Securities and Exchange Commission (SEC). E) generally focuses on reporting information about the enterprise in its entirety rather than by subunits.

22) All of the following entities would have a need for managerial accounting information except: A) the state of Michigan. B) an Internet provider. C) a retail clothing outlet. D) a bookkeeping service. E) None of these responses is correct, as all of these entities would use managerial accounting information.

23) Which of the following choices correctly depicts whether Ocean Co., State University, and Enrique Inc. would have a need for managerial accounting? Ocean Co.

State University

Enrique Inc.

Yes

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A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

24) Which of the following would likely be considered an internal user of accounting information rather than an external user? A) Stockholders. B) Consumer groups. C) Lenders. D) Middle-level managers. E) Government agencies.

25)

Financial accounting focuses primarily on reporting: A) to parties outside of an organization. B) to parties within an organization. C) to an organization's board of directors. D) to financial institutions. E) for financial institutions.

26) Which of the following characteristic(s) relate(s) more to managerial accounting than to financial accounting?

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A) A focus on reporting to personnel within an organization. B) A focus on reporting to external parties. C) An area of accounting that is heavily regulated. D) A focus on providing information that is relevant for planning, decision making, directing, and control. E) A focus on reporting to personnel within an organization and a focus on providing information that is relevant for planning, decision making, directing, and control.

27) Which of the following statements represents a similarity between financial and managerial accounting? A) Both are useful in providing information for external users. B) Both are governed by GAAP. C) Both draw upon data from an organization's accounting system. D) Both rely heavily on published financial statements. E) Both are solely concerned with historical transactions.

28) Which of the following employees at Clear Flights would not be considered as holding a line position? A) Pilot. B) Chief financial officer (CFO). C) Flight attendant. D) Ticket agent. E) Baggage handler.

29)

Which of the following employees would be considered as holding a line position?

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A) Townhouse Corporation's vice-president for government relations. B) The controller of Margin Motors. C) A secretary employed by Signal Communications. D) The manager of food and beverage services at a theme park. E) None of the answers is correct.

30) Which of the following employees at Fresh Brew Co. would likely be considered as holding a staff position? A) The company's chief operating officer (COO). B) The manager of a store located in Kansas City, Missouri. C) The company's manager of the Midwest division. D) The company's president of products nationwide. E) The company's lead, in-house attorney and the company's chief financial officer (CFO).

31)

The chief managerial and financial accountant of an organization is the: A) chief executive officer (CEO). B) treasurer. C) vice-president of accounting. D) internal auditor. E) chief financial officer (CFO).

32)

A company’s leading executive is: A) chief financial officer (CFO). B) treasurer. C) vice-president of accounting. D) internal auditor. E) chief executive officer (CEO).

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33)

Managers directly involved in the provision of goods and services are ____________. A) staff positions. B) line positions. C) general counsel positions. D) human resource positions. E) None of these is correct.

34)

Managerial accountants: A) often work with regulators like the SEC. B) are responsible for issuing a company’s annual financial statements. C) are found primarily at lower levels of the organizational hierarchy. D) are found primarily at higher levels of the organizational hierarchy. E) often work on cross-functional teams and are located throughout an organization.

35)

All of the following are common reasons for forming cross-functional teams except: A) to make decisions. B) to engage in planning exercises. C) to address operational problems from many perspectives. D) to pull together individuals from a variety of specialties. E) to minimize physical location requirements that a company occupies.

36) In a number of companies, managerial accountants are most likely found in crossfunctional teams with personnel having a background in:

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A) commercial art. B) real estate. C) marketing. D) finance. E) communications.

37)

Which of the following typically does not relate to the role of a controller?

A) A controller supervises the accounting department. B) A controller safeguards an organization's assets. C) A controller oversees the preparation of reports required by governmental authorities. D) A controller normally assumes a narrow role within the organization, often preventing the individual's rise to top management ranks. E) A controller safeguards an organization's assets and a controller normally assumes a narrow role within the organization, often preventing the individual's rise to top management ranks.

38)

A controller is normally involved with: A) preparing financial statements. B) managing investments. C) raising capital. D) safeguarding assets. E) managing the firm's credit policy.

39)

Which of the following is not a function of the treasurer?

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A) Safeguarding assets. B) Managing investments. C) Preparing financial statements. D) Being responsible for an entity's credit policy. E) Raising capital.

40)

In order for a company to achieve a sustainable competitive advantage, it must:

A) perform one or more activities in the value chain at the same quality level as its competitors. B) perform all activities in the value chain at the same quality level as its competitors. C) perform its value chain activities at a higher quality level than one of its competitors. D) perform at lower quality and higher cost than competitors.

41)

Which of the following would not be part of a value chain for a fast food restaurant? A) Buying produce. B) Mopping the floor. C) Refilling the napkin dispensers. D) Hiring new cooks. E) All of the choices are a part of the value chain.

42)

A restaurant’s value chain includes: A) supplier development. B) upstream contributors. C) downstream contributors. D) management of inventory. E) All of these are included in the value chain.

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43) Which of the following choices correctly depicts activities that would be included in a manufacturer's value chain? Research and Development

Marketing

Distribution

Yes

A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

44) Strategic cost management is: 1.I. the process of determining cost drivers. 2.II. the recognition of the importance of cost relationships among the activities in the value chain. 3.III. the process of managing cost relationships to the firm’s advantage. 4.IV. cost-causing factors. A) I. B) II. C) III. D) IV. E) II. and III.

45) Which of the preceding activities would likely not be considered part of Forte Clothing Company's value chain?

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A) Designing a new product line. B) Locating and then negotiating terms with a clothing manufacturer. C) Marketing an existing product line. D) Distributing goods from regional warehouses to local stores. E) All of these activities would be an element in the company's value chain.

46) In order for a company to achieve a sustainable competitive advantage, it must perform value chain activities: 1.I. at the same quality level as competitors, at the same cost. 2.II. at the same quality level as competitors, but at a lower cost. 3.III. at a higher quality level than competitors, at a higher cost. 4.IV. at a higher quality level than competitors, but at no greater cost. A) I . B) II. C) III. D) IV. E) II and IV.

47) The process of managing the various activities in the value chain, along with the associated costs, is commonly known as: A) activity-based costing. B) strategic cost management. C) total quality management. D) computer-integrated costing. E) sound management practices (SMP).

48)

The value chain of a manufacturer would tend to include activities related to:

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A) manufacturing. B) research and development. C) product design. D) marketing. E) all of the answers are correct.

49)

Cost management systems tend to focus on an organization's: A) machines. B) employees. C) activities. D) customers. E) rules and regulations.

50) The upper limit on the production of goods and services if everything works perfectly is known as: A) practical capacity. B) theoretical capacity. C) utilized capacity. D) management capacity. E) capacity maximization.

51) The capacity concept that allows for normal occurrences such as machine downtime and employee fatigue is known as: A) practical capacity. B) theoretical capacity. C) utilized capacity. D) management capacity. E) capacity maximization.

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52)

The cost of resources supplied but unused is known as: A) practical capacity costs. B) the cost of theoretical capacity. C) the cost of unused capacity. D) the cost of resources supplied. E) capacity cost.

53) Given the following information, what is the total cost of unused capacity? Cost of material supplied is $3,200; Cost of material used is $3,000; Cost of material used per cake is $3; Cost of material supplied per cake is $3.20. A) $0.20. B) $200. C) $2,000. D) $1,000. E) There is no unused capacity.

54) Given the following information, what is the cost of unused capacity? Cost of material supplied is $8,600; Cost of material used is $8,000; Cost of material used per shelf is $8; Cost of material supplied per shelf is $8.60. A) $600. B) $6,000. C) $0.60. D) $1,000. E) There is no unused capacity.

55) What is the most important factor that has allowed companies to move from recording data to analyze it in order to gain significant insight into the entire value chain of an organization? Version 1

A) relaxed data privacy laws. B) the increase in cell phones. C) powerful, low-cost technology. D) cross-functional teams. E) low-cost nuclear power.

56) The vast amount of data generated by an organization along with supplemental data that can provide context for the internal data is known together as: A) big data. B) data governance. C) data analytics. D) data science. E) data estimation.

57)

Data science draws on what to transform large volumes of data into information? A) techniques from mathematics, probability, statistics, and computer science. B) techniques from military science and management principles. C) techniques from architecture and materials science. D) techniques from mergers and acquisitions. E) techniques from tax regulations and the law.

58)

Data science is often practiced by specialists, who use powerful software tools such as: A) Tableau and RStudio. B) Nintendo and Chrome. C) Unix and Basic. D) QuickBooks and Microsoft Word. E) Microsoft Power Point and Quicken.

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59)

Data analytics are particularly important to the managerial accountant in what two areas? A) budgeting and planning. B) cost behavior and cost estimation. C) variance analysis and planning. D) balanced scorecard perspectives and planning. E) direct cost and direct labor.

60)

The primary design of the CPA designation is to:

A) focus on practices in accounting and finance within the company. B) to ensure competence of managerial accountants throughout Europe. C) to ensure higher wages for accountants within companies. D) to increase membership by academics and senior financial executives. E) assure the competence of those working outside companies and the reliability of public company reports.

61)

The largest professional association for management accountants in the U.S. is: A) The American Institute of Certified Public Accountants. B) The Institute of Management Accountants (IMA). C) The Chartered Institute of Management Accountants. D) The Financial Executives International (FEI). E) The Association for Chartered Global Management Accountants.

62) Criticisms leveled at the audit firm, Arthur Andersen, in its original conviction after the 2001 Enron scandal led Congress to pass:

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A) The 2002 Ethical Conflicts Act. B) The Sarbanes-Oxley Act of 2002. C) The Institute of Management Accountants’ Trust and Confidence Act. D) The Restitution and Penalties Act. E) The Institute of Management Accountants’ Statement of Ethical Professional Practice.

63) Which of the following can be linked to a wave of corporate scandals that took place in recent past? A) Greedy corporate executives. B) Managers who made over-reaching business deals. C) Lack of oversight by companies' audit boards and boards of directors. D) Shoddy work by external auditors. E) All of these choices are correct.

64) Which of the following acts strives to improve corporate governance and the quality of corporate accounting/reporting? A) Robinson-Patman. B) Taft-Hartley. C) Sarbanes-Oxley. D) Bush-Cheney. E) Arthur-Andersen.

65)

When ethical lapses such as the 2015 incident with Volkswagen happen, what is lost? A) trust of society. B) confidence of shareholders, employees, suppliers, and customers. C) market valuation. D) reputation of the ethically challenged company. E) All of these choices are correct.

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66)

Which of the following is not an ethical standard of managerial accounting? A) Competence. B) Confidentiality. C) Efficiency. D) Integrity. E) Credibility.

67)

Which of the following is not an element of competency? A) To develop appropriate knowledge about a particular subject. B) To perform duties in accordance with relevant laws. C) To perform duties in accordance with relevant technical standards. D) To refrain from engaging in an activity that would discredit the accounting profession. E) To prepare clear reports after an analysis of relevant and reliable information.

68) Assume that a managerial accountant regularly communicates with business associates to avoid conflicts of interest and advises relevant parties of potential conflicts. In so doing, the accountant will have applied the ethical standard of: A) objectivity. B) confidentiality. C) integrity. D) credibility. E) unified behavior.

69) Two things that all organizations have in common are a set of goals and information needed by managers. ⊚ true ⊚ false

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70) The role of managerial accounting in organizations is the same as it has been over many years. ⊚ true ⊚ false

71)

Controlling involves the coordination of daily business functions within an organization. ⊚ true ⊚ false

72)

Decision making requires managers to choose among the available alternatives. ⊚ true ⊚ false

73) The balanced scorecard is an important managerial accounting tool for short-run competitiveness. ⊚ true ⊚ false

74)

In most situations, managerial accounting reports solve decision problems. ⊚ true ⊚ false

75) Middle-level managers would likely be considered internal users of accounting information rather than external users. ⊚ true ⊚ false

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76) Measuring the performance of managers and subunits is not an objective of managerial accounting. ⊚ true ⊚ false

77)

The nature of managerial accounting reports is to focus on the enterprise in its entirety. ⊚ true ⊚ false

78)

Line positions are indirectly involved in operational activities. ⊚ true ⊚ false

79)

The position of chief financial officer (CFO) is typically a staff position. ⊚ true ⊚ false

80)

A controller is normally involved with preparing financial statements. ⊚ true ⊚ false

81) The treasurer typically is responsible for raising capital and safeguarding the organization’s assets. ⊚ true ⊚ false

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82) The value chain is a managerial accounting tool that primarily assists in the valuation of assets. ⊚ true ⊚ false

83)

All companies define the value chain in the same way. ⊚ true ⊚ false

84) The upper limit on the production of goods and services if everything works perfectly is known as practical capacity. ⊚ true ⊚ false

85) Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value. ⊚ true ⊚ false

86) If a company has poor data governance practices, managers would have to worry that the managerial accounting data they receive is not what they need for their decisions, or that it would arrive too late or be inaccurate. ⊚ true ⊚ false

87)

The process of making sense of big data is known as data practice.

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⊚ ⊚

true false

88) The largest managerial accounting professional association in the U.S. is the Chartered Institute of Management Accountants. ⊚ true ⊚ false

89) The CMA is a professional certification that managerial accountants can earn to validate their skills and the specialized knowledge that they possess. ⊚ true ⊚ false

90) All financial professionals, including managerial accountants, have an obligation to themselves, their colleagues, and their organizations to adhere to high standards of ethical conduct. ⊚ true ⊚ false

91)

Legitimate ethical issues rarely impact the managerial accountant. ⊚ true ⊚ false

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Answer Key Test name: Chap 01_6e_Cornett 1) C 2) C 3) D 4) B 5) B 6) C 7) A 8) B 9) C 10) D 11) D 12) B 13) E 14) E 15) E 16) C 17) B 18) E 19) B 20) C 21) A 22) E 23) C 24) D 25) A 26) E Version 1

27) C 28) B 29) D 30) E 31) E 32) E 33) B 34) E 35) E 36) D 37) E 38) A 39) C 40) A 41) E 42) E 43) C 44) E 45) E 46) E 47) B 48) E 49) C 50) B 51) A 52) C 53) B 54) A 55) C 56) A Version 1

57) A 58) A 59) B 60) E 61) B 62) B 63) E 64) C 65) E 66) C 67) D 68) C 69) TRUE 70) FALSE 71) FALSE 72) TRUE 73) FALSE 74) FALSE 75) TRUE 76) FALSE 77) FALSE 78) FALSE 79) TRUE 80) TRUE 81) TRUE 82) FALSE 83) FALSE 84) FALSE 85) TRUE 86) TRUE Version 1

87) FALSE 88) FALSE 89) TRUE 90) TRUE 91) FALSE

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Chapter 01 – 6e Cornet- Manually Graded 1) A. What is managerial accounting? B. Explain why managerial accountants are such important strategic partners in an organization’s management team.

2) Give examples of each of the four primary management activities in the context of a national pizza franchise.

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3) State Hospital was once the premier health facility in the Yesville community. Unfortunately, budget cuts and the loss of strategic personnel due to non-competitive salaries have taken a toll on the hospital. The hospital decided to align current strategic goals using the Balanced Scorecard approach. These goals are: Financial: Balance revenue and Cost to break-even, leading to profit. Customer: Create new value for customer. Internal process: Ensure service quality and expand service networks. Learning and growth: Work toward more employees becoming leaders. Based on these goals, the hospital developed Objectives for the new balanced scorecard as follows: Financial Perspectives: Enhance operational excellence and cost management. Customer Perspectives: Investigate customer needs. Internal Process Perspectives: Enhance the combined professional service quality. Learning and Growth Perspectives: (1) Enhance employee satisfaction; and (2) Slow down the expansion of operating activity. Required: Given these objectives, list at least (5) measurements for each perspective.

4) Magnum Overnight operates an overnight package delivery service that competes with Federal Express and United Parcel Service (UPS). Top management is considering the use of a balanced scorecard to evaluate operations. Required: A. What is a balanced scorecard and other than customer-satisfaction measures, what are its typical key components? B. List four customer-satisfaction measures that Magnum might use to evaluate performance.

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5) Nikki and Bart have been tasked by top management with discussing some of the financial measures to include in their company’s balanced scorecard. Both are aware that measures that can be quantified will allow for performance measures that are more effectively captured, leading toward actionable corrective accomplishments. Nikki suggests that they include decreased financing charges as a result of lowering of the federal interest rate by 1% (a rate at which their company borrows money). Is this a good financial goal to include in the balanced scorecard? Explain.

6) Nikki and Bart have been tasked by top management with assembling measures to include in their company’s balanced scorecard. The two compiled more than 100 metrics during a brainstorming session. As they now begin to discuss the list and eliminate some, their question is: What is the ideal number of goals for each of the four balanced scorecard perspectives? Discuss.

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Consider the descriptors that follow.

1. Is heavily involved with the recordkeeping and reporting of assets, liabilities, and stockholders' equity. 2. Focuses on planning, decision making, directing, and control. 3. Is heavily regulated. 4. A field that is becoming more "cross-functional" in nature. 5. Much of the field is based on costs and benefits. 6. Is involved almost exclusively with past transactions and events. 7. Much of the information provided is directed toward stockholders, financial analysts, creditors, and other external parties. 8. Tends to focus more on subunits within an entity rather than the organization as a whole. 9. May become involved with measures of customer satisfaction, and the amount of actual cost incurred vs. budgeted targets. Required: Determine whether the descriptors are most closely associated with financial accounting or managerial accounting.

8) Briefly distinguish between managerial accounting and financial accounting. Be sure to comment on the general focus, users, and regulation related to the two fields.

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The following are activities for State Hospital.

Required: Classify each as a value-added (V) or nonvalue-added (N) and give an explanation why you answered the way you did. Activity

Classification (V or N)

Explanation

Patients waiting in the lobby

Providing in-patient x-rays

Retaking x-rays to get a different view

Outpatient dialysis

10)

The value chain is a key component of contemporary management accounting.

Required: Define the term "value chain" and explain how it would relate to an airline.

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11) Required: Present several examples of managerial accounting information that could help a manager make each of the following decisions: A. A manufacturing company is currently making a part that is a production headache. The firm is deciding whether to abandon production and buy the part from an outside supplier. B. An operator of fast-food restaurants is deciding whether to open a new store in Dallas.

12) 1. Auditions for actors and actresses 2. Development of promotional materials for use by local newspapers 3. Focus groups to evaluate ideas for potential television comedy series 4. Production of DVDs for release to big box stores and online video outlets 5. On-location shooting of scenes 6. Fine-tuning and rewrites of scripts 7. Set design and construction for a new medical drama Required: A. Evaluate the seven activities as upstream (pre-production), production, or downstream (postproduction) in nature. B. Generally speaking, which activities (upstream, production, or downstream), if any, can management ignore if the company is to be successful in achieving its key strategic goals?

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13)

Unused or excess capacity is a key component of contemporary management accounting.

Required: Define the term "excess capacity" and explain how it would relate to a coffee shop.

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14) Tae Franklin is the sales manager of Darius Enterprises, a very profitable distributor of office furniture to local businesses. A recent economic downturn has created an extremely tight cash position, and the company has been hurt by the bankruptcy of two key customers. In late October, anticipating an economic recovery, Franklin began an extensive remodeling of the company's sales floor. Construction costs, decorating, and equipment purchases are projected to cost $250,000. Darius has a policy that individual expenditures in excess of $200,000 must be approved by the firm's board of directors. Franklin, unfortunately, missed the deadline to have the board consider this project at its regular September meeting. Not wanting to wait until the next meeting in December, he subdivided the project in two parts—construction and decorating ($190,000) and equipment purchases ($60,000)—neither of which needed board approval because of the dollar amounts involved. The project was recently completed and sales have begun to recover. Customers have raved about the new sales area, noting that it is far superior to those of Darius's competitors. Required: A. Would Franklin's approach of subdividing the project in two parts have any effect on the company's financial statements? Briefly explain. B. Briefly discuss whether Franklin behaved in an ethical manner. C. Which, if any, of the following standards of conduct would have applicability to Franklin's conduct: competence, confidentiality, integrity, or credibility? Briefly explain.

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15) Many professions have adopted a series of ethical standards to provide guidance for their memberships. The Institute of Management Accountants (IMA), for example, has published standards that focus on competence, confidentiality, integrity, and credibility. In light of these standards, consider the three cases that follow. Case A—Leston Corporation has experienced serious financial difficulties in recent years. John Young, the company's chief financial officer, has just learned that a major competitor was likely to file for bankruptcy; however, he failed to disclose this information at a board meeting held later that day when a plant closure decision was being discussed. The board evaluated several proposals during the session that focused on improving Leston's financial position. Case B—QBX Company manufactures fertilizer from various raw materials, including a raw material know as Felstar. Paul Kelly, the firm's purchasing manager, purposely acquired a lower grade of Felstar than normal because of a very attractive price. The lower-grade product resulted in increased usage during the manufacturing process but had no effect on the fertilizer's overall quality. An end-of-period report showed that QBX profited from Kelly's actions, with the overall savings in purchase price more than offsetting the cost of added consumption. Case C—Central Distributing has a participative budgeting process, allowing employees to have a say in projected sales targets for the upcoming period. These targets are reflected in a series of performance reports that compare actual sales achieved against targeted amounts. Hillary Baxter submitted very low sales targets because, as she confided in a colleague, "I always want to look good in terms of meeting targets, even if anticipated sales and closures don't materialize." Required: Evaluate the three cases and determine the ethical issues, if any, which are involved. Cite the IMA's standards if appropriate.

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Answer Key Test name: Chap 01_6e_Cornett_Manually Graded

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Chapter 02 – 6e Cornett 1)

Which of the following statements is true?

A) The word "cost" has the same meaning in all situations in which it is used. B) Cost data, once classified and recorded for a specific application, are appropriate for use in any application. C) Different cost concepts and classifications are used for different purposes. D) All organizations incur the same types of costs. E) Costs incurred in one year are always meaningful in the following year.

At the most basic level, a cost may be defined as a(n): A) long-term asset. B) data classified for a specific application. C) sacrifice made to achieve a particular purpose. D) useful information for planning. E) suggestion for improvement.

3) Cost data that are classified and recorded in a particular way for one purpose may be inappropriate for another use. For example, which of the following costs would not be a reasonable measure of a plant manager’s performance? A) net income compared to other plants. B) comparison of current period performance costs to planned performance costs of the plant. C) the increase or decrease in depreciation costs for the plant and its equipment. D) penalty costs during each period for orders not completed on time by the plant. E) bonuses earned by plant workers for on-time production.

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4) Cost data that are classified and recorded in a particular way for one purpose may be inappropriate for another use. For example, costs that would likely be noncontrollable by a department supervisor include A) labor used in department production. B) materials used in department production. C) insurance on the plant where the department is housed. D) overtime pay earned by workers in the department. E) bonuses earned by department workers for on-time production.

Research and development costs are classified as: A) product costs. B) period costs. C) inventoriable costs. D) cost of goods sold. E) labor costs.

Product costs are: A) expensed when incurred. B) inventoried. C) treated in the same manner as period costs. D) treated in the same manner as advertising costs. E) subtracted from cost of goods sold.

Which of the following is a product cost?

Version 1

A) Circuitry used in producing hard drives. B) Monthly advertising in the newspaper. C) The salary of the vice president-finance. D) Sales commissions. E) Research costs for new router development.

Which of the following would not be classified as a product cost? A) Direct materials. B) Direct labor. C) Indirect materials. D) Insurance on a manufacturing plant. E) Sales bonuses for meeting quota sales.

9) The accounting records of Dixon Company revealed the following costs: direct materials used, $250,000; direct labor, $425,000; manufacturing overhead, $375,000; and selling and administrative expenses, $220,000. Dixon’s product costs total: A) $1,050,000. B) $830,000. C) $895,000. D) $1,270,000. E) None of the answers is correct.

10)

Costs that are expensed when incurred are called: A) product costs. B) direct costs. C) inventoriable costs. D) period costs. E) indirect costs.

Version 1

11)

Which of the following is a period cost? A) Direct material. B) Advertising expense. C) Indirect labor. D) Miscellaneous supplies used in production activities. E) Factory foreman salary for the motor production line.

12)

Which of the following is not a period cost? A) Legal costs. B) Public relations costs. C) Sales commissions. D) Wages of assembly-line workers. E) The salary of a company's chief financial officer (CFO).

13) The accounting records of Younkin Corporation revealed the following selected costs: Sales commissions, $65,000; plant supervision, $190,000; and administrative expenses, $185,000. Younkin’s period costs total: A) $250,000. B) $440,000. C) $375,000. D) $255,000. E) $185,000.

14) Shu Corporation recently computed total product costs of $567,000 and total period costs of $420,000, excluding $35,000 of sales commissions that were overlooked by the company's administrative assistant. On the basis of this information, Shu’s income statement should reveal operating expenses of:

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A) $35,000. B) $420,000. C) $455,000. D) $567,000. E) $602,000.

15)

Which of the following would not be a period cost? A) Sales salaries. B) Sales commissions. C) Tamper-proof packaging. D) Legal costs. E) Accounting costs.

16) Which of the following entities would most likely have raw materials, work in process, and finished goods? A) A petroleum refiner. B) A national department store. C) A carpet cleaning company. D) A regional airline. E) A state university.

17)

Selling and administrative expenses would likely appear on the balance sheet of: A) A clothing store. B) A computer manufacturer. C) A television network. D) All of these firms. E) None of these firms.

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18)

Which of the following inventories would a discount retailer report as an asset? A) Raw materials. B) Work in process. C) Finished goods. D) Merchandise inventory. E) All of the answers are correct.

19)

Which of the following inventories would a company ordinarily hold for sale? A) Raw materials. B) Work in process. C) Finished goods. D) Raw materials and finished goods. E) Work in process and finished goods.

20) Ford Motor Company produces cars and trucks. Which type of production process is most likely used by Ford? A) Batch. B) Job Shop. C) Continuous Flow. D) Assembly. E) None of these answers is correct.

21)

Which of the four items listed below is not a type of production process?

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A) Batch. B) Job Shop. C) Continuous Flow. D) Job Flow. E) Assembly.

22) Which type of production process is ideal for a low production volume and one-of-a-kind products? A) Batch. B) Continuous Flow. C) Job Shop. D) Assembly. E) Direct assembly.

23)

Which type of production process is likely used for custom yachts built by Hargrave? A) Batch. B) Continuous Flow. C) Job Shop. D) Assembly. E) Direct assembly.

24) Comet Computer Company, a manufacturer of computers and peripheral devices, purchases computer parts such as motherboards, computer chips, hard drives, and displays, and then assembles these parts into a variety of non-customized devices, such as tablet computers, laptops, and desktop computers. Comet’s products are available in a limited regional distribution. Which type of production process is most likely used by Comet Computer Company?

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A) Batch. B) Continuous Flow. C) Job Shop. D) Assembly. E) None of these answers is correct.

25) Which type of production process is likely used by a paint manufacturer to produce paint? A) Batch. B) Continuous Flow. C) Job Shop. D) Assembly. E) Direct assembly.

26) Which of the following would not be classified as direct materials by a company that makes automobiles? A) Wheel lubricant. B) Tires. C) Interior leather. D) CD player. E) Sheet metal used in the automobile's body.

27) Which of the following employees of a commercial printer/publisher would be classified as direct labor?

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A) Book binder. B) Plant security guard. C) Sales representative. D) Plant supervisor. E) Payroll supervisor.

28) Guaranteed Appliance Co. produces washers and dryers in an assembly-line process. Labor costs incurred during a recent period were: corporate executives, $500,000; assembly-line workers, $180,000; security guards, $45,000; and plant supervisor, $110,000. The total of Guaranteed’s direct labor cost was: A) $110,000. B) $180,000. C) $155,000. D) $235,000. E) $735,000.

29)

Which of the following employees would not be classified as indirect labor? A) Plant Custodian. B) Salesperson. C) An employee that packs products for shipment. D) Plant security guard. E) A line employee that produces parts for chairs using a saw and template.

30)

Depreciation of factory equipment would be classified as:

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A) operating cost. B) "other" cost. C) manufacturing overhead. D) period cost. E) administrative cost.

31)

Which of the following costs is not a component of manufacturing overhead? A) Indirect materials. B) Factory utilities. C) Factory equipment. D) Indirect labor. E) Property taxes on the manufacturing plant.

32) The accounting records of Comacho Company revealed the following costs, among others:

Factory insurance

32,000

Raw material used

256,000

Customer entertainment

15,000

Indirect labor

45,000

Depreciation on salespersons’ cars

22,000

Production equipment rental costs

72,000

Costs that would be considered in the calculation of manufacturing overhead total:

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A) $149,000. B) $171,000. C) $186,000. D) $442,000. E) None of the answers is correct.

33) Cost of goods manufactured for Branson Books for the year was $860,000. Beginning work-in-process inventory was $40,000. Ending work-in-process was $60,000. If the beginning finished goods inventory was $400,000 and the ending finished goods inventory was $990,000 what was the cost of goods sold for the year? A) $230,000. B) $270,000. C) $460,000. D) $1,240,000. E) None of these answers is correct.

34)

Which of the following statements is correct?

A) Overtime premiums should be treated as a component of manufacturing overhead. B) Overtime premiums should be treated as a component of direct labor. C) Idle time should be treated as a component of direct labor. D) Idle time should be accounted for as a special type of loss. E) Overtime premiums should be treated as a component of direct labor and idle time should be treated as a component of direct labor.

35)

Conversion costs are:

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A) direct material, direct labor, and manufacturing overhead. B) direct material and direct labor. C) direct labor and manufacturing overhead. D) prime costs. E) period costs.

36)

Prime costs are comprised of: A) direct materials and manufacturing overhead. B) direct labor and manufacturing overhead. C) direct materials, direct labor, and manufacturing overhead. D) direct materials and direct labor. E) direct materials and indirect materials.

37)

The costs of direct materials are classified as: Conversion cost

Manufacturing cost

Prime cost

Yes

A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

Version 1

38) as?

What would the cost of fire insurance for a manufacturing plant generally be categorized

A) Prime cost. B) Direct material cost. C) Period cost. D) Direct labor cost. E) Product cost.

39)

Conversion costs do not include: A) Depreciation B) Direct materials C) Indirect labor D) Indirect materials E) Direct labor

40) How should a company that manufactures automobiles classify its partially completed vehicles? A) Supplies. B) Raw materials inventory. C) Finished goods inventory. D) Cost of goods manufactured. E) Work-in-process inventory.

41)

Which of the following statements is true?

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A) Product costs affect only the balance sheet. B) Product costs affect only the income statement. C) Period costs affect only the balance sheet. D) Neither product costs nor period costs affect the Statement of Retained Earnings. This can also be a true statement if the period costs were prepaid (i.e., prepaid advertising, depreciation). E) Product costs eventually affect both the balance sheet and the income statement.

42) In a manufacturing company, the cost of goods completed during the period would include which of the following elements? A) Raw materials used. B) Beginning finished goods inventory. C) Marketing costs. D) Depreciation of delivery trucks. E) All of the answers are correct.

43) Which of the following equations is used to calculate cost of goods sold during the period? A) Beginning finished goods + cost of goods manufactured + ending finished goods. B) Beginning finished goods − ending finished goods. C) Beginning finished goods + cost of goods manufactured. D) Beginning finished goods + cost of goods manufactured − ending finished goods. E) Beginning finished goods + ending finished goods − cost of goods manufactured.

44)

Work-in-process inventory is composed of:

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A) direct material and direct labor. B) direct labor and manufacturing overhead. C) direct material and manufacturing overhead. D) direct material, direct labor, and manufacturing overhead. E) direct material only.

45) If the beginning monthly balance of materials inventory was $37,000, the ending balance was $39,500, and $257,800 of materials were used, the cost of materials purchased during the month is: A) $255,300. B) $257,800. C) $260,300. D) $297,300. E) None of these answer choices is correct.

46) Harrison Industries began July with a finished-goods inventory of $48,000. The finishedgoods inventory at the end of July was $56,000 and the cost of goods sold during the month was $125,000. The cost of goods manufactured during July was: A) $104,000. B) $125,000. C) $117,000. D) $133,000. E) None of the answers is correct.

47) Texas Plating Company reported a cost of goods manufactured of $520,000, with the firm's year-end balance sheet revealing work in process and finished goods of $70,000 and $134,000, respectively. If supplemental information disclosed raw materials used in production of $80,000, direct labor of $140,000, and manufacturing overhead of $240,000, the company's beginning work in process must have been:

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A) $130,000. B) $10,000. C) $66,000. D) $390,000. E) None of the answers is correct.

48)

The accounting records of Falcon Company revealed the following information:

Raw materials used

60,000

Direct labor

125,000

Manufacturing overhead

360,000

Work-in-process inventory, 1/1

50,000

Finished-goods inventory, 1/1

189,000

Work-in-process inventory, 12/31

76,000

Finished-goods inventory, 12/31

140,000

Falcon’s cost of goods manufactured is: A) $519,000. B) $522,000. C) $568,000. D) $571,000. E) None of the answers is correct.

49)

The accounting records of Stingray Company revealed the following information:

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Total manufacturing costs

$ 530,000

Work-in-process inventory, 1/1

56,000

Finished-goods inventory, 1/1

146,000

Work-in-process inventory, 12/31

78,000

Finished-goods inventory, 12/31

123,000

Stingray’s cost of goods sold is: A) $508,000. B) $529,000. C) $531,000. D) $553,000. E) None of the answers is correct.

50)

The accounting records of Upton Company revealed the following information:

Cost of goods manufactured

$ 754,000

Work-in-process inventory, 1/1

58,000

Finished-goods inventory, 1/1

125,000

Work-in-process inventory, 12/31

49,000

Finished-goods inventory, 12/31

158,000

Upton’s cost of goods sold is:

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A) $721,000. B) $730,000. C) $778,000. D) $787,000. E) None of the answers is correct.

51) For the year just ended, Porter Corporation's manufacturing costs (raw materials used, direct labor, and manufacturing overhead) totaled $1,500,000. Beginning and ending work-inprocess inventories were $60,000 and $90,000, respectively. Porter’s balance sheet also revealed respective beginning and ending finished-goods inventories of $250,000 and $180,000. On the basis of this information, how much would the company report as cost of goods manufactured (CGM) and cost of goods sold (CGS)? A) CGM, $1,430,000; CGS, $1,460,000. B) CGM, $1,470,000; CGS, $1,540,000. C) CGM, $1,530,000; CGS, $1,460,000. D) CGM, $1,570,000; CGS, $1,540,000. E) None of these.

52) Jamison Supplies has a cost of goods manufactured for the year of $860,000. Beginning work-in-process inventory was $50,000 and ending work-in-process was $60,000. If Jamison’s beginning finished goods inventory was $500,000 and the ending finished goods inventory was $990,000, what was the company’s cost of goods sold for the year? A) $360,000. B) $370,000. C) $490,000. D) $1,350,000. E) None of the answers is correct.

Version 1

53) Rainier Industries has Raw materials inventory on January 1, 20x8 of $32,500 and Raw materials inventory on December 31, 20x8 of $26,700. If purchases of raw materials were $135,000 during the year, what was the amount of raw materials used during the year? A) $129,200. B) $140,800. C) $135,000. D) $146,600. E) None of the answers is correct.

54) Rainier Industries has Raw materials inventory on January 1, 20x8 of $32,500 and Raw materials inventory on December 31, 20x8 of $26,700. If raw materials used during the year were $135,000 what was the amount of raw materials purchased during the year? A) $129,200. B) $140,800. C) $135,000. D) $146,600. E) None of the answers is correct.

55) Compton Inc. has a beginning materials inventory balance for May of $27,500, and an ending balance for May of $28,750. Materials used during the month were $128,900. As a result, what is the cost of materials purchased during the month? A) $101,400. B) $127,650. C) $130,150. D) $157,650. E) None of the answers is correct.

56) Beckett Industries has the following beginning and ending inventories for the month of April.

Version 1

April 1 Direct materials

67,000

April 30 $

62,000

Work-in-process

145,000

171,000

Finished goods

85,000

78,000

Production data for the month of April is:

Direct labor

$ 200,000

Actual overhead

132,000

Direct materials purchased

163,000

Transportation in

4,000

Purchase Returns and Allowances

2,000

Beckett uses one overhead control account and charges overhead to production at 70% of direct labor cost. The company does not formally recognize over- or underapplied overhead until yearend. What was the cost of the materials used by Beckett in April? A) $370,000. B) $170,000. C) $363,000. D) $168,000. E) None of the answers is correct.

57) Beckett Industries has the following beginning and ending inventories for the month of April.

Version 1

April 1 Direct materials

67,000

April 30 $

62,000

Work-in-process

145,000

171,000

Finished goods

85,000

78,000

Production data for the month of April is:

Direct labor

$ 200,000

Actual overhead

132,000

Direct materials purchased

163,000

Transportation in

4,000

Purchase Returns and Allowances

2,000

Beckett uses one overhead control account and charges overhead to production at 70% of direct labor cost. The company does not formally recognize over- or underapplied overhead until yearend. What is Beckett’s total manufacturing cost for April? A) $502,000. B) $503,000. C) $363,000. D) $510,000. E) None of the answers is correct.

58) Beckett Industries has the following beginning and ending inventories for the month of April.

Version 1

April 1 Direct materials

67,000

April 30 $

62,000

Work-in-process

145,000

171,000

Finished goods

85,000

78,000

Production data for the month of April is:

Direct labor

$ 200,000

Actual overhead

132,000

Direct materials purchased

163,000

Transportation in

4,000

Purchase Returns and Allowances

2,000

Beckett uses one overhead control account and charges overhead to production at 70% of direct labor cost. The company does not formally recognize over- or underapplied overhead until yearend. What is Beckett’s cost of goods transferred to finished goods inventory for April? A) $469,000. B) $477,000. C) $495,000. D) $484,000. E) None of the answers is correct.

59) Beckett Industries has the following beginning and ending inventories for the month of April.

Version 1

April 1 Direct materials

67,000

April 30 $

62,000

Work-in-process

145,000

171,000

Finished goods

85,000

78,000

Production data for the month of April is:

Direct labor

$ 200,000

Actual overhead

132,000

Direct materials purchased

163,000

Transportation in

4,000

Purchase Returns and Allowances

2,000

Beckett uses one overhead control account and charges overhead to production at 70% of direct labor cost. The company does not formally recognize over- or underapplied overhead until yearend. What is Beckett’s cost of goods sold for April? A) $476,000. B) $484,000. C) $491,000. D) $502,000. E) None of the answers is correct.

60)

Peyton Manufacturing has the following data:

Version 1

Work-in-process inventory, January 1, 20x8

43,000

Work-in-process inventory, December 31, 20x8

48,500

Conversion costs during the year

415,000

If direct materials used during the year were $135,000, what was cost of goods manufactured? A) $140,500. B) $539,000. C) $409,500. D) $544,500. E) None of the answers is correct.

61)

Peyton Manufacturing has the following data:

Work-in-process inventory, January 1, 20x8

43,000

Work-in-process inventory, December 31, 20x8

48,500

Conversion costs during the year

415,000

If the cost of goods manufactured for the year was $565,000, what was the amount of direct materials used during the year? A) $155,500. B) $140,500. C) $150,000. D) $145,500. E) None of the answers is correct.

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62) Dorsett Technologies had finished goods inventory on January 1, 20X8 of $29,300 and finished goods inventory on December 31, 20X8 of $24,100. If the cost of goods manufactured for the year was $385,000, what was the cost of goods sold for the year? A) $395,400. B) $385,000. C) $390,200. D) $400,600. E) None of the answers is correct.

63) Dorsett Technologies had finished goods inventory on January 1, 20X8 of $29,300 and finished goods inventory on December 31, 20X8 of $24,100. If the cost of goods sold for the year was $427,500, what was the cost of goods manufactured for the year? A) $402,100. B) $422,300. C) $417,100. D) $427,500. E) None of the answers is correct.

64) Amaz-a-nation reported the following data for the year just ended: sales revenue, $1,750,000; cost of goods sold, $980,000; cost of goods manufactured, $560,000; and selling and administrative expenses, $170,000. Amaz-a-nation’s gross margin would be: A) $940,000. B) $1,190,000. C) $1,020,000. D) $380,000. E) $770,000.

Version 1

65) Tempest Enterprises began operations on January 1, 20x1, with all of its activities conducted from a single facility. The company's accountant concluded that the year's building depreciation should be allocated as follows: selling activities, 20%; administrative activities, 35%; and manufacturing activities, 45%. If Tempest sold 60% of 20x1 production during that year, what percentage of the depreciation would appear (either directly or indirectly) on the 20x1 income statement? A) 27%. B) 45%. C) 55%. D) 82%. E) 100%.

66) An employee accidentally overstated the year's advertising expense by $50,000. Which of the following correctly depicts the effect of this error? A) Cost of goods manufactured will be overstated by $50,000. B) Cost of goods sold will be overstated by $50,000. C) Both cost of goods manufactured and cost of goods sold will be overstated by $50,000. D) Cost of goods sold will be overstated by $50,000, and cost of goods manufactured will be understated by $50,000. E) None of the answers is correct.

67) Which of the following would likely be a suitable cost driver for the amount of direct materials used? A) The number of units sold. B) The number of direct labor hours worked. C) The number of machine hours worked. D) The number of units produced. E) The number of employees working in the factory.

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68) The choices below depict five costs of Garfield Industries and a possible driver for each cost. Which of these choices likely contains an inappropriate cost driver? A) Manufacturing overhead incurred in a heavily automated facility; direct labor hours. B) Sales commissions; gross sales revenue. C) Gasoline consumed; number of miles driven. D) Building maintenance cost; building square footage. E) Human resources department cost; number of employees.

69) What is the primary trade-off that an accountant must consider when deciding whether to identify cost drivers? A) Will the cost driver identification provide different costs for different purposes? B) Is the cost/benefit of the process reasonable for more accurate cost behavior obtained? C) Will the cost relationships be too complex to understand? D) Will material-related drivers be more accurate than labor-related drivers? E) There is no trade-off to consider when using cost drivers.

70)

Variable costs are costs that: A) vary inversely with changes in activity. B) vary directly with changes in activity. C) remain constant as activity changes. D) decrease on a per-unit basis as activity increases. E) increase on a per-unit basis as activity increases.

71)

As activity decreases, unit variable cost:

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A) increases proportionately with activity. B) decreases proportionately with activity. C) remains constant. D) increases by a fixed amount. E) decreases by a fixed amount.

72)

As activity increases, unit variable cost: A) increases proportionately with activity. B) decreases proportionately with activity. C) remains constant. D) increases by a fixed amount. E) decreases by a fixed amount.

73)

Which of the following is not an example of a variable cost? A) Straight-line depreciation on a machine that has a five-year service life. B) Wages of manufacturing workers whose pay is based on hours worked. C) Tires used in the production of tractors. D) Aluminum used to make patio furniture. E) Commissions paid to sales personnel.

74)

Fixed costs are costs that: A) vary directly with changes in activity. B) vary inversely with changes in activity. C) remain constant on a per-unit basis. D) remain constant as activity changes. E) increase on a per-unit basis as activity increases.

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75)

The fixed cost per unit: A) will increase as activity increases. B) will decrease as activity decreases. C) will decrease as activity remains constant. D) will remain constant. E) will increase as activity decreases and will decrease as activity increases.

76)

Which of the following is an example of a fixed cost? A) Paper used in the manufacture of textbooks. B) Property taxes paid by a firm to a large city. C) The wages of part-time workers who are paid $8 per hour. D) Gasoline consumed by salespersons' cars. E) Surgical supplies used in a hospital's operating room.

77)

The true statement about cost behavior is that:

A) variable costs are constant on a per-unit basis and change in total as activity changes. B) fixed costs are constant on a per-unit basis and change in total as activity changes. C) fixed costs are constant on a per-unit basis and constant in total as activity changes. D) variable costs change on a per-unit basis and change in total as activity changes. E) variable costs are constant on a per-unit basis and are constant in total as activity changes.

78)

The true statement about cost behavior is that:

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A) variable costs change on a per-unit basis and change in total as activity changes. B) fixed costs are constant on a per-unit basis and change in total as activity changes. C) fixed costs are constant on a per-unit basis and are constant in total as activity changes. D) fixed costs change on a per-unit basis and are constant in total as activity changes. E) variable costs are constant on a per-unit basis and are constant in total as activity changes.

79) The relevant range for Maxco Industries is 10,000 to 16,000 units of product. The variable costs per unit are $6 when a company produces 12,000 units of product. What are the variable costs per unit when 14,000 units are produced? A) $4.50. B) $5.00. C) $5.50. D) $6.00. E) None of the answers is correct.

80) The fixed costs per unit are $10 when a company produces 10,000 units of product. What are the fixed costs per unit when 8,000 units are produced? A) $12.50. B) $10.00. C) $8.00. D) $6.50. E) $5.50.

81) Total costs are $180,000 when 10,000 units are produced; of this amount, variable costs are $64,000. What are the total costs when 13,000 units are produced?

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A) $199,200. B) $214,800. C) $234,000. D) Total costs cannot be calculated based on the information presented. E) None of the answers is correct.

82) When 5,000 units are produced variable costs are $35 per unit and total costs are $200,000. What are the total costs when 8,000 units are produced? A) $200,000. B) $305,000. C) $240,000. D) Total costs cannot be calculated based on the information presented. E) None of the answers is correct.

83) How would a 5% sales commission paid to sales personnel be classified in a manufacturing company? A) Fixed, period cost. B) Fixed, product cost. C) Variable, period cost. D) Variable, product cost. E) Direct labor, product cost.

84)

Which of the following would not be characterized as a cost object? A) A vehicle manufactured by an automobile manufacturer. B) A large city’s fire department. C) A fast food restaurant located in a Midwest town. D) A regional airline flight from Atlanta to Miami. E) All of these are examples of cost objects.

Version 1

85)

Costs that can be easily traced to a specific department are called: A) direct costs. B) indirect costs. C) product costs. D) manufacturing costs. E) processing costs.

86) Which of the following would not be considered a direct cost with respect to the service department of a new car dealership? A) Wages of repair technicians. B) Property taxes paid by the dealership. C) Repair parts consumed. D) Salary of the department manager. E) Depreciation on new equipment used to analyze engine problems.

87)

Indirect costs:

A) can be traced to a cost object. B) cannot be traced to a particular cost object. C) are not important. D) are always variable costs. E) may be indirect with respect to theme park but direct with respect to one of its major attractions or rides.

88) Which two terms below best describe the wages paid to security guards that monitor a factory 24 hours a day?

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A) variable cost and direct cost. B) fixed cost and direct cost. C) variable cost and indirect cost. D) fixed cost and indirect cost. E) value-added cost and direct cost.

89) Which one of the following costs would not be considered an indirect cost of serving a customer at a fast food restaurant? A) the cost of the hamburger patty in the burger the customer orders. B) the wages of the employee who cleans the tables. C) the cost of heating and lighting the kitchen. D) the salary of the restaurant’s manager. E) the steam cleaning service for the grill vent.

90)

The salary that is sacrificed by a college student who pursues a degree full time is a(n): A) sunk cost. B) out-of-pocket cost. C) opportunity cost. D) differential cost. E) marginal cost.

91) a(n):

The tuition that will be paid next semester by a college student who pursues a degree is

A) sunk cost. B) out-of-pocket cost. C) indirect cost. D) average cost. E) marginal cost.

Version 1

92)

The sum of costs necessary to effect a one-unit increase in the activity level is a(n): A) Differential cost. B) Opportunity cost. C) Marginal cost. D) Sunk cost. E) None of the answers is correct.

93)

Which of the following costs should be ignored when choosing among alternatives? A) Opportunity costs. B) Sunk costs. C) Out-of-pocket costs. D) Differential costs. E) None of the answers is correct.

94) If the total cost of alternative A is $50,000 and the total cost of alternative B is $34,000, then $16,000 is termed the: A) opportunity cost. B) average cost. C) sunk cost. D) out-of-pocket cost. E) differential cost.

95) Play Time is a nursery school for pre-kindergarten children. The school has determined that the following biweekly revenues and costs occur at different levels of enrollment: Number of Students Enrolled

Version 1

Total Revenue

Total Costs

$ 3,000

$ 2,100

4,500

2,700

4,800

2,800

6,000

3,200

6,300

3,255

The marginal cost when the twenty-first student enrolls in the school is: A) $55. B) $155. C) $300. D) $3,045. E) $3,255.

96) Play Time is a nursery school for pre-kindergarten children. The school has determined that the following biweekly revenues and costs occur at different levels of enrollment: Number of Students Enrolled 10

Total Revenue

Total Costs

$ 3,000

$ 2,100

4,500

2,700

4,800

2,800

6,000

3,200

6,300

3,255

The average cost per student when 16 students enroll in the school is:

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A) $100. B) $125. C) $175. D) $300. E) $400.

97) The costs that follow all have applicability for a manufacturing enterprise. Which of the choices listed correctly denotes the costs' applicability for a service provider? Period Cost

Uncontrollable Cost

Opportunity Cost

Applicable

Not applicable

Applicable

Not applicable

Applicable

Not applicable

Applicable

Not applicable

Applicable

Not applicable

A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

98) You have been asked to work an extra day and will receive $150. However, you already bought a discounted ticket to a theme park for $37 and figure that you will spend an additional $50 at the park. What is the sunk cost if you decide to work? A) $150. B) $107. C) $87. D) $37. E) None of the answers is correct.

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99) Your brother is trying to sell his bicycle for $200. He refuses to lose more than $50 on the sale because it originally cost him $229 when he purchased it two years ago. Which of the following would be his sunk cost? A) $50. B) $200. C) $229. D) $179. E) None of the answers is correct.

100) An important first step in studying managerial accounting is to create a framework for thinking about the various types of costs incurred by organizations and how those costs are actively managed. ⊚ true ⊚ false

101)

Different cost concepts and classifications are used for different purposes. ⊚ true ⊚ false

102)

Inventoriable costs are expensed when incurred. ⊚ true ⊚ false

103)

Another term for product cost is cost of goods sold. ⊚ true ⊚ false

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104)

Finished goods inventory is ordinarily held for sale by a manufacturing company. ⊚ true ⊚ false

105) Selling and administrative costs are always period costs on any type of company’s income statement. ⊚ true ⊚ false

106)

There are three standard categories of manufacturing processes. ⊚ true ⊚ false

107)

A job shop is generally associated with high production volume. ⊚ true ⊚ false

108)

Manufacturing costs are classified into four categories. ⊚ true ⊚ false

109)

Indirect labor is not a component of manufacturing overhead. ⊚ true ⊚ false

110) The following equation -- Beginning finished goods + cost of goods manufactured − ending finished goods -- is used to calculate cost of goods sold during the period.

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⊚ ⊚

true false

111) The total cost of direct material, direct labor, and manufacturing overhead transferred from work-in-process inventory to finished-goods inventory is called the cost of goods manufactured. ⊚ true ⊚ false

112) A suitable cost driver for the amount of direct materials used is the number of direct labor hours worked. ⊚ true ⊚ false

113) The higher the correlation between the cost and the cost driver, the more accurate will be the resulting understanding of cost behavior. ⊚ true ⊚ false

114) As activity changes, total variable cost increases or decreases proportionately with the activity change, but unit variable cost remains the same. ⊚ true ⊚ false

115) As the activity level increases, total fixed cost remains constant and unit fixed cost remains the same. ⊚ true ⊚ false

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116)

A cost that is not directly traceable to a particular cost object is called an indirect cost. ⊚ true ⊚ false

117) Costs that a manager can influence significantly are classified as uncontrollable costs of that manager. ⊚ true ⊚ false

118) Out-of-pocket costs are defined as the benefit that is sacrificed when the choice of one action precludes taking an alternative course of action. ⊚ true ⊚ false

119)

Sunk costs are irrelevant to all future decisions. ⊚ true ⊚ false

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Answer Key Test name: Chap 02_6e_Cornett 1) C 2) C 3) C 4) C 5) B 6) B 7) A 8) E 9) A 10) D 11) B 12) D 13) A 14) C 15) C 16) A 17) E 18) D 19) C 20) D 21) D 22) C 23) C 24) A 25) B 26) A Version 1

27) A 28) B 29) E 30) C 31) C 32) A 33) B 34) A 35) C 36) D 37) C 38) E 39) B 40) E 41) E 42) A 43) D 44) D 45) C 46) D 47) A 48) A 49) C 50) A 51) B 52) B 53) B 54) A 55) C 56) B Version 1

57) D 58) D 59) C 60) D 61) A 62) C 63) B 64) E 65) D 66) E 67) D 68) A 69) B 70) B 71) C 72) C 73) A 74) D 75) E 76) B 77) A 78) D 79) D 80) A 81) A 82) B 83) C 84) E 85) A 86) B Version 1

87) B 88) D 89) A 90) C 91) B 92) C 93) B 94) E 95) A 96) C 97) C 98) D 99) C 100) TRUE 101) TRUE 102) FALSE 103) FALSE 104) TRUE 105) TRUE 106) FALSE 107) FALSE 108) FALSE 109) FALSE 110) TRUE 111) TRUE 112) FALSE 113) TRUE 114) TRUE 115) FALSE 116) TRUE Version 1

117) FALSE 118) FALSE 119) TRUE

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Chapter 02 – 6e Cornet- Manually Graded 1) Gisano’s Pizza operates a restaurant that serves double-decker pizzas. The table below shows the cost incurred during a month when 900 pizzas were served. Number of Pizzas Served

800

900

1,000

Total costs:

Fixed costs

$9,900

Variable costs

8,100

Total costs

$18,000

Cost per pizza:

Fixed cost

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Variable cost

Total cost per pizza

Required: Fill in the missing amounts, labeled A through O, in the table above.

2) Travon and Tony (T & T) Enterprises has a single facility that it uses for manufacturing, sales, and administrative activities. Should the company's building depreciation charge be expensed in its entirety or is a different accounting procedure appropriate? Explain.

3) Manufacturers have established a cost classification called product costs. Define the term "product cost" and note where these costs appear in the financial statements. Be specific.

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4) Briefly explain the four types of production processes in terms of products and volume. Then give examples of each type.

5) Consider the three firms that follow: (1) a regional airline, (2) an automobile manufacturer, and (3) a discount retail store. These firms, examples of service providers, manufacturers, and merchandisers, tend to have different characteristics with respect to costs and financial-statement disclosures. Required: Determine which of the preceding firms (1, 2, and/or 3) would likely: A. Disclose operating expenses on the income statement. B. Have product costs. C. Have period costs. D. Disclose cost of goods sold on the income statement. E. Have no meaningful investment in inventory. F. Maintain raw-material, work-in-process, and finished-goods inventories. G. Have variable and fixed costs.

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Colton Manufacturing produces small electric engines.

Required: Identify the following costs as direct materials (DM), direct labor (DL), manufacturing overhead (MOH), or a period cost (PC). Also indicate whether the cost is variable (V) or fixed (F) with respect to behavior. A. Commissions paid to salespeople B. Straight-line depreciation on the factory building C. Salary of the plant supervisor D. Wages of the assembly-line workers E. Machine lubricant used in production activities F. Engine casings used in production activities G. Advertising placed in trade journals H. Lease payments for the president's automobile I. Property taxes paid on the factory facilities

7) Consider the following items: A. Tomatoes used in the manufacture of ketchup B. Administrative salaries of executives employed by a regional airline C. Wages of assembly-line workers at an automobile manufacturing plant D. Marketing expenditures of the major league baseball club E. Commissions paid to the salespeople working for a soft drink company F. Straight-line depreciation on manufacturing equipment owned by a computer manufacturer G. Shipping charges incurred by office supplies retailer on out-going orders H. Speakers used in a consumer electronics company’s home-theater systems I. Insurance costs related to a cosmetics manufacturing plant Required: Complete the table that follows and classify each of the costs listed as (1) a product or period cost and (2) a variable or fixed cost by placing an "X" in the appropriate column. Product or Period Cost

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Variable or Fixed Cost

Item

Product

Period

Variable

Fixed

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8) The following selected costs were extracted from the accounting records of Louisiana Machining (LAM): 1. Direct materials used in production 2. Wages of machine operators 3. Factory utilities 4. Sales commissions 5. Salary of LAM's president 6. Factory depreciation 7. Wages of plant security guards 8. Uncollectible accounts expense 9. Machine lubricant used in production A. cost of goods manufactured. B. manufacturing overhead. C. total period costs. D. total conversion costs. E. total direct costs of LAM's credit and collections department. F. LAM's inventory cost. Required: By the use of numbers, identify the costs that would be used to calculate:

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9) The income statements and balance sheets of service, retailing, and manufacturing businesses tend to differ. Required: A. Which of these businesses will disclose a cost-of-goods-sold figure on the income statement? Why? B. Briefly describe the difference between a retailing firm and a manufacturer's disclosure of inventories on the balance sheet.

10) Consider the following cost items: 1. Sales commissions earned by a company's sales force. 2. Raw materials purchased during the period. 3. Current year's depreciation on a firm's manufacturing facilities. 4. Year-end completed production of a carpet manufacturer. 5. The cost of products sold to customers of an apparel store. 6. Wages earned by machine operators in a manufacturing plant. 7. Income taxes incurred by an airline. 8. Marketing costs of an electronics manufacturer. 9. Indirect labor costs incurred by a manufacturer of office equipment. Required: A. Evaluate the costs just cited and determine whether the associated dollar amounts would appear on the firm's balance sheet, income statement, or schedule of cost of goods manufactured. B. What major asset will normally be insignificant for service enterprises and relatively substantial for retailers, wholesalers, and manufacturers? Briefly discuss. C. Briefly explain the similarity and difference between the merchandise inventory of a retailer and the finished-goods inventory of a manufacturer.

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11) Briefly define and discuss the terms in each of the pairs that follow. A. Direct and indirect costs B. Direct materials and indirect materials C. Manufacturing overhead and direct labor

12) The following selected information was extracted from the 20x3 accounting records of Farrina Products: Raw materials used

$284,000

Direct labor

178,000

Indirect labor

35,000

Selling and administrative salaries

250,000

Building depreciation*

330,000

Other selling and administrative expenses

80,000

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Other factory costs

620,000

*Seventy percent of the company's building was devoted to production activities; the remaining 30% was used for selling and administrative functions. Farrina’s beginning and ending work-in-process inventories amounted to $306,000 and $245,000, respectively. The company's beginning and ending finished-goods inventories were $450,000 and $440,000, respectively. Required: A. Calculate Farrina’s manufacturing overhead for the year. B. Calculate Farrina’s cost of goods manufactured. C. Compute Farrina’s cost of goods sold.

13) Miao Manufacturing, which began operations on January 1 of the current year, produces an industrial scraper that sells for $325 per unit. Information related to the current year's activities follows. Number of scrapers produced

20,000

Number of scrapers sold

17,000

Variable costs per unit:

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Direct materials

$25

Direct labor

Manufacturing overhead

Annual fixed costs:

Manufacturing overhead

$400,000

Selling and administrative

140,000

Miao carries its finished-goods inventory at the average unit cost of production. There was no work in process at year-end. Required: A. Compute the company's average unit cost of production. B. Determine the cost of the December 31 finished-goods inventory. C. Compute the company's cost of goods sold. D. If next year's production increases to 23,000 units and general cost behavior patterns do not change, what is the likely effect on: 1. The direct-labor cost of $35 per unit? Why? 2. The fixed manufacturing overhead cost of $400,000? Why?

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14)

Portland Manufacturing had the following data for the period just ended:

Work in process, Jan. 1

$ 21,000

Work in process, Dec. 31

40,000

Finished goods, Jan. 1

70,000

Finished goods, Dec. 31

61,000

Direct materials used

126,000

Direct labor

260,000

Factory depreciation

80,000

Sales

945,000

Advertising expense

52,000

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Factory utilities

27,000

Indirect materials

19,000

Indirect labor

35,000

Required: A. Calculate Portland’s cost of goods manufactured. B. Calculate Portland’s cost of goods sold.

15) Frontline Industries has the following beginning and ending inventories for the month of June. June 1

June 30

Direct materials

$80,000

$72,000

Work-in-process

140,000

181,000

Finished goods

85,000

75,000

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Production data for the month of June is: Direct labor

$110,000

Actual overhead

72,000

Direct materials purchased

153,000

Transportation in

6,000

Purchase Returns and Allowances

3,000

Frontline uses one overhead control account and charges overhead to production at 70% of direct labor cost. The company does not formally recognize over- or underapplied overhead until year-end. (a) What was the cost of the materials used by Frontline in June? (b) What is Frontline’s total manufacturing cost for June? (c) What is Frontline’s cost of goods transferred to finished goods inventory for June? (d) What is Frontline’s cost of goods sold for June?

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16)

Tao Company had the following inventory balances at the beginning and end of the year: January 1

December 31

Raw material

$50,000

$35,000

Work in process

130,000

170,000

Finished goods

280,000

255,000

During the year, the company purchased $100,000 of raw material and incurred $340,000 of direct labor costs. Other data: manufacturing overhead incurred, $450,000; sales, $1,560,000; selling and administrative expenses, $90,000; income tax rate, 30%. Required: A. Calculate cost of goods manufactured. B. Calculate cost of goods sold. C. Determine Tao’s net income.

17) The selected amounts that follow were taken from Hawk Corporation's accounting records:

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Raw materials used

$ 27,000

Direct labor

35,000

Total manufacturing costs

104,000

Work-in-process inventory, Jan. 1

19,000

Cost of Goods Manufactured

100,000

Cost of goods available for sale

175,000

Finished goods inventory, Dec. 31

60,000

Sales revenue

300,000

Selling and administrative expenses

125,000

Income tax expense

18,000

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Required: Compute the following: A. Manufacturing overhead. B. Work-in-process inventory, 12/31. C. Finished-goods inventory, 1/1. D. Cost of goods sold. E. Gross margin. F. Net income.

18)

The Enrique Company recorded the following transactions for February 20x1: Materials

Work in Process

Finished Goods

Purchases

$100,000

Beginning inventory

18,000

$ 8,000

Ending inventory

30,000

Direct materials used

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90,000

Direct labor

Manufacturing overhead (includes indirect materials used of $10,000)

115,000

Transferred to finished goods

Cost of goods sold

Sales were $560,000, with sales prices determined by adding a 40% markup to the firm's manufacturing cost. The total cost of direct materials used, direct labor, and manufacturing overhead during the month was $285,000. Note: The materials account includes both direct materials and indirect materials. Required: Calculate the missing values.

19) Sylvia Corporation sold 12,500 units of its single product during the year, reporting a cost of goods sold that totaled $250,000. A review of the company's accounting records disclosed the following information:

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Cost of goods sold as a percentage of sales revenue

40%

Finished goods, Jan. 1

$87,000

Work-in-process, Dec. 31

55,000

Cost of Goods Manufactured

241,000

Raw materials used

40,000

Direct labor

74,000

Manufacturing overhead

122,000

Selling and administrative expenses

310,000

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Sylvia is subject to a 30% income tax rate. Required: A. Determine the selling price per unit. B. Management established a goal at the beginning of the year to reduce the company's investment in finished-goods inventory and work-in-process inventory. 1. Analyze cost of goods sold and determine if management's goal was achieved with respect to finished-goods inventory. Show computations. 2. Analyze the firm's manufacturing costs and determine if management's goal was achieved with respect to work-in-process inventory. Show computations. C. Is the company profitable? Show calculations.

20)

Why are cost drivers in the airline industry considered so complex?

21) Hernandez Systems began business on January 1 of the current year, producing a single product that is popular with home builders. Demand was very strong, allowing the company to sell its entire manufacturing output of 80,000 units. The following unit costs were incurred: Manufacturing costs:

Direct materials

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$15

Direct labor

Variable overhead

Fixed overhead

Selling and administrative costs:

Variable

Fixed

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Hernandez anticipates an increase in productive output to 100,000 units and sales of 95,000 units in the next accounting period. The company uses appropriate drivers to determine cost behavior and estimates. Required: A. Assuming that present cost behavior patterns continue, compute the total expected costs in the upcoming accounting period. B. Jan Compton is about to prepare a graph that shows the unit cost behavior for variable selling and administrative cost. If the graph's horizontal axis is volume and the vertical axis is dollars, briefly describe what Compton’s graph should look like. C. Determine whether the following costs are variable or fixed in terms of behavior: 1. Yearly lease payments for a state-of-the-art cutting machine. 2. A fee paid to a consultant who provided advice about quality issues. The fee was based on the number of consulting hours provided. 3. Cost of an awards dinner for "star" salespeople.

22) Sebastian Muffler, Inc. operates an automobile service facility. The table below shows the cost incurred during a month when 500 mufflers were replaced. Number of Muffler Replacements

400

500

600

Total costs:

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Fixed costs

$9,000

Variable costs

6,000

Total costs

$15,000

Fixed cost

Variable cost

Total cost per muffler replacement

Cost per muffler replacement:

Required: Fill in the missing amounts, labeled A through O, in the table above.

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23) In discussing the operation of her automobile, Dr. Lawson once observed that gasoline is a fixed cost because the cost per gallon is relatively stable. Insurance, on the other hand, is a variable cost because the cost per mile varies inversely with the number of miles driven. Comment on the Dr. Lawson’s observation.

24)

The following terms are used to describe various economic characteristics of costs:

Opportunity cost

Differential cost

Out-of-pocket cost

Marginal cost

Sunk cost

Average cost

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Required: Choose one of the preceding terms to characterize each of the amounts described below. Each term may be used only once. A. The cost of including one extra child in a day-care center. B. The cost of merchandise inventory purchased five years ago. The goods are now obsolete. C. The cost of feeding 300 children in a public school cafeteria is $450 per day, or $1.50 per child per day. What economic term describes this $1.50 cost? D. The management of a high-rise office building uses 3,000 square feet of space in the building for its own administrative functions. This space could be rented for $30,000. What economic term describes this $30,000 of lost rental revenue? E. The cost of building an automated assembly line in a factory is $700,000; a manually operated assembly line would cost $250,000. What economic term is used to describe the $450,000 variation between these two amounts? F. Refer to the preceding question and assume that the firm is currently building the assembly line for $700,000. What economic term is used to describe the $700,000 construction cost?

25) Describe the economic characteristics of sunk costs and opportunity costs, and explain the impact that these costs may have on decisions.

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Answer Key Test name: Chap 02_6e_Cornett_Manually Graded

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Chapter 03 – 6e Cornett 1)

Product costing in a manufacturing firm is the process of: A) accumulating the company's period costs. B) allocating costs among the firm's departments. C) placing a value on the company's fixed assets. D) assigning costs to the firm's inventory. E) assigning costs to the company's managers.

Which of the following statements is true? A) Service firms have little need for determining the cost of their services. B) The concept of product costing is relevant only for manufacturing firms. C) The cost of year-end inventory appears on the balance sheet as an expense. D) Service companies use cost information for planning and control purposes. E) Mining and petroleum companies have no inventoriable costs.

Which of the following statements is true?

A) Product costing is not used in financial accounting. B) There is only one way to assign indirect costs. C) All product cost numbers can be easily derived due to their objective nature. D) Product costing is limited to manufacturing firms. E) Relative profitability depends upon the way we assign costs and define outputs as successful or unsuccessful.

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4) The controller for Jack’s Rabbits, Inc., estimates that the company’s fixed overhead is $150,000 per year. He also has determined that the variable overhead is approximately $0.20 per rabbit raised and sold. Since the company has a single product, overhead is applied on the basis of output units, or in other words, rabbits raised and sold. What is the predetermined overhead rate per rabbit if the output estimate or prediction is 150,000 rabbits? A) $1.00 B) $0.20 C) $1.20 D) $3.00 E) $7.50

5) Dubois Decors is an interior decorator in St. Louis, Missouri. The following costs were incurred in the firm’s contract to redecorate a corporate CEO’s office.

Direct material used

$ 35,000

Direct professional labor

$ 60,000

The firm’s budget for the year included the following estimates:

Budgeted overhead

$ 400,000

Budgeted direct professional labor

$ 250,000

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Overhead is applied to contracts using a predetermined overhead rate calculated annually. The rate is based on direct professional labor cost. What is the predetermined overhead rate? A) 62.5% B) 58.3% C) 160% D) 171% E) None of these choices are correct.

6) Dubois Decors is an interior decorator in St. Louis, Missouri. The following costs were incurred in the firm’s contract to redecorate a corporate CEO’s office.

Direct material used

$ 35,000

Direct professional labor

$ 60,000

The firm’s budget for the year included the following estimates:

Budgeted overhead

$ 400,000

Budgeted direct professional labor

$ 250,000

Overhead is applied to contracts using a predetermined overhead rate calculated annually. The rate is based on direct professional labor cost. What is the total cost of the firm’s contract to redecorate the CEO’s office?

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A) $155,000 B) $95,000 C) $191,000 D) $650,000 E) $132,500

Barnacle Industries incurred and applied the following manufacturing costs:

Direct material

$ 39,000

Direct labor

26,000

Manufacturing overhead

52,000

During 20x2, Barnacle finished products costing $78,000. Products costing $32,500 were sold for $41,600. What is the balance of Work-in-Process on Barnacle’s balance sheet as of December 31, 20x2? A) $117,000 B) $84,500 C) $75,400 D) $39,000 E) $45,500

Barnacle Industries incurred and applied the following manufacturing costs:

Direct material

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$ 39,000

Direct labor

26,000

Manufacturing overhead

52,000

During 20x2, Barnacle finished products costing $78,000. Products costing $32,500 were sold for $41,600. What is the balance of Finished Goods on Barnacle’s balance sheet as of December 31, 20x2? A) $117,000 B) $84,500 C) $78,000 D) $39,000 E) $45,500

If a company sells goods that cost $80,000 for $92,000, the firm will: A) reduce Finished-Goods Inventory by $80,000. B) reduce Finished-Goods Inventory by $92,000. C) report sales revenue on the balance sheet of $92,000. D) reduce Cost of Goods Sold by $80,000. E) follow more than one of the other procedures.

10)

As production takes place, all manufacturing costs are added to the: A) Work-in-Process Inventory account. B) Manufacturing-Overhead Inventory account. C) Cost-of-Goods-Sold account. D) Finished-Goods Inventory account. E) Production Labor account.

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11)

Which of the following statements regarding work in process is not correct?

A) Work in process is partially completed inventory. B) Work in process consists of direct labor, direct material, and manufacturing overhead. C) Work-in-Process Inventory is debited to record direct material used and direct labor incurred. D) Work-in-Process Inventory appears on the year-end balance sheet. E) Work-in-Process Inventory is credited when goods are sold.

12)

Which of the following statements about manufacturing cost flows is false?

A) Direct materials, direct labor, and manufacturing overhead are entered in the Work-inProcess Inventory account. B) The Finished-Goods Inventory account will contain entries that reflect the cost of goods sold during the period. C) The cost of units sold during the period will typically appear on the income statement. D) When a company sells goods that cost $54,000 for $60,000, the firm will enter $6,000 in an account entitled Profit on Sale. E) Units are normally transferred from Work-in-Process Inventory to Finished-Goods Inventory.

13)

The final step in recognizing the completion of production requires a company to:

A) debit Finished-Goods Inventory and credit Work-in-Process Inventory. B) debit Work-in-Process Inventory and credit Finished-Goods Inventory. C) add direct labor to Work-in-Process Inventory. D) add direct materials, direct labor, and manufacturing overhead to Work-in-Process Inventory. E) add direct materials to Finished-Goods Inventory.

14) Morgan Manufacturing recently sold goods that cost $35,000 for $45,000 cash. The journal entries to record this transaction would include:

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A) a credit to Work-in-Process Inventory for $35,000. B) a debit to Sales Revenue for $45,000. C) a credit to Profit on Sale for $10,000. D) a debit to Finished-Goods Inventory for $35,000. E) a credit to Sales Revenue for $45,000.

15)

Job-order costs are most useful for: A) Controlling indirect costs of future production. B) Determining inventory valuation using LIFO. C) Determining the cost of a specific project. D) Estimating the overhead costs included in transfer prices. E) Determining costs by averaging the costs of all production.

16)

Which of the following manufacturers would most likely use job-order costing? A) Chemical manufacturers. B) Microchip processors. C) Custom-furniture manufacturers. D) Gasoline refiners. E) Fertilizer manufacturers.

17)

A custom-home builder would likely utilize: A) job-order costing. B) process costing. C) mass customization. D) process budgeting. E) joint costing.

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18)

Which of the following types of companies would most likely use process costing? A) Aircraft manufacturers. B) Textile manufacturers. C) Textbook publishers. D) Custom-machining firms. E) Shipbuilders.

19) A manufacturing firm produces goods in accordance with customer specifications, commencing production upon receipt of a purchase order. To accumulate the cost of each order, the company would use a: A) job-cost record. B) cost allocation matrix. C) production log. D) overhead sheet. E) manufacturing cost record.

20) A typical job-cost record would provide information about all of the following items related to an order except: A) the cost of direct materials used. B) administrative costs. C) direct labor costs incurred. D) applied manufacturing overhead. E) direct labor hours worked.

21)

Which of the following statements about material requisitions is false?

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A) Material requisitions are often computerized. B) Material requisitions are a common example of source documents. C) Material requisitions contain information that is useful to the cost accounting department. D) Material requisitions authorize the transfer of materials from the production floor to the raw materials warehouse. E) Material requisitions are routinely linked to a bill of materials that lists all of the materials needed to complete a job.

22) Gonzales Company has developed an integrated system that coordinates the flow of all goods, services, and information into and out of the organization, working with raw material vendors as well as customers to improve service and reduce costs. The firm is said to be using: A) participative management. B) top-down management. C) strategic cost management. D) supply chain management. E) management by objectives (MBO).

23)

The assignment of direct labor cost to individual jobs is based on: A) an estimate of the total time spent on the job. B) actual total payroll cost divided equally among all jobs in process. C) estimated total payroll cost divided equally among all jobs in process. D) the actual time spent on each job multiplied by the wage rate. E) the estimated time spent on each job multiplied by the wage rate.

24)

When using normal costing, the total production cost of a job is composed of:

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A) direct material and direct labor, only. B) direct material, direct labor, manufacturing overhead, and outlays for selling costs. C) direct material, direct labor, manufacturing overhead, and outlays for both selling and administrative costs. D) direct material, direct labor, and applied manufacturing overhead. E) direct material, direct labor, and actual manufacturing overhead.

25)

Manufacturing overhead: A) includes direct materials, indirect materials, indirect labor, and factory depreciation. B) is easily traced to jobs. C) includes all selling costs. D) should not be assigned to individual jobs because it bears no obvious relationship to

them. E) is a pool of indirect production costs that must somehow be attached to each unit manufactured.

26) Jetison Industries makes batches of custom novelty items for companies to give away at career fairs. Job X24 for Xcel Corporation consists of 2,000 pens that light up inside the pen base when you write. In addition, the name and address of Xcel Corp. is printed on the pens. Direct material for these pens amount to $1,500; direct labor is $2,800; and manufacturing overhead is $1,600. Based on this information, what is the cost per pen for Job X24? A) $1.40 B) $2.95 C) $3.39 D) $3.95 E) $4.40

27)

Overhead application is also known as:

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A) cost allocation. B) overhead cost distribution. C) overhead absorption. D) application costing. E) overhead cost apportionment.

28) The process of assigning overhead costs to the jobs that are worked on is commonly called: A) service department cost allocation. B) overhead cost distribution. C) overhead application. D) transfer costing. E) overhead cost apportionment.

29)

Which of the following is the correct method to calculate a predetermined overhead rate? A) Budgeted total manufacturing cost ÷ budgeted amount of cost driver. B) Budgeted overhead cost ÷ budgeted amount of cost driver. C) Budgeted amount of cost driver ÷ budgeted overhead cost. D) Actual overhead cost ÷ budgeted amount of cost driver. E) Actual overhead cost ÷ actual amount of cost driver.

30) Norwood Corporation uses a predetermined overhead rate of $20 per machine hour. In deriving this figure, the company's accountant used:

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A) a denominator of budgeted machine hours for the current accounting period. B) a denominator of actual machine hours for the current accounting period. C) a denominator of actual machine hours for the previous accounting period. D) a numerator of budgeted machine hours for the current accounting period. E) a numerator of actual machine hours for the current accounting period.

31) Metalica Company applies overhead based on machine hours. At the beginning of 20x1, the company estimated that manufacturing overhead would be $500,000, and machine hours would total 20,000. By 20x1 year-end, actual overhead totaled $525,000, and actual machine hours were 25,000. On the basis of this information, the 20x1 predetermined overhead rate was: A) $0.04 per machine hour. B) $0.05 per machine hour. C) $20 per machine hour. D) $21 per machine hour. E) $25 per machine hour.

32) Osgood Company, which applies overhead at the rate of 190% of direct material cost, began work on job no. 101 during June. The job was completed in July and sold during August, having accumulated direct material and labor charges of $27,000 and $15,000, respectively. On the basis of this information, the total overhead applied to job no. 101 amounted to: A) $0. B) $28,500. C) $51,300. D) $70,500. E) $79,800.

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33) Blakely charges manufacturing overhead to products by using a predetermined application rate, computed on the basis of machine hours. The following data pertain to the current year: Budgeted manufacturing overhead: $480,000 Actual manufacturing overhead: $440,000 Budgeted machine hours: 20,000 Actual machine hours: 16,000 Overhead applied to production totaled: A) $352,000. B) $384,000. C) $550,000. D) $600,000. E) None of these choices are correct.

34) Farrina Manufacturing uses a predetermined overhead application rate of $8 per direct labor hour. A review of the company's accounting records for the year just ended discovered the following: Underapplied manufacturing overhead: $7,200 Actual manufacturing overhead: $392,000 Budgeted labor hours: 50,000 Simone's actual labor hours worked totaled: A) 48,100. B) 49,100. C) 49,900. D) 50,900. E) cannot be determined based on the information presented.

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35) Boxer Industries worked on four jobs during its first year of operation: nos. 401, 402, 403, and 404. A review of job no. 403's cost record revealed direct material charges of $40,000 and total manufacturing costs of $50,000. If Boxer applies overhead at 150% of direct labor cost, the overhead applied to job no. 403 must have been: A) $0. B) $6,000. C) $4,000. D) $3,333. E) $5,000.

36)

Which of the following statements about materials is false?

A) Acquisitions of materials are normally charged to the Purchases account. B) The use of direct materials gives rise to a debit to Work-in-Process Inventory. C) The use of indirect materials gives rise to a debit to Manufacturing Overhead. D) The use of indirect materials gives rise to a credit to Manufacturing Supplies Inventory. E) Direct materials are accounted for in a different manner than indirect materials.

37) Templeton Corporation recently used $75,000 of direct materials and $9,000 of indirect materials in production activities. The journal entries reflecting these transactions would include: A) a debit to Manufacturing Overhead for $9,000. B) a debit to Manufacturing Overhead for $84,000. C) a debit to Raw-Material Inventory for $75,000. D) a debit to Work-in-Process Inventory for $84,000. E) a credit to Manufacturing Overhead for $9,000.

38) A review of a company's Work-in-Process Inventory account found a debit for materials of $67,000. If all procedures were performed in the correct manner, this means that the firm:

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A) also recorded a credit to Raw-Material Inventory. B) also recorded a credit to Manufacturing Supplies Inventory. C) was accounting for the usage of direct materials. D) was accounting for the usage of indirect materials. E) also recorded a credit to Raw-Material Inventory and was accounting for the usage of direct materials.

39) Travers Manufacturing incurred $106,000 of direct labor and $11,000 of indirect labor. The proper journal entry to record these events would include a debit to Work in Process for: A) $0 because Work in Process should be credited. B) $0 because Work in Process is not affected. C) $11,000. D) $106,000. E) $117,000.

40) The following information relates to October: Production supervisor's salary: $3,500 Factory maintenance wages: 250 hours at $10 per hour The journal entry to record the preceding information is: A) Manufacturing overhead

6,000

Wages Payable

6,000

B) Wages Payable Manufacturing overhead

Version 1

6,000 6,000

C) Work-in-Process Inventory

6,000

Wages Payable

6,000

D) Wages Payable

6,000

Work-in-Process Inventory

6,000

E) Manufacturing overhead

2,500

Work-in-Process Inventory

3,500

Wages Payable

6,000

41) Electricity costs that were incurred by a company's production processes should be debited to: A) Utilities Expense. B) Accounts Payable. C) Cash. D) Manufacturing Overhead. E) Work-in-Process Inventory.

42) The journal entry needed to record $5,000 of advertising for Oxner Manufacturing would include:

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A) a debit to Advertising Expense. B) a credit to Advertising Expense. C) a debit to Manufacturing Overhead. D) a credit to Manufacturing Overhead. E) a debit to Projects-in-Process.

43) Hsu Company incurred $90,000 of depreciation for the year. Eighty percent relates to the firm's production facilities, and 20% relates to sales and administrative offices. If all items are handled in the proper manner, a review of the company's accounting records should reveal a: A) debit to Depreciation Expense for $90,000. B) debit to Manufacturing Overhead for $90,000. C) debit to Manufacturing Overhead for $72,000. D) debit to Work-in-Process Inventory for $18,000. E) credit to Cash for $90,000.

44)

The left side of the Manufacturing Overhead account is used to accumulate: A) actual manufacturing overhead costs incurred throughout the accounting period. B) overhead applied to Work-in-Process Inventory. C) underapplied overhead. D) predetermined overhead. E) overapplied overhead.

45) Throughout the accounting period, the credit side of the Manufacturing Overhead account is used to accumulate:

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A) actual manufacturing overhead costs. B) overhead applied to Work-in-Process Inventory. C) overapplied overhead. D) underapplied overhead. E) predetermined overhead.

46) An accountant recently debited Work-in-Process Inventory and credited Manufacturing Overhead at a company that uses normal costing. The accountant was: A) applying a predetermined overhead amount to production. B) recognizing receipt of the factory utilities bill. C) recording a year-end adjustment for an insignificant amount of underapplied overhead. D) recognizing actual overhead incurred during the period. E) recognizing the completion of production.

47) Job no. C12 was completed in November at a cost of $28,500, subdivided as follows: direct material, $13,500; direct labor, $6,000; and manufacturing overhead, $9,000. The journal entry to record the completion of the job is: A) Finished-Goods Inventory

28,500

Work-in-Process Inventory

28,500

B) Work-in-Process Inventory Finished-Goods Inventory

28,500 28,500

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Work-in-Process Inventory

28,500

Wages Payable

6,000

Raw-Material Inventory

13,500

Manufacturing Overhead

9,000

D) Cost of Goods Sold

28,500

Finished-Goods Inventory

28,500

E) Finished-Goods Inventory Cost of Goods Sold

28,500 28,500

48) A computer manufacturer recently shipped several laptops to a customer (cost: $25,000) and billed the customer $30,000. Which of the following options correctly expresses the accounts that are debited and credited to record this transaction? A) Debits: Accounts Receivable, Finished-Goods Inventory; credits: Sales Revenue, Cost of Goods Sold. B) Debits: Accounts Receivable, Cost of Goods Sold; credits: Sales Revenue, FinishedGoods Inventory. C) Debits: Sales Revenue, Cost of Goods Sold; credits: Accounts Receivable, FinishedGoods Inventory. D) Debits: Sales Revenue, Finished-Goods Inventory; credits: Accounts Receivable, Cost of Goods Sold. E) Debits: Accounts Receivable; credits: Finished-Goods Inventory, Profit on Sale.

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49) Foxmoor Company applies manufacturing overhead by using a predetermined rate of 50% of direct labor cost. The data that follow pertain to job no. 764:

Direct material cost Direct labor cost

$ 55,000 80,000

If Foxmoor adds a 40% markup on total cost to generate a profit, which of the following choices depicts a portion of the accounting needed to record the sale of job no. 764? Account Debited

Amount

Cost of Goods Sold

$ 175,000

Cost of Goods Sold

$ 245,000

Finished-Goods Inventory

$ 175,000

Finished-Goods Inventory

$ 245,000

Sales Revenue

$ 245,000

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

50) Bennington Company applies manufacturing overhead by using a predetermined rate of 150% of direct labor cost. The data that follow pertain to job no. 831:

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Direct material cost Direct labor cost

$ 72,000 38,000

If Bennington adds a 30% markup on total cost to generate a profit, which of the following choices depicts a portion of the accounting needed to record the credit sale of job no. 831? Account Debited

Amount

A. Accounts Receivable

$ 167,000

Accounts Receivable

$ 217,100

Finished-Goods Inventory

$ 167,000

Finished-Goods Inventory

$ 217,100

Sales Revenue

$ 217,100

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

51) Armour, Inc., an advertising agency, applies overhead to jobs on the basis of direct professional labor hours. Overhead was estimated to be $150,000, direct professional labor hours were estimated to be 15,000, and direct professional labor cost was projected to be $225,000. During the year, Armour incurred actual overhead costs of $146,000, actual direct professional labor hours of 14,500, and actual direct labor cost of $222,000. By year-end, the firm's overhead was:

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A) $1,000 underapplied. B) $1,000 overapplied. C) $4,000 underapplied. D) $4,000 overapplied. E) $5,000 underapplied.

52) Boston, Inc. applies manufacturing overhead at the rate of $40 per machine hour. Budgeted machine hours for the current period were anticipated to be 120,000; however, a lengthy strike resulted in actual machine hours being worked of only 90,000. Budgeted and actual manufacturing overhead figures for the year were $4,800,000 and $4,180,000, respectively. On the basis of this information, the company's year-end overhead was: A) overapplied by $580,000. B) underapplied by $580,000. C) overapplied by $1,200,000. D) underapplied by $1,200,000. E) underapplied by $900,000.

53) Terrence Industries charges manufacturing overhead to products by using a predetermined application rate, computed on the basis of labor hours. The following data pertain to the current year:

Budgeted manufacturing overhead Actual manufacturing overhead

$ 1,800,000 1,810,000

Budgeted labor hours

60,000

Actual labor hours

61,500

Which of the following choices is the correct status of manufacturing overhead at year-end? Version 1

A) Overapplied by $10,000. B) Underapplied by $10,000. C) Overapplied by $35,000. D) Underapplied by $35,000. E) Overapplied by $45,000.

54) Mountain Man Corporation debited Cost of Goods Sold and credited Manufacturing Overhead at year-end. On the basis of this information, one can conclude that: A) budgeted overhead exceeded actual overhead. B) budgeted overhead exceeded applied overhead. C) budgeted overhead was less than applied overhead. D) actual overhead exceeded applied overhead. E) actual overhead was less than applied overhead.

55) Rogers Manufacturing's overhead at year-end was underapplied by $5,800, a small amount given the firm's size. The year-end journal entry to record this amount would include: A) a debit to Cost of Goods Sold. B) a debit to Manufacturing Overhead. C) a debit to Work-in-Process Inventory. D) a credit to Cost of Goods Sold. E) a credit to Work-in-Process Inventory.

56) Flores Company, which uses labor hours to apply overhead to manufacturing, may have increased amounts of underapplied overhead at month-end if:

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A) suppliers of direct materials have an across-the-board price increase. B) an accountant failed to record the period's charges for plant maintenance and security. C) employees are hit hard with a widespread outbreak of the flu. D) direct laborers are granted a wage increase. E) outlays for advertising expenditures are increased.

57)

The estimates used to calculate the predetermined overhead rate will virtually always:

A) prove to be correct. B) result in a year-end balance of zero in the Manufacturing Overhead account. C) result in overapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount. D) result in underapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount. E) result in either underapplied or overapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.

58)

Under- or overapplied manufacturing overhead at year-end is most commonly:

A) charged or credited to Work-in-Process Inventory. B) charged or credited to Cost of Goods Sold. C) charged or credited to a special loss account. D) prorated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold. E) ignored because there is no effect on the Cash account.

59) When underapplied or overapplied manufacturing overhead is prorated, amounts can be assigned to which of the following accounts?

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A) Raw-Material Inventory, Manufacturing Overhead, and Direct Labor. B) Cost of Goods Sold, Work-in-Process Inventory, and Finished-Goods Inventory. C) Work-in-Process Inventory, Raw-Material Inventory, and Cost of Goods Sold. D) Raw-Material Inventory, Finished-Goods Inventory, and Cost of Goods Sold. E) Raw-Material Inventory, Work-in-Process Inventory, and Finished-Goods Inventory.

60) Flagler, Inc. disposes of under- or overapplied overhead at year-end as an adjustment to cost of goods sold. Prior to disposal, the firm reported cost of goods sold of $590,000 in a year when manufacturing overhead was underapplied by $15,000. If sales revenue totaled $1,400,000, determine (1) Flagler’s adjusted cost of goods sold and (2) gross margin Gross Margin

Adjusted Cost of Goods Sold $ 575,000

$ 575,000

$ 825,000

$ 590,000

$ 810,000

$ 605,000

$ 795,000

$ 605,000

$ 810,000

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

61)

The term "normal costing" refers to the use of:

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A) job-costing systems. B) computerized accounting systems. C) targeted overhead rates. D) predetermined overhead rates. E) actual overhead rates.

62) Douglas, Inc., employs a normal costing system. The following information pertains to the year just ended. ● Total manufacturing costs were $2,500,000. ● Cost of goods manufactured was $2,425,000. ● Applied manufacturing overhead was 30 percent of total manufacturing costs. ● Manufacturing overhead was applied to production at a rate of 80 percent of direct-labor cost. ● Work-in-process inventory on January 1 was 75 percent of work-in-process inventory on December 31. Based on this information, what is the total direct-labor cost for the year? A) $750,000. B) $600,000. C) $909,375. D) $937,500. E) $1,041,667.

63) Douglas, Inc., employs a normal costing system. The following information pertains to the year just ended. ● Total manufacturing costs were $2,500,000. ● Cost of goods manufactured was $2,425,000. ● Applied manufacturing overhead was 30 percent of total manufacturing costs. ● Manufacturing overhead was applied to production at a rate of 80 percent of direct-labor cost. ● Work-in-process inventory on January 1 was 75 percent of work-in-process inventory on December 31. Based on this information, what amount is the total cost of direct material used during the year?

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A) $750,000. B) $812,500 C) $1,000,000. D) $2,450,000. E) $2,500,000.

64) Douglas, Inc., employs a normal costing system. The following information pertains to the year just ended. ● Total manufacturing costs were $2,500,000. ● Cost of goods manufactured was $2,425,000. ● Applied manufacturing overhead was 30 percent of total manufacturing costs. ● Manufacturing overhead was applied to production at a rate of 80 percent of direct-labor cost. ● Work-in-process inventory on January 1 was 75 percent of work-in-process inventory on December 31. Based on this information, what is the value of the company’s work-in-process inventory on December 31. A) $750,000. B) $300,000 C) $727,500. D) $333,333. E) $1,875,000.

65) The primary difference between normalized and actual costing methods lies in the determination of a job's: A) direct material costs. B) direct labor costs. C) manufacturing overhead costs. D) selling costs. E) administrative costs.

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66)

Which of the following statements about the use of direct labor as a cost driver is false?

A) Direct labor is the most commonly used cost driver when calculating a predetermined overhead rate. B) Direct labor is gaining importance in many manufacturing applications with respect to being a significant cost driver. C) Direct labor is an inappropriate cost driver to use if a company is highly automated. D) If direct labor is a good cost driver, increases in direct labor are matched with increases in manufacturing overhead. E) Companies can use either direct labor cost or direct labor hours as a cost driver.

67) If the amount of effort and attention to products varies substantially throughout a company's various manufacturing operations, the company might consider the use of: A) a plant-wide overhead rate. B) departmental overhead rates. C) actual overhead rates instead of predetermined overhead rates. D) direct labor hours to determine the overhead rate. E) machine hours to determine the overhead rate.

68)

Which of the following is not a drawback of actual costing?

A) Costs are subject to cyclicality. B) Costs avoid the estimation associated with predetermined overhead rates. C) Costs may not be evenly spread throughout the year due to large payments for overhead costs. D) Actual overhead costs may only be available after a production period has passed. E) All of these are drawbacks of actual costing.

69)

Throughput time includes the time required for all of these except:

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A) material handling. B) production processing. C) product inspection. D) packaging. E) the time a salesman spends with a customer.

70)

When selecting a volume-based cost driver, the goal is to:

A) choose an input that varies in a pattern that is most similar to the pattern with which overhead costs vary. B) choose a period where a cost driver is at a low level so that overhead costs will be at a low level. C) choose labor hours for a computer-integrated manufacturing processes. D) eliminate complexity by using a plant-wide overhead rate for all of a firm’s products. E) None of these are goals when selecting a volume-based cost driver.

71)

In the two-stage cost allocation process, costs are assigned:

A) from jobs, to service departments, to production departments. B) from service departments, to jobs, to production departments. C) from service departments, to production departments, to jobs. D) from production departments, to jobs, to service departments. E) from the balance sheet (when goods are produced), to the income statement (when goods are sold).

72)

Which of the following is not considered to be a service department?

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A) Equipment maintenance department B) Material handling department C) Machining department D) Factory custodial service department E) Vehicle repair department

73)

Which of the following entities would not likely be a user of job-costing systems? A) Custom-furniture manufacturers. B) Repair shops. C) Hospitals. D) Accounting firms. E) None of these, because all are likely users.

74) Which of the following would not likely be used by service providers to accumulate job costs? A) Projects. B) Contracts. C) Clients. D) Processes. E) All of these, because service providers cannot use job-costing systems.

75)

Use the following labor budget data for Roy & Miller Accounting, LLP.

Partner Salaries Partner Benefits (40%)

Version 1

$ 400,000 160,000

Total Partner Compensation

$ 560,000

Staff Accountant Salaries

$ 600,000

Staff Benefits (40%) Total Staff Compensation

240,000 $ 840,000

The budgeted overhead cost for the year is $1,260,000. The company has estimated that onethird of the budgeted overhead cost is incurred to support the firm’s two partners, and two-thirds goes to support the staff accountants. The current audit bid for Monoco Industries requires $18,000 in direct partner professional labor, $30,000 in direct staff accountant professional labor, $5,000 in direct material. What is the total budgeted compensation for both partners and staff accountants? A) $1,000,000 B) $600,000 C) $1,160,000 D) $1,400,000 E) None of these answers is correct.

76)

Use the following labor budget data for Roy & Miller Accounting, LLP.

Partner Salaries Partner Benefits (40%)

$ 400,000 160,000

Total Partner Compensation

$ 560,000

Staff Accountant Salaries

$ 600,000

Staff Benefits (40%)

Version 1

240,000

Total Staff Compensation

$ 840,000

The budgeted overhead cost for the year is $1,260,000. The company has estimated that onethird of the budgeted overhead cost is incurred to support the firm’s two partners, and two-thirds goes to support the staff accountants. The current audit bid for Monoco Industries requires $18,000 in direct partner professional labor, $30,000 in direct staff accountant professional labor, $5,000 in direct material. What is the overhead rate based on a single cost driver (rounded to the nearest percentage)? A) 71% B) 90% C) 210 % D) 83% E) 60%

77)

Use the following labor budget data for Roy & Miller Accounting, LLP.

Partner Salaries Partner Benefits (40%)

$ 400,000 160,000

Total Partner Compensation

$ 560,000

Staff Accountant Salaries

$ 600,000

Staff Benefits (40%) Total Staff Compensation

Version 1

240,000 $ 840,000

The budgeted overhead cost for the year is $1,260,000. The company has estimated that onethird of the budgeted overhead cost is incurred to support the firm’s two partners, and two-thirds goes to support the staff accountants. The current audit bid for Monoco Industries requires $18,000 in direct partner professional labor, $30,000 in direct staff accountant professional labor, $5,000 in direct material. What is the overhead rate for partners, if separate rates are used for partners and staff accountants? A) 90% B) 75% C) 60% D) 225% E) 50%

78)

Use the following labor budget data for Roy & Miller Accounting, LLP.

Partner Salaries Partner Benefits (40%)

$ 400,000 160,000

Total Partner Compensation

$ 560,000

Staff Accountant Salaries

$ 600,000

Staff Benefits (40%) Total Staff Compensation

Version 1

240,000 $ 840,000

The budgeted overhead cost for the year is $1,260,000. The company has estimated that onethird of the budgeted overhead cost is incurred to support the firm’s two partners, and two-thirds goes to support the staff accountants. The current audit bid for Monoco Industries requires $18,000 in direct partner professional labor, $30,000 in direct staff accountant professional labor, $5,000 in direct material. What is the overhead rate for staff accountants, if separate rates are used for partners and staff accountants? A) 50% B) 75% C) 66.7% D) 100% E) 150%

79)

Use the following labor budget data for Roy & Miller Accounting, LLP.

Partner Salaries Partner Benefits (40%)

$ 400,000 160,000

Total Partner Compensation

$ 560,000

Staff Accountant Salaries

$ 600,000

Staff Benefits (40%) Total Staff Compensation

Version 1

240,000 $ 840,000

The budgeted overhead cost for the year is $1,260,000. The company has estimated that onethird of the budgeted overhead cost is incurred to support the firm’s two partners, and two-thirds goes to support the staff accountants. The current audit bid for Monoco Industries requires $18,000 in direct partner professional labor, $30,000 in direct staff accountant professional labor, $5,000 in direct material. If overhead is applied on the Monoco engagement based on a single-cost driver basis, what is the total cost of the engagement? A) $101,000 B) $96,200 C) $43,200 D) $48,000 E) $85,000

80)

Use the following labor budget data for Roy & Miller Accounting, LLP.

Partner Salaries Partner Benefits (40%)

$ 400,000 160,000

Total Partner Compensation

$ 560,000

Staff Accountant Salaries

$ 600,000

Staff Benefits (40%) Total Staff Compensation

Version 1

240,000 $ 840,000

The budgeted overhead cost for the year is $1,260,000. The company has estimated that onethird of the budgeted overhead cost is incurred to support the firm’s two partners, and two-thirds goes to support the staff accountants. The current audit bid for Monoco Industries requires $18,000 in direct partner professional labor, $30,000 in direct staff accountant professional labor, $5,000 in direct material. If overhead is applied on the Monoco engagement based on two separate cost drivers, what is the cost of the engagement? A) $101,000 B) $83,000 C) $43,500 D) $96,500 E) $89,000

81) At the Bayshore Advertising Agency, partner and staff compensation cost is a key driver of agency overhead. In light of this fact, which of the following is the correct expression to determine the amount of overhead applied to a particular client job? A) (Budgeted overhead ÷ budgeted compensation) × budgeted compensation cost on the job. B) (Budgeted overhead ÷ budgeted compensation) × actual compensation cost on the job. C) (Budgeted compensation ÷ budgeted overhead) × budgeted compensation cost on the job. D) (Budgeted compensation ÷ budgeted overhead) × actual compensation cost on the job. E) None of these, because service providers do not apply overhead to jobs.

82)

Product or service cost is a very objective number that anyone could agree on. ⊚ true ⊚ false

83)

Product costs provide crucial data for a variety of managerial purposes.

Version 1

⊚ ⊚

true false

84) The final step in recognizing the completion of production requires a company to debit Finished-Goods Inventory and credit Work-in-Process Inventory. ⊚ true ⊚ false

85) As soon as products are completed, their product costs are transferred from Raw Materials Inventory to Finished-Goods Inventory. ⊚ true ⊚ false

86) Manufacturing overhead is a pool of indirect production costs that must somehow be attached to each unit manufactured. ⊚ true ⊚ false

87) In a public accounting firm, for example, costs are assigned to an audit engagement in much the same way they are assigned to a single batch of tables by a furniture manufacturer. ⊚ true ⊚ false

88) In traditional product-costing systems, the measure of productive activity is usually some volume-based cost driver, like direct-labor hours. ⊚ true ⊚ false

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89) A predetermined overhead rate is calculated by dividing actual overhead cost by the actual amount of a cost driver used in the process. ⊚ true ⊚ false

90) Electricity costs that were incurred by a company's production processes should be debited to Utilities Expense. ⊚ true ⊚ false

91)

A production order for a job authorizes the release of material to production. ⊚ true ⊚ false

92) Under- or overapplied manufacturing overhead at year-end is most commonly charged or credited to Work-in-Process Inventory. ⊚ true ⊚ false

93)

The term "normal costing" refers to the use of job-costing systems. ⊚ true ⊚ false

94)

Actual costing avoids the profitability of cyclicality. ⊚ true ⊚ false

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95) Two-stage cost allocation uses a first stage to assign all product costs to production departments and then a second stage to apply different cost drivers to improve efficiency. ⊚ true ⊚ false

96)

The two-stage cost allocation actually has three types of allocation involved. ⊚ true ⊚ false

97) Job-order costing methods are used in a variety of service industry firms and nonprofit organizations. ⊚ true ⊚ false

98)

Nonmanufacturing firms typically refer to their service production processes as jobs. ⊚ true ⊚ false

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Answer Key Test name: Chap 03_6e_Cornett 1) D 2) D 3) E 4) C 5) C 6) C 7) D 8) E 9) A 10) A 11) E 12) D 13) A 14) E 15) C 16) C 17) A 18) B 19) A 20) B 21) D 22) D 23) D 24) D 25) E 26) B Version 1

27) C 28) C 29) B 30) A 31) E 32) C 33) B 34) A 35) B 36) A 37) A 38) E 39) D 40) A 41) D 42) A 43) C 44) A 45) B 46) A 47) A 48) B 49) A 50) B 51) A 52) B 53) C 54) D 55) A 56) C Version 1

57) E 58) B 59) B 60) D 61) D 62) D 63) B 64) B 65) C 66) B 67) B 68) B 69) E 70) A 71) C 72) C 73) E 74) D 75) D 76) B 77) B 78) D 79) B 80) D 81) B 82) FALSE 83) TRUE 84) TRUE 85) FALSE 86) TRUE Version 1

87) TRUE 88) TRUE 89) FALSE 90) FALSE 91) FALSE 92) FALSE 93) FALSE 94) FALSE 95) FALSE 96) TRUE 97) TRUE 98) FALSE

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Chapter 03 – 6e Cornet- Manually Graded 1) Troski Corporation sells a number of products to groups that provide educational workshops and seminars. One of the products involves a combination leather case and note pad. The company purchases the case and pad combination from a supplier and encloses a $3 pen that contains the educational groups' name and logo. Troski began to carry this product at the start of 20x3, acquiring 12,500 cases from Executive Supply for $87,500 along with an identical number of pens from Accent Goods. During 20x3, 9,500 of the cases and pens were issued to Troski’s assembly operation where the pen is added. Eighty percent of these cases were completed as of December 31, and a review of the December 31 finished-goods inventory found 2,600 completed cases in the warehouse. Conversations with salespeople revealed that 70 finished sets were used in various company marketing activities throughout the year. Required: A. Determine the cost of the cases and pens that would appear in Troski’s raw materials, work in process, and finished-goods inventory as of December 31. B. Determine the cost of the cases and pens that would appear in the company's cost of goods sold for 20x3.

Bowers Industries’ beginning and ending inventories for the month of September are: September 1

September 30

Direct materials

$67,000

$62,000

Work-in-process

145,000

171,000

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Finished Goods

85,000

78,000

Production data for the month of September are: Direct labor

$200,000

Actual overhead

132,000

Direct materials purchased

163,000

Transportation in

4,000

Purchase returns and allowances

2,000

Bowers uses one overhead control account and charges overhead to production at 70% of direct labor cost. The company does not formally recognize over/underapplied overhead until year-end. Required: (a) What are the company’s prime costs for September? (b) What are the company’s total manufacturing costs for September? (c) What is the amount of costs of goods transferred to finished goods inventory for September? (d) What is the amount of cost of goods sold for September?

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The selected data that follow relate to the Underwood Furniture Company. Direct material purchased on account

$160,000

Direct material used

79,000

Direct labor

170,000

Manufacturing overhead incurred

100,000

Manufacturing overhead applied

90,000

During the year, products costing $310,000 were completed, and products costing $316,000 were sold on account for $455,000. Required: Prepare journal entries to record the preceding transactions and events.

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4) Pincus Corporation, which uses a job-costing system, had two jobs in process at the start of 20x1: job no. 59 ($95,000) and job no. 60 ($39,500). The following information is available: · The company applies manufacturing overhead on the basis of machine hours. Budgeted overhead and machine activity for the year were anticipated to be $720,000 and 20,000 hours, respectively. · The company worked on three jobs during the first quarter. Direct materials used, direct labor incurred, and machine hours consumed were: Job No.

Direct Materials

Direct Labor

Machine Hours

$18,000

$45,000

900

---

25,000

600

37,000

35,000

1,200

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· Manufacturing overhead during the first quarter included charges for depreciation ($20,000), indirect labor ($50,000), indirect materials used ($4,000), and other factory costs ($108,700). · Pincus completed job no. 59 and job no. 60. Job no. 59 was sold for cash, producing a gross profit of $24,600 for the firm. Required: A. Determine the company's predetermined overhead application rate. B. Prepare journal entries as of March 31 to record the following. (Note: Use summary entries where appropriate by combining individual job data.) 1. The issuance of direct material to production, and the direct labor incurred. 2. The manufacturing overhead incurred during the quarter. 3. The application of manufacturing overhead to production. 4. The completion of job no. 59 and no. 60. 5. The sale of job no. 59.

5) Bartlett Corporation, which began operations on January 1 of the current year, reported the following information: Estimated manufacturing overhead

$600,000

Actual manufacturing overhead

639,000

Estimated direct labor cost

480,000

Actual direct labor cost

500,000

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Total debits in the Work-in-Process account

1,880,000

Total credits in the Finished-Goods account

920,000

Bartlett uses a normal cost system and applies manufacturing overhead to jobs on the basis of direct labor cost. A 60% markup is added to the cost of completed production when finished goods are sold. On December 31, job no. 18 was the only job that remained in production. That job had direct-material and direct-labor charges of $16,500 and $36,000, respectively. Required: A. Determine the company's predetermined overhead rate. B. Determine the amount of under- or overapplied overhead. Be sure to label your answer. C. Compute the amount of direct materials used in production. D. Calculate the balance the company would report as ending work-in-process inventory. E. Prepare the journal entry (ies) needed to record Bartlett’s sales, which are all made on account.

6) Describe the types of manufacturing environments that would best be suited for (1) joborder costing and (2) process costing. Include two examples of manufacturers that would likely use job-cost systems.

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7) Describe how job-order costing concepts are used in professional service firms, such as law practices, hospitals, and governmental agencies.

8) Margin Call, Inc., which uses a job-costing system, is a labor-intensive firm, with many skilled craftspeople on the payroll. Job no. 789 was the only job in process on January 1, having costs of $22,500 as of that date. Direct materials used and direct labor incurred during January were: Job No.

Direct Materials

Direct Labor

789

$2,000

$6,000

790

9,000

10,000

791

14,000

8,000

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Job no. 791 was the only job in production as of January 31. Required: A. Should Margin Call use direct labor or machine hours as a cost driver. Why? B. Assume that the company decided to use direct labor as its cost driver. If the budgeted amounts of direct labor and manufacturing overhead are anticipated to be $200,000 and $300,000, respectively, what is the firm's predetermined overhead rate? C. Compute the cost of work-in-process inventory as of January 31. D. Compute the cost of jobs completed during January. E. Suppose that the company sold all of its completed jobs, adding a 40% markup to cost. How much would the firm report as sales revenue?

9) Garrison, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies manufacturing overhead on the basis of direct-labor cost. The following information relates to 20x3: ● Budgeted direct labor and manufacturing overhead were anticipated to be $200,000 and $250,000, respectively. ● Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and direct labor: Job No.

Direct Materials

Direct Labor

$145,000

$35,000

320,000

65,000

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55,000

80,000

● Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost. Job no. 3 remained in production. ● Actual manufacturing overhead by year-end totaled $233,000. Garrison adjusts all under- and overapplied overhead to cost of goods sold. Required: A. Compute the company's predetermined overhead application rate. B. Compute Garrison’s ending work-in-process inventory. C. Determine Garrison’s sales revenue. D. Was manufacturing overhead under- or overapplied during 20x3? By how much? E. Present the necessary journal entry to handle under- or overapplied manufacturing overhead at year-end. F. Does the presence of under- or overapplied overhead at year-end indicate that Garrison’s accountants made a serious error? Briefly explain.

10) Altman Corporation uses a job-cost system and applies manufacturing overhead to products on the basis of machine hours. The company's accountant estimated that overhead and machine hours would total $800,000 and 50,000, respectively, for 20x1. Actual costs incurred follow. Direct material used

$250,000

Direct labor

300,000

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Manufacturing overhead

816,000

The manufacturing overhead figure presented above excludes $27,000 of sales commissions incurred by the firm. An examination of job-cost records revealed that 18 jobs were sold during the year at a total cost of $2,960,000. These goods were sold to customers for $3,720,000. Actual machine hours worked totaled 51,500, and Altman adjusts under- or overapplied overhead at year-end to Cost of Goods Sold. Required: A. Determine the company's predetermined overhead application rate. B. Determine the amount of under- or overapplied overhead at year-end. Be sure to indicate whether overhead was under- or overapplied. C. Compute the company's adjusted cost of goods sold. D. What alternative accounting treatment could the company have used at year-end to adjust for under- or overapplied overhead? Is the alternative that you suggested appropriate in this case? Why?

11) Darrin Products uses a job-costing system for its units, which pass from the Machining Department, to the Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in contrast, the Assembly Department performs a number of manual-assembly activities. The company uses machine hours to apply manufacturing overhead to products in the Machining Department, and direct labor cost to apply manufacturing overhead to products in the Assembly Department. The following information relates to the Machining Department for the year just ended: Budgeted manufacturing overhead

$12,000,000

Actual manufacturing overhead

12,142,000

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Budgeted machine hours

800,000

Actual machine hours

794,000

The Machining Department data that follow pertain to job no. 775, the only job in production at year-end. Direct materials

$125,000

Direct labor cost

61,800

Machine hours

550

Required: A. Assuming the use of normal costing, calculate the predetermined overhead rate that is used in the Machining Department. B. Compute the cost of the Machining Department's year-end work-in-process inventory. C. Determine the amount that overhead was under- or overapplied during the year in the Machining Department. Indicate whether it is overapplied or underapplied. D. If Darrin disposes of the Machining Department's under- or overapplied overhead as an adjustment to Cost of Goods Sold, would the company's Cost-of-Goods-Sold account increase or decrease? Explain. E. How much overhead would have been charged to the Machining Department's Work-inProcess account during the year? F. Comment on the appropriateness of direct labor cost to apply manufacturing overhead in the Assembly Department.

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12) Kwik Products uses a predetermined overhead application rate of $18 per labor hour. A review of the company's accounting records revealed budgeted manufacturing overhead for the period of $621,000, applied manufacturing overhead of $590,400, and overapplied overhead of $11,900. Required: A. Determine Kwik’s actual labor hours, budgeted labor hours, and actual manufacturing overhead. B. Present the necessary year-end journal entry to handle the overapplied overhead, assuming that the firm allocates over- or underapplied overhead to Cost of Goods Sold.

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13) A review of the records of Protix, Inc., a new company, disclosed the following year-end information: ·Manufacturing Overhead account: Contained debits of $872,000, which included $20,000 of sales commissions. ·Work-in-Process Inventory account: Contained charges for overhead of $875,000. ·Cost-of-Goods-Sold account: Contained a year-end debit balance of $3,680,000. This amount was computed prior to any year-end adjustment for under- or overapplied overhead. Pilgrim applies manufacturing overhead to production by using a predetermined rate of $20 per machine hour. Budgeted overhead for the period was anticipated to be $900,000. Required: A. Determine the actual manufacturing overhead for the year. B. Determine the amount of manufacturing overhead applied to production. C. Is overhead under- or overapplied? By how much? D. Compute the adjusted cost-of-goods-sold figure that should be disclosed on the company's income statement. E. How many machine hours did Protix actually work during the year? F. Compute budgeted machine hours for the year.

14) Discuss the reason for (1) allocating overhead to the cost of production jobs, and (2) applying overhead using a predetermined rate instead of an actual overhead rate.

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15) Caldon Products started and finished job no. C19 during June. The job required $15,000 of direct material and 75 hours of direct labor at $12 per hour. The predetermined overhead rate is $16 per direct labor hour. During June, direct materials requisitions for all jobs totaled $149,000; the total direct labor hours and cost were 6,200 hours at $12 per hour; and the total cost of jobs completed was $337,500. All of these figures include data that pertain to job no. C19. Required: A. Prepare journal entries that summarize June's total activity. B. Determine the cost of job no. C19.

16) Holdren Industries started and finished job no. D45 during April. The job required $6,400 of direct material and 50 hours of direct labor at $18 per hour. The predetermined overhead rate is $6 per direct labor hour. Required: Prepare journal entries to record the incurrence of production costs and the completion of job D45.

17) Manufacturing overhead is applied to production. A. Describe several situations that may give rise to underapplied overhead. B. Assume that underapplied manufacturing overhead is treated as an adjustment to Cost of Goods Sold. Explain why an underapplication of overhead increases Cost of Goods Sold.

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18) Layman, Inc., has just completed job nos. 78 and 79, which were similar in terms of complexity, production processes, and units manufactured. Job no. 78 was manufactured by Joe Bingham, who earns $14 per hour, whereas job no. 79 was completed by Susan Fortner, who earns $20 per hour. If Joe and Susan are equally efficient, would the company be better off using direct labor cost or direct labor hours as the cost driver in its predetermined overhead rate? Briefly explain.

19) When a single, volume-based cost driver (or activity base) is used to apply manufacturing overhead, what is the managerial accountant’s primary objective in selecting the cost driver?

20) Briefly describe the stages used in the two-stage allocation process for assigning overhead costs.

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21) Farnham & Associates is a literary consulting firm in New York. The following costs were incurred in a project to design a dust cover for a new novel: Direct material

$29,000

Direct professional labor

42,000

The firm's budget for the year included the following estimates: Budgeted overhead

$800,000

Budgeted direct professional labor

640,000

Overhead is applied to contracts by using a predetermined overhead rate that is based on direct professional labor cost. Actual professional labor during the year was $655,000 and actual overhead was $793,000. Required: A. Determine the total cost to design the cover of the novel. B. Calculate the under- or overapplied overhead for the year. Be sure to label your answer.

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22) Farmington and Associates designs relatively small sports stadiums and arenas at various sites throughout the country. The firm's accountant prepared the following budget for the upcoming year: Professional staff salaries

$3,000,000

Administrative support staff

800,000

Other operating costs

200,000

Eighty percent of professional staff salaries are directly traceable to client projects, a figure that falls to 60% for the administrative support staff and other operating costs. Traceable costs are charged directly to client projects; nontraceable costs, on the other hand, are treated as firm overhead and charged to projects by using a predetermined overhead application rate. Farmington had one project in process at year-end: an arena that was being designed for Toll County. Costs directly chargeable to this project were: Professional staff salaries

$90,000

Administrative support staff

17,300

Other operating costs

6,700

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Required: A. Determine Farmington’s overhead for the year and the firm's predetermined overhead application rate. The rate is based on costs directly chargeable to firm projects. B. Compute the cost of the Toll County arena project as of year-end. C. Present three examples of "other operating costs" that might be directly traceable to the Toll County project.

23) Bonanza Enterprises provides consulting services and uses a job-order system to accumulate the cost of client projects. Traceable costs are charged directly to individual clients; in contrast, other costs incurred by Bonanza, but not identifiable with specific clients, are charged to jobs by using a predetermined overhead application rate. Clients are billed for directly chargeable costs, overhead, and a markup. Bonanza anticipates the following costs for the upcoming year: Percentage of Cost Directly Traceable to Clients

Cost

Professional staff salaries

$5,000,000

80 %

Administrative support staff

600,000

Travel

200,000

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Other Operating costs

200,000

Total

$6,000,000

Bonanza’s partners desire to make a $480,000 profit for the firm and plan to add a percentage markup on total cost to achieve that figure. On May 14, Bonanza completed work on a project for Laramie Manufacturing. The following costs were incurred: professional staff salaries, $68,000; administrative support staff, $8,900; travel, $10,500; and other operating costs, $2,600. Required: A. Determine Bonanza’s total traceable costs for the upcoming year and the firm's total anticipated overhead. B. Calculate the predetermined overhead rate. The rate is based on total costs traceable to client jobs. C. What percentage of total cost will Bonanza add to each job to achieve its profit target? D. Determine the total cost of the Laramie Manufacturing project. How much would Laramie be billed for services performed?

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Answer Key Test name: Chap 03_6e_Cornett_Manually Graded

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Chapter 04 – 6e Cornett 1)

What is the missing amount in this physical flow of units?

Work in process, August 1 Units started in August

9,000 tons ?

Units completed during August

19,000

Work in process, August 31

2,000 tons

A) 10,000 tons B) 12,000 tons C) 8,000 tons D) 30,000 tons E) None of these answers is correct.

What is the missing amount in this physical flow of units?

Work in process, April 1 Units started in April Units completed during April

100,000 gallons 850,000 gallons ?

Work in process, April 30

200,000 gallons

A) 950,000 gallons B) 650,000 gallons C) 750,000 gallons D) 1,150,000 gallons E) None of these answers is correct.

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What is the missing amount in this physical flow of units?

Work in process, August 1 Units started in August Units completed during August Work in process, August 31

13,000 liters 1,500 liters 9,200 liters ? liters

A) 20,700 liters B) 23,700 liters C) 5,300 liters D) 2,300 liters E) None of these answers is correct.

Which method of process costing is almost always used in practice? A) Weighted average method B) LIFO method C) Straight-line method D) Accelerated method E) None of these answers is correct.

5) Which of the following is a nonmanufacturing business where process costing would most likely be used? A) A beauty shop. B) A tailoring shop. C) A laboratory that tests water samples for lead D) A furniture repair shop. E) An auto body shop.

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Process costing is used to account for:

A) large numbers of identical products that are produced in a continuous manufacturing environment. B) small numbers of products that are produced in batches. C) raw materials that are converted directly to finished goods. D) finished goods that are refined and processed further. E) large numbers of products that are produced in a non-repetitive process.

7) Which of the following manufacturers would most likely not use a process-cost accounting system? A) A producer of computer monitors. B) A paint manufacturer. C) A producer of frozen orange juice. D) A builder of customized yachts. E) A lumber mill.

Process costing would likely be used in all of the following industries except: A) petroleum refining. B) chemicals. C) truck tire manufacturing. D) wood pulp production. E) automobile repair.

Which of the following companies would likely use a process-costing system? Custom Furniture Manufacturer

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Chemical Producer

Soft Drink Bottler

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

10) Which of the following statements about similarities between process costing and joborder costing are true? 1.I. Both systems assign production costs to units of output. 2.II. Both systems require extensive knowledge of financial accounting. 3.III. The flow of costs through the manufacturing accounts is essentially the same.

A) I only. B) I and III. C) II and III. D) III only. E) I, II, and III.

11)

Companies that use a process-cost accounting system would:

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A) establish a separate Work-in-Process Inventory account for each manufacturing department. B) establish a separate Finished-Goods Inventory account for each manufacturing department. C) pass completed production directly to Cost of Goods Sold. D) charge goods produced with actual overhead amounts rather than applied overhead amounts. E) eliminate the need for the Finished-Goods Inventory account.

12)

Which of the following statements is false?

A) In job-order costing, costs are accumulated by job order. B) In process costing, costs are accumulated by department. C) In process costing, the cost per unit in a department is found by spreading the period's manufacturing costs over the production activity. D) In process costing, the total cost of each unit is found by dividing the total factory costs by the number of units completed. E) In job-order costing, the unit cost is found by dividing the job's total cost by the job's total units.

13)

In a process-costing system, manufacturing costs are accumulated by: A) batch. B) batch and time period. C) department, only. D) department and time period, only. E) department or process, and time period.

14) Which of the following choices correctly shows how costs are accumulated in a processcosting system?

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By Batch

By Time Period

By Process or Department

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

15) Mulligan, Inc., which uses a process-cost accounting system, passes completed production from Department A to Department B for further manufacturing. The journal entry to record completed production in Department A requires: A) a debit to Work-in-Process Inventory and a credit to Finished-Goods Inventory. B) a debit to Finished-Goods Inventory and a credit to Work-in-Process Inventory. C) a debit to Finished-Goods Inventory and a credit to Work-in-Process Inventory: Department A. D) a debit to Work-in-Process Inventory: Department A and a credit to Work-in-Process Inventory: Department B. E) a debit to Work-in-Process Inventory: Department B and a credit to Work-in-Process Inventory: Department A.

16) Gulliver, Inc., which uses a process-costing system, transfers completed production from Department no. 1 to Department no. 2 for further work. Which of the following best describes the account that would be debited to record this transfer?

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A) Cost of Goods Transferred. B) Finished-Goods Inventory: Department no. 1. C) Finished-Goods Inventory: Department no. 2. D) Work-in-Process Inventory: Department no. 1. E) Work-in-Process Inventory: Department no. 2.

17) Breight, Inc., which uses a process-costing system, transfers completed production from Department no. 1 to Department no. 2 for further work. Which of the following best describes the account that would be credited to record this transfer? A) Cost of Goods Transferred. B) Finished-Goods Inventory: Department no. 1. C) Finished-Goods Inventory: Department no. 2. D) Work-in-Process Inventory: Department no. 1. E) Work-in-Process Inventory: Department no. 2.

18) Harrington Industries, which uses a process-costing system, had a balance in its Work-inProcess account of $68,000 on January 1. The account was charged with direct materials, direct labor, and manufacturing overhead of $450,000 throughout the year. If a review of the accounting records determined that $86,000 of goods were still in production at year-end, Harrington should make a journal entry on December 31 that includes: A) a debit to Cost of Goods Sold for $432,000. B) a credit to Finished-Goods Inventory for $432,000. C) a credit to Work-in-Process Inventory for $432,000. D) a debit to Finished-Goods Inventory for $86,000. E) a credit to Work-in-Process Inventory for $86,000.

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19) Hornsby has a single production department, and uses a process-costing system. The balance in its Work-in-Process account on January 1 was $68,000. The account was charged with direct materials, direct labor, and manufacturing overhead of $450,000 throughout the year. If a review of the accounting records determined that $86,000 of goods were still in production at year-end, Hornsby should make a journal entry on December 31 that includes: A) a debit to Cost of Goods Sold for $432,000. B) a debit to Finished-Goods Inventory for $432,000. C) a debit to Work-in-Process Inventory for $432,000. D) a debit to Finished-Goods Inventory for $86,000. E) a credit to Work-in-Process Inventory for $86,000.

20)

Unit costs in a process-costing system are derived by using: A) in-process units. B) completed units. C) physical units. D) equivalent units. E) a measure of activity other than those listed above.

21) Bratton Corporation had 6,500 units of work in process on April 1. During April, 19,100 units were completed and as of April 30, 5,100 units remained in production. How many units were started during April? A) 11,600. B) 17,700. C) 20,500. D) 30,700. E) None of the answers is correct.

22) Linder Corporation had 8,200 units of work in process on November 1. During November, 26,800 units were started and as of November 30, 7,900 units remained in production. How many units were completed during November? Version 1

A) 16,100. B) 26,500. C) 27,100. D) 42,800. E) None of the answers is correct.

23) Xin Co., had 3,000 units of work in process on April 1 that were 60% complete. During April, 10,000 units were completed and as of April 30, 4,000 units that were 40% complete remained in production. How many units were started during April? A) 8,600. B) 9,800. C) 11,000. D) 12,200. E) None of the answers is correct.

24) Forte Co., had 3,000 units of work in process on April 1 that were 60% complete. During April, 11,000 units were started and as of April 30, 4,000 units that were 40% complete remained in production. How many units were completed during April? A) 10,000. B) 9,800. C) 11,000. D) 12,200. E) None of the answers is correct.

25) Oxford, Inc., which uses a process-cost accounting system, began operations on January 1 of the current year. The company incurs conversion cost evenly throughout manufacturing. If Oxford started work on 3,000 units during the period and these units were 70% of the way through manufacturing, it would be correct to say that the company has:

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A) 3,000 physical units in production. B) 2,100 completed units. C) 900 in-process units. D) 900 equivalent units of production. E) 3,000 equivalent units of production.

26) Which of the following data are needed to calculate total equivalent units under the weighted-average method? A) Work-to-date on ending work in process, units started during the period. B) Units completed during the period, work-to-date on ending work in process. C) Work to complete beginning work in process, work-to-date on ending work in process. D) Work to complete beginning work in process, units completed, and work done on ending work in process. E) Units completed, work to complete beginning work in process.

27) Covington Corporation uses a process-cost accounting system. The company adds direct materials at the start of its production process; conversion cost, on the other hand, is incurred evenly throughout manufacturing. The firm has no beginning work-in-process inventory; its ending work in process is 40% complete. Which of the following sets of percentages would be used to calculate the correct number of equivalent units in the ending work-in-process inventory? A) Materials, 40%; conversion cost, 40%. B) Materials, 40%; conversion cost, 100%. C) Materials, 100%; conversion cost, 40%. D) Materials, 100%; conversion cost, 60%. E) Materials, 100%; conversion cost, 100%.

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28) Ashley Corporation uses a process-cost accounting system. The company adds direct materials and direct labor at the start of its production process; overhead cost is incurred evenly throughout manufacturing. The firm has no beginning work-in-process inventory; its ending work in process is 40% complete. Which of the following sets of percentages would be used to calculate the correct number of equivalent units in the ending work-in-process inventory? A) Materials, 100%; labor, 100%; overhead cost, 40%. B) Materials, 100%; labor, 100%; overhead cost, 100%. C) Materials, 100%; labor 40%; overhead cost, 40%. D) Materials, 40%; labor, 40%; overhead cost, 60%. E) Materials, 40%; labor, 40%; overhead cost, 100%.

29) Alton Company uses a process-costing system for its single product. Material A is added at the beginning of the process; in contrast, material B is added when the units are 75% complete. The firm's ending work-in-process inventory consists of 6,000 units that are 80% complete. Which of the following correctly expresses the equivalent units of production with respect to materials A and B in the ending work-in-process inventory? A) A, 4,800; B, 0. B) A, 4,800; B, 4,800. C) A, 6,000; B, 0. D) A, 6,000; B, 4,800. E) A, 6,000; B, 6,000.

30) Agee Company uses a process-costing system for its single product. Material A is added at the beginning of the process; in contrast, material B is added when the units are 50% complete. The firm's ending work-in-process inventory consists of 4,000 units that are 75% complete. Which of the following correctly expresses the equivalent units of production with respect to materials A and B in the ending work-in-process inventory?

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A) A, 3,000; B, 0. B) A, 3,000; B, 3,000. C) A, 4,000; B, 0. D) A, 4,000; B, 4,000. E) A, 4,000; B, 3,000.

31) Warren Industries uses a process-costing system for its single product, which is manufactured from Material X and Material Y. X and Y are introduced to the product as follows: Material X: Added at the beginning of manufacturing Material Y: Added at the 75% stage of completion The company started and completed 40,000 units during the period, and had an ending work-inprocess inventory amounting to 8,000 units, 20% complete. Which of the following choices correctly expresses the total equivalent units of production for Material X and Material Y? Material X

Material Y

46,000

41,600

46,000

48,000

40,000

48,000

41,600

48,000

46,000

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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32) Norton Textile Co. manufactures a variety of fabrics. All materials are introduced at the beginning of production; conversion cost is incurred evenly through manufacturing. The Weaving Department had 2,000 units of work in process on April 1 that were 30% complete as to conversion costs. During April, 9,000 units were completed and on April 30, 4,000 units remained in production, 40% complete with respect to conversion costs. The equivalent units of direct materials for April total: A) 9,000. B) 13,000. C) 13,600. D) 14,400. E) 15,000.

33) Norton Textile Co. manufactures a variety of fabrics. All materials are introduced at the beginning of production; conversion cost is incurred evenly through manufacturing. The Weaving Department had 2,000 units of work in process on April 1 that were 30% complete as to conversion costs. During April, 9,000 units were completed and on April 30, 4,000 units remained in production, 40% complete with respect to conversion costs. The equivalent units of conversion for April total: A) 9,000. B) 10,600. C) 11,200. D) 12,000. E) 12,600.

34) Fulton Corporation adds all materials at the beginning of production and incurs conversion cost evenly throughout manufacturing. The company completed 70,000 units during the year and had 12,000 units in process at year end, 20% complete with respect to conversion cost. Equivalent units for the year total:

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A) materials, 70,000; conversion, 70,000. B) materials, 70,000; conversion, 2,400. C) materials, 72,400; conversion, 72,400. D) materials, 82,000; conversion, 72,400. E) materials, 82,000; conversion, 82,000.

35) Gutierrez, which uses a process-costing system, adds all material at the beginning of production and incurs conversion cost evenly throughout manufacturing. The information that follows relates to the period just ended: Units started and completed: 75,000 Units in ending work-in-process inventory: 15,000, 60% complete Which of the following choices correctly expresses the total equivalent units of production with respect to material and conversion cost? Material

Conversion

75,000

84,000

90,000

81,000

90,000

84,000

90,000

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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36) Domkowski began operations on January 1 of the current year. The company uses a process-costing system, and conversion cost is incurred evenly throughout manufacturing. By January 31, the firm had completed 56,000 units. Which of the following statements is true about the ending work-in-process inventory if equivalent units for conversion cost totaled 59,000 units? A) There is no ending work-in-process inventory. B) The ending work-in-process inventory totaled 3,000 physical units. C) The ending work-in-process inventory of 10,000 physical units was 30% complete. D) The ending work-in-process inventory of 20,000 physical units was 85% complete. E) More than one of the other answers is true.

37) Mortensen Industries, which uses a process-costing system, adds material at the beginning of production and incurs conversion cost evenly throughout manufacturing. The following selected information was taken from the company's accounting records: Total equivalent units of materials: 5,000 Total equivalent units of conversion: 4,400 Units started and completed during the period: 3,500 On the basis of this information, the ending work-in-process inventory's stage of completion is: A) 40%. B) 60%. C) 70%. D) 80%. E) some other percentage not listed.

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38) Mohawk Machining, which uses a process-costing system, adds material at the beginning of production and incurs conversion cost evenly throughout manufacturing. The following selected information was taken from the company's accounting records: Total equivalent units of materials: 8,000 Total equivalent units of conversion: 7,400 Units started and completed during the period: 6,500 On the basis of this information, the ending work-in-process inventory's stage of completion is: A) 80%. B) 70%. C) 60%. D) 40%. E) some other percentage

39) Corrigan, Inc. overstated the percentage of work completed with respect to conversion cost on the ending work-in-process inventory. What is the effect of this overstatement on conversion-cost equivalent units and physical units manufactured, respectively? A) Overstated, overstated. B) Overstated, understated. C) Overstated, none. D) None, overstated. E) None, none.

40) St. Onge, Inc. uses a process-costing system. A newly-hired accountant identified the following procedures that must be performed by the close of business on Friday: 1—Calculation of equivalent units 2—Analysis of physical flows of units 3—Assignment of costs to completed units and units still in process 4—Calculation of unit costs Which of the following choices correctly expresses the proper order of the preceding tasks? Version 1

A) 1, 2, 3, 4. B) 1, 2, 4, 3. C) 1, 4, 3, 2. D) 2, 1, 4, 3. E) 2, 1, 3, 4.

41) Lakeland Chemical manufactures a product called Zing. Direct materials are added at the beginning of the process, and conversion activity occurs uniformly throughout production. The beginning work-in-process inventory is 60% complete with respect to conversion; the ending work-in-process inventory is 20% complete. The following data pertain to May: Units Work in process, May 1

15,000

Units started during May

60,000

Units completed and transferred out

68,000

Work in process, May 31

7,000

Total

Direct Materials

Conversion Costs

41,250

Costs: Work in process, May 1 Costs incurred during May Totals

234,630 $ 275,880

16,500 72,000

88,500

24,750 162,630

187,380

Using the weighted-average method of process costing, the equivalent units of direct materials total:

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A) 68,000. B) 69,400. C) 74,000. D) 75,000. E) None of the answers is correct.

42) Lakeland Chemical manufactures a product called Zing. Direct materials are added at the beginning of the process, and conversion activity occurs uniformly throughout production. The beginning work-in-process inventory is 60% complete with respect to conversion; the ending work-in-process inventory is 20% complete. The following data pertain to May: Units Work in process, May 1

15,000

Units started during May

60,000

Units completed and transferred out

68,000

Work in process, May 31

7,000

Total

Direct Materials

Conversion Costs

41,250

Costs: Work in process, May 1 Costs incurred during May Totals

234,630 $ 275,880

16,500 72,000

88,500

24,750 162,630

187,380

Using the weighted-average method of process costing, the equivalent units of conversion activity total:

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A) 60,400. B) 68,000. C) 69,400. D) 74,000. E) None of the answers is correct.

43) Lakeland Chemical manufactures a product called Zing. Direct materials are added at the beginning of the process, and conversion activity occurs uniformly throughout production. The beginning work-in-process inventory is 60% complete with respect to conversion; the ending work-in-process inventory is 20% complete. The following data pertain to May: Units Work in process, May 1

15,000

Units started during May

60,000

Units completed and transferred out

68,000

Work in process, May 31

7,000

Total

Direct Materials

Conversion Costs

41,250

Costs: Work in process, May 1 Costs incurred during May Totals

234,630 $ 275,880

16,500 72,000

88,500

24,750 162,630

187,380

Using the weighted-average method of process costing, the cost per unit of direct materials is:

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A) $1.17. B) $1.18. C) $1.20. D) $1.28. E) None of the answers is correct.

44) Lakeland Chemical manufactures a product called Zing. Direct materials are added at the beginning of the process, and conversion activity occurs uniformly throughout production. The beginning work-in-process inventory is 60% complete with respect to conversion; the ending work-in-process inventory is 20% complete. The following data pertain to May: Units Work in process, May 1

15,000

Units started during May

60,000

Units completed and transferred out

68,000

Work in process, May 31

7,000

Total

Direct Materials

Conversion Costs

41,250

Costs: Work in process, May 1 Costs incurred during May Totals

234,630 $ 275,880

16,500 72,000

88,500

24,750 162,630

187,380

Using the weighted-average method of process costing, the cost per unit of conversion activity is:

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A) $2.50. B) $2.53. C) $2.70. D) $2.76. E) None of the answers is correct.

45) Lakeland Chemical manufactures a product called Zing. Direct materials are added at the beginning of the process, and conversion activity occurs uniformly throughout production. The beginning work-in-process inventory is 60% complete with respect to conversion; the ending work-in-process inventory is 20% complete. The following data pertain to May: Units Work in process, May 1

15,000

Units started during May

60,000

Units completed and transferred out

68,000

Work in process, May 31

7,000

Total

Direct Materials

Conversion Costs

41,250

Costs: Work in process, May 1 Costs incurred during May Totals

234,630 $ 275,880

16,500 72,000

88,500

24,750 162,630

187,380

Using the weighted-average method of process costing, the cost of goods completed and transferred during May is:

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A) $249,560. B) $250,240. C) $258,400. D) $263,840. E) None of the answers is correct.

46) Lakeland Chemical manufactures a product called Zing. Direct materials are added at the beginning of the process, and conversion activity occurs uniformly throughout production. The beginning work-in-process inventory is 60% complete with respect to conversion; the ending work-in-process inventory is 20% complete. The following data pertain to May: Units Work in process, May 1

15,000

Units started during May

60,000

Units completed and transferred out

68,000

Work in process, May 31

7,000

Total

Direct Materials

Conversion Costs

41,250

Costs: Work in process, May 1 Costs incurred during May Totals

234,630 $ 275,880

16,500 72,000

88,500

24,750 162,630

187,380

Using the weighted-average method of process costing, the total costs remaining in work in process on May 31 are:

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A) $17,480. B) $0. C) $25,640. D) $12,040. E) None of the answers is correct.

47) When calculating unit costs under the weighted-average process-costing method, the unit cost is based on: A) only the current period's manufacturing costs. B) only costs in the period's beginning work-in-process inventory. C) a summation of the costs in the beginning work-in-process inventory plus costs incurred in the current period. D) only costs incurred in previous accounting periods. E) a summation of the costs in the beginning work-in-process inventory plus costs to be incurred in the upcoming period.

48) When computing the conversion cost per equivalent unit under the weighted-average method of process costing, all of the following information would be needed except: A) the number of units completed during the current accounting period. B) the conversion work performed during the current period on the ending work-inprocess inventory. C) the conversion work performed during the current period on the beginning work-inprocess inventory. D) the conversion cost in the beginning work-in-process inventory. E) the conversion cost incurred during the current accounting period.

49) Barton Corporation, which adds materials at the beginning of production, uses a weighted-average process-costing system. Consider the data that follow.

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Number of Units 40,000

Cost of Materials $ 80,600

Started in June

60,000

124,400

Production completed

75,000

Ending work in process

25,000

Beginning work in process

The company's cost per equivalent unit for materials is: A) $1.24. B) $1.66. C) $1.67. D) $2.05. E) None of the answers is correct.

50) Peach Company uses a weighted-average process-costing system. Company records disclosed that the firm completed 40,000 units during the month and had 10,000 units in process at month-end, 20% complete. Conversion costs associated with the beginning work-in-process inventory amounted to $231,000, and amounts that relate to the current month totaled $966,000. If conversion is incurred uniformly throughout manufacturing, Peach's equivalent-unit cost is: A) $23.00. B) $23.94. C) $24.15. D) $28.50. E) None of the answers is correct.

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51) Universal Manufacturing uses a weighted-average process-costing system. All materials are introduced at the start of manufacturing, and conversion costs are incurred evenly throughout the process. The company's beginning and ending work-in-process inventories totaled 10,000 units and 15,000 units, respectively, with the latter units being 2/3 complete at the end of the period. Universal started 30,000 units into production and completed 25,000 units. Manufacturing costs follow. Beginning work in process: Materials, $60,000; conversion cost, $150,000 Current costs: Materials, $180,000; conversion cost, $480,000 Universal's equivalent-unit cost for materials is: A) $4.50. B) $6.00. C) $8.00. D) $9.60. E) None of the answers is correct.

52) Universal Manufacturing uses a weighted-average process-costing system. All materials are introduced at the start of manufacturing, and conversion costs are incurred evenly throughout the process. The company's beginning and ending work-in-process inventories totaled 10,000 units and 15,000 units, respectively, with the latter units being 2/3 complete at the end of the period. Universal started 30,000 units into production and completed 25,000 units. Manufacturing costs follow. Beginning work in process: Materials, $60,000; conversion cost, $150,000 Current costs: Materials, $180,000; conversion cost, $480,000 Universal's equivalent-unit cost for conversion cost is: A) $13.71. B) $18.00. C) $21.00. D) $25.20. E) None of the answers is correct.

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53) Gambino Construction adds materials at the beginning of production and incurs conversion cost uniformly throughout manufacturing. Consider the data that follow. Units Beginning work in process

20,000

Started in August

60,000

Production completed

55,000

Ending work in process, 40% complete

25,000

Conversion cost in the beginning work-in-process inventory totaled $120,000, and August conversion cost totaled $270,000. Assuming use of the weighted-average method, which of the following choices correctly depicts the number of equivalent units for conversion cost and the conversion cost per equivalent unit?

Equivalent Units: Conversion Costs 55,000

Conversion Cost Per Equivalent Unit $ 4.91

65,000

4.88

65,000

6.00

80,000

4.88

80,000

6.00

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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54) Which of the following are needed to calculate the total cost of the ending work-inprocess inventory under the weighted-average process-costing method? Unit Cost

Equivalent Units

Yes

Yes but only in specialized cases

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

55) Which of the following are needed under weighted-average process costing to calculate the cost of goods completed during the period? Unit Cost

Equivalent Units

Yes

Yes but only in specialized cases

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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56)

Equivalent-unit calculations are necessary to allocate manufacturing costs between: A) units completed and ending work in process. B) beginning work in process and units completed. C) units sold and ending work in process. D) cost of goods manufactured and beginning work in process. E) cost of goods manufactured and cost of goods sold.

57) Frankenberger Company, which uses a weighted-average process-costing system, had 7,000 units in production at the end of the current period that were 60% complete. Material A is introduced at the beginning of the process; material B is introduced at the end of the process; and conversion cost is introduced evenly throughout manufacturing. Equivalent-unit production costs follow. Material A: $12.50 Material B: $2.00 Conversion cost: $6.60 The cost of the company's ending work-in-process inventory is: A) $88,620. B) $115,220. C) $123,620. D) $147,700. E) None of the answers is correct.

58) Forrest Corporation, a new company, adds material at the beginning of its production process; conversion cost, in contrast, is incurred evenly throughout manufacturing. During May, the firm completed 15,000 units and had ending work in process of 2,000 units, 60% complete. Equivalent-unit costs were: materials, $15; conversion, $22. The cost of Forrest’s completed production is:

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A) $225,000. B) $330,000. C) $333,000. D) $555,000. E) None of the answers is correct.

59) Forrest Corporation, a new company, adds material at the beginning of its production process; conversion cost, in contrast, is incurred evenly throughout manufacturing. During May, the firm completed 15,000 units and had ending work in process of 2,000 units, 60% complete. Equivalent-unit costs were: materials, $15; conversion, $22. The cost of the company's ending work-in-process inventory is: A) $26,640. B) $44,400. C) $56,400. D) $74,000. E) None of the answers is correct.

60) Claremore Industries uses a weighted-average process-costing system. All materials are added at the beginning of the process; conversion costs are incurred evenly throughout production. The company finished 40,000 units during the period and had 15,000 units in progress at year-end, the latter at the 40% stage of completion. Total material costs amounted to $220,000; conversion costs were $414,000. The cost of goods completed is: A) $312,000. B) $414,000. C) $520,000. D) $634,000. E) None of the answers is correct.

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61) Claremore Industries uses a weighted-average process-costing system. All materials are added at the beginning of the process; conversion costs are incurred evenly throughout production. The company finished 40,000 units during the period and had 15,000 units in progress at year-end, the latter at the 40% stage of completion. Total material costs amounted to $220,000; conversion costs were $414,000. The cost of the ending work in process is: A) $54,000. B) $78,000. C) $114,000. D) $195,000. E) None of the answers is correct.

62)

Which of the following is a key document in a typical process-costing system? A) Departmental production report. B) Master schedule. C) Production budget. D) Sequential product report. E) Materials requirement report.

63) Which of the following is true concerning cost drivers for the predetermined overhead rate in a process-costing system?

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A) Predetermined overhead rates are not used in a process-costing system. B) If direct material cost is the cost driver, direct labor and direct materials may be combined into the single element of prime cost. C) If direct labor hours is the cost driver, direct labor and manufacturing overhead may be combined into the single element of conversion cost. D) If direct labor cost is the cost driver, direct labor and manufacturing overhead may be combined into the single element of conversion cost. E) Cost drivers are irrelevant in process-costing systems.

64) Operation costing might be used to determine the cost of all of the following products except: A) sweaters. B) automobiles. C) living-room sofas. D) dishwashing detergent. E) high-definition (HD) and surround-sound cables.

65) Which of the following statements about operation costing is (are) true? 1.I. Conversion costs are accumulated by department. 2.II. Direct material costs are accumulated by batch. 3.III. Operation costing is a hybrid product-costing system. A) I only. B) I and II only. C) I and III only. D) II and III only. E) I, II, and III.

66)

Operation costing:

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A) tends to parallel job-order costing with respect to the treatment of conversion cost. B) tends to parallel process costing with respect to the treatment of conversion cost. C) tends to parallel process costing with respect to the treatment of direct materials. D) would likely be used by a manufacturing plant that produces one model of a single product. E) is commonly known as a joint-costing system.

67) Which of the following best describes the procedures used in operation costing to assign direct-material and conversion costs to production? Direct-Material Costs

Conversion Costs

Similar to those in job costing.

Similar to those in process costing.

Similar to those in job costing.

Similar to those in process costing.

None of these answers is correct since operating costing is totally unlike both job costing and process costing.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

68) When determining the cost of a manufactured good under an operation-costing system, a company would:

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A) trace direct-material cost and actual conversion cost to each product produced. B) trace direct-material cost to each product produced and use a predetermined application rate for conversion cost. C) trace actual conversion cost to each product produced and use a predetermined application rate for direct material. D) use a predetermined application rate for both direct-material cost and conversion cost. E) often switch to a job-costing system to simplify recordkeeping procedures.

69)

All of the following statements about an operation-costing system are true except:

A) direct material and conversion costs are traced to each batch of product produced. B) direct-material cost is traced to each batch produced. C) conversion costs are applied to products on a departmental basis using a predetermined application rate. D) batches of product pass sequentially through the same processes. E) conversion activities are similar across product lines but direct materials differ significantly.

70) Xtreme Sports makes baseball bats. The company buys wood as a direct material. The company’s Shaping Department processes the bats, which are transferred to the Coating Department where a sealant is applied. The Shaping Department began manufacturing 20,000 Babe Ruth sluggers during the month of October. There was no beginning inventory. Costs in the Shaping Department for the month of October were:

Direct materials Conversion costs Total

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66,000 34,000

$ 100,000

A total of 16,000 bats were completed and transferred to the Coating Department; the remaining 4,000 bats were still in the Shaping Process at the end of the month. All of the Shaping Department’s direct materials were placed in process, but on average, only 25% of the conversion cost was applied to the ending work-in-process inventory. What is the cost of the units transferred to Xtreme Sports’ Coating Department? A) $80,000. B) $84,800. C) $100,000. D) $106,000. E) $75,000.

71) Xtreme Sports makes baseball bats. The company buys wood as a direct material. The company’s Shaping Department processes the bats, which are transferred to the Coating Department where a sealant is applied. The Shaping Department began manufacturing 20,000 Babe Ruth sluggers during the month of October. There was no beginning inventory. Costs in the Shaping Department for the month of October were:

Direct materials Conversion costs Total

66,000 34,000

$ 100,000

A total of 16,000 bats were completed and transferred to the Coating Department; the remaining 4,000 bats were still in the Shaping Process at the end of the month. All of the Shaping Department’s direct materials were placed in process, but on average, only 25% of the conversion cost was applied to the ending work-in-process inventory. What is the cost of the work-in-process inventory in Xtreme Sports’ Shaping Department at the end of October?

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A) $5,200. B) $15,200. C) $21,200. D) $25,000. E) $34,000.

72) The flow of costs through the manufacturing accounts is essentially the same in both process costing and job-order costing. ⊚ true ⊚ false

73) Companies that use a process-cost accounting system would establish a separate Workin-Process Inventory account for each manufacturing department. ⊚ true ⊚ false

74) Direct labor and manufacturing overhead often are combined into a single cost category termed conversion costs. ⊚ true ⊚ false

75)

When goods are sold, their costs are transferred to Finished Goods Inventory. ⊚ true ⊚ false

76) California Corporation overstated the percentage of work completed with respect to conversion cost on the ending work-in-process inventory. This overstatement caused conversioncost equivalent units to be overstated.

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⊚ ⊚

77)

true false

Equivalent units and physical units are the same in manufacturing inventories. ⊚ true ⊚ false

78) When calculating equivalent units using the weighted average method, the number of equivalent units of activity is calculated without making a distinction as to whether the activity occurred in the current accounting period or the preceding period. ⊚ true ⊚ false

79) When computing the cost per equivalent unit under the weighted-average method of process costing, the cost per equivalent unit for direct material is computed by dividing the total direct-material cost by the total equivalent units. ⊚ true ⊚ false

80) Equivalent-unit calculations are necessary to allocate manufacturing costs between units sold and ending work in process. ⊚ true ⊚ false

81) When the cutting process in a manufacturing firm has been finished and the goods are transferred into the assembly department, the journal entry to record the transfer will debit Finished Goods Inventory and credit Work in Process – Assembly. ⊚ true ⊚ false

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82)

Only normal costing may be used in conjunction with a process-costing system. ⊚ true ⊚ false

83) Under weighted-average process costing, unit-cost figures are weighted averages of costs incurred over two or more accounting periods. ⊚ true ⊚ false

84) A departmental production report under weighted-average process costing would most likely present total costs for two different processes. ⊚ true ⊚ false

85) Operation costing tends to parallel job-order costing with respect to the treatment of conversion cost. ⊚ true ⊚ false

86) A predetermined application rate for conversion costs is based on actual conversion costs divided by a budgeted cost driver. ⊚ true ⊚ false

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Answer Key Test name: Chap 04_6e_Cornett 1) B 2) C 3) C 4) A 5) C 6) A 7) D 8) E 9) D 10) B 11) A 12) D 13) E 14) D 15) E 16) E 17) D 18) C 19) B 20) D 21) B 22) C 23) C 24) A 25) A 26) B Version 1

27) C 28) A 29) E 30) D 31) C 32) B 33) B 34) D 35) D 36) C 37) B 38) C 39) C 40) D 41) D 42) C 43) B 44) C 45) D 46) D 47) C 48) C 49) D 50) D 51) B 52) B 53) C 54) A 55) B 56) A Version 1

57) B 58) D 59) C 60) C 61) C 62) A 63) D 64) D 65) E 66) B 67) B 68) B 69) A 70) B 71) B 72) TRUE 73) TRUE 74) TRUE 75) FALSE 76) TRUE 77) FALSE 78) TRUE 79) TRUE 80) FALSE 81) FALSE 82) FALSE 83) TRUE 84) FALSE 85) FALSE 86) FALSE Version 1

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Chapter 04 – 6e Cornet- Manually Graded 1) A considerable portion of the text's process-costing presentation illustrated the proper way to allocate manufacturing costs to the units completed during the period and the ending work-in-process inventory. For companies that have a single manufacturing department, the journal entry to recognize completed production involves a debit to Finished-Goods Inventory and a credit to Work-in-Process Inventory. Required: What journal entry, if any, is needed for these same companies to properly account for ending work in process?

2) Films Inc. manufactures various types of industrial strength film products and employs a process-costing system for its manufacturing operations. All direct materials are added at the beginning of the process, and conversion costs are incurred uniformly throughout the process. The company’s production schedule for March follows. Units

Work in process on March 1 (60% complete as to conversion)

1,500

Units started during March

4,500

Total units to account for

6,000

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Units from beginning work in process, which were completed and transferred out during October

1,000

Units started and completed during March

3,500

Work in process on March 31 (20% complete as to conversion)

1,500

Total units accounted for

6,000

Required: Calculate each of the following amounts using weighted-average process costing. 1. Equivalent units of direct material during March. 2. Equivalent units of conversion activity during March.

3) Boulder Building Company quarries rock for use in construction. The following data pertain to the company’s production during April. Work in process, April 1:

Direct material

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$ 95,000

Conversion

195,000

Costs incurred during April:

Direct material

$405,000

Conversion

685,000

The equivalent units of activity for April were as follows: 6,250 equivalent units of direct material and 2,000 equivalent units of conversion activity. Required: Calculate the cost per equivalent unit, for both direct material and conversion, during April. Use weighted-average process costing.

4) COLORWHEEL PAINT Company manufactures a variety of paint products. The following data are from the firm’s Tulsa plant. Work in process, April 1

2,000,000

gallons

Direct material

100%

complete

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Conversion

25%

complete

Units started in process during November

950,000

gallons

Work in process, April 30

240,000

gallons

Direct material

100%

complete

Conversion

80%

complete

Required: Compute the equivalent units of direct material and conversion for the month of November. Use the weighted-average method of process costing.

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5) Fedora, Inc, uses a weighted-average process-costing system and has one production department. All materials are introduced at the start of manufacturing; in contrast, conversion cost is incurred uniformly throughout production. The company had respective work-in-process inventories on May 1 and May 31 of 62,000 units and 70,000 units, the latter of which was 40% complete. The production supervisor noted that Fedora completed 100,000 units during the month. Costs in the May 1 work-in-process inventory were subdivided as follows: materials, $40,000; conversion, $90,000. During May, Fedora charged production with $300,000 of material and $710,000 of conversion, resulting in a material cost per equivalent unit of $2. Required: A. Determine the number of units that Fedora started during May. B. Compute the number of equivalent units with respect to conversion cost. C. Determine the conversion cost per equivalent unit. D. Compute the cost of the May 31 work-in-process inventory. E. What account would have been credited to record Fedora's completed production?

6) Limited Technology Corp. uses a weighted-average process-costing system. Material A is added at the start of production; packaging material is introduced at the end. Conversion costs are incurred evenly throughout manufacturing. The following selected data were extracted from the company's production report: Units completed

15,000

Ending work in process (units)

6,000

Equivalent units: conversion cost

16,800

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Equivalent units cost: material A ($)

Equivalent units cost: packaging ($)

Total conversion cost ($)

134,400

Required: A. Compute the equivalent-unit cost for conversion cost. B. How far into the manufacturing process is the ending work-in-process inventory? C. Would the total equivalent units for Material A and the packaging material be the same? Why? D. Compute the cost of goods completed during the period. E. Compute the cost of the ending work-in-process inventory. F. What account would be debited to record the cost of goods completed during the period?

7) California Products employs a process-costing system for its manufacturing operations. All materials are added at the beginning of the process, and conversion costs are incurred uniformly throughout production. The information that follows relates to September. Units

Work in process, September 1 (30% complete as to conversion)

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8,900

Units started in September

28,500

Total units to account for

37,400

Units completed during September

29,700

Work in process, September 30 (80% complete as to conversion)

7,700

Total units to account for

37,400

Required: A. Calculate equivalent units of direct material for September. B. Calculate equivalent units of conversion activity for September.

8) Zorbex Company refines a variety of petrochemical products. The following data pertain to the firm's Baton Rouge plant: Work in Process, August 1:

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100,000 gallons

Direct Material

100% complete

Conversion

25% complete

Units started into production

1,375,000 gallons

Work in Process, August 31:

120,000 gallons

Direct Material

100% complete

Conversion

80% complete

Required: Compute the equivalent units of direct materials and conversion for August.

9) Sun Chemicals uses a weighted-average process-costing system. The following data relate to May:

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Work in Process, May 1:

25,000 pounds

Direct Material

70% complete

Conversion

80% complete

Units started into production

80,000 pounds

Work in Process, May 31:

30,000 pounds

Direct Material

40% complete

Conversion

65% complete

Required: A. Calculate the number of pounds completed during May. B. Calculate equivalent units of materials and conversion for May. C. Does Sun introduce all of its direct materials at the very beginning of production? Explain your answer.

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10) Professor Jones is concerned that her students do not understand the concept of equivalent units. She has therefore prepared the following questions, to appear on an upcoming examination: Equivalent units are used in a process-costing accounting system. A. Explain the need for equivalent units and why separate equivalent-unit totals are calculated for direct materials and conversion cost. B. If an examination of goods in production at the end of the period revealed 12,000 units that are, on average, 75% complete, would it be correct to say that 9,000 units were finished during the period? Why? Required: Prepare a complete answer key that can be used in grading the examination questions.

11) Basil Manufacturing uses a weighted-average process-costing system. The following figures pertain to July: Equivalent units

Physical units

Equivalent units Conversion

Materials

Units completed

120,000

Ending work in process

40,000

18,000

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All materials are introduced at the start of the process, and conversion cost is incurred evenly throughout production. The company used direct materials that cost $640,000; conversion amounted to $8 per equivalent unit. Required: A. Calculate the direct materials cost per equivalent unit. B. Calculate the cost of units completed and transferred. C. What percentage of conversion work will be performed on the 40,000-unit ending work-inprocess inventory during August? D. In all likelihood, were all of the 120,000 completed units begun in July? Explain.

12) Minnon, Inc., uses a weighted-average process-costing system. All materials are introduced at the beginning of production; conversion cost is incurred evenly throughout manufacturing. The following information pertains to April: Beginning Work in Process (80% complete)

9,000 units

Goods completed during April

53,000 units

Ending work in process (30% complete)

12,000 units

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The company's accountant has already computed the cost per equivalent unit, as follows: materials, $5; conversion, $14. Required: Calculate the cost of goods completed during April and the cost of the ending work-in-process inventory.

13)

Markus Corporation reported the following as of February 1, (weighted-average method). Work in Process: Feb. 1

Direct material

$42,000

Conversion cost

$20,000

February production costs:

Direct material

470,000

Conversion cost

280,000

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Conversations with the production supervisor revealed that materials are introduced at the start of the process and conversion cost is incurred evenly throughout manufacturing. The company started 29,000 units during the month. Goods in process at the beginning and end of February totaled 3,000 units and 5,000 units, respectively, the latter batch being 60% complete. Just prior to leaving on vacation, a trusted staff assistant was asked to compute the cost of February's ending work-in-process inventory. Her calculations showed a huge rise in unit cost when compared with the February 1 figures, soaring to $250 [($470,000 + $280,000) ÷ 3,000 units (5,000 units ÷ 60%)]. Required: A. Did the staff assistant make any errors in her calculations? Explain. B. Analyze the company's production volume and determine the proper equivalent-unit figures for February. C. Calculate the proper unit costs for February. D. Calculate the cost of the February 28 work-in-process inventory.

14) Frankoff Company had a beginning work-in-process inventory of 30,000 units on June 1. These units contained $120,000 of direct materials and $272,000 of conversion cost. The following data relate to activity during June: Production completed (units)

70,000

Ending work in process, 60% complete (units)

20,000

Direct materials used

$258,000

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Conversion cost

$695,600

Frankoff uses a weighted-average process-costing system. All materials are added at the start of manufacturing; in contrast, conversion cost is incurred evenly throughout production. Required: A. Compute the total equivalent units for direct material and conversion cost. B. Compute the cost per equivalent unit of direct material and conversion cost. C. Determine the cost of completed production. D. Determine the cost of the June 30 work in process.

15) On May 1, Diggton Company had a work-in-process inventory of 10,000 units. The units were 100% complete for material and 30% complete for conversion, with respective costs of $30,000 and $1,850. During the month, 150,000 units were completed and transferred to finished goods. The May 31 ending work-in-process inventory consisted of 10,000 units that were 100% complete with respect to materials and 80% complete with respect to conversion. Costs added during the month were $330,000 for materials and $503,750 for conversion. Required: Using the weighted-average method, calculate: A. total equivalent units for material and conversion. B. the cost per equivalent unit for material and conversion. C. the cost transferred to finished goods. D. the cost of ending work in process.

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16) Baxter Products manufactures office furniture by using an assembly-line process. All direct materials are introduced at the start of the process, and conversion cost is incurred evenly throughout manufacturing. An examination of the company's Work-in-Process account for August revealed the following selected information: Debit side— August 1 balance: 600 units, 40% complete; cost, $44,600* Production started: 1,800 units Direct materials used during August: $90,000 August conversion cost: $51,400 Credit side— Production completed: 1,400 units *Supplementary records disclosed direct material cost of $30,000 and conversion cost of $14,600. Conversations with manufacturing personnel revealed that the ending work in process was 80% complete. Required: A. Determine the number of units in the August 31 work-in-process inventory. B. Calculate the cost of goods completed during August, and prepare the appropriate journal entry to record completed production. C. Determine the cost of the August 31 work-in-process inventory.

17)

Whiporwill Pizza, a manufacturer of frozen pizzas, has the following data:

Work in Process, October 1

10,000 units*

Direct material

$5,500

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Conversion

17,000

Costs incurred during October

Direct material

$110,000

Conversion

171,600

* Complete as to direct material; 40% complete as to conversion

The equivalent units of activity for October are: Direct material (weighted-average method)

110,000

Conversion (weighted-average method)

92,000

Completed and transferred out

90,000

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Required: Compute the following amounts using weighted-average process costing. 1. Cost of goods completed and transferred out during October. 2. Cost of the October 31 work-in-process inventory.

18) The following data pertain to Clean Products Company, a manufacturer of plastic package bins. Work in process, October 1

20,000 units*

Direct material

$ 11,000

Conversion

34,000

Costs incurred during October

Direct material

$220,000

Conversion

343,200

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*Complete as to direct material; 40% complete as to conversion.

The equivalent units of activity for October were as follows: Direct material (weighted-average method)

220,000

Conversion (weighted-average method)

184,000

Completed and transferred out

180,000

Required: Compute the following amounts using weighted-average process costing. 1. Cost of goods completed and transferred out during October. 2. Cost of the October 31 work-in-process inventory.

19) The following data pertain to Stauffacher Entree Company, a manufacturer of frozen Italian dinners. Work in process, August 1

20,000 units*

Direct material

$ 11,000

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Conversion

34,000

Costs incurred during October

Direct material

$220,000

Conversion

343,200

*Complete as to direct material; 40% complete as to conversion.

The equivalent units of activity for August were as follows: Direct material (weighted-average method)

220,000

Conversion (weighted-average method)

184,000

Completed and transferred out

180,000

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Required: Compute the following amounts using weighted-average process costing. 1. Cost of goods completed and transferred out during August. 2. Cost of the August 31 work-in-process inventory.

20) The July production of Bait Buckets for Flying Angler’s Supply Division consisted of batch X337 (2,000 deluxe) and batch Z444 (4,000 basic). Each batch was started and finished during July, and there was no beginning or ending work in process. Costs incurred were as follows: Direct Material: Batch X337, $42,000, including $2,500 for packaging material; batch Z444, $45,000. Conversion Costs: Preparation Department, predetermined rate of $7.50 per unit; Finishing Department, predetermined rate of $6.00 per unit; Packaging Department, predetermined rate of $.50 per unit. (Only the deluxe buckets are packaged.) Required: 1. Compute the July product cost for each type of bait bucket. 2. Prepare journal entries to record the cost flows during July.

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21) Lowery Corporation, which uses an operation-costing system, has three processing departments. All units pass through Department no. 1; upon completion, 70% of the goods are sent to Department no. 2 and 30% are sent to Department no. 3. Additional data follow. · Forty thousand units were manufactured during the year. · Conversion cost in each department was: No. 1, $380,000; no. 2, $196,000; and no. 3, $150,000. · Batch no. 67, which consisted of 500 units, was sent to Department no. 3 for its additional processing. Direct materials of $23,500 and $11,900 were introduced to this batch in Department nos. 1 and 3, respectively. Lowery assigns conversion cost to goods manufactured on the basis of units produced. Required: A. Determine the conversion cost per unit in Department no. 1, Department no. 2, and Department no. 3. B. Compute the total cost of batch no. 67. C. Operation costing is sometimes referred to as a hybrid costing system. Briefly explain.

22) Upton Knitters manufactures sweaters and uses an operation-costing system. All sweaters are processed through Department no. 1, with subsequent processing taking place in Department no. 2 or Department no. 3, depending on the type of fabric used. Twenty thousand sweaters were produced during the year; there was no beginning or ending work in process. Sixty percent of the goods were sent to Department no. 2 for manufacturing. Conversion cost incurred in the three departments totaled $504,000, subdivided as follows: Department no. 1, $360,000; Department no. 2, $60,000; and Department no. 3, $84,000. Data pertaining to two representative orders, nos. 545 and 567, were:

Direct materials

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No. 545

No. 567

$112,000

$94,000

Number of sweaters

800

1,300

Subsequent processing department

No. 3

No. 2

Required: A. Explain the nature of operation costing. B. Determine the cost of order nos. 545 and 567.

23) Operation costing is a hybrid type of accounting system that combines features of joborder and process-cost accounting. Required: A. Briefly discuss the similarities and differences of an operation-costing system and a job-order costing system. B. Briefly discuss the similarities and differences of an operation-costing system and a processcosting system.

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24) Operation costing is a popular type of accounting system, one that combines selected features of job-order and process-cost accounting. Required: A. Briefly discuss the basic features that are associated with an operation-costing system. B. Explain why a sweater manufacturer may have a need for an operation-costing system.

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Answer Key Test name: Chap 04_6e_Cornett_Manually Graded

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Chapter 05 – 6e Cornett 1) Rocket Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity Material handling

Cost 225,000

Cost Driver Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Finishing

170,000

Direct labor hours

Packaging

170,000

Orders shipped

Total

$ 3,880,000

The following information pertains to the three product lines for next year: Economy

Standard

Deluxe

Units to be produced

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

Labor hours per unit

Assume that Rocket is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:

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A) $456,471. B) $646,471. C) $961,176. D) $1,141,176. E) None of the answers is correct.

2) Rocket Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity Material handling

Cost 225,000

Cost Driver Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Finishing

170,000

Direct labor hours

Packaging

170,000

Orders shipped

Total

$ 3,880,000

The following information pertains to the three product lines for next year: Economy

Standard

Deluxe

Units to be produced

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

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Labor hours per unit

3) Consider the following statements regarding traditional costing systems: 1.I. Overhead costs are applied to products on the basis of volume-related measures. 2.II. All manufacturing costs are easily traceable to the goods produced. 3.III. Traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have widely varying production requirements. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) I and III. E) II and III.

Many traditional costing systems:

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A) trace manufacturing overhead to individual activities and require the development of numerous activity-costing rates. B) write off manufacturing overhead as an expense of the current period. C) combine widely varying elements of overhead into a single cost pool. D) use a host of different cost drivers (e.g., number of production setups, inspection hours, orders processed) to improve the accuracy of product costing. E) produce results far superior to those achieved with activity-based costing.

5) St. Vincent’s, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. Product Beta

Pool No.1 (Driver: DLH) 1,200

Zeta

Pool Cost

Pool No. 2 (Driver: SU) 45

2,800

160,000

Pool No. 3 (Driver: PC) 2,250

280,000

750

360,000

The overhead cost allocated to Beta by using traditional costing procedures would be: A) $240,000. B) $356,000. C) $444,000. D) $560,000. E) None of the answers is correct.

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6) St. Vincent’s, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. Product Beta

Pool No.1 (Driver: DLH) 1,200

Zeta

Pool Cost

Pool No. 2 (Driver: SU) 45

2,800

160,000

Pool No. 3 (Driver: PC) 2,250

280,000

750

360,000

The overhead cost allocated to Zeta by using traditional costing procedures would be: A) $240,000. B) $356,000. C) $444,000. D) $560,000. E) None of the answers is correct.

7) St. Vincent’s, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. Product Beta Zeta

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Pool No.1 (Driver: DLH) 1,200 2,800

Pool No. 2 (Driver: SU) 45 55

Pool No. 3 (Driver: PC) 2,250 750

Pool Cost

160,000

280,000

360,000

The overhead cost allocated to Beta by using activity-based costing procedures would be: A) $240,000. B) $356,000. C) $444,000. D) $560,000. E) None of the answers is correct.

8) St. Vincent’s, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow. Product Beta

Pool No.1 (Driver: DLH) 1,200

Zeta

Pool Cost

Pool No. 2 (Driver: SU) 45

2,800

160,000

Pool No. 3 (Driver: PC) 2,250

280,000

750

360,000

The overhead cost allocated to Zeta by using activity-based costing procedures would be:

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A) $240,000. B) $356,000. C) $444,000. D) $560,000. E) None of the answers is correct.

9) International Gems sells fine jewelry and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping. International has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected. The final cost pool is used for general operations of the department and the cost driver is the number of orders. Information about the activities is summarized below: Cost Pool Packaging and shipping Final inspection General operations

Estimated Cost Driver Total Costs $ 67,200 Number of boxes shipped

Estimated Annual Activity 16,000 boxes

200,000 Number of individual items inspected 85,000 Number of orders

100,000 items 10,000 orders

During December, 2,100 boxes were packed and shipped. How much is the packaging and shipping cost for each box shipped? A) $0.24 B) $4.20 C) $7.62 D) $32.00 E) None of the answer choices is correct.

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10) International Gems sells fine jewelry and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping. International has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected. The final cost pool is used for general operations of the department and the cost driver is the number of orders. Information about the activities is summarized below: Cost Pool Packaging and shipping Final inspection General operations

Estimated Cost Driver Total Costs $ 67,200 Number of boxes shipped

Estimated Annual Activity 16,000 boxes

200,000 Number of individual items inspected 85,000 Number of orders

100,000 items 10,000 orders

During December, 4,000 items were sold, reflecting 800 orders that were packed and shipped in 2,100 boxes. What amount is allocated to each order for general operations of the department? A) $4.20 B) $8.50 C) $10.00 D) $29.53 E) None of the answer choices is correct.

11) International Gems sells fine jewelry and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping. International has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected. The final cost pool is used for general operations of the department and the cost driver is the number of orders. Information about the activities is summarized below:

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Cost Pool Packaging and shipping Final inspection General operations

Estimated Cost Driver Total Costs $ 67,200 Number of boxes shipped

Estimated Annual Activity 16,000 boxes

200,000 Number of individual items inspected 85,000 Number of orders

100,000 items 10,000 orders

An order is shipped to a retail customer who has ordered 6 individual items. This order will be shipped in 3 separate boxes. What is the packing and shipping cost that will be allocated to the order? A) $4.03 B) $4.20 C) $12.60 D) $25.20 E) None of the answer choices is correct.

12) International Gems sells fine jewelry and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping. International has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected. The final cost pool is used for general operations of the department and the cost driver is the number of orders. Information about the activities is summarized below: Cost Pool Packaging and shipping Final inspection General operations

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Estimated Cost Driver Total Costs $ 67,200 Number of boxes shipped

Estimated Annual Activity 16,000 boxes

200,000 Number of individual items inspected 85,000 Number of orders

100,000 items 10,000 orders

A new customer orders two items that can be shipped in a single box. What is the total shipping department cost that will be allocated to this order? A) $8.20 B) $14.70 C) $16.70 D) $25.20 E) None of the answer choices is correct.

13) International Gems sells fine jewelry and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping. International has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected. The final cost pool is used for general operations of the department and the cost driver is the number of orders. Information about the activities is summarized below: Cost Pool Packaging and shipping Final inspection General operations

Estimated Cost Driver Total Costs $ 67,200 Number of boxes shipped

Estimated Annual Activity 16,000 boxes

200,000 Number of individual items inspected 85,000 Number of orders

100,000 items 10,000 orders

During the period, the Southern sales office generated 240 orders for a total of 3,560 items, which were shipped in 1,200 boxes. What amount of shipping department costs should be allocated to these sales?

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A) $9,480 B) $5,040 C) $14,200 D) $18,328 E) None of the answer choices is correct.

14) Carlin and Marley, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $270,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm's billable hours to clients resulted from tax planning services, while 45% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:

Staff Support

$ 200,000

In-house computing charges

50,000

Miscellaneous office costs

20,000

Total

$ 270,000

A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm's computer hours, and accounted for 20% of the total client transactions. If Carlin and Marley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

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A) decrease by $32,500. B) increase by $32,500. C) decrease by $59,500. D) change by an amount other than those listed. E) change, but the amount cannot be determined based on the information presented.

15)

The following tasks are associated with an activity-based costing system:

1— Assignment of cost to products 2— Calculation of pool rates 3— Identification of cost drivers 4— Identification of cost pools Which of the following choices correctly expresses the proper order of the preceding tasks? A) 1, 2, 3, 4. B) 2, 4, 1, 3. C) 3, 4, 2, 1. D) 4, 2, 1, 3. E) 4, 3, 2, 1.

16) Which of the following is the proper sequence of events in an activity-based costing system? A) Identification of cost drivers, identification of cost pools, calculation of pool rates, assignment of cost to products. B) Identification of cost pools, identification of cost drivers, calculation of pool rates, assignment of cost to products. C) Assignment of cost to products, identification of cost pools, identification of cost drivers, calculation of pool rates. D) Calculation of pool rates, identification of cost drivers, identification of cost pools, assignment of cost to products. E) None of the answers is correct.

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17) Cost allocation is the process of assigning indirect costs to a cost object. The indirect costs are grouped in cost pools and then allocated by a common allocation base to the cost object. The base that is employed to allocate a homogeneous cost pool should: A) Assign the costs in the pool uniformly to cost objects even if the cost objects use resources in a nonuniform way. B) Be a nonfinancial measure (e.g., number of setups) because a nonfinancial measure is more objective. C) Have a cause-and-effect relationship with the cost items in the cost pool. D) Have a high correlation with the cost items in the cost pool as the sole criterion for selection. E) None of these answer choices is correct.

18) Which of the following is not a broad, cost classification category typically used in activity-based costing? A) Unit-level. B) Batch-level. C) Product-sustaining level. D) Facility-level. E) Management-level.

19) a:

In an activity-based costing system, direct materials used would typically be classified as

A) unit-level cost. B) batch-level cost. C) product-sustaining cost. D) facility-level cost. E) matrix-level cost.

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20) Which of the following is least likely to be classified as a batch-level activity in an activity-based costing system? A) Shipping. B) Receiving and inspection. C) Production setup. D) Property taxes. E) Quality assurance.

21) Which of the following is most likely to be a cost driver for a packaging and shipping activity? A) Number of setups. B) Number of components. C) Hours of testing. D) Number of orders. E) Estimated product costs.

22)

In an activity-based costing system, materials receiving would typically be classified as a: A) unit-level activity. B) batch-level activity. C) product-sustaining activity. D) facility-level activity. E) period-level activity.

23) Rosen, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. The research and testing costs associated with the new ovens is said to arise from a:

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A) unit-level activity. B) batch-level activity. C) product-sustaining activity. D) facility-level activity. E) competitive-level activity.

24) Consider the following statements regarding product-sustaining activities: 1.I. They must be performed for each batch of product that is made. 2.II. They must be performed for each unit of product that is made. 3.III. They are needed to support an entire product line. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) I and II. E) II and III.

25) Which of the following is least likely to be classified as a facility-level activity in an activity-based costing system? A) Plant maintenance. B) Property taxes. C) Machine processing cost. D) Plant depreciation. E) Plant management salaries.

26) Due to changes that are occurring in the basic operations of many firms, all of the following represent trends in the way indirect costs are allocated except:

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A) Using several machine cost pools to measure product costs on the basis of time in a machine center. B) Preferring facility-wide application rates that are applied to machine hours rather than incurring the cost of detailed allocations. C) Using throughput time as an application base to increase awareness of the costs associated with lengthened throughput time. D) Treating direct labor as an indirect manufacturing cost in an automated factory. E) Incorporate a value chain analysis as a continuous process of gathering, evaluating, and communicating information for business decision making.

27)

The salaries of a manufacturing plant's management are said to arise from: A) unit-level activities. B) batch-level activities. C) product-sustaining activities. D) facility-level activities. E) direct-cost activities.

28) Which of the following choices correctly depicts a cost that arises from a batch-level activity and one that arises from a facility-level activity? Batch-Level Activity

Facility-Level Activity

Direct materials

Plant depreciation

Inspection

Property taxes

Quality assurance

Shipping

Plant maintenance

Insurance

Management salaries

Material handling

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A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

29) Which of the following choices correctly depicts the proper classification of direct materials used and management salaries? Direct Materials Used

Management Salaries

Batch level

Facility level

Batch level

Unit level

Product-sustaining level

Unit level

Facility level

Product-sustaining level

Batch level

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

30) The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is commonly known as a cost: A) object. B) application method. C) hierarchy. D) estimation method. E) classification scheme that is useful in traditional, volume-based systems.

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31) Pound Industries’ customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company's wholesale operation (the remainder were for the retail division), costs allocated to the retail division should amount to: A) $0. B) $29. C) $85,260. D) $117,740. E) $203,000.

32) Pound Industries’ customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company's wholesale operation (the remainder were for the retail division), costs allocated to the wholesale operation should amount to: A) $0. B) $29. C) $85,260. D) $117,740. E) $203,000.

33) Pound Industries’ customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company's wholesale operation; the remainder was for the retail division. Costs allocated to the wholesale operation are: A) $0. B) $31,200. C) $118,560. D) $193,440. E) $203,000.

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34) Baxter customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company's wholesale operation; the remainder was for the retail division. Costs allocated to the retail division are: A) $0. B) $31,200. C) $118,560. D) $193,440. E) $203,000.

35) Ice Land offers 2 types of skating lessons for children—advanced and hockey skating lessons. The company has two different activities—skating instruction and maintenance—that provide input into its cost objectives. Data on estimated overhead for the year follows: Activity

Skating instruction Maintenance

Driver

# of Labor hours Hours of skating time

Estimated Overhead Cost $ 63,940

Advanced Lesson Estimate 3,280 hours

Hockey Skating Estimate 2,280 hours

1,500 hours

2,500 hours

88,000

The company provides 2,400 hockey skating lessons and 1,200 advanced skating lessons each year. How much overhead will be assigned to each hockey skating lesson? A) $42.20 B) $73.24 C) $22.56 D) $33.84 E) None of the answer choices is correct.

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36) Dawg Town produces dog tags and bowls with the name of your dog permanently etched into a stainless steel label. Indirect etching costs are allocated to tags and bowls based on the amount of time spent on the laser etching machine. The company has budgeted etching costs of $4,224 per month and expects to spend 4,800 hours on the etching labels each month. Each dog tag uses 24 minutes and each bowl uses 6 minutes of laser etching time. How much of the etching costs will be allocated to each dog tag? A) $0.88 B) $0.35 C) $8.12 D) $21.12 E) None of the answer choices is correct.

37) Skyline Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:

Wages and salaries Other overhead

Bouquet Production 60 %

Delivery

Other

30 %

10 %

50 %

35 %

15 %

Skyline anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year. The cost of wages and salaries and other overhead that would be charged to each bouquet made is: A) $7.15. B) $8.75. C) $12.50. D) $13.75. E) None of the answers is correct.

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38) Skyline Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:

Wages and salaries Other overhead

Bouquet Production 60 %

Delivery

Other

30 %

10 %

50 %

35 %

15 %

Skyline anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year. The cost of wages and salaries and other overhead that would be charged to each delivery is closest to: A) $19.63. B) $20.31. C) $26.75. D) $40.63. E) None of the answers is correct.

39) Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity Material handling

Cost 225,000

Cost Driver Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Version 1

Finishing

170,000

Direct labor hours

Packaging

170,000

Orders shipped

Total

$ 3,880,000

The following information pertains to the three product lines for next year: Economy

Standard

Deluxe

Units to be produced

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

Labor hours per unit

What is Barnett’s pool rate for the material-handling activity? A) $1.00 per part. B) $2.25 per part. C) $6.62 per labor hour. D) $13.23 per part. E) None of the answers is correct.

40) Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity

Version 1

Cost

Cost Driver

Material handling

225,000

Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Finishing

170,000

Direct labor hours

Packaging

170,000

Orders shipped

Total

$ 3,880,000

The following information pertains to the three product lines for next year: Economy

Standard

Deluxe

Units to be produced

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

Labor hours per unit

What is Barnett’s pool rate for the material-insertion activity? A) $11.00 per part. B) $49.50 per part. C) $16.18 per labor hour. D) $1.00 per part. E) None of the answers is correct.

Version 1

41) Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity Material handling

Cost 225,000

Cost Driver Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Finishing

170,000

Direct labor hours

Packaging

170,000

Orders shipped

Total

$ 3,880,000

The following information pertains to the three product lines for next year: Economy

Standard

Deluxe

Units to be produced

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

Labor hours per unit

What is Barnett’s pool rate for the automated machinery activity?

Version 1

A) $24.00 per machine hour. B) $24.50 per labor hour. C) $49.42 per unit. D) $50.00 per machine hour. E) None of the answers is correct.

42) Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity Material handling

Cost 225,000

Cost Driver Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Finishing

170,000

Direct labor hours

Packaging

170,000

Orders shipped

Total

$ 3,880,000

The following information pertains to the three product lines for next year: Economy

Standard

Deluxe

Units to be produced

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

Version 1

Labor hours per unit

What is Barnett’s pool rate for the finishing activity? A) $5.00 per labor hour. B) $5.00 per machine hour. C) $5.00 per unit. D) $7.50 per unit. E) None of the answers is correct.

43) Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity Material handling

Cost 225,000

Cost Driver Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Finishing

170,000

Direct labor hours

Packaging

170,000

Orders shipped

Total

$ 3,880,000

The following information pertains to the three product lines for next year:

Units to be produced

Version 1

Economy

Standard

Deluxe

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

Labor hours per unit

What is Barnett’s pool rate for the packaging activity? A) $4.86 per machine hour. B) $5.00 per labor hour. C) $10.00 per part. D) $100.00 per order shipped. E) None of the answers is correct.

44) Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity Material handling

Cost 225,000

Cost Driver Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Finishing

170,000

Direct labor hours

Packaging

170,000

Orders shipped

Total

Version 1

$ 3,880,000

The following information pertains to the three product lines for next year: Economy

Standard

Deluxe

Units to be produced

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

Labor hours per unit

Under Barnett’s activity-based costing system, what is the per-unit overhead cost of Economy? A) $141. B) $164. C) $225. D) $228. E) None of the answers is correct.

45) Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity Material handling

Cost 225,000

Cost Driver Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Finishing

170,000

Direct labor hours

Version 1

Packaging Total

170,000

Orders shipped

$ 3,880,000

The following information pertains to the three product lines for next year: Economy

Standard

Deluxe

Units to be produced

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

Labor hours per unit

Under Barnett’s activity-based costing system, what is the per-unit overhead cost of Standard? A) $164. B) $228. C) $272. D) $282. E) None of the answers is correct.

46) Barnett Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below. Activity Material handling

Version 1

Cost 225,000

Cost Driver Number of parts

Material insertion

2,475,000

Number of parts

Automated machinery

840,000

Machine hours

Finishing

170,000

Direct labor hours

Packaging

170,000

Orders shipped

Total

$ 3,880,000

The following information pertains to the three product lines for next year: Economy

Standard

Deluxe

Units to be produced

10,000

5,000

2,000

Orders to be shipped

1,000

500

200

Number of parts per unit

Machine hours per unit

Labor hours per unit

Under Barnett’s activity-based costing system, what is the per-unit overhead cost of Deluxe? A) $272. B) $282. C) $320. D) $440. E) None of the answers is correct.

Version 1

47) Colonial Company manufactures decorative wall clocks and uses activity-based costing. Each clock consists of 20 separate parts totaling $95 in direct materials, and requires 2.5 hours of machine time to produce. Additional information is as follows: Activity

Allocation Base

Cost Allocation Rate $ 0.08

Materials handling

Number of parts

Machining

Machine hours

7.20

Assembling

Number of parts

0.35

Packaging

Number of finished clocks

2.70

What is the cost of materials handling per clock? A) $0.08. B) $1.60. C) $6.00. D) $5.00. E) $7.20.

48) Colonial Company manufactures decorative wall clocks and uses activity-based costing. Each clock consists of 20 separate parts totaling $95 in direct materials, and requires 2.5 hours of machine time to produce. Additional information is as follows: Activity

Allocation Base

Cost Allocation Rate $ 0.08

Materials handling

Number of parts

Machining

Machine hours

7.20

Assembling

Number of parts

0.35

Packaging

Number of finished clocks

2.70

Version 1

What is the cost of machining per clock? A) $7.20. B) $18.00. C) $180.00. D) $30.00. E) $144.00.

49) Colonial Company manufactures decorative wall clocks and uses activity-based costing. Each clock consists of 20 separate parts totaling $95 in direct materials, and requires 2.5 hours of machine time to produce. Additional information is as follows: Activity

Allocation Base

Cost Allocation Rate $ 0.08

Materials handling

Number of parts

Machining

Machine hours

7.20

Assembling

Number of parts

0.35

Packaging

Number of finished clocks

2.70

What is the cost of assembling per clock? A) $7.00. B) $7.50. C) $35.00. D) $70.00. E) $87.50.

Version 1

50) Colonial Company manufactures decorative wall clocks and uses activity-based costing. Each clock consists of 20 separate parts totaling $95 in direct materials, and requires 2.5 hours of machine time to produce. Additional information is as follows: Activity

Allocation Base

Cost Allocation Rate $ 0.08

Materials handling

Number of parts

Machining

Machine hours

7.20

Assembling

Number of parts

0.35

Packaging

Number of finished clocks

2.70

What is the number of finished clocks? A) 20. B) 100. C) 200. D) 250. E) Cannot be determined from the information given.

51) Colonial Company manufactures decorative wall clocks and uses activity-based costing. Each clock consists of 20 separate parts totaling $95 in direct materials, and requires 2.5 hours of machine time to produce. Additional information is as follows: Activity

Allocation Base

Cost Allocation Rate $ 0.08

Materials handling

Number of parts

Machining

Machine hours

7.20

Assembling

Number of parts

0.35

Packaging

Number of finished clocks

2.70

Version 1

What is the total manufacturing cost per clock? A) $115.32. B) $121.13. C) $124.30. D) $125.75. E) $206.60.

52) Bridges and Lloyd, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning services, while 35% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:

Staff Support

$ 180,000

In-house computing charges

50,000

Miscellaneous office costs

20,000

Total

$ 250,000

A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, inhouse computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions. Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:

Version 1

A) 20%. B) 60%. C) 65%. D) 75%. E) 80%.

53) Bridges and Lloyd, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning services, while 35% resulted from consulting services. The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:

Staff Support

$ 180,000

In-house computing charges

50,000

Miscellaneous office costs

20,000

Total

$ 250,000

A recent analysis of staff support found a strong correlation between the number of staff personnel and the number of clients served (consulting, 20; tax planning, 60). In contrast, inhouse computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions. If Bridges and Lloyd switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

Version 1

A) decrease by $23,500. B) increase by $23,500. C) decrease by $32,500. D) change by an amount other than those listed. E) change, but the amount cannot be determined based on the information presented.

54)

Which of the following would activity-based costing most likely lead to? A) Cutting back on high-volume products that appear to be unprofitable. B) Raising the sale price of low-volume products. C) Raising the sale price of high-volume products. D) Expanding low-volume products that appear to be profitable. E) Distorting product costs.

55)

Which of the following would likely not be a cost driver? A) Product orders B) Product inspections C) Cost accountant’s labor hours D) Material requisitions E) Machine setups

56)

Activity-based costing systems: A) use a single, volume-based cost driver. B) assign overhead to products based on the products' relative usage of direct labor. C) often reveal products that were under- or over-costed by traditional costing systems. D) typically use fewer cost drivers than more traditional costing systems. E) have a tendency to distort product costs.

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57) Flavorful Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true? A) All other things being equal, the company should consider a drop in its sales price. B) The company may have been extremely competitive in the marketplace from a price perspective. C) Product no. 519 could be labeled as being overcosted by the firm's traditional costing procedures. D) If product no. 519 is undercosted by traditional accounting procedures, then all of the company's other products must be undercosted as well. E) Generally speaking, the activity-based cost figure is "less accurate" than the traditionally-derived cost figure.

58) Starwatch Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 520 revealed a traditionally-derived total cost of $1,623 and a selling price of $1,850 based on that figure. A newly computed activity-based total cost is $1,215. Which of the following statements is true? A) All other things being equal, Starwatch should consider increasing its sales price. B) Starwatch should increase the product's selling price to maintain the same markup percentage. C) Product no. 520 could be labeled as being overcosted by Starwatch’s traditional costing procedures. D) If product no. 520 is undercosted by traditional accounting procedures, then all of Starwatch’s other products must be undercosted as well. E) Generally speaking, the activity-based cost figure is "less accurate" than the traditionally-derived cost figure.

59) Magnolia Industries combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Magnolia’s current procedures that: Version 1

A) all of the company's products are undercosted. B) the company's high-volume products are undercosted. C) all of the company's products are overcosted. D) the company's high-volume products are overcosted. E) the company's low-volume products are overcosted.

60) If Fowler Corporation changes to activity-based costing (ABC), this method normally results in: A) Equalizing setup costs for all product lines. B) Substantially lower unit costs for low-volume products than is reported by traditional product costing. C) Decreased setup costs being charged to low-volume products. D) Substantially greater unit costs for low-volume products than are reported by traditional product costing. E) None of the answer choices is correct.

61) Fortner Technologies manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Fortner’s current accounting procedures? X

Undercosted

Overcosted

Undercosted

Overcosted

Costed correctly

Version 1

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

62) Miami Production manufactures products X and Y, applying overhead on the basis of labor hours. X is a high-volume product and relatively simplistic in nature. Y is both a lowvolume product and requires a variety of complex manufacturing procedures. What would an activity-based costing system likely disclose about products X and Y as a result of Miami’s current accounting procedures? X

Undercosted

Overcosted

Undercosted

Overcosted

Costed correctly

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

63) Towler Inc. manufactures products J and K, applying overhead on the basis of labor hours. J, a low-volume product, requires a variety of complex manufacturing procedures. K, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products J and K as a result of Towler’s current accounting procedures? Undercosted

Version 1

Overcosted

J, K

None of the answers is correct.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

64) Consider the following statements: 1.I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in different ways. 2.II. Overhead costs that are not incurred at the unit level create costing problems because such costs do not vary with traditional application bases such as direct labor hours or machine hours. 3.III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different colors. Which of the above statements is (are) true? A) I only. B) II only. C) I and II. D) I and III. E) II and III.

65)

Consumption ratios are useful in determining:

Version 1

A) the existence of product-line diversity. B) overhead that is incurred at the unit level. C) if overhead-producing activities are being utilized effectively. D) if overhead costs are being applied to products. E) if overhead-producing activities are being utilized efficiently.

66)

Widely varying consumption ratios: A) are reflective of product-line diversity. B) indicate an out-of-control production environment. C) dictate a need for traditional costing systems. D) work against the implementation of activity-based costing. E) create an unsolvable product-costing problem.

67) In comparison with a system that uses a single, volume-based cost driver, an activitybased costing system is preferred when a company has: A) a large proportion of non-unit-level activities. B) product-line diversity. C) minimal product-line diversity and a small proportion of non-unit-level activities. D) existing variances from budgeted amounts. E) product-line diversity and a large proportion of non-unit-level activities.

68) Consider the following factors: 1.I. The degree of correlation between consumption of an activity and consumption of a particular cost driver. 2.II. The likelihood that a particular cost driver will induce a desired behavioral effect. 3.III. The likelihood that a particular cost driver will cause an increase in the cost of measurement. Which of these factors should be considered in the selection of a cost driver?

Version 1

A) I only. B) I and II. C) I and III. D) II and III. E) I, II, and III.

69) Edwards Company manufactures low-cost wooden chairs and uses activity-based costing. The following information is for the month of March. Activity

Materials handling Assembly Packaging

Estimated Indirect activity costs $ 3,500

Allocation base

Estimated quantity of allocation base

Number of parts

5,000

parts

12,000

Number of parts

5,000

parts

5,750

Number of chairs

1,250

chairs

Each chair consists of 4 parts and the direct materials cost per chair is $7.00. Based on the information given for Edwards Company, what is the cost of materials handling and assembly per chair? A) $4.60. B) $17.00. C) $14.40. D) $12.40. E) $24.00.

Version 1

70) Edwards Company manufactures low-cost wooden chairs and uses activity-based costing. The following information is for the month of March. Activity

Materials handling Assembly Packaging

Estimated Indirect activity costs $ 3,500

Allocation base

Estimated quantity of allocation base

Number of parts

5,000

parts

12,000

Number of parts

5,000

parts

5,750

Number of chairs

1,250

chairs

Each chair consists of 4 parts and the direct materials cost per chair is $7.00. Based on the information given for Edwards Company, what is the total manufacturing cost per chair? A) $4.60. B) $17.00. C) $14.40. D) $12.40. E) $24.00.

71) Genoa Company makes three products and classifies its costs as belonging to the following functions: Design, Production, Marketing, Distribution, and Customer Service. All company costs are assigned to the three products. Direct costs of each of the five functions are traced directly to the three products. The indirect costs of each of the five business functions are collected into five separate cost pools and then assigned to the three products using appropriate allocation bases. The allocation base that will most likely be the best for allocating the indirect costs of the distribution function is:

Version 1

A) Dollar sales volume. B) Number of sales persons. C) Number of customer phone calls. D) Number of shipments. E) None of these answer choices is correct.

72) Which of the following activity cost pools and activity measures likely has the lowest degree of correlation? Activity Cost Pool

Activity Measure

Order department

Number of orders processed

Sales management

Time spent by managers in each sales territory

Accounts receivable processing

Number of customers

Catering

Numbers of meals served

E. Employee travel to job sites (sites are within 100-mile radius of company headquarters)

Number of employees

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

73) Cozy Nights Industries manufactures down-filled comforters and uses activity-based costing. The following information is provided for September. Activity

Version 1

Estimated indirect activity costs

Allocation base

Estimated quantity of allocation base

Materials handling Assembly

$ 12,600

Number of parts

4,200 parts

55,440

Number of parts

4,200 parts

Packaging

10,920

Number of comforters

1,050 comforters

Each comforter consists of 4 parts and the direct materials cost per comforter is $14.00. Based on the information given for Cozy Nights Industries, what is the cost of materials handling and assembly per comforter? A) $3.00. B) $30.20. C) $14.00. D) $64.80. E) $10.40.

74) Cozy Nights Industries manufactures down-filled comforters and uses activity-based costing. The following information is provided for September. Activity

Materials handling Assembly Packaging

Estimated indirect activity costs $ 12,600

Allocation base

Estimated quantity of allocation base

Number of parts

4,200 parts

55,440

Number of parts

4,200 parts

10,920

Number of comforters

1,050 comforters

Each comforter consists of 4 parts and the direct materials cost per comforter is $14.00. Based on the information given for Cozy Nights Industries, what is the total cost of packaging each comforter? Version 1

A) $3.00. B) $16.20. C) $12.00. D) $64.80. E) $10.40.

75) Cozy Nights Industries manufactures down-filled comforters and uses activity-based costing. The following information is provided for September. Activity

Materials handling Assembly Packaging

Estimated indirect activity costs $ 12,600

Allocation base

Estimated quantity of allocation base

Number of parts

4,200 parts

55,440

Number of parts

4,200 parts

10,920

Number of comforters

1,050 comforters

Each comforter consists of 4 parts and the direct materials cost per comforter is $14.00. Based on the information given for Cozy Nights Industries, what is the total manufacturing cost per comforter? A) $3.00. B) $30.20. C) $78.80. D) $64.80. E) $89.20.

Version 1

76) Cozy Nights Industries manufactures down-filled comforters and uses activity-based costing. The following information is provided for September. Activity

Materials handling Assembly Packaging

Estimated indirect activity costs $ 12,600

Allocation base

Estimated quantity of allocation base

Number of parts

4,200 parts

55,440

Number of parts

4,200 parts

10,920

Number of comforters

1,050 comforters

Each comforter consists of 4 parts and the direct materials cost per comforter is $14.00. If the cost of purchasing nearly the same comforter from a supplier is $88.80, what should Cozy Night do to maximize profits? A) Continue to manufacture the comforters. B) Redesign the packaging. C) Since the cost to manufacture the comforter is also $88.80, the company would make the same profit whether it bought the comforter or manufactured it. D) Close down the business. E) Purchase the comforter from the supplier.

77) Overton Enterprises is converting to an activity-based costing system. It wishes to depict the various activities in its manufacturing process along with the activities' relationships. Which of the following is a tool that the company can use to accomplish this task? A) Storyboards. B) Activity relationship charts (ARCs). C) Decision trees. D) Simulation games. E) Process organizers.

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78) Successful adoptions of activity-based costing typically occur when companies rely heavily on: A) finance personnel. B) accounting personnel. C) manufacturing personnel. D) office personnel. E) multidisciplinary project teams.

79) Which of the following statements is (are) true about non-value-added activities? 1.I. Non-value-added activities are often unnecessary and dispensable. 2.II. Non-value-added activities may be necessary but are being performed in an inefficient and improvable manner. 3.III. Non-value-added activities can be eliminated without deterioration of product quality, performance, or perceived value. A) I only B) II only C) III only D) I and II E) I, II, and III

80) Generally inspecting time is considered ____________ and delivering the product is considered _____________. A) value-added/non-value added. B) non-value-added/value-added. C) non-value-added/non-value-added. D) value-added/value-added. E) None of these answer choices are correct.

Version 1

81) During a recent accounting period, Falcon Express’ shipping department processed 26 orders. Each order typically takes four hours to complete. However, the average time increased to five hours because of various departmental inefficiencies. If shipping labor is paid $14 per hour, the company's non-value-added cost would be: A) $0. B) $56. C) $364. D) $1,456. E) $1,820.

82) Flagler Corporation takes eight hours to complete the setup process for a certain electrical component, with the setup cost averaging $150 per hour. If the company's competitor can accomplish the same process in six hours, Flagler’s non-value-added cost would be: A) $0. B) $150. C) $300. D) $900. E) $1,200.

83) Willow Springs produces various wooden bookcases, tables, storage units, and chairs. Which of the following would be included in a listing of the company's non-value-added activities? A) Assembly of tables. B) Staining of storage units. C) Transfer of chairs from the assembly line to the staining facility. D) Storage of completed bookcases in inventory. E) Transfer of chairs from the assembly line to the staining facility and storage of completed bookcases in inventory.

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84) Motor Mike builds recreational motor homes. All of the following activities add value to the finished product except: A) installation of carpet. B) assembly of the frame to the chassis. C) storage of the vehicle in the sales area. D) addition of exterior lights. E) final painting and polishing.

85)

An example of a customer-value-added activity is: A) final painting and polishing of the product. B) installation of a computerized human resource management module. C) shortening the customers' billing cycle. D) addition of an employee hotline for workplace complaints. E) maintenance of an adequate safety stock.

86)

Which of the following is not an example of a business-value-added activity? A) Adopting bar-code technology in the receiving department. B) Installation of a computerized human resource management module. C) Shortening the customers' billing cycle. D) Addition of an employee hotline for workplace complaints. E) Final painting and polishing of the product.

87)

The adoption of a 24/7 customer service help line is an example of a: A) business-value-added activity. B) customer-value-added activity. C) non-value-added activity. D) batch-related activity. E) product-sustaining activity.

Version 1

88)

The adoption of a 24/7 employee hotline for workplace complaints is an example of a: A) business-value-added activity. B) customer-value-added activity. C) non-value-added activity. D) batch-related activity. E) product-sustaining activity.

89) Sleek, Inc. is a manufacturer that assigns cost using activity-based costing principles. Activities have been identified and classified as being either value-added or non-value-added as to each product. Which of the following activities used in Sleek’s production process is nonvalue-added? A) raw materials storage activity. B) heat treatment activity. C) drill press activity. D) molding activity. E) engineering design activity.

90)

Customer profitability analysis is tied closely to: A) just-in-time systems. B) activity-based costing. C) job costing. D) process costing. E) operation costing.

91)

When determining customer profitability, activity-based costing can be used to analyze:

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A) orders processed. B) sales visits. C) special packaging and handling. D) billing and collections. E) All of the answers are correct.

92)

Generally speaking, companies prefer doing business with customers who: A) order small quantities rather than large quantities. B) often change their orders. C) require special packaging or handling. D) request normal delivery times. E) need specialized engineering design changes.

93)

Which of the following can have a negative impact on a particular sale's profitability? A) Number of required sales contacts (phone calls, visits, etc.). B) Special shipping instructions. C) Accounts receivable collection time. D) Purchase-order changes. E) All of the answers are correct.

94) Arnold Corporation's customers differ greatly with respect to number of required sales contacts (e.g., phone calls and sales visits), account payment patterns, and design/engineering change orders. Which of the following choices likely denotes an ideal customer from Arnold’s perspective? Required Sales Contacts

Account Payment Patterns

Design/Engineering Change Orders

Many

Slow

Many

Rapid

Many

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Few

Slow

Many

Few

Rapid

Few

Many

Rapid

Few

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

95)

Of the following organizations, activity-based costing (ABC) cannot be used by: A) manufacturers. B) financial-services firms. C) book publishers. D) hotels. E) None of these are correct, as all these organizations can use ABC.

96) A hospital administrator is in the process of implementing an activity-based-costing system. Which of the following tasks would not be part of this process? A) Identification of cost pools. B) Calculation of pool rates. C) Assignment of cost to services provided. D) Identification of cost drivers. E) None of the answers is correct.

97) Which of the following cost drivers would best be associated with the activity of physician time in a medical clinic?

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A) Number of new patient visits. B) Number of continuing patient visits. C) Physician minutes with a patient. D) Number of line items on the clinic’s bill. E) The number of accreditations held by the clinic.

98) Which of the following best explains the main advantages of time-driven-activity-based costing for services over the use of conventional ABC? A) The number of services can more easily be expanded than under conventional ABC, since costs are assigned to unused capacity. B) Theoretical capacity, used in this type of costing, allows service companies a better method to assess quality control than does conventional ABC. C) Time-based resource and activity data is easy to collect and practical capacity is used by time-driven-activity-based costing. D) The number of line items on a service’s bill is minimized and practical capacity is used by time-driven-activity-based costing. E) This type of costing allows service companies better information since their objectives when using ABC are different than those of manufacturing firms.

99) Because labor hours are related closely to the volume of activity in the factory, these traditional product-costing systems often are said to be volume-based costing systems. ⊚ true ⊚ false

100) Traditional product-costing systems are structured on multiple, volume-based cost drivers. ⊚ true ⊚ false

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101)

In the first stage of ABC, a cost driver is selected for each activity cost pool. ⊚ true ⊚ false

102) When using ABC, overhead costs assigned to each activity comprise an activity cost pool. ⊚ true ⊚ false

103) In an activity-based costing system, direct materials used would typically be classified as a unit-level cost. ⊚ true ⊚ false

104)

Engineering design costs are typically known as batch-level activities. ⊚ true ⊚ false

105) The pool rate is defined as the cost per unit of the cost driver for a particular activity cost pool. ⊚ true ⊚ false

106) A product’s cost is the sum of its direct-material cost, its direct-labor cost, and its overhead cost, which is the accumulation of all the resource costs driven to the product by the various cost drivers selected for the ABC system. ⊚ true ⊚ false

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107)

Activity-based costing systems have a tendency to distort product costs. ⊚ true ⊚ false

108)

Consumption ratios are useful in determining the existence of product-line diversity. ⊚ true ⊚ false

109)

There are six important factors when selecting appropriate cost drivers. ⊚ true ⊚ false

110) One of the important factors when selecting appropriate cost drivers is the ability to overcost related services. ⊚ true ⊚ false

111)

Storyboarding may be used to develop a detailed process flowchart. ⊚ true ⊚ false

112) A bill of activities is a complete listing of the activities identified and used in the ABC analysis. ⊚ true ⊚ false

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113) An example of a customer-value-added activity is final painting and polishing of the product. ⊚ true ⊚ false

114) Non-value-added activities are the events that trigger activities and linkages among activities. ⊚ true ⊚ false

115) Customer-profitability analysis uses activity-based costing to determine the activities, costs, and profit associated with serving particular customers. ⊚ true ⊚ false

116) Generally speaking, companies prefer doing business with customers who order small quantities rather than large quantities. ⊚ true ⊚ false

117) A version of ABC that has found wide acceptance in service-industry settings is called volume-based activity-costing. ⊚ true ⊚ false

118) Simplified forms of ABC use time-driven elements for service companies that are well aligned with the resources deployed in terms of units of time of labor.

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⊚ ⊚

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true false

Answer Key Test name: Chap 05_6e_Cornett 1) A 2) D 3) D 4) C 5) A 6) D 7) C 8) B 9) B 10) B 11) C 12) C 13) C 14) A 15) E 16) B 17) C 18) E 19) A 20) D 21) D 22) B 23) C 24) C 25) C 26) B Version 1

27) D 28) B 29) D 30) C 31) D 32) C 33) C 34) D 35) D 36) B 37) A 38) A 39) A 40) A 41) A 42) A 43) D 44) B 45) C 46) D 47) B 48) B 49) A 50) E 51) C 52) D 53) A 54) B 55) C 56) C Version 1

57) B 58) C 59) D 60) D 61) B 62) C 63) C 64) C 65) A 66) A 67) E 68) E 69) D 70) E 71) D 72) E 73) D 74) E 75) E 76) E 77) A 78) E 79) E 80) B 81) C 82) C 83) E 84) C 85) A 86) E Version 1

87) B 88) A 89) A 90) E 91) E 92) D 93) E 94) D 95) E 96) E 97) C 98) C 99) TRUE 100) FALSE 101) FALSE 102) TRUE 103) TRUE 104) FALSE 105) TRUE 106) TRUE 107) FALSE 108) TRUE 109) FALSE 110) FALSE 111) TRUE 112) FALSE 113) TRUE 114) FALSE 115) TRUE 116) FALSE Version 1

117) FALSE 118) TRUE

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Chapter 05 – 6e Cornet- Manually Graded 1) Charger Industries currently assigns overhead to products by using a predetermined rate based on direct labor hours. The company is considering the adoption of an activity-based costing (ABC) system, and management desires a brief overview of this system before it makes a final decision. Required: Compare ABC with the company's current system, focusing on the number of cost pools and cost drivers, costing accuracy, and cost distortion.

2) Tanner Industries manufactures high-end speakers and sub-woofers. The company is now preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the following information. Speakers

Sub-woofers

Units produced

Material moves per product line

Direct-labor hours per unit

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The total budgeted material-handling cost is $66,000. Required: 1. Under a costing system that allocates overhead on the basis of direct-labor hours, the material-handling costs allocated to one speaker would be what amount? 2. Answer the same question as in requirement 1, but for sub-woofers. 3. Under activity-based costing (ABC), the material-handling costs allocated to one speaker would be what amount? The cost driver for the material-handling activity is the number of material moves. 4. Answer the same question as in requirement 3, but for sub-woofers.

3) Forrest Company manufactures sophisticated industrial drill bits and saw blades used in heavy construction projects. The company is now preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the following information. Bits

Blades

Units produced

Material moves per product line

Direct-labor hours per unit

225

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The total budgeted material-handling cost is $75,000. Required: 1. Under a costing system that allocates overhead on the basis of direct-labor hours, the material-handling costs allocated to one lens would be what amount? 2. Answer the same question as in requirement 1, but for mirrors. 3. Under activity-based costing (ABC), the material-handling costs allocated to one lens would be what amount? The cost driver for the material-handling activity is the number of material moves. 4. Answer the same question as in requirement 3, but for mirrors.

4) Upton Industries uses a traditional cost accounting system to apply quality-control costs uniformly to all products at a rate of 13.0 percent of direct-labor cost. Monthly direct-labor cost for Gentle Healing Lotion (GHL) is $30,000. In an attempt to more equitably distribute qualitycontrol costs, management is considering activity-based costing. The monthly data shown in the following chart have been gathered for Gentle Healing Lotion. Activity Cost Pool

Cost Driver

Pool Rates

Quantity of Driver for GHL

Incoming material inspection

Type of material

$11.00 per type

12 types

In-process inspection

Number of units

.14 per unit

17,500 units

Product certification

Per order

77.00 per order

25 orders

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Required: 1. Calculate the monthly quality-control cost to be assigned to the Gentle Healing Lotion product line under each of the following product-costing systems. (Round to the nearest dollar.) 1. Traditional system, which assigns overhead on the basis of direct-labor cost. 2. Activity-based costing. 2. Does the traditional product-costing system overcost or undercost the Gentle Healing Lotion product line with respect to quality-control costs? By what amount?

5) Whitman Enterprises uses a traditional-costing system to estimate quality-control costs for its Dragon product line. Costs are estimated at 32% of direct-labor cost, and direct labor totaled $860,000 for the quarter just ended. Management is contemplating a change to activitybased costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers. The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the Dragon’s: Pool Rate

Driver Quantities

$0.50 per part

560,000 parts

0.12 per unit

28,000 units

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115.00 per order

90 orders

Required: A. Calculate the quarterly quality-control cost that is allocated to the Dragon product line under Whitman’s traditional-costing system. B. Calculate the quarterly quality-control cost that is allocated to the Dragon product line if activity-based costing is used. C. Does the traditional approach under- or overcost the product line? By what amount?

6) Todd Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company's products (H15, H16, and H17) follow. Cost Pool

Cost Driver

H15

H16

H17

Machine setup

Number of setups

50%

20%

30%

Quality assurance

Number of inspections

70%

15%

Engineering

Number of change orders

15%

10%

75%

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Estimated costs for these three activities, which account for 80% of the firm's total overhead, are $400,000, $500,000, and $120,000, respectively. Todd currently applies manufacturing overhead to products on the basis of machine hours. Required: A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary. B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to product H17. C. Consider the company's current overhead application procedure. 1. Is Todd emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain. 2. How accurate will the current costing procedure be given the nature of most of the company's activities? Briefly discuss. 3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.

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7) Kettle Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are: F56: 2,000 units, $234 F57: 3,500 units, $271 Kettle’s overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kettle’s selling prices are based heavily on cost. Required: A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained. B. Compute: 1. the pool rate for purchase-order processing. 2. the purchase-order processing cost to be charged to one unit of F56. C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220. 1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary. 2. Which of the two products, F56 or F57, may have been less competitive in the marketplace prior to the change to ABC? Briefly explain.

8) Javier Industries manufactures two products: A and B. A review of the company's accounting records revealed the following per-unit costs and production volumes:

Production volume (units)

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2,500

5,000

Direct material

$40

$60

Direct labor:

2 hours at $12

3 hours at $12

Manufacturing overhead

2 hours at $93

186

3 hours at $93

279

Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm's accounting procedures, and the following data are available: Cost Driver Volume

Cost Pool

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Cost

Cost Driver

Total

Setups

$240,000

Number of setups

100

120

General factory

1,500,000

Direct labor hours

5,000

15,000

20,000

Machine processing

120,000

Machine Hours

2,200

800

3,000

$1,860,000

Javier determines selling prices by adding 40% to a product's total cost. Required: A. Compute the per-unit cost and selling price of product B by using Javier’s current costing procedures. B. Compute the per-unit overhead cost of product B if the company switches to activity-based costing. C. Compute B's total per-unit cost and selling price under activity-based costing. D. Javier has recently encountered significant international competition for product B, with considerable business being lost to very aggressive suppliers. Will activity-based costing allow the company to be more competitive with product B from a price perspective? Briefly explain. E. Will the cost and selling price of product A likely increase or decrease if Javier changes to activity-based costing? Why? Hint: No calculations are necessary.

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9) Fairchild, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company's products follows. Regular— Estimated production volume: 3,000 units Direct materials cost: $28 per unit Direct labor per unit: 3 hours at $15 per hour Deluxe— Estimated production volume: 4,000 units Direct materials cost: $42 per unit Direct labor per unit: 4 hours at $15 per hour Fairchild's overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.

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Orders Processed

Machine Hours Worked

Inspection Hours

Regular

320

16,000

4,000

Deluxe

180

24,000

6,000

Total

500

40,000

10,000

Required: A. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system. B. Assuming use of activity-based costing, compute the unit manufacturing costs of Regular and Deluxe if the expected manufacturing volume is attained. C. How much overhead would be applied to a unit of Regular and Deluxe if the company used traditional costing and applied overhead solely on the basis of direct labor hours? Which of the two products would be undercosted by this procedure? Overcosted?

10) Private Corporation manufactures two types of transponders—no. 156 and no. 157—and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows. No. 156

No. 157

Anticipated volume (units)

6,000

14,000

Direct material cost

$40

$65

Direct labor cost

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The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities' three respective cost drivers, follow. No. 156

No. 157

Total

Setups

100

Machine hours worked

15,000

25,000

40,000

Outgoing shipments

120

200

The firm's total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000. Required: A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system. B. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 156 and 157 if the expected manufacturing volume is attained. C. Assuming use of activity-based costing, compute the total cost per unit of product no. 156. D. If the company's selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156? Show computations.

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11) The controller for Norton Machining has established the following overhead cost pools and cost drivers: Overhead Cost Pool

Budgeted Overhead Cost

Cost Driver

Machine setups

$240,000

Number of setups

Material handling

90,000

Units of raw material

Quality control inspection

48,000

Number of Inspections

Other overhead costs

160,000

Machine hours

Total

$538,000

Overhead Cost Pool

Budgeted Level for Cost Driver

Pool Rate

Machine setups

200 setups

$1,200 per setup

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Material handling

60,000 units

$1.50 per unit

Quality control

1,200 inspections

$40 per inspection

Other overhead

20,000 machine hours

$8 per machine hour

Order no. 715 has the following production requirements: Machine setups: 7 Raw material: 11,200 units Inspections: 16 Machine hours: 850 Required: A. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing. B. Suppose that Norton were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to order no. 715. C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.

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12) Element Cellars produces wine in northern Oregon. Consider the following selected costs that arose during the current year: 1. Safety costs at winery 2. Truckload shipping costs 3. Building maintenance costs 4. Bottle and cork cost 5. Development cost of new, after-dinner wine 6. Tasting and testing costs Required: A. Briefly distinguish between unit-level and product-sustaining activities. B. Classify the six costs listed as arising from a unit-level, batch-level, product-sustaining, or facility-level activity.

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13)

Consider the following costs that relate to a bank and a manufacturer of software:

Bank 1. Review costs of commercial loan applications 2. Operating costs of human resources department 3. Immediate processing costs of a specific customer's cash deposit 4. Bank membership costs of joining local Chamber of Commerce Software manufacturer 5. Label and packaging charges from a commercial printer for a new software release 6. Air conditioning/heating costs of the firm's production plant 7. Transport costs of moving the finished products from production run no. 1 to the company's warehouse 8. Design and development costs of new spreadsheet software Required: A. Classify the eight costs listed as arising from either a unit-level, batch-level, productsustaining, or facility-level activity. B. Would number of loan applications or number of customers be a more appropriate cost-driver base for #1 above? Briefly explain.

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14) Washburn Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year: 1. Direct materials used: $3,640,000 2. Plant rent, utilities, and taxes: $1,229,000 3. New technology design engineering: $2,040,000 4. Materials receiving: $318,000 5. Manufacturing-run/set-up charges: $115,000 6. Equipment depreciation: $92,000 7. General management salaries: $1,564,000 Required: A. Briefly distinguish between batch-level and facility-level activities. B. Determine the cost of the firm's unit-level, batch-level, product-sustaining, and facility-level activities.

15) At a recent professional meeting, two controllers discussed product-costing problems in their respective companies. Both controllers are familiar with ABC systems, but neither of their firms utilizes such a system. Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her company, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. Lately, however, there has been a significant increase in the number of item colors. Both controllers are worried about the potential distortion of product costs under their traditional product-costing systems. Required: Which controller should be more concerned about the potential distortion? Explain.

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16) Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers.

17) Marvel Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available: Activity

Cost

Drive

Driver Units

Application processing

$900,000

Applications

4,000

Loan underwriting

800,000

Underwriting hours

16,000

Loan closure

880,000

Legal hours

8,000

Total

$2,580,000

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Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure. Required: A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications. B. Determine the cost of processing the two loans if Marvel uses the traditional labor-hourbased system. Conversations with management found that, on average, each application took nine labor hours of processing time, excluding underwriting and closure. C. Is Marvel making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?

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18)

Consider the nine activities that follow.

1. A software company: Developing computer coding for a new spreadsheet package. 2. A breakfast cereal company: Painting the office of a maintenance supervisor at a plant that produces cereal. 3. A major metropolitan hospital: Examining a new patient. 4. A regional airline carrier: The 90 minutes that a Boeing 757 sits idle on the ground between flights. 5. A retail office supply store: Moving cases of paper from one location to another in the same warehouse. 6. A company that makes watches: Attaching a watch band to the watch's face. 7. A shipping company: Reprocessing cargo that had been sorted incorrectly on a malfunctioning sorting machine. 8. An investment company: Correcting errors made by company personnel in customer accounts. 9. A major hotel chain: Upgrading the quality of bedding used at hotels in very competitive marketplaces. Required: Categorize each of the activities as either value-added or non-value-added for the companies noted.

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19) Trayton Enterprises, which manufactures lawn mowers, recently installed a just-in-time purchasing system and an activity-based management program. Required: A. Determine whether the following items would be apt to increase or decrease as a result of the just-in-time system: 1. Inventory storage costs. 2. Number of suppliers used. 3. Number of raw material shipments handled. 4. Dollars available for alternative investment opportunities. 5. Quality of raw materials purchased. B. Identify the following items as value-added activities, non-value-added activities, or both. 1. Attaching the engine to the mower's body. 2. Installing a new air-conditioning system in the executive offices. 3. Replacing a defective wheel with a new wheel. 4. Designing and printing an owner's instruction manual for a new model. 5. Moving completed mowers to the finished-goods warehouse. 6. Attaching the handle to the mower's body. The process took longer than normal because of a worker slowdown caused by disgruntled employees.

20) Germaine Lotions and Mystic Oils uses a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. This month’s direct labor costs for the Mystic Oil line is $27,500. Germaine would like to distribute quality control costs in a more equitable manner and is considering the change to activity-based costing. The monthly data shown in the chart below have been gathered for Mystic Oils. Activity

Cost Driver

Cost Rates

Quantity for Mystic Oils

Incoming material inspection

Type of material

$11.50 per type

12 types

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In-process inspection

Number of units

$0.14 per unit

17,500 units

Product Certification

Per Order

$77 per order

25 orders

Required: (1) Calculate the monthly quality control cost assigned to Mystic Oils using traditional costing. (2) Calculate the monthly quality control cost assigned to Mystic Oils using activity-based costing (ABC).

21) Sampler, Inc., which sells books to college bookstores and individuals, uses activitybased costing and activity-based management. The following information is available for the company's three cost pools: Activity

Cost Driver

Cost-Driver Quantity

Percent of CostDriver Activity for Bookstore transactions

Percent of CostDriver Activity for Transactions to Individuals

Incoming Receipts

Number of Purchase orders

3,000

20%

80%

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Warehousing

Number of inventory moves

8,000

Outgoing shipments

Number of shipments

18,000

Bookstore sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: Incoming receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company's activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500 moves and 400 shipments, respectively. Required: A. What is a non-value-added activity? B. How much did non-value-added activities cost Sampler this past year? C. Which of the two markets—sales to bookstores or sales to individuals—resulted in lower overall costs for incoming receipts, warehousing, and outgoing shipments? Evaluate these costs in both absolute dollars and as a percentage of sales. In addition, present a possible explanation for your results. Note: Exclude costs that arose from inefficient operations.

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22) Non-value-added costs occur in nonmanufacturing organizations as well as in manufacturing firms. Required: A. Explain what is meant by a non-value-added cost. B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels.

23) Anton’s Fresh Fish and Produce is a wholesale distributor that operates in central Florida. An analysis of two of the company's customers, Seaside Spa and Sigma Assisted Living, reveals the data that follows the requirements for this problem for a recent 12-month period. Anton’s uses activity-based costing to determine the cost of servicing its customers. The company had total delivery costs during the year of $576,000 and 8,000 deliveries, along with cost of $765,000 for the administrative processing of 90,000 invoices. Required: A. Compute the pool rates for deliveries and invoice processing. B. Compute the operating income that Anton’s earned from these two customers. C. Compute the total of customer-related costs (deliveries and invoice processing) for each customer as a percentage of gross margin, and analyze the results for management. Explain any significant differences that you find.

Sales revenue

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Seaside Spa

Sigma

$680,000

$270,000

Cost of goods sold

90% of sales

80% of sales

Number of Deliveries

100

135

Number of Invoices

120

180

24) Tennair Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Evans Equipment and Rogers Refrigeration. Evans Equipment

Rogers Refrigeration

Sales revenue

$215,000

$154,000

Cost of goods sold

95,000

68,000

General selling costs

30,000

21,500

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General administrative costs

21,000

15,050

Cost-driver data used by the firm and traceable to Evans and Rogers are: Customer Activity

Cost Driver

Pool Rate

Sales activity

Sales visits

$900

Order taking

Sales orders

250

Special handling

Units handled

Special shipping

Shipments

600

Customer Activity

Sales activity

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Evans Equipment

8 visits

Rogers Refrigeration

5 visits

Order taking

17 orders

22 orders

Special handling

600 units

550 units

Special shipping

19 shipments

30 shipments

Required: A. Perform a customer profitability analysis for Tennair. Compute the gross margin and operating income on transactions related to Evans Equipment and Rogers Refrigeration. B. Compute gross margin as a percentage of sales revenue. Then compute (1) general selling and administrative costs as a percentage of gross margin and (2) total customer-related costs (i.e., costs that arise from sales visits, order taking, and special handling and shipping) as a percentage of gross margin. C. On the basis of your calculations, which of the two customers is "more costly" to deal with? Briefly explain.

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25) Power Corporation sells a line of power tools to home improvement chains, generating a cost of goods sold equal to 70% of net sales. The selected data that follow relate to the period just ended for the company's three largest customers: Weekend Project, Tool Mart, and Fix-It City. Power’s management recently attended a seminar and learned that customers with excessive requests and demands can have a significant, negative impact on corporate profitability. Required: A. For each of the three chains, compute: 1. Total customer-related costs as a percentage of gross margin. 2. The average order size (ignoring sales returns). 3. The ratio of regular orders to rush orders. 4. The number of sales returns as a percentage of the number of total orders. B. Prepare a brief summary of your findings. Should Power work with any of the chains in an effort to improve results? Explain. Weekend Project

Tool Mart

Fix-It City

Dollars

$2,000,000

$4,900,000

$4,600,000

Number of Orders

175

125

135

110

Gross sales volume:

Type of order:

Regular

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Rush

Dollars

$100,000

$400,000

$240,000

Number of returns

Total customer-related costs

$245,100

$918,000

$457,800

Sales returns:

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26) Sailing Manufacturing is a relatively new customer of Hammer Enterprises. In the short period that the two companies have done business with each other, Hammer has found Sailing to be, in management's words, "an expensive proposition." Numerous sales visits are typically required to "close a deal," with selling prices and discounts offered being among the most attractive in the industry. Complicating matters, Sailing is slow to settle its account, orders in small quantities, and often has numerous specialized shipping and handling needs. A recent customer profitability analysis has painted a very negative picture of Sailing Manufacturing, and Hammer’s managers are questioning whether an on-going relationship with the firm is warranted. Required: A. Briefly explain why the customer profitability analysis painted a negative picture of Sailing Manufacturing. B. What actions are available to Hammer Enterprises to improve Sailing’s profitability?

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Answer Key Test name: Chap 05_6e_Cornett_Manually Graded

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Chapter 06 – 6e Cornett 1)

The relationship between cost and activity is known as: A) cost estimation. B) cost prediction. C) cost behavior. D) cost analysis. E) cost approximation.

A forecast of a cost at a particular level of activity is known as: A) cost estimation. B) cost prediction. C) cost behavior. D) cost analysis. E) cost approximation.

3) Volcano Hot Wings has budgeted the following costs for a month in which 12,000 wings will be cooked and sold.

Wings, breading, and sauce

$ 4,900

Direct labor (Variable)

3,500

Rent

1,100

Depreciation

900

Other fixed costs

400

Each wing sells for $1.60 each. How much is the budgeted variable cost per unit?

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A) $0.70 B) $0.90 C) $1.60 D) $0.80 E) None of these answer choices are correct.

4) Volcano Hot Wings has budgeted the following costs for a month in which 12,000 wings will be cooked and sold.

Wings, breading, and sauce

$ 4,900

Direct labor (Variable)

3,500

Rent

1,100

Depreciation

900

Other fixed costs

400

Each wing sells for $1.60 each. What is the budgeted total variable cost? A) $10,800 B) $10,400 C) $9,500 D) $8,400 E) None of these answer choices is correct.

5) Volcano Hot Wings has budgeted the following costs for a month in which 12,000 wings will be cooked and sold.

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Wings, breading, and sauce

$ 4,900

Direct labor (Variable)

3,500

Rent

1,100

Depreciation

900

Other fixed costs

400

Each wing sells for $1.60 each. What is the budgeted total fixed cost? A) $7,300 B) $2,400 C) $8,400 D) $10,800 E) None of these answer choices is correct.

6) Volcano Hot Wings has budgeted the following costs for a month in which 12,000 wings will be cooked and sold.

Wings, breading, and sauce

$ 4,900

Direct labor (Variable)

3,500

Rent

1,100

Depreciation

900

Other fixed costs

400

Each wing sells for $1.60 each. What is the budgeted fixed cost per unit?

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A) $0.70 B) $1.60 C) $0.20 D) $0.34 E) None of these answer choices is correct.

7) Volcano Hot Wings has budgeted the following costs for a month in which 12,000 wings will be cooked and sold.

Wings, breading, and sauce

$ 4,900

Direct labor (Variable)

3,500

Rent

1,100

Depreciation

900

Other fixed costs

400

Each wing sells for $1.60 each. What is Volcano Hot Wings’ budgeted profit? A) $19,200 B) $13,200 C) $8,400 D) $10,800 E) None of these answer choices is correct.

8) Volcano Hot Wings has budgeted the following costs for a month in which 12,000 wings will be cooked and sold.

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Wings, breading, and sauce

$ 4,900

Direct labor (Variable)

3,500

Rent

1,100

Depreciation

900

Other fixed costs

400

Each wing sells for $1.60 each. How much would Volcano Hot Wings’ profit increase if 100 more wings were sold? A) $160.00 B) $70.00 C) $90.00 D) $168.00 E) None of these answer choices are correct.

9) Fractured Auto Repair projects variable labor costs of $21,500 in March when 8,600 units are produced. If production is expected to drop to 8,000 units in April, what is the expected labor cost in April? A) $21,500 B) $20,000 C) $23,113 D) $20,900 E) None of these answer choices is correct.

10) Grimaldi Chocolates projects its factory rent to be $8,000 in July when 4,000 pounds of candy are expected to be produced. If rent is a fixed cost, and if production is expected to increase to 6,000 units in August, what is the expected cost of rent in August?

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A) $12,000 B) $8,000 C) $7,000 D) $10,667 E) Not enough information is provided to determine the answer.

11) Polka King Gifts had the following costs in March when 400 ceramic statues were produced: materials, $4,200; labor cost, $1,600; depreciation, $800; rent, $700; and other fixed costs, $500. Which one of the following is the correct cost for Polka King? A) The fixed cost per unit is $3.75 B) The variable cost per unit is $14.50 C) The fixed cost per unit is $19.50 D) The total cost per unit is $14.50 E) None of these answer choices is correct.

12) Polka King Gifts had the following costs in March when 400 ceramic statues were produced: materials, $4,200; labor cost, $1,600; depreciation, $800; rent, $700; and other fixed costs, $500. If production changes to 500 units and production still remains within the relevant range, which of the following costs will stay the same? A) Variable cost per unit B) Fixed cost per unit C) Total variable cost D) Total cost per unit E) None of these answer choices is correct.

13) Polka King Gifts had the following costs in March when 400 ceramic statues were produced: materials, $4,200; hourly labor, $1,600; depreciation, $800; rent, $700; and other fixed costs, $500. If the production level changes to 500 units, how much will the total costs be?

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A) $9,750 B) $7,800 C) $9,250 D) $1,950 E) None of these answer choices is correct.

14) At Medallion Industries, variable cost per unit is budgeted to be $8.00 and fixed cost per unit is budgeted to be $5.00 in a period when 4,000 units are produced. What is the expected total cost of the units produced at Medallion, if instead, production is actually 5,100 units? A) $52,000 B) $60,800 C) $66,300 D) $40,800 E) None of these answer choices is correct.

15) At Medallion Industries, during 20x5 the anticipated production is 5,000 units, budgeted variable costs are $75,000, and budgeted fixed costs are $24,000. If 5,600 units are actually produced, what is the expected total cost? A) $110,600 B) $84,000 C) $108,000 D) $88,394 E) None of these answer choices is correct.

16) During 20x5, Medallion Industries anticipates production of 20,000 units, budgeted variable costs of $85,000, and budgeted fixed costs of $45,000. If 15,000 units are actually produced, what is the expected total cost?

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A) $130,000 B) $97,500 C) $108,750 D) $118,750 E) None of these answer choices is correct.

17) Command Generators is in the process of preparing a production cost budget for August. Actual costs in July for the production of 60 generators were:

Materials cost

5,200

Labor cost

2,600

Rent

1,200

Depreciation

1,700

Other fixed costs

4,600

Total

$ 15,300

Materials and labor are the only variable costs. If production and sales are budgeted to increase to 70 generators in August, how much is the expected total cost on the August budget? A) $17,850 B) $16,600 C) $9,100 D) $15,300 E) None of these answer choices is correct.

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18) Command Generators is in the process of preparing a production cost budget for August. Actual costs in July for the production of 60 generators were:

Materials cost

5,200

Labor cost

2,600

Rent

1,200

Depreciation

1,700

Other fixed costs

4,600

Total

$ 15,300

Materials and labor are the only variable costs. If production and sales are budgeted to increase to 70 generators in August, how much is the expected total variable cost on the August budget? A) $17,850 B) $16,600 C) $9,100 D) $15,300 E) None of these answer choices is correct.

19) Brawny Generators is in the process of preparing a production cost budget for August. Actual costs in July for the production of 60 generators were:

Materials cost

5,200

Labor cost

2,600

Rent

1,200

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Depreciation

1,700

Other fixed costs

4,600

Total

$ 15,300

Materials and labor are the only variable costs. If production and sales are budgeted to increase to 70 generators in August, how much is the fixed cost per unit on the August budget? A) $107.14 B) $125.00 C) $218.57 D) $130.00 E) None of these answer choices is correct.

20) Brawny Generators is in the process of preparing a production cost budget for August. Actual costs in July for the production of 60 generators were:

Materials cost

5,200

Labor cost

2,600

Rent

1,200

Depreciation

1,700

Other fixed costs

4,600

Total

15,300

Materials and labor are the only variable costs. If production and sales are budgeted to increase to 70 generators in August, how much is the expected total fixed cost on the August budget?

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A) $8,750 B) $7,800 C) $7,500 D) $15,300 E) None of these answer choices is correct.

21) Which of the following costs changes in direct proportion to a change in the activity level? A) Variable cost. B) Fixed cost. C) Semivariable cost. D) Step-variable cost. E) Step-fixed cost.

22) Macon Company has a variable selling cost. If sales volume increases, how will the total variable cost and the variable cost per unit behave? Total Variable Cost

Variable Cost Per Unit

Increase

Remain constant

Increase

Decrease

Remain constant

Decrease

Increase

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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23)

What type of cost exhibits the behavior shown below?

Manufacturing Volume (Units)

Cost Per Unit

50,000

$ 1.95

70,000

1.95

A) Variable cost. B) Fixed cost. C) Semivariable cost. D) Discretionary fixed cost. E) Step-fixed cost.

24) Paige Corporation observed that when 25,000 units were sold, a particular cost amounted to $75,000, or $3.00 per unit. When volume increased by 10%, the cost totaled $82,500 (i.e., $3.00 per unit). The cost that Paige is studying can best be described as a: A) variable cost. B) fixed cost. C) semivariable cost. D) discretionary fixed cost. E) step-fixed cost.

25)

When graphed, a typical variable cost appears as:

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A) a horizontal line. B) a vertical line. C) a u-shaped line. D) a diagonal line that slopes downward to the right. E) a diagonal line that slopes upward to the right.

26) Norman Company pays a sales commission of 4% on each unit sold. If a graph is prepared, with the vertical axis representing per-unit cost and the horizontal axis representing units sold, how would a line that depicts sales commissions be drawn? A) As a straight diagonal line, sloping upward to the right. B) As a straight diagonal line, sloping downward to the right. C) As a horizontal line. D) As a vertical line. E) As a curvilinear line.

27) A company observed a decrease in the cost per unit. All other things being equal, which of the following is most likely true? A) The company is studying a variable cost, and total volume has increased. B) The company is studying a variable cost, and total volume has decreased. C) The company is studying a fixed cost, and total volume has increased. D) The company is studying a fixed cost, and total volume has decreased. E) The company is studying a fixed cost, and total volume has remained constant.

28) Ralston has the following budgeted costs at its anticipated production level (expressed in hours): variable overhead, $165,000; fixed overhead, $250,000. If Ralston now revises its anticipated production slightly upward, it would expect:

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A) total fixed overhead of $250,000 and a lower hourly rate for variable overhead. B) total fixed overhead of $250,000 and the same hourly rate for variable overhead. C) total fixed overhead of $250,000 and a higher hourly rate for variable overhead. D) total variable overhead of less than $165,000 and a lower hourly rate for variable overhead. E) total variable overhead of less than $165,000 and a higher hourly rate for variable overhead.

29)

What type of cost exhibits the behavior shown below?

Manufacturing Volume (Units)

Total Cost

Cost Per Unit

50,000

$ 150,000

$ 3.00

80,000

150,000

1.88

A) Variable cost. B) Fixed cost. C) Semivariable cost. D) Step-variable cost. E) Mixed cost.

30)

When graphed, a typical fixed cost appears as: A) a horizontal line. B) a vertical line. C) a u-shaped line. D) a diagonal line that slopes downward to the right. E) a diagonal line that slopes upward to the right.

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31)

Straight-line depreciation is a typical example of a: A) variable cost. B) step-variable cost. C) fixed cost. D) mixed cost. E) curvilinear cost.

32) Which of the following choices denotes the typical cost behavior of advertising and sales commissions? Advertising

Sales Commissions

Variable

Fixed

Variable

Fixed

Semivariable

Variable

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

33) If the Malabar Yacht Club expense includes a rent of $2,000 plus a charge of $40 per member and the club has 80 members, A) fixed costs amount to $2,000 and variable costs amount to $3,200. B) fixed costs amount to $3,200 and variable costs amount to $2,000. C) all costs are fixed. D) all costs are variable. E) cannot be determined.

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34) Costs that remain the same over a wide range of activity, but jump to a different amount outside that range, are known as: A) step-fixed costs. B) step-variable costs. C) semivariable costs. D) curvilinear costs. E) mixed costs.

35)

When graphed, a typical step-fixed cost appears as: A) a horizontal line. B) a vertical line. C) a series of staggered horizontal lines with the steps moving upward to the right. D) a diagonal line that slopes downward to the right. E) a diagonal line that slopes upward to the right.

36) Each of Boggart’s production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing activity. Thus, if the company has 50,000 hours of manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed; for 125,000 hours, three managers are needed; and so forth. Boggart’s salary cost can best be described as a: A) variable cost. B) semivariable cost. C) step-variable cost. D) fixed cost. E) step-fixed cost.

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37) Sophie Corporation recently produced and sold 100,000 units. Fixed costs at this level of activity amounted to $50,000; variable costs were $100,000. How much cost would the company anticipate if during the next period it produced and sold 102,000 units? A) $150,000. B) $151,000. C) $152,000. D) $153,000. E) None of the answers is correct.

38) Organize, Inc. has only variable costs and fixed costs. A review of the company's records disclosed that when 200,000 units were produced, fixed manufacturing costs amounted to $800,000 and the cost per unit manufactured totaled $11. On the basis of this information, how much cost would the firm anticipate at an activity level of 205,000 units? A) $2,235,000. B) $2,222,000. C) $2,214,000. D) $2,200,000. E) None of the answers is correct.

39) A review of Parson Corporation's accounting records found that at a volume of 90,000 units, the variable and fixed cost per unit amounted to $8 and $4, respectively. On the basis of this information, what amount of total cost would Parson anticipate at a volume of 85,000 units? A) $1,020,000. B) $1,040,000. C) $1,060,000. D) $1,080,000. E) None of the answers is correct.

40)

A cost that has both a fixed and variable component is known as a:

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A) step-fixed cost. B) step-variable cost. C) semivariable cost. D) curvilinear cost. E) discretionary cost.

41)

A mixed cost is also known as a: A) semivariable cost. B) step-fixed cost. C) variable cost. D) curvilinear cost. E) discretionary cost.

42) Brock Morton has a fast-food franchise and must pay a franchise fee of $45,000 plus 4% of gross sales. In terms of cost behavior, the fee is known as a: A) variable cost. B) fixed cost. C) step-fixed cost. D) semivariable cost. E) curvilinear cost.

43) Which of the following is (are) example(s) of a mixed cost? 1.I. A building that is used for both manufacturing and sales activities. 2.II. An employee's compensation, which consists of a flat salary plus a commission. 3.III. Depreciation that relates to five different machines. 4.IV. Maintenance cost that must be split between sales and administrative offices.

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A) I only. B) II only. C) I and III. D) I, III, and IV. E) I, II, III, and IV.

44) Which of the following costs exhibits both decreasing and increasing marginal costs over a specific range of activity? A) Semivariable cost. B) Curvilinear cost. C) Step-fixed cost. D) Step-variable cost. E) Fixed cost.

45)

The relevant range is that range of activity: A) where a company achieves its maximum efficiency. B) where units produced equal units sold. C) where management expects the firm to operate. D) where the firm will earn a profit. E) where expected results are abnormally high.

46)

Within the relevant range of activity, costs: A) can be estimated with reasonable accuracy. B) can be expected to change radically. C) exhibit decreasing marginal cost patterns. D) exhibit increasing marginal cost patterns. E) cannot be estimated satisfactorily.

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47)

Within the relevant range, a curvilinear cost function can sometimes be graphed as a: A) sloping straight line. B) jagged line. C) vertical straight line. D) curved line. E) horizontal straight line.

48) A variable cost that has a definitive physical relationship to the activity measure is called a (n): A) discretionary cost. B) engineered cost. C) managed cost. D) programmed cost. E) committed cost.

49) Costs that result from a company's ownership or use of facilities and its basic organizational structure are known as: A) discretionary fixed costs. B) committed fixed costs. C) discretionary variable costs. D) committed variable costs. E) engineered costs.

50)

Property taxes are an example of a(n):

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A) committed fixed cost. B) committed variable cost. C) discretionary fixed cost. D) discretionary variable cost. E) engineered cost.

51)

Which of the following is not an example of a committed fixed cost? A) Property taxes. B) Depreciation on buildings. C) Salaries of management personnel. D) Outlays for advertising programs. E) Equipment rental costs.

52)

Committed fixed costs would include: A) advertising. B) research and development. C) depreciation on buildings and equipment. D) contributions to charitable organizations. E) expenditures for direct labor.

53)

Amounts spent for charitable contributions are an example of a(n): A) committed fixed cost. B) committed variable cost. C) discretionary fixed cost. D) discretionary variable cost. E) engineered cost.

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54)

Which of the following would not typically be classified as a discretionary fixed cost? A) Equipment depreciation. B) Employee development (education) programs. C) Advertising. D) Outlays for research and development. E) Charitable contributions.

55) Which of the following choices correctly classifies a committed fixed cost and a discretionary fixed cost? Committed

Discretionary

Promotion

Management salaries

Building depreciation

Charitable contributions

Management training

Property taxes

Equipment rentals

Equipment depreciation

Research and development

Advertising

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

56) Which type of fixed cost (1) tends to be more long-term in nature and (2) can be cut back more easily in bad economic times without doing serious harm to organizational goals and objectives? Long Term in Nature

Can be Cut Back More Easily In Bad Economic Times

Committed

Discretionary

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Discretionary

Committed

Discretionary

Committed

No difference between committed and discretionary

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

57)

Which of the following techniques is not used to analyze cost behavior? A) Least-squares regression. B) High-low method. C) Visual-fit method. D) Linear programming. E) Multiple regression.

58)

The high-low method and least-squares regression are used by accountants to: A) evaluate divisional managers for purposes of raises and promotions. B) choose among alternative courses of action. C) maximize output. D) estimate costs. E) control operations.

59) Which of the following statements about the visual-fit method is (are) true? 1.I. The method results in the creation of a scatter diagram. 2.II. The method is not totally objective because of the manner in which the cost line is determined. 3.III. The method is especially helpful in the determination of outliers.

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A) I only. B) II only. C) I and II. D) I and III. E) I, II, and III.

60) The nonstatistical method of cost estimation that calls for the creation of a scatter diagram is the: A) least-squares regression method. B) high-low method. C) visual-fit method. D) account analysis method. E) multiple regression method.

61)

Which of the following methods of cost estimation relies on only two data points? A) Least-squares regression. B) The high-low method. C) The visual-fit method. D) Account analysis. E) Multiple regression.

62) Gentry Industries has the following information about maintenance costs in the past six months. Month January

Machine Hours 200

Amount $ 2,800

February

350

3,000

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March

450

4,000

April

500

5,000

May

600

5,200

June

580

5,800

If the company uses the high-low method to analyze costs, Gentry’s variable cost is: A) $8.70 B) $1.60 C) $7.90 D) $6.00 E) None of the answers is correct.

63) Gentry Industries has the following information about maintenance costs in the past six months. Month January

Machine Hours 200

Amount $ 2,800

February

350

3,000

March

450

4,000

April

500

5,000

May

600

5,200

June

580

5,800

Gentry’s monthly fixed maintenance fee is:

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A) $1,600. B) $1,200. C) $3,600. D) $112. E) None of the answers is correct.

64) Gentry Industries has the following information about maintenance costs in the past six months. Month January

Machine Hours 200

Amount $ 2,800

February

350

3,000

March

450

4,000

April

500

5,000

May

600

5,200

June

580

5,800

How much would Gentry pay if maintenance machine hours are 550? A) $9,600. B) $5,150. C) $4,900. D) $5,100. E) None of the answers is correct.

65) Gentry Industries has the following information about maintenance costs in the past six months.

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Month January

Machine Hours 200

Amount $ 2,800

February

350

3,000

March

450

4,000

April

500

5,000

May

600

5,200

June

580

5,800

The cost formula that expresses the behavior of Gentry’s maintenance cost is: A) Y = $0 + $1,600X. B) Y = $160 + $6X. C) Y = $16,000 + $6X. D) Y = $0 + $6X. E) Y = $1,600 + $6X.

66) Fulton and Sons, Inc. presently leases a copy machine under an agreement that calls for a fixed fee each month and a charge for each copy made. Fulton made 7,000 copies and paid a total of $360 in March; in May, the firm paid $280 for 5,000 copies. The company uses the highlow method to analyze costs. Fulton’s variable cost per copy is: A) $0.040. B) $0.051. C) $0.053. D) $0.056. E) None of the answers is correct.

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67) Fulton and Sons, Inc. presently leases a copy machine under an agreement that calls for a fixed fee each month and a charge for each copy made. Fulton made 7,000 copies and paid a total of $360 in March; in May, the firm paid $280 for 5,000 copies. The company uses the highlow method to analyze costs. Fulton’s monthly fixed fee is: A) $80. B) $102. C) $106. D) $112. E) None of the answers is correct.

68) Fulton and Sons, Inc. presently leases a copy machine under an agreement that calls for a fixed fee each month and a charge for each copy made. Fulton made 7,000 copies and paid a total of $360 in March; in May, the firm paid $280 for 5,000 copies. The company uses the highlow method to analyze costs. How much would Fulton pay if it made 5,500 copies? A) $382.50. B) $322. C) $300. D) $292.50. E) None of the answers is correct.

69) Barkoff Enterprises, which uses the high-low method to analyze cost behavior, has determined that machine hours best explain the company's utilities cost. The company's relevant range of activity varies from a low of 600 machine hours to a high of 1,100 machine hours, with the following data being available for the first six months of the year: Month

Utilities

Machine Hours

January

$ 8,700

800

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February

8,360

720

March

8,950

810

April

9,360

920

May

9,625

950

June

9,150

900

The variable utilities cost per machine hour for Barkoff is: A) $0.18. B) $4.50. C) $5.00. D) $5.50. E) None of the answers is correct.

70) Barkoff Enterprises, which uses the high-low method to analyze cost behavior, has determined that machine hours best explain the company's utilities cost. The company's relevant range of activity varies from a low of 600 machine hours to a high of 1,100 machine hours, with the following data being available for the first six months of the year: Month

Utilities

Machine Hours

January

$ 8,700

800

February

8,360

720

March

8,950

810

April

9,360

920

May

9,625

950

June

9,150

900

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The fixed utilities cost per month for Barkoff is: A) $3,764. B) $4,400. C) $4,760. D) $5,100. E) None of the answers is correct.

71) Barkoff Enterprises, which uses the high-low method to analyze cost behavior, has determined that machine hours best explain the company's utilities cost. The company's relevant range of activity varies from a low of 600 machine hours to a high of 1,100 machine hours, with the following data being available for the first six months of the year: Month

Utilities

Machine Hours

January

$ 8,700

800

February

8,360

720

March

8,950

810

April

9,360

920

May

9,625

950

June

9,150

900

Using the high-low method, the utilities cost for Barkoff associated with 980 machine hours would be: A) $9,510. B) $9,660. C) $9,700. D) $9,790. E) None of the answers is correct.

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72) Swan, Inc. uses the high-low method to analyze cost behavior. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $30.40. On the basis of this information, the variable cost per machine hour for Swan was: A) $8.40. B) $22.00. C) $25.00. D) $30.40. E) $33.40.

73) Swan, Inc. uses the high-low method to analyze cost behavior. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $30.40. On the basis of this information, the fixed cost for Swan was: A) $184,800. B) $210,000. C) $550,000. D) $734,800. E) $760,000.

74) Swan, Inc. uses the high-low method to analyze cost behavior. The company observed that at 22,000 machine hours of activity, total maintenance costs averaged $33.40 per hour. When activity jumped to 25,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $30.40. On the basis of this information, what were total maintenance costs when Swan experienced 23,000 machine hours?

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A) $193,200. B) $550,000. C) $734,800. D) $743,200. E) $760,000.

75) Tallequah, Inc. uses the high-low method to analyze cost behavior. The company observed that at 20,000 machine hours of activity, total maintenance costs averaged $10.50 per hour. When activity jumped to 24,000 machine hours, which was still within the relevant range, the average total cost per machine hour was $9.75. On the basis of this information, the company's fixed maintenance costs were: A) $24,000. B) $90,000. C) $210,000. D) $234,000. E) None of the answers is correct.

76) year:

The following data relate to the Torrence Company for May and August of the current

May

August

Maintenance hours

25,000

29,000

Maintenance cost

$ 1,175,000

$ 1,247,000

May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. Which of the following statements is true?

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A) The variable maintenance cost is $43 per hour. B) The variable maintenance cost is $45 per hour. C) The variable maintenance cost is $47 per hour. D) The fixed maintenance cost is $725,000 per month. E) More than one of the other answers is true.

77)

Data below relate to the Torrence Company for May and August of the current year: May

August

Maintenance hours

25,000

29,000

Maintenance cost

$ 1,175,000

$ 1,247,000

May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. Which of the following statements is true? A) The variable maintenance cost is $18 per hour. B) The variable maintenance cost is $22 per hour. C) The variable maintenance cost is $24 per hour. D) The fixed maintenance cost is $72,000 per month. E) More than one of the other answers is true.

78)

The following data relate to the Torrence Company for May and August: May

August

Maintenance hours

25,000

29,000

Maintenance cost

$ 1,175,000

$ 1,247,000

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May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true? A) The variable maintenance cost is $18 per hour. B) The variable maintenance cost is $22 per hour. C) The variable maintenance cost is $24 per hour. D) The fixed maintenance cost is $72,000 per month. E) More than one of the other answers is true.

79)

The following data relate to the Torrence Company for May and August: May

August

Maintenance hours

25,000

29,000

Maintenance cost

$ 1,175,000

$ 1,247,000

May and August were the lowest and highest activity levels, and Torrence uses the high-low method to analyze cost behavior. If maintenance hours are estimated to be 26,000 hours in October, which of the following statements is true? A) Total maintenance costs will be $1,175,000. B) Total maintenance costs will be $1,182,000. C) Total maintenance costs will be $1,193,000. D) Total maintenance costs will be $1,221,000. E) Total maintenance costs will be $1,247,000.

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80) Shum Manufacturing, which uses the high-low method, makes a product called Kwan. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below. Type A

Type B

Type C

Total

5,000 units

$ 17

7,500 units

The cost types shown above are identified by behavior as:

Type A

Type B

Type C

Fixed

Variable

Semivariable

Fixed

Semivariable

Variable

Semivariable

Fixed

Variable

Fixed

Semivariable

Variable

Fixed

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

81) Shum Manufacturing, which uses the high-low method, makes a product called Kwan. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below. Type A

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Type B

Type C

Total

5,000 units

$ 17

7,500 units

If Shum produces 10,000 units, the total cost would be: A) $90,000. B) $100,000. C) $110,000. D) $125,000. E) None of the answers is correct.

82) Shum Manufacturing, which uses the high-low method, makes a product called Kwan. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below. Type A

Type B

Type C

Total

5,000 units

$ 17

7,500 units

The cost formula that expresses the behavior of Shum’s total cost is: A) Y = $0 + $17X. B) Y = $20,000 + $13X. C) Y = $40,000 + $9X. D) Y = $45,000 + $4X. E) Y = $60,000 + $5X.

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83)

In regression analysis, the variable that is being predicted is known as the: A) independent variable. B) dependent variable. C) explanatory variable. D) interdependent variable. E) functional variable.

84) Almed Products has determined that the number of machine hours worked (MH) drives the amount of manufacturing overhead incurred (MOH). On the basis of this relationship, a staff analyst has constructed the following regression equation: MOH = 240,000 + 8MH Which of the choices correctly depicts the nature of Almed’s variables? Dependent

Independent

MOH

240,000

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

85) Focus, Inc. operates a small package delivery service in the Atlanta suburbs. If the company uses a regression equation to forecast total operating costs, the equation's intercept would correspond to the:

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A) variable operating cost per delivery. B) fixed operating costs. C) number of deliveries. D) total variable operating costs. E) total operating costs.

86) Rushmont, Inc. operates a small package delivery service in the Nashville suburbs. If the company uses a regression equation to forecast total operating costs, the coefficient of the equation's independent variable would correspond to the: A) variable operating cost per delivery. B) fixed operating costs. C) number of deliveries. D) total variable operating costs. E) total operating costs.

87) Corrine Corporation, which uses least-squares regression analysis, has derived the following regression equation for estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if the primary cost driver is machine hours? A) Total manufacturing overhead is represented by the variable "X." B) The company anticipates $495,000 of fixed manufacturing overhead. C) "X" is commonly known as the dependent variable. D) "X" represents the number of machine hours. E) The company anticipates $495,000 of fixed manufacturing overhead and "X" represents the number of machine hours.

88) Blaster, Inc. recently conducted a least-squares regression analysis to predict selling expenses. The company has constructed the following regression equation: Y = 329,000 + 7.80X. Which of the following statements is false if the primary cost driver is number of units sold?

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A) The company anticipates $329,000 of fixed selling expenses. B) "Y" represents total selling expenses. C) The company expects both variable and fixed selling expenses. D) For each unit sold, total selling expenses will increase by $7.80. E) "X" represents the number of hours worked during the period.

89) Trey, Inc. is studying marketing cost and sales volume, and has generated the following information by use of a scatter diagram and a least-squares regression analysis:

Variable cost per unit sold

Scatter Diagram $ 6.50

Regression Analysis $ 6.80

Total monthly fixed cost

$ 42,500

45,000

Trey is now preparing an estimate for monthly sales of 18,000 units. On the basis of the data presented, compute the most accurate sales forecast possible. A) $159,500. B) $162,000. C) $164,900. D) $167,400. E) None of the answers is correct.

90) Bogata Enterprises has determined that three variables play a key role in determining company revenues. To arrive at an objective forecast of revenues for the next accounting period, Bogata should use:

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A) simple regression. B) multiple regression. C) a scatter diagram. D) complex regression. E) the high-low method.

91)

Which of the following tools is not associated with cost estimation? A) Least-squares regression. B) Multiple regression. C) Inversion equations. D) Time and motion (engineering) studies. E) Learning curves.

92) A staff assistant at Warrington Corporation recently determined that the first five units completed in a new manufacturing process took 500 hours to complete, or an average of 100 hours per unit. The assistant also found that when the cumulative output produced doubles, the average labor time declines by 20%. On the basis of this information, how many total hours would Warrington use if it produces a cumulative amount of 40 units? A) 128. B) 160. C) 1,280. D) 2,048. E) None of the answers is correct.

93) Berringer Designs hired a graphic artist. It is estimated that the artist’s learning rate is at 70% and her first quarter’s output amounted to 300 relatively equal job outputs, which took her a total of 50 hours to complete. Output is expected to double in every succeeding quarter. What is the total output as of the 5th quarter?

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A) 1,500. B) 3,000. C) 2,400. D) 4,800. E) None of the answers is correct.

94) Berringer Designs hired a graphic artist. It is estimated that the artist’s learning rate is at 70% and her first quarter’s output amounted to 300 relatively equal job outputs, which took her a total of 50 hours to complete. Output is expected to double in every succeeding quarter. What is the total time requirement as of the 5th quarter? (Do not round your intermediate calculations.) A) 150 hours. B) 175 hours. C) 250 hours. D) 192.08 hours. E) None of the answers is correct.

95) Berringer Designs hired a graphic artist. It is estimated that the artist’s learning rate is at 70% and her first quarter’s output amounted to 300 relatively equal job outputs, which took her a total of 50 hours to complete. Output is expected to double in every succeeding quarter. By the 5th quarter, based on learning curve estimates, what should the artist’s average time (in hours) be for the units of output? A) 17.15 hours. B) 3.5 hours. C) 12.005 hours. D) 6.9 hours. E) None of the answers is correct.

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96)

Which of the following is not an issue in the collection of data for cost estimation? A) Outliers. B) Missing data. C) Mismatched time periods. D) Inflation. E) All of the answers are issues in data collection.

97)

The determination of cost behavior is called cost prediction. ⊚ true ⊚ false

98)

Cost estimation typically focuses on the future. ⊚ true ⊚ false

99)

Variable costs change in direct proportion to a change in the activity level. ⊚ true ⊚ false

100) Cost that are nearly variable, but increase in small steps instead of continuously are called step-variable costs. ⊚ true ⊚ false

101) The relevant range is that range of activity where a company achieves its maximum efficiency.

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⊚ ⊚

true false

102) If the organization operates at an activity level outside the relevant range, any cost predictions based on data from the relevant range may not be very accurate. ⊚ true ⊚ false

103) A committed cost results from a management decision to spend a particular amount of money for some purpose. ⊚ true ⊚ false

104)

An example of a discretionary cost is the cost of research and development. ⊚ true ⊚ false

105)

The least-squares regression method of cost estimation relies on only two data points. ⊚ true ⊚ false

106) In regression analysis, the variable that is being predicted is known as the independent variable. ⊚ true ⊚ false

107) Multiple regression is a statistical method that estimates a linear (straight-line) relationship between one dependent variable and one independent variable.

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⊚ ⊚

true false

108) When the engineering method is applied to costs other than labor, it is referred to as the experience method. ⊚ true ⊚ false

109)

Mismatched time periods are not issues in the collection of data for cost estimation. ⊚ true ⊚ false

110)

Outliers are a common data collection problem. ⊚ true ⊚ false

111) In the least-squares regression method, the cost line is estimated so as to maximize the sum of the squared deviations between the cost line and the data points. ⊚ true ⊚ false

112) The slope of a regression line measures how steeply the cost line rises as activity increases. ⊚ true ⊚ false

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Answer Key Test name: Chap 06_6e_Cornett 1) C 2) B 3) A 4) D 5) B 6) C 7) C 8) C 9) B 10) B 11) B 12) A 13) C 14) B 15) C 16) C 17) B 18) C 19) A 20) C 21) A 22) B 23) A 24) A 25) E 26) C Version 1

27) C 28) B 29) B 30) A 31) C 32) C 33) A 34) A 35) C 36) E 37) C 38) A 39) B 40) C 41) A 42) D 43) B 44) B 45) C 46) A 47) A 48) B 49) B 50) A 51) D 52) C 53) C 54) A 55) B 56) B Version 1

57) D 58) D 59) E 60) C 61) B 62) D 63) A 64) C 65) E 66) A 67) A 68) C 69) D 70) B 71) D 72) A 73) C 74) D 75) B 76) D 77) A 78) A 79) C 80) D 81) C 82) E 83) B 84) B 85) B 86) A Version 1

87) E 88) E 89) C 90) B 91) C 92) D 93) D 94) D 95) C 96) E 97) FALSE 98) FALSE 99) TRUE 100) TRUE 101) FALSE 102) TRUE 103) FALSE 104) TRUE 105) FALSE 106) FALSE 107) FALSE 108) FALSE 109) FALSE 110) TRUE 111) FALSE 112) TRUE

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Chapter 06 – 6e Cornet- Manually Graded 1) Consider the graphs that follow (the horizontal axis represents activity; the vertical axis represents total dollars). {MISSING IMAGE} Required: For items A-I that follow, choose the graph that best represents the cost behavior pattern described. Note: Graphs can be used more than once. A. Straight-line depreciation on machinery. B. The cost of chartering a private airplane. The cost is $800 per hour for the first 6 hours of a flight; it then drops to $600 per hour. C. The wages of table service personnel in a restaurant. The employees are part-time workers who can be called upon for as little as 4 hours at a time. D. Weekly wages of store clerks who work 40 hours each week. One clerk is hired for every 125 sales made during the month. E. The cost of tires used in the production of trucks. F. Outbound shipping charges that increase at a decreasing rate as sales rise because the firm can use more efficient modes of transportation (e.g., full trailer loads, full rail cars, etc.). Gradually, however, at high levels of sales, freight costs start to increase at an increasing rate, which reflects more transactions made to customers in far-away locations. G. Equipment leasing costs that are computed at $2 per machine hour worked. The company pays a maximum of $120,000 per month. H. The monthly cost of a franchise fee for a fast-food restaurant. The franchisee must pay $20,000 plus 5% of gross dollar sales. I. The cost of electricity during peak demand periods, which is based on the following schedule: Up to 20,000 kilowatt hours (KWH): $4,000 Above 20,000 kilowatt hours: $4,000 + $0.02 per KWH

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2) Consider the six costs that follow. 1. Advertising and promotion costs of a do-it-yourself retailer 2. Surgical supplies used in a hospital's operating room 3. Aircraft depreciation charges of an airline 4. Utility charges that include a minimum-use fee, for a small business 5. Annual business licensing fee paid by a daycare center 6. Truck fuel consumed by a road construction company Required: A. Classify each of these costs as variable, committed fixed, discretionary fixed, or semivariable. B. Briefly describe the behavior of a per-unit variable cost as activity changes. C. What elements are present in a semivariable cost that cause it to behave in a semivariable manner? D. Generally speaking, does management have more flexibility when dealing with committed fixed costs or discretionary fixed costs?

3) Rolling Hills Bistro produces one of the best sausage products in Tennessee. The company's controller compiled the following information by analyzing the accounting records: 1. Meat costs the company $3.25 per pound of sausage produced. 2. Compensation of production employees is $2.25 per pound of sausage produced. 3. Supervisory salaries total $23,000 per month. 4. The company incurs utility costs of $9,000 per month plus $0.35 per pound of sausage produced. 5. Insurance and property taxes average $6,400 per month. Required: A. Classify each cost as variable, fixed, or semivariable. B. Write a formula to express the behavior of the firm's production costs. (Use the form Y = a + bX, where X denotes the quantity of sausage produced.)

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4) Vargis Corporation has a machining capacity of 200,000 hours per year. Utilization of capacity is normally 75%; it has been as low as 40% and as high as 90%. An analysis of the accounting records revealed the following selected costs: At a 40% Utilization Rate

At a 90% Utilization Rate

Total

$440,000

Per hour

$5.50

Total

$1,944,000

Per hour

$10.80

Cost A:

Cost B:

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Cost C:

Total

$680,000

$1,330,000

Per hour

$8.50

$7.39

Vargis uses the high-low method to analyze cost behavior. Required: A. Classify each of the costs as being either variable, fixed, or semivariable. B. Calculate amounts for the two unknowns in the preceding table. C. Calculate the total amount that Vargis would expect at a 75% utilization rate for Cost A, Cost B, and Cost C. D. Develop an equation that Vargis can use to predict total cost for any level of hours within its range of operation.

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5) Cheyenne Corporation operates a small medical lab in Wyoming that conducts minor medical procedures (including blood tests and x-rays) for a number of doctors. The lab consumes various medical supplies and is staffed by two technicians, both of whom are paid a monthly salary. In addition, there is an on-site office manager who is also paid by the month. Required: A. If the lab's patient count increases by 15%, will the lab's total operating costs increase by 15%? Explain. B. Cheyenne is considering opening an additional lab in a new suburban medical building. What will likely happen to the lab's level of fixed cost incurrence? Why? C. What analysis methods would be available to the office manager and/or Cheyenne management if a close look at the lab's cost behavior is desired?

6) The following selected data were taken from the accounting records of Colorado Enterprises: Month

Machine Hours

Manufacturing Overhead

May

46,000

$889,000

June

60,000

1,130,000

July

68,000

1,274,000

August

52,000

980,000

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Manufacturing overhead consists of three different costs; (1) machine supplies (variable), (2) property taxes (fixed), and (3) plant maintenance (semivariable). July's overhead costs were $170,000 for machine supplies, $24,000 for property taxes, and $1,080,000 for plant maintenance. Required: A. Determine the machine supplies and property taxes for May. B. By using the high-low method, analyze Colorado’s plant maintenance cost and calculate the monthly fixed portion and the variable cost per machine hour. C. Assume that present cost behavior patterns continue into future months. Estimate the total amount of manufacturing overhead the company can expect in September if 56,000 machine hours are worked.

7) Lichtenstein Imports needs to determine the variable utilities rate per machine hour in order to estimate cost for August. Relevant information is as follows. Month

Machine Hours Worked

Utilities Cost

April

4,500

$9,560

May

4,200

9,440

June

6,500

10,725

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July

7,000

11,400

Lichtenstein anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine time. The company uses the high-low method to analyze costs. Required: A. Calculate the variable and fixed components of the utilities cost. B. Using the data calculated above, estimate the utilities cost for August. C. Compare the high-low method versus the visual-fit method with respect to (1) number of data observations used in the analysis and (2) objectivity of the results.

8) Trane Medical Clinic offers a number of specialized medical services. A review of data for the year just ended revealed variable costs of $32 per patient day; annual fixed costs of $480,000, which are incurred evenly throughout the year; and semivariable costs that displayed the following behavior at the "peak" and "valley" of activity: January (2,400 patient days): $258,400 August (2,900 patient days): $278,900 Required: A. Calculate the total cost for an upcoming month (2,800 patient days) if current cost behavior patterns continue. Trane uses the high-low method to analyze cost behavior. B. There is a high probability that Trane’s volume will increase in forthcoming months as patients take advantage of new scientific advances. Can the data and methodology used in part (a) for predicting the costs of 2,800 patient days be employed to estimate the costs for, say, 3,800 patient days? Why or why not?

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9) Hogan Mining extracts ore for eight different companies in South Dakota. The firm anticipates variable costs of $65 per ton along with annual fixed overhead of $840,000, which is incurred evenly throughout the year. These costs exclude the following semivariable costs, which are expected to total the amounts shown for the high and low points of ore extraction activity: March (850 tons): $39,900 August (1,300 tons): $46,200 Hogan uses the high-low method to analyze cost behavior. Required: A. Calculate the semivariable cost for an upcoming month when 875 tons will be extracted. B. Calculate the total cost for that same month. C. Hogan uses Martinez Trucking to haul extracted ore. Martinez’s monthly charges are as follows: 800 to 1,099 tons

$ 70,000

1,100 to 1,399 tons

90,000

1,400 + tons

110,000

1. From a cost behavior perspective, what type of cost is this? 2. If Hogan plans to extract 875 tons, is the company being very "cost effective" with respect to Martinez’s billing rates? Briefly discuss.

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10) T.L. Franklin Corporation has three costs: A, which is variable; B, which is fixed; and C, which is semivariable. The company uses the high-low method and extracted the following data from its accounting records: · At 180,000 hours of activity, Cost A totaled $2,610,000. · At 140,000 hours, the low point during the period, Cost C totaled $1,498,000; at 200,000 hours, the high point, Cost C's fixed portion amounted to $1.75 per hour. · At 160,000 hours of activity, the sum of Costs A, B, and C amounted to $8,162,000. Required: A. Compute the variable portion (total) of Cost C at 140,000 hours of activity. B. Compute Cost C (total) at 160,000 hours of activity. C. Compute Cost B (total) at 160,000 hours of activity.

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11) Shortly after being hired as an analyst with Hidden Cove Rentals in Coastal North Carolina, Matt Loman was asked to prepare a report that focused on the company's order processing costs—a cost driven largely by the number of rental invoices written. Matt knew that he could use several different tools to analyze cost behavior, including scatter diagrams, leastsquares regression, and the high-low method. In addition, he knew that he could present the results of his analysis in the form of algebraic equations. Those equations follow. Scatter diagram: OP = $56,000 + $6.80RI Least-squares regression: OP = $59,000 + $6.75RI High-low method: OP = $53,500 + $7.25RI where OP = total order processing costs and RI = number of rental invoices written Matt had analyzed data over the past 12 months and built equations based on these data, purposely including the slowest month of the year and the busiest month so that things would "tend to even out." He observed that February was especially slow because of a paralyzing ice storm, one that forced the company to close for four days. Required: A. Will scatter diagrams, least-squares regression, and the high-low method normally result in the same equation? Why? B. Assuming the use of least-squares regression, explain what the $59,000 and $6.75 figures represent. C. Assuming the use of a scatter diagram, predict the order processing cost of an upcoming month when Hidden Cove expects to write 2,500 rental invoices. D. Did Matt err in constructing the equations on data of the past 12 months? Briefly discuss. If "yes," determine which of the three tools is likely to be affected the most and explain why.

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12) Duke Corporation uses least-squares regression to analyze a variety of operating costs. A staff assistant determined that monthly machine hours (MH) have a strong cause-and-effect relationship with total maintenance costs, and generated the following statistics: Intercept: $170,000 b coefficient: $3.80 Total machine hours for the year: 36,500 Required: A. Construct the company's regression equation. B. Based on your answer in part "A," identify Duke’s dependent variable and independent variable. C. What does the b coefficient really represent? D. Predict the company's maintenance cost in a month when 3,200 machine hours are worked.

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13) Townson Company is making plans for the introduction of a new product, which has a target selling price of $7 per unit. The following estimates of manufacturing costs have been derived for 6 million units, to be produced during the first year: Direct material: $6,000,000 Direct labor: $2,100,000 (at $14 per hour) Overhead costs have not yet been estimated, but monthly data on total production and overhead for the past 12 months have been analyzed by using least-squares regression. The major overhead cost driver is direct labor hours, with the following results: Computed values: Fixed overhead cost: $3,200,000 Coefficient of independent variable: $2.25 Required: A. Prepare the company's regression equation (Y = a + bX) to estimate overhead. B. Calculate the predicted overhead cost at an activity level of 6,300,000 units. C. What is Townson’s dependent variable in this case?

14) Compare and contrast the following types of costs: (1) variable and step-variable and (2) fixed and step-fixed.

15) Define the term "relevant range" and explain its importance in understanding cost behavior.

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16) Differentiate between committed costs and discretionary costs. Be sure to present two examples of each and explain which of the two cost types would likely be cut should a company encounter financial difficulties.

17) Both the visual-fit and high-low methods of cost estimation have inherent limitations. Briefly identify the major deficiency associated with each method.

18) Distinguish between least-squares regression and multiple regression as cost estimation methods.

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Answer Key Test name: Chap 06_6e_Cornett_Manually Graded

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Chapter 07 – 6e Cornett 1) Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units. Narchie: A) will break-even by selling 8,000 units. B) will break-even by selling 13,333 units. C) will break-even by selling 20,000 units. D) will break-even by selling 1,000,000 units. E) cannot break-even because it loses money on every unit sold.

2) Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units. Each unit that Narchie sells will: A) increase profit by $20. B) increase profit by $30. C) increase profit by $50. D) increase profit by some other amount. E) decrease profit by $5.

3) Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units. In order to produce a target profit of $22,000, Narchie's dollar sales must total: A) $8,440. B) $21,100. C) $1,000,000. D) $1,055,000. E) None of the answers is correct.

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4) Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units. If Narchie sells 24,000 units, its safety margin will be: A) $200,000. B) $400,000. C) $1,000,000. D) $1,200,000. E) None of the answers is correct.

A 25% increase in production volume will result in: A) a 25% increase in the variable cost per unit. B) a 25% increase in total mixed costs. C) a 25% increase in total variable costs. D) a 25% increase in total administration costs. E) None of these answer choices is correct.

CVP analysis can be used to study the effect of: A) changes in selling prices on a company's profitability. B) changes in variable costs on a company's profitability. C) changes in fixed costs on a company's profitability. D) changes in product sales mix on a company's profitability. E) All of the answers are correct.

The break-even point is that level of activity where:

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A) total revenue equals total cost. B) variable cost equals fixed cost. C) total contribution margin equals the sum of variable cost plus fixed cost. D) sales revenue equals total variable cost. E) profit is greater than zero.

The break-even point is that level of activity where: A) variable cost equals fixed cost. B) contribution margin equals fixed cost. C) total contribution margin equals the sum of variable cost plus fixed cost. D) sales revenue equals total variable cost. E) sales revenue equals fixed cost.

The unit contribution margin is calculated as the difference between: A) selling price and fixed cost per unit. B) selling price and variable cost per unit. C) selling price and product cost per unit. D) fixed cost per unit and variable cost per unit. E) fixed cost per unit and product cost per unit.

10) unit?

Which of the following would produce the largest increase in the contribution margin per

A) A 7% increase in selling price. B) A 15% decrease in selling price. C) A 14% increase in variable cost. D) A 17% decrease in fixed cost. E) A 23% increase in the number of units sold.

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11)

Which of the following occurs if a company was able to reduce its variable cost per unit? Contribution Margin

Break-even Point

Increase

Decrease

Increase

Decrease

Increase

No effect

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

12)

Which of the following would occur if a company increases its variable cost per unit? Contribution Margin

Break-even Point

Increase

Decrease

Increase

Decrease

Increase

No effect

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

13)

Which of the following occurs if a company experiences an increase in its fixed costs?

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A) Net income would increase. B) The break-even point would increase. C) The contribution margin would increase. D) The contribution margin would decrease. E) More than one of the answers would occur.

14)

Which of the following occurs if a company experiences a decrease in its fixed costs? A) Income would decrease. B) The break-even point would decrease. C) The contribution margin would increase. D) The contribution margin would decrease. E) More than one of the answers would occur.

15) Assuming no change in sales volume, an increase in company's per-unit contribution margin would: A) increase income. B) decrease income. C) have no effect on income. D) increase fixed costs. E) decrease fixed costs.

16)

A company that desires to lower its break-even point should strive to: A) decrease selling prices. B) reduce variable costs. C) increase fixed costs. D) sell more units. E) achieve more than one of the answers listed.

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17) A company has fixed costs of $900 and a per-unit contribution margin of $3. Which of the following statements is true? A) Each unit "contributes" $3 toward covering the fixed costs of $900. B) The situation described is not possible and there must be an error. C) Once the break-even point is reached; the company will increase income at the rate of $3 per unit. D) The firm will definitely lose money in this situation. E) Each unit "contributes" $3 toward covering the fixed costs of $900 and once the breakeven point is reached, the company will increase income at the rate of $3 per unit.

18) Partner Industries sells a single product for $50 that has a variable cost of $30. Fixed costs amount to $5 per unit when anticipated sales targets are met. If the company sells one unit in excess of its break-even volume, profit will be: A) $15. B) $20. C) $25. D) $50. E) an amount that cannot be derived based on the information presented.

19) At a volume of 20,000 units, Almount Industries reported sales revenues of $1,000,000, variable costs of $300,000, and fixed costs of $260,000. The company's contribution margin per unit is: A) $22. B) $28. C) $35. D) $37. E) None of the answers is correct.

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20) At a volume of 20,000 units, Almount Industries reported sales revenues of $1,000,000, variable costs of $300,000, and fixed costs of $260,000. The company's break-even point in units is: A) 7,027 (rounded). B) 8,667 (rounded). C) 9,286 (rounded). D) 7,429 (rounded). E) None of the answers is correct.

21)

A recent income statement of Benton Corporation reported the following data:

Sales revenue

$ 8,000,000

Variable costs

5,000,000

Fixed costs

2,200,000

If these data are based on the sale of 20,000 units, the contribution margin per unit would be: A) $40. B) $150. C) $290. D) $360. E) None of the answers is correct.

22)

A recent income statement of Benton Corporation reported the following data:

Sales revenue

Version 1

$ 8,000,000

Variable costs

5,000,000

Fixed costs

2,200,000

If these data are based on the sale of 20,000 units, the break-even point would be: A) 9,565 units (rounded). B) 11,000 units (rounded). C) 7,586 units (rounded). D) 14,667 units (rounded). E) None of the answers is correct.

23)

A recent income statement of Safety Corporation reported the following data:

Sales revenue

$ 6,800,000

Variable costs

2,800,000

Fixed costs

2,500,000

If these data are based on the sale of 20,000 units, the break-even point would be: A) 7,500 units. B) 11,628 units. C) 12,500 units. D) 33,333 units. E) None of the answers is correct.

24)

A recent income statement of Carson Corporation reported the following data:

Version 1

Sales revenue

$ 2,500,000

Variable costs

1,500,000

Fixed costs

800,000

If these data are based on the sale of 5,000 units, the break-even sales would be: A) $2,000,000. B) $2,206,000. C) $2,500,000. D) $10,000,000. E) None of the answers is correct.

25) Hsu, Inc. sells a single product for $12. Variable costs are $8 per unit and fixed costs total $360,000 at a volume level of 60,000 units. Assuming that fixed costs do not change, Hsu’s break-even point would be: A) 30,000 units. B) 45,000 units. C) 90,000 units. D) negative because the company loses $2 on every unit sold. E) a positive amount other than the specific amounts given.

26) Sarafine, Inc. sells a single product for $20. Variable costs are $8 per unit and fixed costs total $120,000 at a volume level of 5,000 units. Assuming that fixed costs do not change, Sarafine’s break-even sales would be:

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A) $160,000. B) $200,000. C) $300,000. D) $480,000. E) None of the answers is correct.

27) Bargain Town recently reported sales revenues of $800,000, a total contribution margin of $300,000, and fixed costs of $180,000. If sales volume amounted to 10,000 units, the company's variable cost per unit must have been: A) $12. B) $32. C) $50. D) $92. E) None of the answers is correct.

28) Dane Company has a break-even point of 120,000 units. If the firm's sole product sells for $40 and fixed costs total $480,000, the variable cost per unit must be: A) $4. B) $36. C) $44. D) an amount that cannot be derived based on the information presented. E) an amount other than $4, $36, or $44, but one that can be derived based on the information presented.

29) Starlight Co. makes and sells only one product. The unit contribution margin is $6 and the break-even point in unit sales is 24,000. The company's fixed costs are:

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A) $4,000. B) $14,400. C) $40,000. D) $144,000. E) None of the answers is correct.

30) Ripley Co. sold 2,000 units in March at a price of $35 per unit. The variable cost per unit is $20. What is the total contribution margin? A) $20,000. B) $70,000. C) $40,000. D) $30,000. E) None of the answers is correct.

31) Ripley Co. sold 2,000 units in March at a price of $35 per unit. The variable cost per unit is $20. The monthly fixed costs are $10,000. What is the operating income earned in March? A) $20,000. B) $70,000. C) $40,000. D) $30,000. E) None of the answers is correct.

32)

The contribution-margin ratio is: A) the difference between the selling price and the variable cost per unit. B) fixed cost per unit divided by variable cost per unit. C) variable cost per unit divided by the selling price. D) unit contribution margin divided by the selling price. E) unit contribution margin divided by fixed cost per unit.

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33)

At a volume level of 500,000 units, Sullivan reported the following information:

Sales price

$ 60

Variable cost per unit

Fixed cost per unit

The company's contribution-margin ratio is closest to: A) 0.33. B) 0.40. C) 0.60. D) 0.67. E) None of the answers is correct.

34)

Garrison Company provides the following information about its product:

Targeted Operating Income

50,000

Selling price per unit

6.00

Variable cost per unit Total Fixed Costs

1.50 $ 125,000

What is the contribution-margin ratio?

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A) 25%. B) 100%. C) 125%. D) 75%. E) None of these answer choices is correct.

35) Thai Two sells hot pots for $40 each. The company incurs monthly fixed costs of $5,000. The contribution-margin ratio is 20%. Based on this information, what is the variable cost per hot pot? A) $38. B) $40. C) $48. D) $32. E) None of these answer choices is correct.

36) Which of the following expressions can be used to calculate break-even sales revenue with the contribution-margin ratio (CMR)? A) CMR ÷ fixed costs. B) CMR × fixed costs. C) Fixed costs ÷ CMR. D) (Fixed costs + variable costs) × CMR. E) (Sales revenue − variable costs) ÷ CMR.

37) Denise sells silk scarves at a hobby fair. Each scarf sells for $25 and has a variable cost of $15. Denise’s booth rental for one day is $30. Based on this information, how many scarves must Denise sell to break-even?

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A) 2 scarves. B) 3 scarves. C) 4 scarves. D) 5 scarves. E) None of these answer choices is correct.

38) Denise sells silk scarves at a hobby fair. Each scarf sells for $25 and has a variable cost of $15. Denise’s booth rental for one day is $30. Based on this information, what total revenue amount does Denise need to earn to break-even? A) $85. B) $75. C) $100. D) $50. E) None of these answer choices is correct.

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39)

Refer to the figure above. Line A is the: A) total revenue line. B) fixed cost line. C) variable cost line. D) total cost line. E) profit line.

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40)

Refer to the figure above. Line C represents the level of: A) fixed cost. B) variable cost. C) semivariable cost. D) total cost. E) mixed cost.

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41)

Refer to the figure above. The slope of line A is equal to the: A) fixed cost per unit. B) selling price per unit. C) profit per unit. D) variable cost per unit. E) unit contribution margin.

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42)

Refer to the figure above. The slope of line B is equal to the: A) fixed cost per unit. B) selling price per unit. C) variable cost per unit. D) profit per unit. E) unit contribution margin.

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43)

Refer to the figure above. The vertical distance between the total cost line (Line B) and the total revenue line (Line A) represents: A) fixed cost. B) variable cost. C) profit or loss at that volume. D) semivariable cost. E) the safety margin.

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44)

Refer to the figure above. Assume that the company whose cost structure is depicted in the figure expects to produce a loss for the upcoming period. The loss would be shown on the graph: A) by the area immediately above the break-even point. B) by the area immediately below the total cost line. C) by the area diagonally to the right of the break-even point. D) by the area diagonally to the left of the break-even point. E) none of the answers is correct.

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45)

Refer to the figure above. At a given sales volume, the vertical distance between the fixed cost line and the total cost line represents: A) fixed cost. B) variable cost. C) profit or loss at that volume. D) semivariable cost. E) the safety margin.

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46)

Refer to the figure above. Assume that the company whose cost structure is depicted in the figure expects to produce a profit for the upcoming accounting period. The profit would be shown on the graph by the letter: A) D. B) E. C) F. D) G. E) H.

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47)

Refer to the figure above. Line A is the: A) fixed cost line. B) variable cost line. C) total cost line. D) total revenue line. E) profit line.

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48)

Refer to the figure above. The triangular area between the horizontal axis and Line A, to the right of 4,000, represents: A) fixed cost. B) variable cost. C) profit. D) loss. E) sales revenue.

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49)

Refer to the figure above. The triangular area between the horizontal axis and Line A, to the left of 4,000, represents: A) fixed cost. B) variable cost. C) profit. D) loss. E) sales revenue.

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50)

A recent income statement of McClennon Corporation reported the following data:

Units sold

8,000

Sales revenue

$ 9,600,000

Variable costs

6,000,000

Fixed costs

2,600,000

If the company desired to earn a target profit of $1,270,000, it would have to sell: A) 5,778 units. B) 8,600 units. C) 10,160 units. D) 11,908 units. E) None of the answers is correct.

51) Flower Depot, Inc. sells a single product for $10. Variable costs are $4 per unit and fixed costs total $120,000 at a volume level of 10,000 units. What dollar sales level would Flower Depot have to achieve to earn a target profit of $240,000? A) $400,000. B) $500,000. C) $600,000. D) $750,000. E) $900,000.

52)

The difference between budgeted sales revenue and break-even sales revenue is the:

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A) contribution margin. B) contribution-margin ratio. C) safety margin. D) target net profit. E) operating leverage.

53)

Finn’s budget for the upcoming year revealed the following figures:

Sales revenue

$ 840,000

Contribution margin

504,000

Income

54,000

If the company's break-even sales total $750,000, Finn’s safety margin would be: A) $(90,000). B) $90,000. C) $246,000. D) $336,000. E) $696,000.

54) Santa Fe Production sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. Santa Fe’s safety margin in units is:

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A) (13,400). B) 0. C) 1,600. D) 13,600. E) None of the answers is correct.

55) Santa Fe Production sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. If Santa Fe’s unit sales are 200 units less than anticipated, its break-even point will: A) increase by $12 per unit sold. B) decrease by $12 per unit sold. C) increase by $8 per unit sold. D) decrease by $8 per unit sold. E) not change.

56) Santa Fe Production sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. If Santa Fe’s unit sales are 300 units more than anticipated, its break-even point will: A) increase by $12 per unit sold. B) decrease by $12 per unit sold. C) increase by $8 per unit sold. D) decrease by $8 per unit sold. E) not change.

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57) Quigley Glass Industries sells glass vases at a wholesale price of $2.50 per unit. The variable cost is $1.75 per unit. Monthly fixed costs are $7,500. If Quigley’s current sales are 25,000 units per month, and Quigley wants to increase operating income by 20%, how many additional units should be sold (to the nearest unit)? A) 145,000 vases. B) 62,500 vases. C) 13,500 vases. D) 3,000 vases. E) None of these choices is correct.

58) Food Mart produces gourmet cookies, which sell for $16 a basket. Variable costs per basket are $6 and fixed costs are $5,000 per month. If Food Mart expects to sell 1,500 baskets of cookies, what is the margin of safety in number of baskets? A) 500. B) 8,000. C) 1,500. D) 1,000. E) None of these answer choices is correct.

59) Food Mart produces gourmet cookies, which sell for $16 a basket. Variable costs per basket are $6 and fixed costs are $5,000 per month. If Food Mart expects to sell 1,500 baskets of cookies, what is the margin of safety in dollars? A) $6,000. B) $10,000. C) $15,000. D) $16,000. E) None of these answer choices is correct.

60)

If a company desires to increase its safety margin, it should:

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A) increase fixed costs. B) decrease the contribution margin. C) decrease selling prices, assuming the price change will have no effect on demand. D) stimulate sales volume. E) attempt to raise the break-even point.

61) Morgan Technologies sells a single product at $20 per unit. The firm's most recent income statement revealed unit sales of 100,000, variable costs of $800,000, and fixed costs of $400,000. If a $4 drop in selling price will boost unit sales volume by 20%, the company will experience: A) no change in profit because a 20% drop in sales price is balanced by a 20% increase in volume. B) an $80,000 drop in profit. C) a $240,000 drop in profit. D) a $400,000 drop in profit. E) None of the answers is correct.

62) Markham Industries is studying the profitability of a change in operation and has gathered the following information: Current Operation Anticipated Operation Fixed costs

38,000

48,000

Selling price

Variable costs

Sales (units)

9,000

6,000

Should Markham Industries make the change?

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A) Yes, the company will be better off by $6,000. B) No, because sales will drop by 3,000 units. C) No, because the company will be worse off by $4,000. D) No, because the company will be worse off by $22,000. E) It is impossible to judge because additional information is needed.

63) Charriott sells a single product at $200 per unit. The firm's most recent income statement revealed unit sales of 2,000, variable costs per unit of $50, and fixed costs of $120,000. Management believes that a 20% drop in selling price will boost sales by 20%. If this reduction in selling price is implemented, A) Operating income will increase by $36,000. B) Operating income will decrease by $80,000. C) Operating income will decrease by $36,000. D) Operating income will increase by $44,000. E) Operating income will decrease by $124,000.

64) All other things being equal, a company that sells multiple products should attempt to structure its sales mix so the greatest portion of the mix is composed of those products with the highest: A) selling price. B) variable cost. C) contribution margin. D) fixed cost. E) gross margin.

65) McGuire Corporation sells three products: R, S, and T. Budgeted information for the upcoming accounting period follows. Product

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Sales Volume (Units)

Selling Price

Variable Cost

16,000

$ 14

12,000

52,000

The company's weighted-average unit contribution margin is: A) $3.00. B) $3.55. C) $4.00. D) $19.35. E) None of the answers is correct.

66) Applewood’s Bakery sells three large muffins for every 2 small muffins sold. A small muffin sells for $3.00, with a variable cost of $2.00. A large muffin sells for $5.00, with a variable cost of $2.50. What is the weighted-average contribution margin? A) $1.95 per muffin. B) $1.25 per muffin. C) $1.75 per muffin. D) $1.90 per muffin. E) Cannot be determined based on the information presented.

67) Elise Corporation has the following sales mix for its three products: A, 20%; B, 35%; and C, 45%. Fixed costs total $400,000 and the weighted-average contribution margin is $100. How many units of product A must be sold to break-even?

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A) 800. B) 4,000. C) 20,000. D) Cannot be determined based on the information presented. E) None of the answers is correct.

68) Ahmed & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows:

Unit selling price Variable cost per unit

Plain

Fancy

$ 20.00

$ 35.00

12.00

24.50

Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000. The weighted-average unit contribution margin is: A) $4.80. B) $9.00. C) $9.25. D) $17.00. E) None of the answers is correct.

69) Ahmed & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows:

Unit selling price

Version 1

Plain

Fancy

$ 20.00

$ 35.00

Variable cost per unit

12.00

24.50

Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000. Assuming that the sales mix remains constant, the total number of units that Ahmed must sell to break even is: A) 2,432. B) 2,647. C) 4,737. D) 5,000. E) None of the answers is correct.

70) Ahmed & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows:

Unit selling price Variable cost per unit

Plain

Fancy

$ 20.00

$ 35.00

12.00

24.50

Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000. Assuming that the sales mix remains constant, the number of units of Plain that Ahmed must sell to break even is: A) 2,000. B) 3,000. C) 3,375. D) 5,000. E) 5,625.

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71) Ahmed & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows:

Unit selling price Variable cost per unit

Plain

Fancy

$ 20.00

$ 35.00

12.00

24.50

Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000. Assuming that the sales mix remains constant, the number of units of Fancy that Ahmed must sell to break even is: A) 2,000. B) 3,000. C) 3,375. D) 5,000. E) 5,625.

72) Which of the following underlying assumptions form(s) the basis for cost-volume-profit analysis? A) Revenues and costs behave in a linear manner. B) Costs can be categorized as variable, fixed, or semivariable. C) Worker efficiency and productivity remain constant. D) In multiproduct organizations, the sales mix remains constant. E) All the answers are assumptions that underlie cost-volume-profit analysis.

73) Cost-volume-profit analysis is based on certain general assumptions. Which of the following is not one of these assumptions?

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A) Product prices will remain constant as volume varies within the relevant range. B) Costs can be categorized as fixed, variable, or semivariable. C) The efficiency and productivity of the production process and workers will change to reflect manufacturing advances. D) Total fixed costs remain constant as activity changes. E) Unit variable cost remains constant as activity changes.

74) The assumptions on which cost-volume-profit analysis is based appear to be most valid for businesses: A) over the short run. B) over the long run. C) over both the short run and the long run. D) in periods of sustained profits. E) in periods of increasing sales.

75) The contribution income statement differs from the traditional income statement in which of the following ways? A) The traditional income statement separates costs into fixed and variable components. B) The traditional income statement subtracts all variable costs from sales to obtain the contribution margin. C) Cost-volume-profit relationships can be analyzed more easily from the contribution income statement. D) The effect of sales volume changes on profit is readily apparent on the traditional income statement. E) The contribution income statement separates costs into product and period categories.

76)

Which of the following does not typically appear on a contribution income statement?

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A) Net income. B) Gross margin. C) Contribution margin. D) Total variable costs. E) Total fixed costs.

77) Which of the following does not typically appear on an income statement prepared by using a traditional format? A) Cost of goods sold. B) Contribution margin. C) Gross margin. D) Selling expenses. E) Administrative expenses.

78)

The extent to which an organization uses fixed costs in its cost structure is measured by: A) financial leverage. B) operating leverage. C) fixed cost leverage. D) contribution leverage. E) efficiency leverage.

79) A manager who wants to determine the percentage impact on income of a given percentage change in sales would multiply the percentage increase/decrease in sales revenue by the:

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A) contribution margin. B) gross margin. C) operating leverage factor. D) safety margin. E) contribution-margin ratio.

80) Gandee Company has an operating leverage factor of 5. Which of the following statements is true? Thus, an 8% change in ______ should result in a 40% change in _____. The respective amounts that change are: A) An 8% change in income should result in a 40% change in sales revenue. B) An 8% change in sales revenue should result in a 40% change in income. C) An 8% change in variable costs should result in a 40% change in contribution margin. D) An 8% change in fixed costs should result in a 40% change in income. E) An 8% change in variable costs should result in a 40% change in break-even sales.

81) Which of the following calculations can be used to measure a company's degree of operating leverage? A) Contribution margin ÷ sales. B) Contribution margin ÷ income. C) Sales ÷ contribution margin. D) Sales ÷ income. E) Sales ÷ fixed costs.

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82) You are analyzing Barroz Corporation and Newton Corporation and have concluded that Barroz has a higher operating leverage factor than Newton. Which one of the following choices correctly depicts (1) the relative use of fixed costs (as opposed to variable costs) for the two companies and (2) the percentage change in income caused by a change in sales? Relative Use of Fixed Costs as Opposed to Variable Costs

Percentage Change in Income Caused by a Change in Sales

Greater for Barroz

Lower for Barroz

Greater for Barroz

Equal for Both

Lower for Barroz

Greater for Barroz

Lower for Barroz

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

83)

The following information relates to Dazie Company:

Sales revenue Contribution margin Net Income

12,000,000 4,800,000 800,000

Dazie's operating leverage factor is closest to:

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A) 0.067. B) 0.167. C) 0.400. D) 2.500. E) 6.000.

84) Operating leverage predicts the effects fixed costs have on changes in operating income when: A) production is discontinued. B) there are no sales returns. C) variable costs change. D) sales volume changes. E) None of these answer choices is correct.

85)

The following information relates to Paternus Company:

Sales revenue

10,000,000

Contribution margin

4,000,000

Net Income

1,000,000

If a manager at Paternus desired to determine the percentage impact on income of a given percentage change in sales, the manager would multiply the percentage increase/decrease in sales revenue by:

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A) 0.25. B) 0.40. C) 2.50. D) 4.00. E) 10.00.

86) Edmonco Company produced and sold 45,000 units of a single product last year, with the following results:

Sales Revenue

$ 1,350,000

Manufacturing costs: Variable

585,000

Fixed

270,000

Selling costs: Variable

40,500

Fixed

54,000

Administrative costs: Variable

184,500

Fixed

108,000

Edmonco's operating leverage factor was:

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A) 4. B) 5. C) 6. D) 7. E) 8.

87) Edmonco Company produced and sold 45,000 units of a single product last year, with the following results:

Sales Revenue

$ 1,350,000

Manufacturing costs: Variable

585,000

Fixed

270,000

Selling costs: Variable

40,500

Fixed

54,000

Administrative costs: Variable

184,500

Fixed

108,000

If Edmonco's sales revenues increase 15%, what will be the percentage increase in income before income taxes?

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A) 15%. B) 45%. C) 60%. D) 75%. E) None of the other answers is correct.

88) When advanced manufacturing systems are installed, what effect does such installation usually have on fixed costs and the break-even point? Fixed Costs

Break-even Point

Increase

Decrease

Increase

Decrease

Do not change

Does not change

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

89) Which of the following statements is (are) true regarding a company that has implemented flexible manufacturing systems and activity-based costing? 1.I. The company has erred, as these two practices used in conjunction with one another will severely limit the firm's ability to analyze costs over the relevant range. 2.II. Costs formerly viewed as fixed under traditional-costing systems may now be considered variable with respect to changes in cost drivers such as number of setups, number of material moves, and so forth. 3.III. As compared with the results obtained under a traditional-costing system, the concept of break-even analysis loses meaning.

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A) I only. B) II only. C) III only. D) I and II. E) II and III.

90) A company, subject to a 40% tax rate, desires to earn $500,000 of after-tax income. How much should the firm add to fixed costs when figuring the sales revenues necessary to produce this income level? A) $200,000. B) $300,000. C) $500,000. D) $833,333. E) $1,250,000.

91) Samuels, Inc. is subject to a 40% income tax rate. The following data pertain to the period just ended when the company produced and sold 45,000 units:

Sales revenue

$ 1,350,000

Variable costs

810,000

Fixed costs

432,000

How many units must Samuels sell to earn an after-tax profit of $180,000?

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A) 42,000. B) 45,000. C) 51,000. D) 61,000. E) None of the answers is correct.

92) Techtron, Inc. has a fixed cost of $225,000 for the production of flashlights. Estimated sales are 150,000 units. A before-tax profit of $125,000 is desired by the CFO. If Techtron sells the flashlights for $5.00 each, what unit contribution margin is required to maintain the profit target? A) $2.33. B) $3.00. C) $1.47. D) $0.90. E) None of the answers is correct.

93) Samuels, Inc. is subject to a 40% income tax rate. The following data pertain to the period just ended when the company produced and sold 45,000 units:

Sales revenue

$ 1,350,000

Variable costs

810,000

Fixed costs

432,000

How many units must Samuels sell to earn an after-tax profit of $225,000?

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A) 67,250. B) 62,250. C) 61,000. D) 51,000. E) None of the answers is correct.

94)

The break-even point is that level of activity where total revenue equals total cost. ⊚ true ⊚ false

95)

Total contribution margin is defined as total sales revenue plus total variable expenses. ⊚ true ⊚ false

96) The contribution-margin ratio is calculated as unit contribution margin divided by the selling price per unit. ⊚ true ⊚ false

97)

The contribution margin ratio can also be expressed as a percentage. ⊚ true ⊚ false

98) The relevant range is the range of activity in which management of a company expects to operate. ⊚ true ⊚ false

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99) On the CVP graph, the break-even point is determined by the intersection of the totalrevenue line and the total-expense line. ⊚ true ⊚ false

100) The difference between budgeted sales revenue and break-even sales revenue is the operating leverage. ⊚ true ⊚ false

101)

The safety margin is another name for the break-even point. ⊚ true ⊚ false

102) For any organization selling multiple products, the relative proportion of each type of product sold is called the sales mix. ⊚ true ⊚ false

103)

Total contribution margin is an important assumption in multiproduct CVP analysis. ⊚ true ⊚ false

104) Cost-volume-profit analysis is based on certain general assumptions. One of these assumptions is that product prices will remain constant as volume varies within the relevant range.

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⊚ ⊚

true false

105) Sensitivity analysis has become relatively easy to perform with the advent of personal computers and spreadsheet software. ⊚ true ⊚ false

106) Many operating managers find the traditional income-statement format difficult to use, because it does not separate revenues and expenses. ⊚ true ⊚ false

107) The management functions of planning, control, and decision making all are facilitated by an understanding of cost-volume-profit relationships. ⊚ true ⊚ false

108) The extent to which an organization uses fixed costs in its cost structure is measured by financial leverage. ⊚ true ⊚ false

109)

Cost structures differ widely among industries and among firms within an industry. ⊚ true ⊚ false

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110) Activity-based costing systems should not be used in conjunction with cost-volume-profit analyses. ⊚ true ⊚ false

111) An ABC cost-volume-profit analysis recognizes that some costs that are fixed with respect to sales volume may not be fixed with respect to other important cost drivers. ⊚ true ⊚ false

112)

Companies with advanced manufacturing technology tend to have lower fixed costs. ⊚ true ⊚ false

113) Companies with advanced manufacturing technology tend to have higher break-even points. ⊚ true ⊚ false

114) The requirement that companies pay income taxes does not affect their cost-volumeprofit relationships. ⊚ true ⊚ false

115) When a firm is required to pay taxes on income, it is important to distinguish between after-tax (AT) income and before-tax (BT) income. ⊚ true ⊚ false

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Answer Key Test name: Chap 07_6e_Cornett 1) C 2) A 3) D 4) A 5) C 6) E 7) A 8) B 9) B 10) A 11) B 12) C 13) B 14) B 15) A 16) B 17) E 18) B 19) C 20) D 21) B 22) D 23) C 24) A 25) C 26) B Version 1

27) C 28) B 29) D 30) D 31) A 32) D 33) D 34) D 35) D 36) C 37) B 38) B 39) A 40) A 41) B 42) C 43) C 44) D 45) B 46) D 47) E 48) C 49) D 50) B 51) C 52) C 53) B 54) C 55) E 56) E Version 1

57) D 58) D 59) D 60) D 61) C 62) C 63) C 64) C 65) B 66) D 67) A 68) B 69) D 70) B 71) A 72) E 73) C 74) A 75) C 76) B 77) B 78) B 79) C 80) B 81) B 82) A 83) E 84) D 85) D 86) B Version 1

87) D 88) A 89) B 90) D 91) D 92) A 93) A 94) TRUE 95) FALSE 96) TRUE 97) TRUE 98) TRUE 99) TRUE 100) FALSE 101) FALSE 102) TRUE 103) FALSE 104) TRUE 105) TRUE 106) FALSE 107) TRUE 108) FALSE 109) TRUE 110) FALSE 111) TRUE 112) FALSE 113) TRUE 114) FALSE 115) TRUE

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Chapter 07 – 6e Cornet- Manually Graded 1) Vogt Corporation's product no. H647 has a negative contribution margin. How can such a situation arise? Should the company continue to stock and sell product no. H647? Explain.

2) Randy’s Pizza delivers pizzas to dormitories and apartments near a major state university. The company's annual fixed costs are $48,000. The sales price averages $9, and it costs the firm $3 to make and deliver each pizza. Required: A. How many pizzas must Randy’s sell to break even? B. How many pizzas must the company sell to earn a target profit of $54,000? C. If budgeted sales total 9,900 pizzas, how much is the company's safety margin in dollars? D. Tony’s assistant manager, an accounting major, has suggested that the firm should try to increase the contribution margin per pizza. Explain the meaning of "contribution margin" in layman's terms.

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3) High Flying takes tourists on helicopter tours of Hawaii. Each tourist buys a $150 ticket; the variable costs average $60 per person. High Flying has annual fixed costs of $702,000. Required: A. Compute the average number of tours the company must conduct per month to break even. B. Compute the average sales revenue needed per month to produce a target average profit of $36,000 per month. See below (answer to "B"). C. Calculate the contribution margin ratio. D. Determine whether the actions that follow will increase, decrease, or not affect the company's break-even point. 1. A decrease in tour prices. 2. The termination of a salaried clerk (no replacement is planned). 3. A decrease in the number of tours sold.

4) Exercise Express sells exercise equipment. For purposes of a cost-volume-profit analysis, the shop owner has divided sales into two categories of treadmills, as follows: Treadmill Type

Sales Price

Invoice Cost

Sales Commission

High-quality

$500

$275

$25

Medium-quality

300

135

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Three-quarters of the shop’s sales are medium-quality treadmills. The shop’s annual fixed expenses are $65,000. (In the following requirements, ignore income taxes.) Required: 1. Compute the unit contribution margin for each product type. 2. What is the shop’s sales mix? 3. Compute the weighted-average unit contribution margin, assuming a constant sales mix. 4. What is the shop’s break-even sales volume in dollars? Assume a constant sales mix. 5. How many treadmills of each type must be sold to earn a target net income of $48,750? Assume a constant sales mix.

5) The information that follows was obtained from the accounting records of Portofino Manufacturing during a period when the company sold 100,000 units.

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Sales revenue

$8,800,000

Variable costs

2,400,000

Fixed costs

6,016,000

Required: A. Compute the company's per-unit contribution margin and break-even point in units. B. How many units must Portofino sell to produce a target profit of $550,400? C. Assume that Portofino was able to reduce the variable cost per unit by $4. What selling price could management charge if it desired to maintain the current break-even point? D. Depreciation charges of $640,000 are included in the firm's fixed costs of $6,016,000. If these charges were to increase by 10%, what effect, if any, would this cost increase have on the company's contribution margin?

6) Paranormal Company is considering the development of two products: no. 65 or no. 66. Manufacturing cost information follows. No. 65

No. 66

Annual fixed costs

$220,000

$340,000

Variable cost per unit

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Regardless of which product is introduced, the anticipated selling price will be $50 and the company will pay a 10% sales commission on gross dollar sales. Paranormal will not carry an inventory of these items. Required: A. What is the break-even sales volume (in dollars) on product no. 66? B. Which of the two products will be more profitable at a sales level of 25,000 units? C. At what unit-volume level will the profit/loss on product no. 65 equal the profit/loss on product no. 66?

7) On Time Products produced and sold digital date books during the year just ended at an average price of $20 per unit. Variable manufacturing costs were $8 per unit, and variable marketing costs were $4 per unit sold. Fixed costs amounted to $180,000 for manufacturing and $72,000 for marketing. There was no year-end work-in-process inventory. (Ignore taxes.) Required: 1. Compute On Time’s breakeven point in sales dollars for the year. 2. Compute the number of sales units required to earn a net income of $180,000 during the year. 3. On Time’s variable manufacturing costs are expected to increase by 10 percent in the coming year. Compute the firm’s breakeven point in sales dollars for the coming year. 4. If On Time’s variable manufacturing costs do increase by 10 percent, compute the selling price that would yield the same contribution-margin ratio in the coming year.

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8) Downtown Industries recently sold 70,000 units, generating sales revenue of $4,900,000. The company's variable cost per unit and total fixed cost amounted to $20 and $2,800,000, respectively. Management is in the process of studying the dollar impact of various transactions and events, and desires answers to the following independent cases: Case no. 1: Management wants to lower the firm's break-even point to 52,000 units. If all other costs remain constant, what must happen to fixed costs to achieve this objective? Case no. 2: The company anticipates a $2 hike in the variable cost per unit. If all other costs remain constant and management desires to maintain the firm's current break-even point, what must happen to Downtown’s selling price? If selling price remains constant, what must happen to the firm's total fixed costs? Required: A. Answer the two cases raised by management. B. Determine the impact (increase, decrease, or no effect) of the following operating changes on the items cited: 1. An increase in variable selling costs on income. 2. A decrease in direct material cost on the unit contribution margin. 3. A decrease in the number of units sold on the break-even point.

9) Calle Company is studying the impact of the following: 1. An increase in sales price. 2. An increase in the variable cost per unit. 3. An increase in the number of units sold (note: each unit produces a $6 contribution margin). 4. A decrease in fixed costs. 5. A proposed change in the method of compensation for salespeople, away from commissions based on gross sales dollars and toward higher monthly salaries. Required: Determine the impact of each of these operating changes on Calle’s per-unit contribution margin and break-even point by completing the chart that follows. Your responses should be Increase (INC), Decrease (DEC), No Effect (NE), or Insufficient Information to Judge (II).

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Per-Unit Contribution Margin

Break-Even Point

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10) Pfitz Company is studying the impact of the following: 1. An increase in sales price on the break-even point. 2. A decrease in fixed costs on the contribution margin. 3. An increase in the contribution margin on the break-even point. 4. A decrease in the variable cost per unit on the sales volume needed to achieve Pfitz’s $68,000 target profit. 5. An increase in sales commissions on the contribution margin and the break-even point. 6. A decrease in anticipated advertising outlays on fixed cost and the break-even point. Required: Determine the impact of these operating changes (increase, decrease, no effect) on the item(s) noted.

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11) McClatchy Industries is studying the acquisition of two electrical connector systems that are integral for production of its leading product - the ROBOTECH. Data relevant to the systems follow. Model no. 6: Variable costs, $16.00 per unit Annual fixed costs, $985,600 Model no. 4: Variable costs, $12.80 per unit Annual fixed costs, $1,113,600 McClatchy’s selling price is $64 per unit for the ROBOTECH, which is subject to a 5 percent sales commission. (For this problem, ignore income taxes.) Required: 1. How many units must the company sell to break even if Model 6 is selected? 2. Which of the two systems would be more profitable if sales and production are expected to average 46,000 units per year? 3. Assume Model 4 requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $450,000 and will be depreciated over a five-year life by the straight-line method. How many units must McClatchy sell to earn $956,400 of income if Model 4 is selected? As in requirement 2, sales and production are expected to average 46,000 units per year. 4. Ignoring the information presented in requirement 3, at what volume level will management be indifferent between the acquisition of Model 6 and Model 4? In other words, at what volume level will the annual total cost of each system be equal? (Hint: At any given sales volume, sales commissions will be the same amount regardless of which model is selected.)

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12) Falcon Environmental Services, Inc. provides consulting services to power plants. The consulting firm’s contribution-margin ratio is 15 percent, and its annual fixed expenses are $135,000. The firm’s income-tax rate is 35 percent. Required: 1. Calculate the firm’s break-even volume of service revenue. 2. How much before-tax income must the firm earn to make an after-tax net income of $65,000? 3. What level of revenue for consulting services must the firm generate to earn an after-tax net income of $65,000? 4. Suppose the firm’s income-tax rate rises to 45 percent. Explain what will happen to the breakeven level of consulting service revenue.

13) A contribution income statement for Paradise Hideaway Hotel is shown below. (Ignore income taxes.) Revenue

$500,000

Less: Variable expenses

300,000

Contribution margin

$200,000

Less: Fixed expenses

150,000

Net income

$ 50,000

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Required: 1. Show the hotel’s cost structure by indicating the percentage of the hotel’s revenue represented by each item on the income statement. 2. Suppose the hotel’s revenue declines by 15 percent. Use the contribution-margin percentage to calculate the resulting decrease in net income. 3. What is the hotel’s operating leverage factor when revenue is $500,000? 4. Use the operating leverage factor to calculate the increase in net income resulting from a 20 percent increase in sales revenue.

14) A contribution income statement for Paradise Hideaway Hotel is shown below. (Ignore income taxes.) Refer to the income statement given and prepare a new contribution income statement for the Paradise Hideaway in each of the following independent situations. (Ignore income taxes.) Revenue

$500,000

Less: Variable expenses

300,000

Contribution margin

$200,000

Less: Fixed expenses

150,000

Net income

$ 50,000

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Prepare a new contribution income statement for the Paradise Hideaway Hotel in each of the following independent situations. (Ignore income taxes.) 1. The hotel’s volume of activity increases by 20 percent, and fixed expenses increase by 40 percent. 2. The ratio of variable expenses to revenue doubles. There is no change in the hotel’s volume of activity. Fixed expenses decline by $25,000.

15) The Arkansas Panthers, an arena football team, play their weekly games in a small stadium just outside Hogeye. The stadium holds 10,000 people and tickets sell for $10 each. The franchise owner estimates that the team’s annual fixed expenses are $180,000, and the variable expense per ticket sold is $1. (In the following requirements, ignore income taxes.) Required: 1. If the stadium is half full for each game, how many games must the team play to break even? 2. What is the safety margin for the team if it plays 12-games in the season and stadium is expected to be 30 percent full for each game? 3. What is the ticket price that the team would have to charge to break even for a 12-game season with a half-full stadium?

16) The PowerClean Company manufactures an engine for carpet cleaners called the "Snooper." Budgeted cost and revenue data for the "Snooper" are given below, based on sales of 40,000 units.

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Sales revenue

$1,600,000

Less: Cost of goods sold

1,120,000

Gross margin

$480,000

Less: Operating expenses

100,000

Income

$380,000

Cost of goods sold consists of $810,000 of variable costs and $310,000 of fixed costs. Operating expenses consist of $30,000 of variable costs and $70,000 of fixed costs. Required: A. Calculate the break-even point in units and sales dollars. B. Calculate the safety margin (in dollars). C. PowerClean received an order for 6,000 units at a price of $25.00. There will be no increase in fixed costs, but variable costs will be reduced by $0.54 per unit because of cheaper packaging. Determine the projected increase or decrease in profit from the order, assuming there are no opportunity costs.

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17) Max Company manufactures and sells three products: Good, Better, and Best. Annual fixed costs are $3,315,000, and data about the three products follow. Good

Better

Best

Sales mix in units

30%

50%

20%

Selling price

$250

$350

$500

Variable cost

100

150

250

Required: A. Determine the weighted-average unit contribution margin. B. Determine the break-even volume in units for each product. C. Determine the total number of units that must be sold to obtain a profit for the company of $234,000. D. Assume that the sales mix for Good, Better, and Best is changed to 50%, 30%, and 20%, respectively. Will the number of units required to break-even increase or decrease? Explain. Hint: Detailed calculations are not needed to obtain the proper solution.

18) Shotz Corporation sells three products: J, K, and L. The following information was taken from a recent budget: J

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Unit sales

40,000

130,000

30,000

Selling price

$60

$80

$75

Variable cost

Total fixed costs are anticipated to be $2,450,000. Required: A. Determine Shotz’s sales mix. B. Determine the weighted-average contribution margin. C. Calculate the number of units of J, K, and L that must be sold to break even. D. If Shotz desires to increase company profitability, should it attempt to increase or decrease the sales of product K relative to those of J and L? Briefly explain.

19) Bolton Publications, Inc. produces and sells business books. The results of the company's operations for the year ended December 31, 20x1, are given below. Sales Revenue

$400,000

Cost of goods sold (manufacturing costs):

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Fixed

100,000

Variable

200,000

Selling costs:

Fixed

10,000

Variable

20,000

Administrative costs:

Fixed

24,000

Variable

6,000

Required: A. Prepare a traditional income statement for the company. B. Prepare a contribution income statement for the company. C. Which income statement (traditional or contribution) would an operating manager most likely use to study changes in operating income that are caused by changes in sales? Why?

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20) Flavol Corporation reported sales revenues of $1,850,000 for the period just ended. Cost of goods sold, selling expenses, and administrative expenses totaled $1,200,000, $280,000, and $170,000, respectively. A detailed analysis of the latter three amounts revealed respective fixed cost components of $780,000, $60,000, and $130,000. Required: A. Determine the amounts, if any, that Flavol would report on a traditional income statement for (1) gross margin, (2) contribution margin, and (3) income. B. Determine the amounts, if any, that Flavol would report on a contribution income statement for (1) gross margin, (2) contribution margin, and (3) income. C. Which of the two income statements (traditional or contribution) is more useful for studying a company's cost-volume-profit relationships?

21) Techtronics Software, Inc. specializes in customized spreadsheet software. The results of the company’s operations during the prior year (20xx) are given in the following table. All units produced during the year were sold. (Ignore income taxes.) Sales revenue

$ 3,000,000

Manufacturing costs:

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Fixed

500,000

Variable

1,000,000

Selling costs:

Fixed

50,000

Variable

100,000

Administrative costs:

Fixed

120,000

Variable

30,000

Required: 1. Prepare a traditional income statement and a contribution income statement for the company. 2. What is the firm’s operating leverage for the sales volume generated during the prior year? 3. Suppose sales revenue increases by 20 percent. What will be the percentage increase in net income? 4. Which income statement would an operating manager use to answer requirement (3)? Why?

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22) Clarkson Enterprises is studying the addition of a new product that would have an expected selling price of $180 and expected variable cost of $120. Anticipated demand is 9,000 units. A new salesperson must be hired because the company's current sales force is working at capacity. Two compensation plans are under consideration: Plan 1: An annual salary of $38,000 plus 10% commission based on gross sales dollars Plan 2: An annual salary of $180,000 and no commission Required: A. What is meant by the term "operating leverage"? B. Calculate the contribution margin and income of the two plans at 9,000 units. C. Compute the operating leverage factor of the two plans at 9,000 units. Which of the two plans is more highly leveraged? Why? D. Assume that a general economic downturn occurred during year no. 2, with product demand falling from 9,000 to 7,200 units. By using the operating leverage factors, determine and show which plan would produce a larger percentage decrease in income.

23) Two brothers (Baylor and Lamar) dreamt about owning and operating companies in the same line of business. Baylor believed in maintaining a very large, highly efficient manual labor force; Lamar, on the other hand, favored automated-production processes. One business was located in Omaha and the other was located in Tulsa. Recent data follow. Omaha

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Tulsa

Sales

$2,000,000

Contribution margin

1,500,000

450,000

Income

150,000

Required: A. Which of the two businesses, Omaha or Tulsa, has the higher level of (1) variable cost and (2) higher level of fixed cost? Explain how you determined your answer. B. Determine the probable owner of the firm located in (1) Omaha and (2) Tulsa. Briefly explain your logic. C. Compute the operating leverage factor for Omaha and Tulsa. D. Suppose that both Omaha and Tulsa had the opportunity to increase sales by 10%. Which of the two locations would experience a larger percentage change in net income? Why?

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24)

Operating leverage is an important concept for many companies.

Required: A. Define operating leverage. B. Assume that a firm pays no income taxes and is planning to increase its selling price. If sales volume in units does not change, what will be the effect on the operating leverage factor? Explain. C. Assume that another firm that pays no income taxes is planning to increase total fixed manufacturing costs and decrease variable manufacturing costs per unit. At the present volume of production, the total manufacturing costs will be unchanged. What will this change do to the operating leverage factor? Explain.

25) Many firms are moving toward flexible manufacturing systems and adopting the just-intime (JIT) philosophy. Required: A. How is cost behavior altered in the typical flexible manufacturing environment as compared to a traditional manufacturing system? What is the impact on the break-even point? Explain. B. One of the assumptions underlying cost-volume profit analysis is that sales volume and production volume are equal. Stated another way, inventories are assumed to remain constant. Is this assumption likely to be violated under an ongoing JIT philosophy? Explain.

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Answer Key Test name: Chap 07_6e_Cornett_Manually Graded

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Chapter 08 – 6e Cornett 1)

Under variable costing, which of the following is not considered a product cost? A) Fixed manufacturing overhead. B) Variable manufacturing overhead. C) Direct labor. D) Direct materials. E) Indirect materials.

Under variable costing, fixed manufacturing overhead is: A) expensed immediately when incurred. B) never expensed. C) applied directly to Finished-Goods Inventory. D) applied directly to Work-in-Process Inventory. E) treated in the same manner as variable manufacturing overhead.

All of the following are inventoried under variable costing except: A) direct materials. B) direct labor. C) variable manufacturing overhead. D) fixed manufacturing overhead. E) variable manufacturing overhead and fixed manufacturing overhead.

All of the following are expensed under variable costing except:

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A) variable manufacturing overhead. B) fixed manufacturing overhead. C) variable selling and administrative costs. D) fixed selling and administrative costs. E) variable selling and administrative costs and fixed selling and administrative costs.

All of the following costs are inventoried under absorption costing except: A) direct materials. B) direct labor. C) variable manufacturing overhead. D) fixed manufacturing overhead. E) fixed administrative salaries.

All of the following are inventoried under absorption costing except: A) direct labor. B) raw materials used in production. C) utilities cost consumed in manufacturing. D) sales commissions. E) machine lubricant used in production.

Under absorption costing, which of the following is not considered a product cost? A) direct labor. B) direct materials. C) variable manufacturing overhead. D) administrative costs. E) fixed manufacturing overhead.

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8) The underlying difference between absorption costing and variable costing lies in the treatment of: A) direct labor. B) variable manufacturing overhead. C) fixed manufacturing overhead. D) variable selling and administrative expenses. E) fixed selling and administrative expenses.

Which of the following statements is false regarding absorption costing?

A) Variable overhead is treated as a product cost. B) Fixed overhead is treated as a product cost. C) Fixed overhead is expensed in the period incurred. D) Absorption costing is required for tax purposes. E) Absorption costing is required for external financial statements prepared in accordance with generally accepted accounting principles (GAAP).

10) Which of the following costs would be treated differently under absorption costing and variable costing? Direct Labor

Variable Manufacturing Fixed Administrative Overhead Expenses

Yes

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A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

11) Which of the following descriptions would not be found on an income statement prepared using variable costing? A) Sales. B) Fixed Costs. C) Cost of Goods Sold. D) Net income. E) All of these options are on the income statement prepared using variable costing.

12) Which of the following descriptions would not be found on an income statement prepared using absorption costing? A) Sales. B) Contribution Margin. C) Cost of Goods Sold. D) Net income. E) All of these options are on the income statement prepared using absorption costing.

13)

Vega Enterprises has computed the following unit costs for the year just ended:

Direct material used

$ 12

Direct labor

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Variable manufacturing overhead

Fixed manufacturing overhead

Variable selling and administrative cost

Fixed selling and administrative cost

Under variable costing, each unit of the company's inventory would be carried at: A) $35. B) $55. C) $65. D) $84. E) None of the answers is correct.

14)

Vega Enterprises has computed the following unit costs for the year just ended:

Direct material used

$ 12

Direct labor

Variable manufacturing overhead

Fixed manufacturing overhead

Variable selling and administrative cost

Fixed selling and administrative cost

Under absorption costing, each unit of the company's inventory would be carried at:

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A) $35. B) $55. C) $65. D) $84. E) None of the answers is correct.

15)

Romano Corporation has computed the following unit costs for the year just ended:

Direct material used

$ 11

Direct labor

Variable manufacturing overhead

Fixed manufacturing overhead

Variable selling and administrative cost

Fixed selling and administrative cost

Under absorption costing, each unit of the company's inventory would be carried at: A) $49. B) $54. C) $72. D) $104. E) None of the answers is correct.

16)

Romano Corporation has computed the following unit costs for the year just ended:

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Direct material used

$ 11

Direct labor

Variable manufacturing overhead

Fixed manufacturing overhead

Variable selling and administrative cost

Fixed selling and administrative cost

Under variable costing, each unit of the company's inventory would be carried at: A) $49. B) $54. C) $72. D) $104. E) None of the answers is correct.

17)

Falisari Corporation has computed the following unit costs for the year just ended:

Direct material used

$ 25

Direct labor

Variable manufacturing overhead

Fixed manufacturing overhead

Variable selling and administrative cost

Fixed selling and administrative cost

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Which of the following choices correctly depicts the per-unit cost of inventory under variable costing and absorption costing?

Variable Costing $ 79

Absorption Costing $ 119

$ 79

$ 151

$ 96

$ 119

$ 96

$ 151

None of the answers is correct.

A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

18)

Montana Industries has the following costs for the year just ended:

Beginning variable manufacturing overhead in inventory

$ 30,000

Beginning fixed manufacturing overhead in inventory

60,000

Ending variable manufacturing overhead in inventory

$ 14,250

Ending fixed manufacturing overhead in inventory

Fixed selling and administrative costs

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45,000

$ 724,000

Units produced

5,000 units

Units sold

4,800 units

What is the difference between operating incomes under absorption costing and variable costing? A) $15,000. B) $30,750. C) $750. D) $7,500. E) None of the answers is correct.

19)

Mallory Industries has the following cost information for the year just ended:

Direct materials

6.00 per unit

Direct labor

2.00 per unit

Variable manufacturing overhead

1.50 per unit

Fixed manufacturing overhead

$ 40,000

Variable selling and administrative cost

Fixed selling and administrative cost

$ 50,000

3.00 per unit

During the year, Mallory produced 10,000 units, out of which 9,100 were sold for $50 each. What is net income under variable costing?

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A) $251,250. B) $254,850. C) $285,000. D) $291,250. E) None of the answers is correct.

20)

Mallory Industries has the following cost information for the year just ended:

Direct materials

6.00 per unit

Direct labor

2.00 per unit

Variable manufacturing overhead

1.50 per unit

Fixed manufacturing overhead

$ 40,000

Variable selling and administrative cost

Fixed selling and administrative cost

$ 50,000

3.00 per unit

During the year, Mallory produced 10,000 units, out of which 9,100 were sold for $50 each. What is net income under absorption costing? A) $251,250. B) $254,850. C) $285,000. D) $299,850. E) None of the answers is correct.

21)

Cagney Industries has the following cost information for the year just ended:

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Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$ 1.00 per unit $ 2.00 per unit $ 1.50 per unit $ 30,000

Variable selling and administrative cost Fixed selling and administrative cost

$ 0.50 per unit $ 25,000

During the year, Cagney produced 6,000 units, out of which 5,400 were sold for $20 each. What is net income under variable costing? A) $26,000. B) $35,000. C) $29,000. D) $23,000. E) None of the answers is correct.

22)

Cagney Industries has the following cost information for the year just ended:

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$ 1.00 per unit $ 2.00 per unit $ 1.50 per unit $ 30,000

Variable selling and administrative cost Fixed selling and administrative cost

$ 0.50 per unit $ 25,000

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During the year, Cagney produced 6,000 units, out of which 5,400 were sold for $20 each. What is net income under absorption costing? A) $26,000. B) $35,000. C) $29,000. D) $23,000. E) None of the answers is correct.

23) Fort Smith Technologies incurred the following costs during the past year when planned production and actual production each totaled 20,000 units:

Direct material used

$ 280,000

Direct labor

120,000

Variable manufacturing overhead

160,000

Fixed manufacturing overhead

100,000

Variable selling and administrative cost

60,000

Fixed selling and administrative cost

90,000

If Fort Smith uses variable costing, the total inventoriable costs for the year would be: A) $400,000. B) $460,000. C) $560,000. D) $620,000. E) $660,000.

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24) Fort Smith Technologies incurred the following costs during the past year when planned production and actual production each totaled 20,000 units:

Direct material used

$ 280,000

Direct labor

120,000

Variable manufacturing overhead

160,000

Fixed manufacturing overhead

100,000

Variable selling and administrative cost

60,000

Fixed selling and administrative cost

90,000

Fort Smith’s per-unit inventoriable cost under variable costing is: A) $9.50. B) $25.00. C) $28.00. D) $33.00. E) $40.50.

25) Fort Smith Technologies incurred the following costs during the past year when planned production and actual production each totaled 20,000 units:

Direct material used

$ 280,000

Direct labor

120,000

Variable manufacturing overhead

160,000

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Fixed manufacturing overhead

100,000

Variable selling and administrative cost

60,000

Fixed selling and administrative cost

90,000

If Fort Smith uses absorption costing, the total inventoriable costs for the year would be: A) $400,000. B) $460,000. C) $560,000. D) $620,000. E) $660,000.

26) Fort Smith Technologies incurred the following costs during the past year when planned production and actual production each totaled 20,000 units:

Direct material used

$ 280,000

Direct labor

120,000

Variable manufacturing overhead

160,000

Fixed manufacturing overhead

100,000

Variable selling and administrative cost

60,000

Fixed selling and administrative cost

90,000

Fort Smith’s per-unit inventoriable cost under absorption costing is:

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A) $9.50. B) $25.00. C) $28.00. D) $33.00. E) $40.50.

27) Consider the following comments about absorption- and variable-costing income statements: 1.I. A variable-costing income statement discloses a firm's contribution margin. 2.II. Cost of goods sold on an absorption-costing income statement includes fixed costs. 3.III. The amount of variable selling and administrative cost is the same on absorption- and variable-costing income statements. Which of the above statements is (are) true? A) I only. B) II only. C) I and II. D) II and III. E) I, II, and III.

28) Consider the following comments about absorption- and variable-costing income statements: 1.I. A variable-costing income statement discloses a firm's gross margin. 2.II. Cost of goods sold on an absorption-costing income statement includes fixed costs. 3.III. The amount of variable selling and administrative cost is the same on absorption- and variable-costing income statements. Which of the above statements is (are) true? A) I only. B) II only. C) I and II. D) II and III. E) I, II, and III.

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29) data:

Riverton Corp., which began business at the start of the current year, had the following

Planned and actual production: 40,000 units Sales: 37,000 units at $15 per unit Production costs: Variable: $4 per unit Fixed: $260,000 Selling and administrative costs: Variable: $1 per unit Fixed: $32,000 The gross margin that the company would disclose on an absorption-costing income statement is: A) $97,500. B) $147,000. C) $166,500. D) $370,000. E) None of the answers is correct.

30) data:

Riverton Corp., which began business at the start of the current year, had the following

Planned and actual production: 40,000 units Sales: 37,000 units at $15 per unit Production costs: Variable: $4 per unit Fixed: $260,000 Selling and administrative costs: Variable: $1 per unit Fixed: $32,000 The contribution margin that the company would disclose on a variable-costing income statement is:

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A) $97,500. B) $147,000. C) $166,500. D) $370,000. E) None of the answers is correct.

31) data:

Callaway Corp., which began business at the start of the current year, had the following

Planned and actual production: 40,000 units Sales: 38,000 units at $15 per unit Production costs: Variable: $5 per unit Fixed: $260,000 Selling and administrative costs: Variable: $1 per unit Fixed: $32,000 The gross margin that the company would disclose on an absorption-costing income statement is: A) $0. B) $133,000. C) $166,500. D) $342,000. E) None of the answers is correct.

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32) data:

Callaway Corp., which began business at the start of the current year, had the following

Planned and actual production: 40,000 units Sales: 38,000 units at $15 per unit Production costs: Variable: $5 per unit Fixed: $260,000 Selling and administrative costs: Variable: $1 per unit Fixed: $32,000 The contribution margin that the company would disclose on a variable-costing income statement is: A) $0. B) $120,000. C) $166,500. D) $342,000. E) None of the answers is correct.

33) Sawyer Industries began business at the start of the current year. The company planned to produce 25,000 units, and actual production conformed to expectations. Sales totaled 22,000 units at $30 each. Costs incurred were:

Variable manufacturing overhead per unit Fixed manufacturing overhead

8 150,000

Variable selling and administrative cost per unit Fixed selling and administrative cost

2 100,000

If there were no variances, the company's absorption-costing income would be:

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A) $190,000. B) $202,000. C) $208,000. D) $220,000. E) None of the answers is correct.

34)

Which of the following statements pertain to variable costing? A) This method must be used for external financial reporting. B) Fixed manufacturing overhead is attached to each unit produced. C) The income statement not does disclose a company's contribution margin. D) Variable manufacturing overhead becomes part of a unit's cost. E) None of the answers is correct.

35) Which of the following statements pertain to both variable costing and absorption costing? A) The income statement discloses the amount of gross margin generated during the reporting period. B) Fixed selling and administrative expenses are treated in the same manner as fixed manufacturing overhead. C) Both variable and absorption costing can be used for external financial reporting. D) Variable selling costs are written-off as expenses of the accounting period. E) Fixed manufacturing overhead is attached to each unit produced.

36) Variable costing of inventory and absorption costing of inventory is relevant for which of the following types of businesses?

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A) Manufacturing firms. B) Not-for-profit companies. C) Governmental units. D) Service firms. E) All of the answers are correct.

37)

Which of the following product-costing systems is/are required for tax purposes? A) Absorption costing. B) Variable costing. C) Throughput costing. D) Either absorption or variable costing. E) Absorption, variable costing, or throughput costing.

38) ProTech began business at the start of the current year. The company planned to produce 40,000 units, and actual production conformed to expectations. Sales totaled 37,000 units at $42 each. Costs incurred were:

Variable manufacturing overhead per unit Fixed manufacturing overhead

19 240,000

Variable selling and administrative cost per unit Fixed selling and administrative cost per unit

7 140,000

If there wereno variances, the company's variable-costing income would be:

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A) $155,000. B) $212,000. C) $240,500. D) $592,000. E) None of the answers is correct.

39) ProTech began business at the start of the current year. The company planned to produce 40,000 units, and actual production conformed to expectations. Sales totaled 37,000 units at $42 each. Costs incurred were:

Variable manufacturing overhead per unit

Fixed manufacturing overhead

19 240,000

Variable selling and administrative cost per unit

Fixed selling and administrative cost per unit

140,000

If there were no variances, the company's absorption-costing income would be: A) $155,000. B) $230,000. C) $240,500. D) $592,000. E) None of the answers is correct.

40)

Jordan Manufacturing has the following cost information for year 20X9:

Direct materials

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6.00 per unit

Direct labor Variable manufacturing overhead per unit Fixed manufacturing overhead

$ 4.00 per unit $ 2.00 per unit $ 80,000

Variable selling and administrative cost per unit Fixed selling and administrative cost per unit

$ 1.00 per unit $ 25,000

During 20X9, Jordan produced 12,500 units, out of which 11,000 were sold for $60 each. What is Jordan’s net income assuming the company uses variable costing: A) $421,600. B) $412,000. C) $425,000. D) $513,000. E) None of the answers is correct.

41)

Jordan Manufacturing has the following cost information for year 20X9:

Direct materials Direct labor Variable manufacturing overhead per unit Fixed manufacturing overhead

$ 6.00 per unit $ 4.00 per unit $ 2.00 per unit $ 80,000

Variable selling and administrative cost per unit Fixed selling and administrative cost per unit

$ 1.00 per unit $ 25,000

During 20X9, Jordan produced 12,500 units, out of which 11,000 were sold for $60 each. What is Jordan’s net income assuming the company uses absorption costing:

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A) $421,600. B) $412,000. C) $425,000. D) $457,600. E) None of the answers is correct.

42)

The following data relate to Lebeaux Corporation for the year just ended:

Sales revenue

$ 750,000

Cost of goods sold: Variable portion

370,000

Fixed portion

110,000

Variable selling and administrative costs

50,000

Fixed selling and administrative cost

75,000

Which of the following statements is correct? A) Lebeaux's variable-costing income statement would show a gross margin of $270,000. B) Lebeaux's variable-costing income statement would show a contribution margin of $330,000. C) Lebeaux's absorption-costing income statement would show a contribution margin of $330,000. D) Lebeaux's absorption-costing income statement would show a gross margin of $330,000. E) Lebeaux's absorption-costing income statement would show a gross margin of $145,000.

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43) Favaz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9; fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and fixed selling and administrative costs, $220,000. The company sells its units for $45 each. Additional data follow: Planned production in units

10,000

Actual production in units

10,000

Number of units sold

8,500

There were no variances. The income (loss) under absorption costing is: A) $(7,500). B) $9,000. C) $15,000. D) $18,000. E) None of the answers is correct.

44) Favaz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9; fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and fixed selling and administrative costs, $220,000. The company sells its units for $45 each. Additional data follow: Planned production in units

10,000

Actual production in units

10,000

Number of units sold

8,500

There were no variances. The income (loss) under variable costing is:

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A) $(7,500). B) $9,000. C) $15,000. D) $18,000. E) None of the answers is correct.

45)

Income reported under absorption costing and variable costing is: A) always the same. B) typically different. C) always higher under absorption costing. D) always higher under variable costing. E) always the same or higher under absorption costing.

46) Fallows Manufacturing produces a single product. During 20X9, the company incurred the following costs:

Variable product costs Variable period costs Total fixed product costs

$ 8.00 per unit $ 2.00 per unit $ 21,000

Total fixed period costs

$ 10,000

Fallows had no units in beginning inventory. During 20X9, 6,000 units were produced and 5,000 units were sold. Which of the following statements is true when comparing net income using absorption versus variable costing?

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A) Net income will be $3,500 higher using absorption costing rather than variable costing. B) Net income will be $3,500 lower using absorption costing rather than variable costing. C) Net income will be equal for both absorption costing and variable costing. D) Net income will be $4,200 higher using absorption costing rather than variable costing. E) Net income will be $4,200 lower using absorption costing rather than variable costing.

47) Chu Enterprise’s inventory increased during the year. On the basis of this information, income reported under absorption costing: A) will be the same as that reported under variable costing. B) will be higher than that reported under variable costing. C) will be lower than that reported under variable costing. D) will differ from that reported under variable costing, the direction of which cannot be determined from the information given. E) will be less than that reported in the previous period.

48) Which of the following conditions would cause absorption-costing income to be lower than variable-costing income? A) Units sold exceeded units produced. B) Units sold equaled units produced. C) Units sold were less than units produced. D) Sales prices decreased. E) Selling expenses increased.

49) Which of the following conditions would cause absorption-costing income to be higher than variable-costing income?

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A) Units sold exceeded units produced. B) Units sold equaled units produced. C) Units sold were less than units produced. D) Sales prices decreased. E) Selling expenses increased.

50) Which of the following situations would cause variable-costing income to be lower than absorption-costing income? A) Units sold equaled 39,000 and units produced equaled 42,000. B) Units sold and units produced were both 42,000. C) Units sold equaled 55,000 and units produced equaled 49,000. D) Sales prices decreased by $7 per unit during the accounting period. E) Selling expenses increased by 10% during the accounting period.

51) Assuming that the number of units produced is less than the number of units sold, which of the following statements is true when comparing net income using absorption and variable costing? A) Absorption costing will yield a higher net income. B) Net income will be the same under both methods. C) Variable costing will yield a higher net income. D) The sales price per unit will be less using absorption costing. E) None of these statements is true.

52) Which of the following situations would cause variable-costing income to be higher than absorption-costing income?

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A) Units sold equaled 39,000 and units produced equaled 42,000. B) Units sold and units produced were both 42,000. C) Units sold equaled 55,000 and units produced equaled 49,000. D) Sales prices decreased by $7 per unit during the accounting period. E) Selling expenses increased by 10% during the accounting period.

53) Consider the following statements about absorption- and variable-costing income: 1.I. Yearly income reported under absorption costing will differ from income reported under variable costing if production and sales volumes differ. 2.II. In the long-run, total income reported under absorption costing will often be close to that reported under variable costing. 3.III. Differences in income under absorption and variable costing can often be reconciled by multiplying the change in inventory (in units) by the variable manufacturing overhead cost per unit. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) I and II. E) II and III.

54) Which of the following formulas can often reconcile the difference between absorptionand variable-costing income? A) Change in inventory units × predetermined variable-overhead rate per unit. B) Change in inventory units ÷ predetermined variable-overhead rate per unit. C) Change in inventory units × predetermined fixed-overhead rate per unit. D) Change in inventory units ÷ predetermined fixed-overhead rate per unit. E) (Absorption-costing income − variable-costing income) × fixed-overhead rate per unit.

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55) Foxtrot reported $65,000 of income for the year by using absorption costing. The company had no beginning inventory, planned and actual production of 20,000 units, and sales of 18,000 units. Standard variable manufacturing costs were $20 per unit, and total budgeted fixed manufacturing overhead was $100,000. If there were no variances, income under variable costing would be: A) $15,000. B) $55,000. C) $65,000. D) $75,000. E) $115,000.

56) Razor Technologies reported $106,000 of income for the year by using variable costing. The company had no beginning inventory, planned and actual production of 50,000 units, and sales of 47,000 units. Standard variable manufacturing costs were $15 per unit, and total budgeted fixed manufacturing overhead was $150,000. If there were no variances, income under absorption costing would be: A) $52,000. B) $97,000. C) $106,000. D) $115,000. E) $160,000.

57) Consider the following statements about absorption costing and variable costing: 1.I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis. 2.II. Absorption costing must be used for external financial reporting. 3.III. A number of companies use both absorption costing and variable costing. Which of the above statements is (are) true?

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A) I only. B) II only. C) III only. D) I and II. E) I, II, and III.

58) Consider the following statements about absorption costing and variable costing: 1.I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis. 2.II. Variable costing must be used for external financial reporting. 3.III. A number of companies use both absorption costing and variable costing. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) I and II. E) I and III.

59) For external-reporting purposes, generally accepted accounting principles require that net income be based on: A) absorption costing. B) variable costing. C) direct costing. D) semivariable costing. E) activity-based costing.

60) Assuming the number of units sold and produced are the same, which of the following statements is true when comparing net income using absorption and variable costing?

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A) Net income will be the same under both methods. B) Variable costing will yield a higher net income. C) Variable costing will have higher sales revenue. D) Absorption costing will yield a higher net income. E) None of these statements is true.

61)

Which of the following is not a type of quality cost? A) External failure costs. B) Internal failure costs. C) Prevention costs. D) Appraisal costs. E) All of the answers are correct.

62)

Costs of determining whether defects exist are called: A) appraisal costs. B) external failure costs. C) internal failure costs. D) prevention costs. E) defects costs.

63)

The optimum level of product quality is where: A) external failure costs are at a minimum. B) total quality costs are at a minimum. C) prevention costs are at a minimum. D) internal failure costs are at a minimum. E) all of the answers are correct.

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64)

Which of the following statements about environmental costs is false?

A) Remediation costs include offsite, but not onsite, remediation costs. B) Abatement costs include costs to reduce or eliminate pollution. C) Monitoring costs include the costs of monitoring the regulatory environment as well as monitoring the production process to determine if pollution is being generated. D) Private environmental costs are those borne by a company or individual. E) Social environmental costs are those borne by the public at large.

65)

Fixed manufacturing overhead is not inventoried under absorption costing. ⊚ true ⊚ false

66)

Absorption costing is required for tax purposes. ⊚ true ⊚ false

67) Variable manufacturing overhead becomes part of a unit's cost when variable costing is used. ⊚ true ⊚ false

68)

On an absorption-costing income statement, fixed overhead costs are period costs. ⊚ true ⊚ false

69)

On a variable-costing income state-ment, fixed overhead is not treated as a period cost.

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⊚ ⊚

true false

70) On a variable-costing income state-ment, the cost of goods sold is measured at variable cost, which includes direct material, direct labor, and variable manufacturing overhead. ⊚ true ⊚ false

71) Income reported under absorption and variable costing can be reconciled by focusing on the effects of the five places where the two statements differ. ⊚ true ⊚ false

72) When units sold exceed units produced, absorption-costing income will be lower than variable-costing income. ⊚ true ⊚ false

73)

Absorption costing is inconsistent with CVP analysis. ⊚ true ⊚ false

74) Cost-volume-profit analysis and break-even calculations account for fixed manufacturing overhead as a lump sum. ⊚ true ⊚ false

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75) For external-reporting purposes, generally accepted accounting principles require that net income be based on variable costing. ⊚ true ⊚ false

76)

Many managers prefer to use absorption-costing data in cost-based pricing decisions. ⊚ true ⊚ false

77) The quality of conformance refers to how well a product is conceived or designed for its intended use. ⊚ true ⊚ false

78) When discussing the costs of quality, the costs of determining whether defects exist are known as appraisal costs. ⊚ true ⊚ false

79) An analytical method that aims at achieving near-perfect results in a production process is known as the zero-defect perspective. ⊚ true ⊚ false

80) Total quality management or TQM refers to the broad set of management and control processes designed to focus the entire organization and all of its employees on providing products or services that do the best possible job of satisfying the customer. ⊚ true ⊚ false

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81) On a global scale, there are four primary environmental agreements addressing the atmosphere, hazardous substances, the marine environment, nature conservation, and nuclear power issues. ⊚ true ⊚ false

82) Hidden private environmental costs are those that are caused by environmental issues but have not been so identified by the accounting system. ⊚ true ⊚ false

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Answer Key Test name: Chap 08_6e_Cornett 1) A 2) A 3) D 4) A 5) E 6) D 7) D 8) C 9) C 10) E 11) C 12) B 13) B 14) D 15) C 16) A 17) A 18) A 19) A 20) B 21) A 22) C 23) C 24) C 25) E 26) D Version 1

27) E 28) D 29) C 30) D 31) B 32) D 33) C 34) D 35) D 36) A 37) A 38) B 39) B 40) B 41) A 42) B 43) D 44) B 45) B 46) A 47) B 48) A 49) C 50) A 51) C 52) C 53) D 54) C 55) B 56) D Version 1

57) E 58) E 59) A 60) A 61) E 62) A 63) B 64) A 65) FALSE 66) TRUE 67) TRUE 68) FALSE 69) FALSE 70) TRUE 71) FALSE 72) TRUE 73) TRUE 74) TRUE 75) FALSE 76) TRUE 77) FALSE 78) TRUE 79) FALSE 80) TRUE 81) FALSE 82) TRUE

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Chapter 08 – 6e Cornet- Manually Graded 1) Consider the statements that follow. 1. Variable selling costs are expensed when incurred. 2. The income statement discloses a company's contribution margin. 3. Fixed manufacturing overhead is attached to each unit produced. 4. Direct labor becomes part of a unit's cost. 5. Sales revenue minus cost of goods sold equals contribution margin. 6. This method must be used for external financial reporting. 7. Fixed selling and administrative expenses are treated in the same manner as fixed manufacturing overhead. 8. This method is sometimes called full costing. 9. This method requires the calculation of a fixed manufacturing cost per unit. Required: Determine which of the nine statements: A. Relate only to absorption costing. B. Relate only to variable costing. C. Relate to both absorption costing and variable costing. D. Relate to neither absorption costing nor variable costing.

2) The table that follows denotes selected characteristics of absorption costing and/or variable costing. Characteristic

Absorption Costing

Variable Costing

Product cost:

Direct materials

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Direct labor

Variable manufacturing overhead

Fixed manufacturing overhead

Period cost:

Variable selling and administrative cost

Fixed selling and administrative cost

Fixed manufacturing overhead

Income statement disclosure/audience:

Gross margin

Contribution margin

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Lower net income when inventories rise

External financial-statement users

Required: Evaluate each product-cost, period-cost, and income-statement/disclosure characteristic and determine whether it relates to absorption costing, variable costing, or both methods. Place an "X" in the proper column.

Information taken from Horner Corporation's May accounting records follows. Direct materials used

$150,000

Direct labor

80,000

Variable manufacturing overhead

30,000

Fixed manufacturing overhead

100,000

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Variable selling and administrative costs

51,000

Fixed selling and administrative costs

60,000

Sales revenues

625,000

Required: A. Assuming the use of variable costing, compute the inventoriable costs for the month. B. Compute the month's inventoriable costs by using absorption costing. C. Assume that anticipated and actual production totaled 20,000 units, and that 18,000 units were sold during May. Determine the amount of fixed manufacturing overhead and fixed selling and administrative costs that would be expensed for the month under (1) variable costing and (2) absorption costing. D. Assume the same data as in requirement "C." Compute the contribution margin that would be reported on a variable-costing income statement.

4) Vero, Inc. began operations at the start of the current year, having a production target of 60,000 units. Actual production totaled 60,000 units, and the company sold 95% of its manufacturing output at $50 per unit. The following costs were incurred: Manufacturing:

Direct materials used

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$240,000

Direct labor

480,000

Variable manufacturing overhead

360,000

Fixed manufacturing overhead

600,000

Selling and administrative:

Variable

180,000

Fixed

630,000

Required: A. Assuming the use of variable costing, compute the cost of Vero’s ending finished-goods inventory. B. Compute the company's contribution margin. Would Vero disclose the contribution margin on a variable-costing income statement or an absorption-costing income statement? C. Assuming the use of absorption costing, how much fixed selling and administrative cost would Vero include in the ending finished-goods inventory? D. Compute the company's gross margin.

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5) The following data relate to Jupiter Company, a new corporation, during a period when the firm produced and sold 100,000 units and 90,000 units, respectively: Direct materials used

$400,000

Direct labor

200,000

Variable manufacturing overhead

120,000

Fixed manufacturing overhead

250,000

Selling and administrative expenses:

Variable

45,000

Fixed

300,000

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The company met its original planned production target of 100,000 units. There were no variances during the period, and the firm's selling price is $15 per unit. Required: A. What is the cost of Jupiter’s end-of-period finished-goods inventory under the variablecosting method? B. Calculate the company's variable-costing income. C. Calculate the company's absorption-costing income.

The following data relate to Santa Mia, Inc., a new company: Planned and actual production

200,000 units

Sales at $48 per unit

170,000 units

Manufacturing costs:

Variable

$18 per unit

Fixed

$840,000

Selling and administrative costs:

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Variable

$7 per unit

Fixed

$925,000

There were no variances during the period. Required: A. Determine the number of units in the ending finished-goods inventory. B. Calculate the cost of the ending finished-goods inventory under (1) variable costing and (2) absorption costing. C. Determine the company's variable-costing income. D. Determine the company's absorption-costing income.

7) Carrington, Inc. began business at the start of the current year and maintains its accounting records on an absorption-cost basis. The following selected information appeared on the company's income statement and end-of-year balance sheet: Income Statement data:

Sales revenues (35,000 units × $22)

$770,000

Gross margin

210,000

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Total sales and administrative expenses

160,000

Balance sheet data:

Ending finished goods inventory (12,000 units)

192,000

Carrington achieved its planned production level for the year. The company's fixed manufacturing overhead totaled $141,000, and the firm paid a 10% commission based on gross sales dollars to its sales force. Required: A. How many units did Carrington plan to produce during the year? B. How much fixed manufacturing overhead did the company apply to each unit produced? C. Compute Carrington’s cost of goods sold. D. How much variable cost did the company attach to each unit manufactured?

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8) Craig Company has per-unit fixed and variable manufacturing costs of $40 and $15, respectively. Variable selling and administrative costs are $9 per unit. Consider the two independent cases that follow for the firm. Case A: Variable-costing income, $110,000; sales, 6,000 units; production, 6,000 units Case B: Variable-costing income, $178,000; sales, 7,500 units; production, 7,100 units Required: A. From a product-costing perspective, what is the basic difference between absorption costing and variable costing? B. Compute Craig’s absorption-costing income in Case A. C. Compute Craig’s absorption-costing income in Case B.

9) Dalton Corporation has fixed manufacturing cost of $12 per unit. Consider the three independent cases that follow. Case A: Absorption- and variable costing income each totaled $240,000 in a period when the firm produced 18,000 units. Case B: Absorption-costing income totaled $320,000 in a period when finished-goods inventory levels rose by 7,000 units. Case C: Absorption-costing income and variable-costing income respectively totaled $220,000 and $250,000 in a period when the beginning finished-goods inventory was 14,000 units. Required: A. In Case A, how many units were sold during the period? B. In Case B, how much income would Dalton report under variable costing? C. In Case C, how many units were in the ending finished-goods inventory?

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10) Carolina Corporation, which uses throughput costing, began operations at the start of the current year. Planned and actual production equaled 20,000 units, and sales totaled 17,500 units at $95 per unit. Cost data for the year were as follows: Direct materials (per unit)

$18

Conversion cost:

Direct labor

160,000

Variable manufacturing overhead

280,000

Fixed manufacturing overhead

340,000

Selling and administrative costs (total)

430,000

Required: A. Compute the company's total cost for the year. B. How much of this cost would be held in year-end inventory under (1) absorption costing and (2) variable costing? C. How much of the company's total cost for the year would appear on the period's income statement under (1) absorption costing and (2) variable costing?

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11) Absorption and variable costing are two different methods of measuring income and costing inventory. Required: A. Product costs are defined as costs associated with the manufacturing process. How does the operational definition of product cost differ between absorption costing and variable costing? B. An absorption-costing income statement will report gross profit or gross margin whereas a variable-costing income statement will report contribution margin. What is the difference between these terms?

12) The difference in income between absorption and variable costing can be explained by the change in finished-goods inventory (in units) multiplied by the standard fixed manufacturing overhead rate. Required: Explain why this calculation accounts for the difference noted.

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13) Fly Boy Company manufactures fishing rods with a variable cost of $35. The rods sell for $54. Budgeted fixed manufacturing overhead for the most recent year was $784,000. Actual production was equal to planned production. Required: Under each of the following conditions, state (1) whether operating income is higher under variable or absorption costing and (2) the amount of the difference in reported operating income under the two methods. Treat each condition as an independent case. A. Production 196,000 units Sales 192,000 units B. Production 128,000 units Sales 136,000 units C. Production 180,000 units Sales 180,000 units

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14) White Water Rafting Company manufactures kayaks, which sell for $565 each. The variable costs of production (per unit) are as follows: Direct Material $ 200 Direct labor 110 Variable manufacturing overhead 80 Budgeted fixed overhead in 20x1 was $400,000 and budgeted production was 50,000 kayaks. The year’s actual production was 50,000 units, of which 47,000 were sold. Variable selling and administrative costs were $5 per unit sold; fixed selling and administrative costs were $75,000. Required: 1. Calculate the product cost per kayak under (a) absorption costing and (b) variable costing. 2. Prepare operating income statements for the year using (a) absorption costing and (b) variable costing. 3. Reconcile reported operating income under the two methods using the shortcut method.

15)

List and define four types of product quality costs.

16) What is the difference between observable and hidden quality costs? Explain and give at least one example of each.

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17) What is the difference between a product’s quality of design and its quality of conformance?

18)

What are three strategies of environmental cost management? Define each strategy.

19)

What is a product’s grade, as a characteristic of quality? Give a service industry example.

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20) The following costs were incurred by Home Master, a company that makes washing machines. a. The company requires each machine to complete 5 spin cycles before it is boxed and shipped. b. The company replaced switches on 10% of machines sold last year. c. Cost of rewiring the machines that failed the 5-spin cycle test. d. The company sent its machine inspectors to a two-week training program on the new model that is to be released this year. It is hoped that this will lower the defect rate on the new model. Required: Classify each of these costs as a prevention, appraisal, internal failure, or external failure cost.

21) Xenon Enterprises (XE) produces two extruding machines that are popular with food processors: No. 616 and No. 717. Machine No. 616 has an average selling price of $160,000, whereas No. 717 typically sells for approximately $155,000. The company is extremely focused on quality and has provided the following information:

Number of machines produced and sold

No. 616

No. 717

180

200

$2,200

$1,400

Warranty costs:

Average repair cost per unit

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Percentage of units needing repair

75%

15%

Reliability engineering at $150 per hour

2,600 hours

3,000 hours

Average rework cost per unit

$2,900

$2,600

Percentage of units needing rework

40%

30%

Manufacturing inspection at $50 per hour

600 hours

1,000 hours

Transportation costs to customer sites to fix problems

$49,500

$35,000

Quality training for employees

$50,000

$75,000

Rework at XE’s manufacturing plant:

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Required: a. Classify the preceding costs as prevention, appraisal, internal failure, or external failure. b. Using the classifications in requirement (1), compute XE’s quality costs for machine No. 616 in dollars and as a percentage of sales revenues. Also calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs. c. Repeat requirement (b) for machine No. 717. d. Comment on your findings, noting whether the company is “investing” its quality expenditures differently for the two machines. e. Quality costs can be classified as observable or hidden. What are hidden quality costs, and how do these costs differ from observable costs?

22) Take Two manufactures electrical switches for a variety of purposes. The following costs related to maintaining product quality were incurred in April. Training of quality-control inspectors

$41,000

Tests of instruments before sale

50,000

Inspection of electrical components purchased from outside suppliers

22,000

Costs of rework on faulty instruments

29,000

Replacement of instruments already sold, which were still covered by warranty

36,500

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Costs of defective parts that cannot be salvaged

26,100

Required: Prepare a quality-cost report.

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Answer Key Test name: Chap 08_6e_Cornett_Manually Graded

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Chapter 09 – 6e Cornett 1)

Generally speaking, budgets are not used to: A) identify a company's most profitable products. B) evaluate performance. C) create a plan of action. D) assist in the control of profit and operations. E) facilitate communication and coordinate activities.

2) Which of the following choices correctly denotes managerial functions that are commonly associated with budgeting? Planning

Performance Evaluation

Coordination of Activities

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

A formal budget program will almost always result in: A) higher sales. B) more cash inflows than cash outflows. C) decreased expenses. D) improved profits. E) a detailed plan against which actual results can be compared.

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A budget serves as a benchmark against which: A) actual results can be compared. B) allocated results can be compared. C) actual results become inconsequential. D) allocated results become inconsequential. E) cash balances can be compared to expense totals.

5) The comprehensive set of budgets that serves as a company's overall financial plan is commonly known as: A) an integrated budget. B) a pro-forma budget. C) a master budget. D) a financial budget. E) a rolling budget.

6) A company's plan for the acquisition of long-lived assets, such as buildings and equipment, is commonly called a: A) pro-forma budget. B) master budget. C) financial budget. D) profit plan. E) capital budget.

A company's plan for the issuance of stock or incurrence of debt is commonly called a:

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A) pro-forma budget. B) master budget. C) financial budget. D) profit plan. E) capital budget.

8) A company's expected receipts from sales and planned disbursements to pay bills is commonly called a: A) pro-forma budget. B) master budget. C) financial budget. D) profit plan. E) cash budget.

9) Salizar Corporation is budgeting its equipment needs on an on-going basis, with a new quarter being added to the budget as the current quarter is completed. This type of budget is most commonly known as a: A) capital budget. B) rolling budget. C) revised budget. D) pro-forma budget. E) financial budget.

10)

An organization's budgets will often be prepared to cover:

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A) one month. B) one quarter. C) one year. D) periods longer than one year. E) All of these choices are correct.

11)

A manufacturing firm would begin preparation of its master budget by constructing a: A) sales budget. B) production budget. C) cash budget. D) capital budget. E) set of pro-forma financial statements.

12)

Which of the following budgets is based on many other master-budget components? A) Direct labor budget. B) Overhead budget. C) Sales budget. D) Cash budget. E) Selling and administrative expense budget.

13) The budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows comprise: A) the final portion of the master budget. B) the depiction of an organization's overall actual financial results. C) the first step of the master budget. D) the portion of the master budget prepared after the sales forecast and before the remainder of the operational budgets. E) the second step of the master budget.

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14)

Which of the following budgets is prepared at the end of the budget-construction cycle? A) Sales budget. B) Production budget. C) Budgeted financial statements. D) Cash budget. E) Overhead budget.

15) Which of the following would depict the logical order for preparing (1) a production budget, (2) a cash budget, (3) a sales budget, and (4) a direct-labor budget? A) 1-3-4-2. B) 2-3-1-4. C) 2-1-3-4. D) 3-1-4-2. E) 3-1-2-4.

16) The master budget contains the following components, among others: (1) direct-material budget, (2) budgeted balance sheet, (3) production budget, and (4) cash budget. Which of these components would be prepared first and which would be prepared last? First

Last

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A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

17)

A company's sales forecast would likely consider all of the following factors except: A) political and legal events. B) advertising and pricing policies. C) general economic and industry trends. D) top management's attitude toward decentralized operating structures. E) competition.

18)

Which of the following would be considered when preparing a company's sales forecast? Anticipated Advertising Campaigns

General Economic Trends

Expected Competitive Actions

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

19)

A company's sales forecast would likely consider all of the following factors except:

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A) past sales levels and trends. B) the company's intended pricing policy. C) the company's product costing policy. D) market research studies. E) planned advertising and promotions.

20) Which of the following statements best describes the relationship between the salesforecasting process and the master-budgeting process? A) The sales forecast is typically completed after completion of the master budget. B) The sales forecast is typically completed approximately halfway through the masterbudget process. C) The sales forecast is typically completed before the master budget and has no impact on the master budget. D) The sales forecast is typically completed before the master budget and has little impact on the master budget. E) The sales forecast is typically completed before the master budget and has significant impact on the master budget.

21)

Which of the following organizations is not likely to use budgets? A) Manufacturing firms. B) Merchandising firms. C) Firms in service industries. D) Nonprofit organizations. E) None of the other answers are correct, because all are likely to use budgets.

22)

Nonprofit organizations begin their budgeting process with:

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A) a sales budget. B) anticipated funding. C) proforma financial statements. D) services to be provided. E) a cash budget.

23)

Activity-based budgeting: A) begins with a forecast of products and services to be produced, and customers served. B) ends with a forecast of products and services to be produced, and customers served. C) parallels the flow of analysis that is associated with activity-based costing. D) reverses the flow of analysis that is associated with activity-based costing. E) None of the answers is correct.

24) A company that uses activity-based budgeting performs the following: 1—Plans activities for the budget period. 2—Forecasts the demand for products and services as well as the customers to be served. 3—Budgets the resources necessary to carry out activities. Which of the following denotes the proper order of the preceding activities? A) 1-2-3. B) 2-1-3. C) 2-3-1. D) 3-1-2. E) 3-2-1.

25) A manufacturer develops budgets for the direct materials, direct labor, and overhead that will be required in the production process from which of the following?

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A) The selling and administrative expenses budget. B) The budget for merchandise purchases. C) The sales budget. D) The production budget. E) The cash budget.

26)

For an airline, which of the following would not be an operational budget? A) A labor budget for flight crew. B) A budget of planned air miles to be flown. C) A materials budget for aircraft parts. D) A fuel budget. E) A cash receipts budget of flying consumers.

27) Chong Corporation has a highly automated production facility. Which of the following correctly shows the two factors that would likely have the most direct influence on the company's manufacturing overhead budget? A) Sales volume and labor hours. B) Contribution margin and cash payments. C) Production volume and management judgment. D) Labor hours and management judgment. E) Management judgment and indirect labor cost.

28) Wu Production Company, which uses activity-based budgeting, is in the process of preparing a manufacturing overhead budget. Which of the following would likely appear on that budget?

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A) Batch-level costs: Production setup. B) Unit-level costs: Depreciation. C) Unit-level costs: Maintenance. D) Product-level costs: Insurance and property taxes. E) Facility and general operations-level costs: Indirect material.

29) Miracle Enterprises sells electronics in retail outlets and on the Internet. It uses activitybased budgeting in the preparation of its selling, general, and administrative expense budget. Which of the following costs would the company likely classify as a unit-level expense on its budget? A) Media advertising. B) Retail outlet sales commissions. C) Salaries of web-site maintenance personnel. D) Administrative salaries. E) Salary of the sales manager employed at store no. 23.

30) Karma Company has prepared its operating budget for the first quarter of 20x9. The company forecasts sales of $50,000 in February, $60,000 in March, and $70,000 in April. Variable and fixed expenses are as follows: ● Variable: Utilities (electricity):

40 % of sales

Misc. expenses:

5 % of sales

● Fixed: Salary expense

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$ 8,000 per month

Rent expense

$ 5,000 per month

Depreciation expense

$ 1,200 per month

Utilities expense (fixed part)

Misc. Expense (fixed part)

$ 1,000 per month

800 per month

What are the total selling and administrative expenses for the month of February? A) $47,500. B) $38,500. C) $41,700. D) $43,000. E) None of these amounts is correct.

31) Karma Company has prepared its operating budget for the first quarter of 20x9. The company forecasts sales of $50,000 in February, $60,000 in March, and $70,000 in April. Variable and fixed expenses are as follows: ● Variable: Utilities (electricity):

40 % of sales

Misc. expenses:

5 % of sales

● Fixed: Salary expense

$ 8,000 per month

Rent expense

$ 5,000 per month

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Depreciation expense

$ 1,200 per month

Utilities expense (fixed part)

Misc. Expense (fixed part)

$ 1,000 per month

800 per month

What are the total selling and administrative expenses for the month of March? A) $47,500. B) $38,500. C) $41,700. D) $43,000. E) None of these amounts is correct.

32) Karma Company has prepared its operating budget for the first quarter of 20x9. The company forecasts sales of $50,000 in February, $60,000 in March, and $70,000 in April. Variable and fixed expenses are as follows: ● Variable: Utilities (electricity):

40 % of sales

Misc. expenses:

5 % of sales

● Fixed: Salary expense

$ 8,000 per month

Rent expense

$ 5,000 per month

Depreciation expense

$ 1,200 per month

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Utilities expense (fixed part)

800 per month

Misc. Expense (fixed part)

$ 1,000 per month

What are the total selling and administrative expenses for the month of April? A) $47,500. B) $38,500. C) $41,700. D) $43,000. E) None of these amounts is correct.

33) Which of the following would have no effect, either direct or indirect, on an organization's cash budget? A) Sales revenues. B) Outlays for professional labor. C) Advertising expenditures. D) Raw material purchases. E) None of the other answers are correct, since all of these items would have some influence.

34)

Overton Industries has the following sales forecasts for its hip waders next year:

First Quarter Second Quarter Third Quarter Fourth Quarter

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10,000 pairs 5 % increase over first quarter 3 % decrease from second quarter 8 % increase over first quarter

What is Overton’s estimated sales in units for next year? A) 41,485 pairs. B) 38,300 pairs. C) 40,000 pairs. D) 40,685 pairs. E) None of the answers is correct.

35)

Overton Industries has the following sales forecasts for its hip waders next year:

First Quarter Second Quarter Third Quarter Fourth Quarter

10,000 pairs 5 % increase over first quarter 3 % decrease from second quarter 8 % increase over first quarter

What is Overton’s estimated sales revenue for next year if each pair sells for an average of $30? A) $1,149,000. B) $1,200,000. C) $1,220,550. D) $1,244,550. E) None of the answers is correct.

36) Barre plans to sell 5,000 units each quarter next year. During the first two quarters each unit will sell for $12; during the last two quarters the sales price will increase $1.50 per unit. What is Barre’s estimated sales revenue for next year?

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A) $240,000. B) $255,000. C) $270,000. D) $244,000. E) None of the answers is correct.

37) Bacon has budgeted sales for the first quarter of the next year to be 30,000 units. The inventory in hand at the beginning of quarter is 5,000 units. The desired ending inventory is 10,000 units. What is the budgeted production for the quarter? A) 10,000 units. B) 35,000 units. C) 25,000 units. D) 40,000 units. E) None of the answers is correct.

38) Guiness Inc. has a budgeted production of 8,000 units. Each unit requires 40 minutes of direct labor work to complete. The direct labor rate is $100 per hour. What is the budgeted cost of direct labor for the month? A) $633,333.33. B) $500,000. C) $566,666.67. D) $533,333.33. E) None of the answers is correct.

39) Cycle Sporting Goods sells bicycles throughout the northeastern United States. The following data were taken from the most recent quarterly sales forecast: Expected Sales

End-of Month Target Inventory

July

1,800 units

210 units

August

1,950 units

300 units

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September

1,880 units

270 units

On the basis of the information presented, how many bicycles should the company purchase in August? A) 1,860. B) 1,950. C) 2,040. D) 2,250. E) None of the answers is correct.

40) Maki plans to sell 10,000 units of a particular product during July, and expects sales to increase at the rate of 10% per month during the remainder of the year. The June 30 and September 30 ending inventories are anticipated to be 1,100 units and 950 units, respectively. On the basis of this information, how many units should Maki purchase for the quarter ended September 30? A) 31,850. B) 32,150. C) 32,950. D) 33,250. E) None of the answers is correct.

41) Terrence Corporation plans to sell 41,000 units of its single product in March. The company has 2,800 units in its March 1 finished-goods inventory and anticipates having 2,400 completed units in inventory on March 31. On the basis of this information, how many units does Terrence plan to produce during March? A) 40,600. B) 41,400. C) 43,800. D) 46,200. E) None of the answers is correct.

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42) Houseman, Inc. anticipates sales of 50,000 units, 48,000 units, and 51,000 units in July, August, and September, respectively. Company policy is to maintain an ending finished-goods inventory equal to 40% of the following month's sales. On the basis of this information, how many units would the company plan to produce in July? A) 46,800. B) 49,200. C) 49,800. D) 52,200. E) None of the answers is correct.

43) Houseman, Inc. anticipates sales of 50,000 units, 48,000 units, and 51,000 units in July, August, and September, respectively. Company policy is to maintain an ending finished-goods inventory equal to 40% of the following month's sales. On the basis of this information, how many units would the company plan to produce in August? A) 48,000. B) 49,200. C) 49,800. D) 50,600. E) None of the answers is correct.

44) Houseman, Inc. anticipates sales of 50,000 units, 48,000 units, 51,000 units and 50,000 units in July, August, September and October, respectively. Company policy is to maintain an ending finished-goods inventory equal to 40% of the following month's sales. On the basis of this information, how many units would the company plan to produce in September? A) 46,800. B) 49,200. C) 49,800. D) 50,600. E) None of the answers is correct.

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45) Elon & Company had 3,000 units in finished-goods inventory on December 31. The following data are available for the upcoming year: January

February

Units to be produced

9,400

10,200

Desired ending finished-goods inventory

2,500

2,100

The number of units the company expects to sell in January is: A) 6,900. B) 8,900. C) 9,400. D) 9,900. E) 11,900.

46) To derive the raw material to purchase during an accounting period, an accountant would calculate the raw material required for production and then: A) add the beginning raw-material inventory and the desired ending raw-material inventory. B) subtract the beginning raw-material inventory and the desired ending raw-material inventory. C) add the beginning raw-material inventory and subtract the desired ending raw-material inventory. D) add the desired ending raw-material inventory and subtract the beginning raw-material inventory. E) add the desired ending raw-material inventory and subtract both the beginning rawmaterial inventory and the expected units to be sold.

47) Blaylock plans to sell 85,000 units of product no. 794 in May, and each of these units requires three units of raw material. Pertinent data follow.

Actual May 1 inventory

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Product No. 794

Raw Material

11,000 units

29,000 units

Desired May 31 inventory

17,000 units

20,000 units

On the basis of the information presented, how many units of raw material should Blaylock purchase for use in May production? A) 228,000. B) 246,000. C) 264,000. D) 282,000. E) None of the answers is correct.

48) An examination of Hyong Corporation's inventory accounts revealed the following information: Raw materials, June 1: 46,000 units Raw materials, June 30: 51,000 units Purchases of raw materials during June: 185,000 units Hyong’s finished product requires four units of raw materials. On the basis of this information, how many finished products were manufactured during June? A) 45,000. B) 47,500. C) 57,750. D) 70,500. E) None of the answers is correct.

49) Hsu plans to sell 40,000 units of product no. 75 in June, and each of these units requires five square feet of raw material. Pertinent data follow. Product No. 75 Actual June 1 inventory Estimated June 30 inventory

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5,500 4,300

Raw Material 18,000 square feet ? square feet

If the company purchases 201,000 square feet of raw material during the month, the estimated raw-material inventory on June 30 would be: A) 23,000 square feet. B) 11,000 square feet. C) 25,000 square feet. D) 13,000 square feet. E) None of the answers is correct.

50) Nevis Motors manufactures a product requiring 0.5 ounces of platinum per unit. The cost of platinum is approximately $360 per ounce; the company maintains an ending platinum inventory equal to 10% of the following month's production usage. The following data were taken from the most recent quarterly production budget:

Planned production in units

July

August

September

1,000

1,100

980

The cost of platinum to be purchased to support August production is: A) $195,840. B) $198,000. C) $200,160. D) $391,680. E) None of the answers is correct.

51) Nevis’ production data for one of its products were taken from the most recent quarterly production budget:

Planned production in units

July

August

September

1,000

1,100

980

If it takes two direct labor hours to produce each unit and Nevis’ cost per labor hour is $15, direct labor cost for August would be budgeted at:

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A) $16,500. B) $31,200. C) $33,000. D) $34,800. E) None of the answers is correct.

52) Nevis’ production data for a new deluxe product were taken from the most recent quarterly production budget:

Planned production in units

July

August

September

1,000

1,100

980

In addition, Nevis produces 5,000 units a month of its standard product. It takes two direct labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe unit. Nevis’ cost per labor hour is $15. Direct labor cost for July would be budgeted at: A) $183,750. B) $187,125. C) $189,125. D) $194,750. E) None of the answers is correct.

53) Nevis’ production data for a new deluxe product were taken from the most recent quarterly production budget:

Planned production in units

July

August

September

1,000

1,100

980

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A) $187,125. B) $194,750. C) $197,107. D) $183,250. E) None of the answers is correct.

54) Nevis’ production data for a new deluxe product were taken from the most recent quarterly production budget:

Planned production in units

July

August

September

1,000

1,100

980

In addition, Nevis produces 5,000 units a month of its standard product. It takes two direct labor hours to produce each standard unit and 2.25 direct labor hours to produce each deluxe unit. Nevis’ cost per labor hour is $15. Direct labor cost for September would be budgeted at: A) $187,125. B) $183,075. C) $194,750. D) $197,075. E) None of the answers is correct.

55) Nevis’ production data for a new deluxe product were taken from the most recent quarterly production budget:

Planned production in units

July

August

September

1,000

1,100

980

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A) $519,075. B) $533,125. C) $547,750. D) $553,950. E) None of the answers is correct.

56) Gallonte Inc. began operations in April of this year. It makes all sales on account, subject to the following collection pattern: 30% are collected in the month of sale; 60% are collected in the first month after sale; and 10% are collected in the second month after sale. If sales for April, May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's budgeted collections for April? A) $60,000. B) $18,000. C) $65,000. D) $21,000. E) None of the answers is correct.

57) Gallonte Inc. began operations in April of this year. It makes all sales on account, subject to the following collection pattern: 30% are collected in the month of sale; 60% are collected in the first month after sale; and 10% are collected in the second month after sale. If sales for April, May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's budgeted collections for May? A) $21,000. B) $60,000. C) $69,000. D) $75,000. E) None of the answers is correct.

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58) Gallonte Inc. began operations in April of this year. It makes all sales on account, subject to the following collection pattern: 30% are collected in the month of sale; 60% are collected in the first month after sale; and 10% are collected in the second month after sale. If sales for April, May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's budgeted collections for June? A) $21,000. B) $60,000. C) $69,000. D) $75,000. E) None of the answers is correct.

59) Gallonte Inc. began operations in April of this year. It makes all sales on account, subject to the following collection pattern: 30% are collected in the month of sale; 60% are collected in the first month after sale; and 10% are collected in the second month after sale. If sales for April, May, and June were $60,000, $80,000, and $70,000, respectively, what were the firm's budgeted collections for the quarter? A) $121,000. B) $140,000. C) $153,000. D) $175,000. E) None of the answers is correct.

60) Parvis makes all sales on account, subject to the following collection pattern: 20% are collected in the month of sale; 70% are collected in the first month after sale; and 10% are collected in the second month after sale. If sales for October, November, and December were $70,000, $60,000, and $50,000, respectively, what was the budgeted receivables balance on December 31?

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A) $40,000. B) $46,000. C) $49,000. D) $59,000. E) None of the answers is correct.

61) Harrington makes all sales on account, subject to the following collection pattern: 30% are collected in the month of sale; 60% are collected in the first month after sale; and 10% are collected in the second month after sale. If sales for June, July, and August were $120,000, $160,000, and $220,000, respectively, what were the firm's budgeted collections for August and the company's budgeted receivables balance on August 31? August Collections

August 31 Receivables Balance

$ 162,000

$ 182,000

$ 174,000

$ 170,000

$ 174,000

$ 154,000

$ 262,000

$ 170,000

None of these options is correct.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

62)

The following selected data pertain to Flagship Corporation:

Cash operating expenses July 1-31

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$ 180,000

Depreciation

60,000

Merchandise purchases in July

560,000

Estimated payments in July for June purchases

220,000

Estimated payments in July for purchases prior to June

50,000

Estimated payments in July for purchases in July

40 %

July's cash disbursements are expected to be: A) $404,000. B) $464,000. C) $674,000. D) $734,000. E) None of the answers is correct.

63) Dalton Industries makes all purchases on account, subject to the following payment pattern: Paid in the month of purchase: 30% Paid in the first month following purchase: 60% Paid in the second month following purchase: 10% If purchases for January, February, and March were $200,000, $180,000, and $230,000, respectively, what were the firm's budgeted payments in March? A) $69,000. B) $138,000. C) $177,000. D) $197,000. E) None of the answers is correct.

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64) Virginia Enterprises makes all purchases on account, subject to the following payment pattern: Paid in the month of purchase: 30% Paid in the first month following purchase: 65% Paid in the second month following purchase: 5% If purchases for April, May, and June were $200,000, $160,000, and $250,000, respectively, what was the firm's budgeted payables balance on June 30? A) $175,000. B) $179,000. C) $183,000. D) $189,000. E) None of the answers is correct.

65) Fortune Inc. has budgeted sales for June and July at $680,000 and $720,000, respectively. Sales are 80% credit, of which 70% is collected in the month of sale and 30% is collected in the following month. What is the accounts receivable balance on July 31? A) $175,000. B) $179,000. C) $172,800. D) $189,000. E) None of the answers is correct.

66)

Express Meals is a local bistro that has budgeted inventory purchases as follows:

September:

300,000

October:

350,000

November:

390,000

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Express pays for 20% of their purchases during the month of purchase, 70% during the month following the purchase, and the remaining 10% two months after the month of purchase. What is the budgeted accounts payable balance on November 30? A) $425,000. B) $390,000. C) $347,000. D) $312,000. E) None of the answers is correct.

67) Rainbow, Inc. began operations on January 1 of the current year with a $12,000 cash balance. Forty percent of sales are collected in the month of sale; 60% are collected in the month following sale. Similarly, 20% of purchases are paid in the month of purchase, and 80% are paid in the month following purchase. The following data apply to January and February: January

February

$ 35,000

$ 55,000

Purchases

30,000

40,000

Operating expenses

7,000

9,000

Sales

If operating expenses are paid in the month incurred and include monthly depreciation charges of $2,500, determine the change in Rainbow’s cash balance during February. A) $2,000 increase. B) $4,500 increase. C) $5,000 increase. D) $7,500 increase. E) None of the answers is correct.

68)

Doral Corp. has provided a part of its budget for the third quarter: July

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August

September

Cash Collections

$ 40,000

$ 45,000

$ 52,000

Purchases of Inventory

4,500

7,200

4,500

Operating Expenses

7,900

5,600

9,000

20,000

4,600

Cash Payments

Capital expenditures

The cash balance on July 1 is $12,000. Assume that there will be no financing transactions or costs during the quarter. What is the cash balance at the end of July? A) $50,000. B) $39,600. C) $49,600. D) $40,200. E) None of the answers is correct.

69)

Doral Corp. has provided a part of its budget for the third quarter: July

August

September

$ 40,000

$ 45,000

$ 52,000

Purchases of Inventory

4,500

7,200

4,500

Operating Expenses

7,900

5,600

9,000

20,000

4,600

Cash Collections Cash Payments

Capital expenditures

The cash balance on July 1 is $12,000. Assume that there will be no financing transactions or costs during the quarter. What is the cash balance at the end of August?

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A) $52,000. B) $64,600. C) $49,600. D) $51,800. E) None of the answers is correct.

70)

Doral Corp. has provided a part of its budget for the third quarter: July

August

September

$ 40,000

$ 45,000

$ 52,000

Purchases of Inventory

4,500

7,200

4,500

Operating Expenses

7,900

5,600

9,000

20,000

4,600

Cash Collections Cash Payments

Capital expenditures

The cash balance on July 1 is $12,000. Assume that there will be no financing transactions or costs during the quarter. What is the cash balance at the end of September? A) $97,000. B) $84,600. C) $85,700. D) $86,800. E) None of the answers is correct.

71)

Morgan Company's budgeted income statement reflects the following amounts:

January

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Sales

Purchases

Expenses

$ 120,000

$ 78,000

$ 24,000

February

110,000

66,000

24,200

March

125,000

81,250

27,000

April

130,000

84,500

28,600

Sales are collected 50% in the month of sale, 30% in the month following sale, and 19% in the second month following sale. One percent of sales is uncollectible and expensed at the end of the year. Morgan pays for all purchases in the month following purchase and takes advantage of a 3% discount. The following balances are as of January 1:

Cash

$ 88,000

Accounts receivable*

58,000

Accounts payable

72,000

*Of this balance, $35,000 will be collected in January and the remaining amount will be collected in February. The monthly expense figures include $5,000 of depreciation. The expenses are paid in the month incurred. Morgan’s expected cash balance at the end of January is: A) $87,000. B) $89,160. C) $92,000. D) $94,160. E) $113,160.

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72)

Morgan Company's budgeted income statement reflects the following amounts: Sales

Purchases

Expenses

January

$ 120,000

$ 78,000

$ 24,000

February

110,000

66,000

24,200

March

125,000

81,250

27,000

April

130,000

84,500

28,600

Sales are collected 50% in the month of sale, 30% in the month following sale, and 19% in the second month following sale. One percent of sales is uncollectible and expensed at the end of the year.Morgan pays for all purchases in the month following purchase and takes advantage of a 3% discount. The following balances are as of January 1:

Cash

$ 88,000

Accounts receivable*

58,000

Accounts payable

72,000

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A) $91,000. B) $95,000. C) $113,090. D) $113,640. E) $114,000.

73)

Morgan Company's budgeted income statement reflects the following amounts: Sales

Purchases

Expenses

January

$ 120,000

$ 78,000

$ 24,000

February

110,000

66,000

24,200

March

125,000

81,250

27,000

April

130,000

84,500

28,600

Cash

$ 88,000

Accounts receivable*

58,000

Accounts payable

72,000

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*Of this balance, $35,000 will be collected in January and the remaining amount will be collected in February. The monthly expense figures include $5,000 of depreciation. The expenses are paid in the month incurred. Morgan’s budgeted cash payments in February are: A) $75,660. B) $94,860. C) $97,200. D) $99,860. E) $102,200.

74)

Morgan Company's budgeted income statement reflects the following amounts: Sales

Purchases

Expenses

January

$ 120,000

$ 78,000

$ 24,000

February

110,000

66,000

24,200

March

125,000

81,250

27,000

April

130,000

84,500

28,600

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Cash

$ 88,000

Accounts receivable*

58,000

Accounts payable

72,000

*Of this balance, $35,000 will be collected in January and the remaining amount will be collected in February. The monthly expense figures include $5,000 of depreciation. The expenses are paid in the month incurred. Morgan’s expected cash balance at the end of February is: A) $87,000. B) $89,160. C) $92,000. D) $94,160. E) $113,300.

75) Nikolas Industries has a cash balance of $20,000 on July 1, 20x8. The company is in the process of preparing the cash budget for the third quarter, with budgeted cash collections and payments as follows: July

August

September

$ 25,000

$ 22,000

$ 20,000

Purchases of Inventory

5,800

7,000

6,200

Operating Expenses

3,500

4,600

5,300

Cash Collections Cash Payments:

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There are no budgeted capital expenditures or financing transactions during the quarter. Using the data above, what is the projected cash balance at the end of July? A) $36,100. B) $23,700. C) $35,700. D) $22,000. E) None of these amounts is correct.

76) Nikolas Industries has a cash balance of $20,000 on July 1, 20x8. The company is in the process of preparing the cash budget for the third quarter, with budgeted cash collections and payments as follows: July

August

September

$ 25,000

$ 22,000

$ 20,000

Purchases of Inventory

5,800

7,000

6,200

Operating Expenses

3,500

4,600

5,300

Cash Collections Cash Payments:

There are no budgeted capital expenditures or financing transactions during the quarter. Using the data above, what is the projected cash balance at the end of August? A) $46,100. B) $43,700. C) $35,700. D) $44,000. E) None of these amounts is correct.

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77) Nikolas Industries has a cash balance of $20,000 on July 1, 20x8. The company is in the process of preparing the cash budget for the third quarter, with budgeted cash collections and payments as follows: July

August

September

$ 25,000

$ 22,000

$ 20,000

Purchases of Inventory

5,800

7,000

6,200

Operating Expenses

3,500

4,600

5,300

Cash Collections Cash Payments:

There are no budgeted capital expenditures or financing transactions during the quarter. Using the data above, what is the projected cash balance at the end of September? A) $46,100. B) $54,600. C) $35,700. D) $57,000. E) None of these amounts is correct.

78)

Farre Company has prepared the following purchases budget:

Month July

Budgeted Purchases $ 67,000

August

72,500

September

76,300

October

73,700

November

69,200

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All purchases are paid for as follows: 10% in the month of purchase, 50% in the following month, and 40% two months after purchase. What are the total cash payments made in November for purchases? A) $70,680. B) $70,520. C) $74,290. D) $72,630. E) $67,370.

79) End-of-period figures for accounts receivable and payables to suppliers would be found on the: A) cash budget. B) budgeted schedule of cost of goods manufactured. C) budgeted income statement. D) budgeted balance sheet. E) budgeted statement of cash flows.

80) Which of the following statements is false regarding the budgeted schedule of cost of goods manufactured and sold? A) This budget schedule first summarizes the various costs of production from other budget schedules to compute the period’s total manufacturing costs. B) This budget adjusts for the beginning and ending cost of work-in-process inventory to compute the cost of goods manufactured. C) This budget computes cost of goods sold by adjusting cost of goods manufactured by the beginning and ending balances in finished goods inventory. D) This budget uses a format that is prepared by companies for external reporting purposes. E) This budget shows production costs that are expected to flow through the inventory accounts.

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81) The direct-material budget shows the number of units and the cost of material to be purchased and used during a budget period. Which of the following formulas is this schedule based on? A) Raw materials required for production + desired ending inventory of raw material = Total raw material required − expected beginning inventory of raw material = Raw material to be purchased. B) Raw materials required for production − desired ending inventory of raw material = Total raw material required + expected beginning inventory of raw material = Raw material to be purchased. C) Total raw material required + Raw materials required for production = desired ending inventory of raw material = Raw material to be purchased. D) Raw material to be purchased + expected beginning inventory of raw material = Desired ending inventory of raw material × cost per unit = Raw materials required for production. E) Raw material required for production ÷ [(expected beginning inventory of raw material + desired ending inventory of raw material) ÷ 2] = Raw material to be purchased.

82) Marvel Woodcraft makes furniture. Marvel’s expected sales are 20,000 bookcases for the quarter. The company begins the quarter with inventory of 3,000 bookcases and wants to have enough finished bookcases on hand at the end of the quarter to provide for 15% of the next quarter’s expected sales of 24,000 bookcases. Based on this information, how many bookcases need to be produced during the quarter? A) 3,600 B) 20,600 C) 21,000 D) 4,000 E) 17,600

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83) Marvel Woodcraft makes furniture. Marvel’s expected sales are 20,000 bookcases for the quarter. The company begins the quarter with inventory of 3,000 bookcases and wants to have enough finished bookcases on hand at the end of the quarter to provide for 15% of the next quarter’s expected sales of 24,000 bookcases. Ignoring any beginning inventory, if 50 board feet are required for each bookcase and the wood costs $2 per board foot, how much will Marvel pay for the bookcases it needs produce during the quarter? A) $360,000 B) $2,060,000 C) $2,600,000 D) $600,000 E) $1,760,000

84) Assume that Toy Craft makes ragdolls. Each ragdoll requires 12 square feet of fabric. If the number of dolls to be produced during the quarter is 19,000, the desired ending inventory of fabric is 11,400 square feet, the beginning inventory of fabric is 22,800 square feet, and the cost of the fabric is $9 per square foot, what is the total cost of fabric purchases? A) $216,600 B) $1,949,400 C) $2,154,600 D) $2,052,000 E) $307,800

85)

Craftco has prepared the following sales budget:

Month April

Budgeted Sales $ 200,000

May

180,000

June

220,000

July

260,000

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Cost of goods sold is budgeted at 60% of sales and the inventory at the end of March was $36,000. Desired inventory levels at the end of each month are 20% of the next month's cost of goods sold. What is the desired beginning inventory on July 1? A) $52,000 B) $26,400 C) $43,200 D) $31,200 E) None of these amounts is correct.

86)

Which of the following statements about financial planning models (FPMs) is (are) false? A) FPMs express a company's financial and operating relationships in mathematical

terms. B) FPMs allow a user to explore the impact of changes in variables. C) FPMs are commonly known as "what-if" models. D) FPMs have become less popular in recent years because of computers and spreadsheets. E) Both FPMs are commonly known as "what-if" models and FPMs have become less popular in recent years because of computers and spreadsheets.

87) Consider the following statements about budget administration: 1.The budgeting process is a very formal process in all organizations regardless of an organization's size. 2.The budget manual is prepared to communicate budget procedures and deadlines to employees throughout an organization. 3.Effective internal control procedures require that the budget director be an individual other than the controller. Which of the above statements is (are) true?

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A) I only. B) II only. C) III only. D) I and II. E) I and III.

88)

Which of the following statements concerning the budget director is false?

A) The budget director is often an organization's controller. B) The budget director has the responsibility of specifying the process by which budget data will be gathered. C) The budget director collects information and participates in preparing the master budget. D) The budget director communicates budget procedures and deadlines to employees throughout an organization. E) The budget director usually has the authority to give final approval to the master budget.

89) Consider the following statements about companies that are involved with international operations: 1.Budgeting for these firms is often very involved because of fluctuating values in foreign currencies. 2.Multinational firms may encounter hyperinflationary economies. 3.Such organizations often face changing laws and political climates that affect business activity. Which of the above statements is (are) true? A) I only. B) III only. C) I and II. D) II and III. E) I, II, and III.

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90) The difference between the revenue or cost projection that a person provides, and a realistic estimate of the revenue or cost, is called: A) passing the buck. B) budgetary slack. C) false budgeting. D) participative budgeting. E) resource allocation processing.

91) If a manager builds slack into a budget, how would that manager handle estimates of revenues and expenses? Revenues

Expenses

Underestimate

Overestimate

Underestimate

Overestimate

Estimate correctly

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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92) The following events took place when Managers A, B, and C were preparing budgets for the upcoming period: 1.Manager A increased property tax expenditures by 2% when she was informed of a recent rate hike by local authorities. 2.Manager B reduced sales revenues by 4% when informed of recent aggressive actions by a new competitor. 3.Manager C, who supervises employees with widely varying skill levels, used the highest wage rate in the department when preparing the labor budget. Assuming that the percentage amounts given are reasonable, which of the preceding cases is (are) an example of building slack in budgets? A) I only. B) II only. C) III only. D) I and II. E) II and III.

93) Consider the following statements about budgetary slack: 1.Managers build slack into a budget so that they stand a greater chance of receiving favorable performance evaluations. 2.Budgetary slack is used by managers to guard against uncertainty and unforeseen events. 3.Budgetary slack is used by managers to guard against dollar cuts by top management in the resource allocation process. Which of the above statements is (are) true? A) I only. B) II only. C) I and II. D) II and III. E) I, II, and III.

94) When an organization involves its many employees in the budgeting process in a meaningful way, the organization is said to be using an approach most commonly known as:

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A) budgetary slack. B) participative budgeting. C) budget padding. D) imposed budgeting. E) employee-based budgeting.

95) Which of the following outcomes is (are) sometimes associated with participative budgeting? A) Employees make little effort to achieve budgetary goals. B) Budget preparation time can be somewhat lengthy. C) The problem of budget padding may arise. D) Financial modeling becomes much more difficult to undertake. E) Budget preparation time can be somewhat lengthy and the problem of budget padding may arise.

96) Company A uses a heavily participative budgeting approach whereas at Company B, top management develops all budgets and imposes them on lower-level personnel. Which of the following statements is false? A) A's employees will likely be more motivated to achieve budgetary goals than the employees of Company B. B) B's employees may be somewhat disenchanted because although they will be evaluated against a budget, they really had little say in budget development. C) Budget padding will likely be a greater problem at Company B. D) Budget preparation time will likely be longer at Company A. E) Ethical issues are more likely to arise at Company A, especially when the budget is used as a basis for performance appraisal.

97) A complete financial planning and analysis (FP&A) system includes subsystems for (1) planning, (2) measuring and recording results, and (3) evaluating performance.

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⊚ ⊚

98)

true false

The planning component of the FP&A system is called the sales budget. ⊚ true ⊚ false

99) The budgeting technique that helps managers assess the company's future and know if they are reaching their performance goals is called life-cycle budgeting. ⊚ true ⊚ false

100) The comprehensive set of budgets that serves as a company's overall financial plan is commonly known as the financial budget. ⊚ true ⊚ false

101) A company's sales forecast would likely not consider general economic and industry trends. ⊚ true ⊚ false

102) Companies develop a set of operating budgets to project cash flow and likely cash shortfalls and/or surpluses. ⊚ true ⊚ false

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103) A budgeted income statement, a budgeted balance sheet, and a budgeted statement of cash flows are the end result of the master budgeting process. ⊚ true ⊚ false

104)

A three-stage allocation process is used in activity-based costing systems. ⊚ true ⊚ false

105) Activity-based budgeting (ABB) takes the Activity-based costing model (ABC) and reverses the flow of the analysis. ⊚ true ⊚ false

106) Sainte Claire Corporation has a highly automated production facility. Production volume and management judgment are the two factors that would likely have the most direct influence on the company's manufacturing overhead budget. ⊚ true ⊚ false

107)

The first step in developing a master budget is always the creation of a cash budget. ⊚ true ⊚ false

108)

All conversion costs are included in the direct-labor budget. ⊚ true ⊚ false

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109) lags.

A difference in timing between units sold and units produced can result from logistical ⊚ ⊚

110) plan.

true false

Managers typically avoid making assumptions that will be part of the year’s financial ⊚ ⊚

true false

111) The risk of being wrong about predictions can sometimes be mitigated by managers’ actions. ⊚ true ⊚ false

112) A disadvantage of a provider hosted approach through the cloud is that the company’s proprietary financial data resides outside of the company’s walls. ⊚ true ⊚ false

113) Translation of foreign currencies is a challenge faced by the budgeting process in firms with international operations. ⊚ true ⊚ false

114)

Budgetary slack often is used to cope with uncertainty. ⊚ true ⊚ false

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115) That employees make little effort to achieve budgetary goals is an outcome sometimes associated with participative budgeting. ⊚ true ⊚ false

116)

Implementation of participative budgeting prevents budget padding. ⊚ true ⊚ false

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Answer Key Test name: Chap 09_6e_Cornett 1) A 2) B 3) E 4) A 5) C 6) E 7) C 8) E 9) B 10) E 11) A 12) D 13) A 14) C 15) D 16) D 17) D 18) D 19) C 20) E 21) E 22) D 23) E 24) B 25) D 26) E Version 1

27) C 28) A 29) B 30) B 31) D 32) A 33) E 34) A 35) D 36) B 37) B 38) D 39) C 40) C 41) A 42) B 43) B 44) D 45) D 46) D 47) C 48) A 49) C 50) A 51) C 52) A 53) A 54) B 55) D 56) B Version 1

57) B 58) D 59) C 60) B 61) B 62) C 63) D 64) C 65) C 66) C 67) B 68) B 69) D 70) C 71) D 72) E 73) B 74) E 75) C 76) A 77) B 78) C 79) D 80) D 81) A 82) B 83) B 84) B 85) D 86) D Version 1

87) B 88) E 89) E 90) B 91) B 92) C 93) E 94) B 95) E 96) C 97) TRUE 98) FALSE 99) FALSE 100) FALSE 101) FALSE 102) FALSE 103) TRUE 104) FALSE 105) TRUE 106) TRUE 107) FALSE 108) FALSE 109) TRUE 110) FALSE 111) TRUE 112) TRUE 113) TRUE 114) TRUE 115) FALSE 116) FALSE Version 1

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Chapter 09 – 6e Cornet- Manually Graded 1) Paradise, Inc., a distributor of suntan lotion, has the following historical collection pattern for its credit sales. 70 percent collected in the month of sale.

15 percent collected in the first month after sale.

10 percent collected in the second month after sale.

4 percent collected in the third month after sale.

1 percent uncollectible.

The sales on account have been budgeted for the last seven months as follows: April

$ 49,000

May

60,000

June

70,000

July

80,000

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August

90,000

September

100,000

October

85,000

Required: A. Compute the estimated total cash collections during August from credit sales. B. Compute the estimated total cash collections during the August - October quarter from sales made on account during this quarter.

2) Tsao Company budgets on an annual basis. The following beginning and ending inventory levels (in units) are planned for the year 20x1. Three units of raw material are required to produce each unit of finished product. Required: A. If Tsao Company plans to sell 380,000 units during the year, compute the number of units the firm would have to manufacture during the year. B. If 400,000 finished units were to be manufactured by Tsao Company during the year, determine the amount of raw material to be purchased. January 1

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December 31

Raw material

70,000

90,000

Work in process

12,000

Finished goods

70,000

40,000

3) Weed Master Company plans to sell 200,000 units of finished product in June and anticipates a growth rate in sales of 5 percent per month. The desired monthly ending inventory in units of finished product is 80 percent of the next month’s estimated sales. There are 160,000 finished units in inventory on May 31. Each unit of finished product requires four pounds of raw material at a cost of $1.15 per pound. There are 700,000 pounds of raw material in inventory on May 31. Required: A. Compute the company’s total required production in units of finished product for the entire three-month period ending August 31. B. Independent of your answer to requirement (A), assume the company plans to produce 600,000 units of finished product in the three-month period ending August 31, and to have rawmaterial inventory on hand at the end of the three-month period equal to 25 percent of the use in that period. Compute the total estimated cost of raw-material purchases for the entire threemonth period ending August 31.

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4) The following information is from Barkley’s Auto Alarm Company financial records. Collections from customers are normally 70 percent in the month of sale, 20 percent in the month following the sale, and 9 percent in the second month following the sale. The balance is expected to be uncollectible. All purchases are on account. Management takes full advantage of the 2 percent discount allowed on purchases paid for by the tenth of the following month. Purchases for December are budgeted at $60,000, and sales for December are forecasted at $66,000. Cash disbursements for expenses are expected to be $14,400 for the month of December. The company’s cash balance on December 1 was $22,000. Month

Sales

Purchases

August

$72,000

$42,000

September

66,000

48,000

October

60,000

36,000

November

78,000

54,000

Required: Prepare the following schedules. A. Expected cash collections during December. B. Expected cash disbursements during December. C. Expected cash balance on December 31.

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5) State University is preparing its master budget for the upcoming academic year (an academic year consists of two semesters). Currently, 12,000 students are enrolled on campus; however, the admissions office is forecasting a 5% growth in the student body despite a tuition hike to $80 per credit hour. The following additional information has been gathered from an examination of university records and conversations with university officials: · State is planning to award 150 tuition-free scholarships. · The average class has 30 students, and the typical student takes 15 credit hours each semester. · Each class is three credit hours. · Each faculty member teaches five classes during the academic year. Required: A. Compute the budgeted tuition revenue for the upcoming academic year. B. Determine the number of faculty members needed to cover classes. C. In preparing the university's master budget, should the administration begin with a forecast of students or a forecast of faculty members? Briefly explain.

6) Markham Corporation has experienced a number of out-of-stock situations with respect to its finished-goods inventories. Inventory at the end of May, for example, was only 50 units— an all-time low. Management desires to implement a policy whereby finished-goods inventory is 70% of the following month's sales. Budgeted sales for June, July, and August are expected to be 5,000 units, 5,600 units, and 5,500 units, respectively. Required: Determine the number of units that Markham must produce in June and July. Version 1

7) Planton Manufacturing plans to produce 20,000 units, 24,000 units, and 30,000 units, respectively, in October, November, and December. Each of these units requires four units of part no. 879, which the company can purchase for $7 each. Planton has 35,000 units of part no. 879 in stock on September 30. Required: Prepare a direct-material purchases budget for October and November in units and dollars. Management desires to maintain an ending raw-material inventory equal to 40% of the following month's production usage.

8) Boxer Company plans to sell 400,000 units of finished product in July 20x1. Management (1) anticipates a growth rate in sales of 5% per month thereafter and (2) desires a monthly ending finished-goods inventory (in units) of 80% of the following month's estimated sales. There are 300,000 completed units in the June 30, 20x1 inventory. Each unit of finished product requires four pounds of direct material at a cost of $1.50 per pound. There are 1,600,000 pounds of direct material in inventory on June 30, 20x1. Required: A. Prepare a production budget for the quarter ended September 30, 20x1. Note: For both part "A" and part "B" of this problem, prepare your budget on a quarterly (not monthly) basis. B. Independent of your answer to part "A," assume that Boxer plans to produce 1,200,000 units of finished product for the quarter ended September 30. If the firm desires to stock direct materials at the end of this period equal to 25% of current production usage, compute the cost of direct material purchases for the quarter.

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9) Grande Corporation assembles bicycles by purchasing frames, wheels, and other parts from various suppliers. Consider the following data: * The company plans to sell 25,000 bicycles during each month of the year's first quarter. * A review of the accounting records disclosed a finished-goods inventory of 1,400 bicycles on January 1 and an expected finished-goods inventory of 1,850 bicycles on January 31. * Grande has 4,300 wheels in inventory on January 1, a level that is expected to drop by 5% at month-end. * Assembly time totals 30 minutes per bicycle, and workers are paid $14 per hour. * Grande accounts for employee benefits as a component of direct labor cost. Pension and insurance costs average $2 per hour (total); additionally, the company pays Social Security taxes that amount to 8% of gross wages earned. Required: A. How many bicycles does Grande expect to produce (i.e., assemble) in January? B. How many wheels are budgeted to be purchased in January? C. Compute Grande’s total direct labor cost for January. D. Briefly explain how the company's purchasing activity would affect the end-of-period balance sheet.

10) Bacon Industries manufactures two products: A and B. The company predicts a sales volume of 10,000 units for product A and ending finished-goods inventory of 2,000 units. These numbers for product B are 12,000 and 3,000, respectively. Bacon currently has 7,000 units of A in inventory and 9,000 units of B. The following raw materials are required to manufacture these products:

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Raw Material

Cost per Pound

Required for Product

$2.00

2 pounds

2.50

1 pound

1.25

1 pound

3 pounds

Product A requires three hours of cutting time and two hours of finishing time; B requires one hour and three hours, respectively. The direct labor rate for cutting is $10 per hour and $18 per hour for finishing. Required: A. Prepare a production budget in units for products A and B. B. Prepare a materials usage budget in pounds and dollars for materials X, Y, and Z. C. Prepare a direct labor budget in hours and dollars for product A.

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11) Joyner Company has the following historical collection pattern for its credit sales: 70% collected in month of sale 15% collected in the first month after sale 10% collected in the second month after sale 4% collected in the third month after sale 1% uncollectible Budgeted credit sales for the last six months of the year follow. July

$30,000

August

35,000

September

40,000

October

45,000

November

50,000

December

42,500

Required: A. Calculate the estimated total cash collections during October. B. Calculate the estimated total cash collections during the year's fourth quarter.

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12) The accounting records of Lowery, Inc., revealed an accounts receivable balance of $195,000 on January 1, 20x6. Forty percent of the company's sales are for cash, and the remaining 60% are on account. Of the credit sales, 30% are collected in the month of sale and 70% are collected in the following month. Total sales in January and February are expected to amount to $500,000 and $530,000, respectively. Assume that in the latter half of 20x6, Lowery hired a new sales manager who aggressively tried to maximize the company's market share. She implemented a compensation system for the sales force that was 100% commission based, with the commission calculated on the basis of gross sales dollars. Sales volume increased dramatically in a very short period of time, and the sales and collection patterns changed, as follows: Cash sales:

20%

Credit sales:

80%

Collected in the month of sale

15%

Collected in the month following sale

75%

Uncollectible

10%

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Required: A. Compute the company's cash inflows for January and February, 20x6. B. Determine the outstanding receivables balance at the end of February. C. Compare the sales and collection patterns before and after the arrival of the new sales manager. Have things improved or deteriorated? Explain. D. On the basis of the information presented, determine what likely caused the improvement or deterioration in collection patterns.

13)

Parson Corporation, a wholesaler, provided the following information:

Month

Merchandise Purchases

Sales

January

$142,000

$172,000

February

148,000

166,000

March

136,000

165,000

April

154,000

178,000

May

160,000

166,000

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Customers pay 60% of their balances in the month of sale, 30% in the month following sale, and 10% in the second month following sale. The company pays all invoices in the month following purchase and takes advantage of a 3% discount on all amounts due. Cash payments for operating expenses in May will be $119,500; Parson’s cash balance on May 1 was $127,800. Required: Determine the following: A. Expected cash collections during May. B. Expected cash disbursements during May. C. Expected cash balance on May 31.

14) Fortner Manufacturing has a cash balance of $8,000 on August 1 of the current year. The company's controller forecast the following cash receipts and cash disbursements for the upcoming two months of activity: Cash Receipts

Cash Payments

August

$45,000

$57,000

September

66,000

56,000

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Management desires to maintain a minimum cash balance of $8,000 at all times. If necessary, additional financing can be obtained in $1,000 multiples at a 12% interest rate. All borrowings are made at the beginning of the month; debt retirement, on the other hand, occurs at the end of the month. Interest is paid at the time of repaying loan principal and is computed on the portion of debt repaid. Required: A. Determine the ending cash balance in August both before and after any necessary financing or debt retirement. B. Repeat part "A" for September.

15)

Flagler Inc. has the following budgeted sales for the next quarter:

Month:

Units

10,000

11,000

12,000

Inventory of finished goods on hand at the beginning of the quarter is 4,000 units. The company desires to maintain ending inventory equal to beginning inventory plus 1,000 units every month. Required: What is the quantity to be produced during the quarter?

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16) DuPree Enterprises reported the following cash collections in July and August from credit sales: July

From June receivables

$33,000

From July sales

105,000

From August sales

August

$45,000

168,000

The company sells a single product for $20, and all sales are collected over a two-month period. Required: A. Determine the number of units that were sold in July. B. Determine the percent of credit sales collected in the month of sale and the percent of sales collected in the month following sale. C. How many units were sold in August? D. Determine the accounts receivable balance as of August 31.

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17) Lancaster Company provides services in the retail flooring industry. The following information is available for 20x5: * Twenty percent of the firm's services are for cash and the remaining 80% are on account. Of the credit services, 40% are collected in the month that the service is provided, with the remaining 60% collected in the following month. * Services provided in January are expected to total $250,000 and grow at the rate of 5% per month thereafter. * January's cash collections are expected to be $240,400, and month-end receivables are forecast at $120,000. * Monthly cash operating costs and depreciation during the first quarter of the year are approximated at $250,000 and $15,000, respectively. * Lancaster’s December 31, 20x4 balance sheet revealed accounts payable balances of $28,000. This amount is related to the company's operating costs and is expected to grow to $36,000 by the end of 20x5's first quarter. All operating costs are paid within 30 days of incurrence. * Company policy requires that a $20,000 minimum cash balance be maintained, and Lancaster’s 20x4 year-end balance sheet showed that the firm was in compliance with policy by having cash of $23,000. Required: A. Determine the sales revenue earned that will appear on the income statement for the quarter ended March 31, 20x5. B. Compute the company's first-quarter cash collections. C. Compute the cash balance that would appear on the March 31, 20x5 balance sheet. D. What are some possible actions the company could pursue if, at any time during the quarter, it finds that the cash balance has fallen below the stated minimum?

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18)

The following information relates to Mega Corporation:

* All sales are on account and are budgeted as follows: February, $350,000; March, $360,000; and April, $400,000. Mega collects 70% of its sales in the month of sale and 30% in the following month. * Cost of goods sold averages 60% of sales. Purchases total 65% of the following month's sales and are paid in the month following acquisition. * Cash operating expenses total $60,000 per month and are paid when incurred. Monthly depreciation amounts to $18,000. * Selected amounts taken from the January 31 balance sheet were: accounts receivable, $115,000; plant and equipment (net), $107,000; and retained earnings, $85,000. Required: (NOTE: Ignore income taxes in answering these questions). A. Prepare a budgeted income statement that summarizes activity for the two months ended March 31, 20x1. B. Compute the amounts that would appear on the March 31 balance sheet for accounts receivable, plant and equipment (net), and retained earnings.

19)

Discuss the importance of budgeting and identify five purposes of budgeting systems.

20)

List several factors that an organization might consider when developing a sales forecast.

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21) Barry Clarion, new-accounts manager at East Bank of New Hampshire, has been asked to project how many new accounts he will open during 20x2. The local economy has been growing, and the bank has experienced a 10% increase in the number of new accounts over each of the past five years. In 20x1, the bank had 10,000 accounts. Clarion is paid a salary, plus a bonus of $20 for every new account above the budgeted amount. Thus, if the annual budget calls for 1,000 new accounts, and 1,080 new accounts are obtained, his bonus will be $1,600 (80 × $20). Clarion believes that the local economy will continue to grow at the same rate in 20x2 as it has in recent years. He decided to submit a projection of 700 new accounts for 20x2. Required: Your consulting firm has been hired by the bank president to make recommendations for improving the bank's operation. Write a memorandum to the president defining and explaining the negative consequences of budgetary slack. Also discuss the bank's bonus system for the newaccounts manager and how the bonus program tends to encourage budgetary slack.

22) Randall Corporation, headquartered in Pittsburgh, has a manufacturing plant in Dallas. Plant managers desire to participate in the company's budget efforts, which, for the past 10 years, have been handled solely by top executives in Pittsburgh. Dallas managers feel that by becoming involved, they can make great strides in terms of improving operating performance of their aging facility. Required: Briefly discuss this situation, focusing on the benefits and problems of letting Dallas managers participate in the company's budgetary efforts.

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Answer Key Test name: Chap 09_6e_Cornett_Manually Graded

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Chapter 10 – 6e Cornett 1)

A standard cost: A) is the "true" cost of a unit of production. B) is a budget for the production of one unit of a product or service. C) can be useful in calculating equivalent units. D) is normally the average cost within an industry. E) is almost always the actual cost from previous years.

2) Which of the following is a predetermined estimated cost that can be used in the calculation of a variance? A) Product cost. B) Actual cost. C) Standard cost. D) Differential cost. E) Marginal cost.

Variances are computed by taking the difference between which of the following? A) Product cost and period cost. B) Actual cost and differential cost. C) Price factors and rate factors. D) Actual cost and standard cost. E) Product cost and standard cost.

The term "management by exception" is best defined as:

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A) choosing exceptional managers. B) controlling actions of subordinates through acceptance of management techniques. C) investigating unfavorable variances. D) devoting management time to investigate significant variances. E) controlling costs so that non-zero variances are treated as "exceptional."

Which of the following are methods for setting standards? A) Analysis of historical data and goal congruence. B) Task analysis and matrix application forms. C) Task analysis and the analysis of historical data. D) Matrix application forms and analysis of historical data. E) Goal congruence and task analysis.

6) Which of the following individuals is least likely to become involved in the setting of either direct material standards or direct labor standards? A) The purchasing manager. B) A production supervisor. C) An engineer. D) A machine operator. E) A company's president.

A perfection standard: A) tends to motivate employees over a long period of time. B) is attainable in an ideal operating environment. C) would make allowances for normal amounts of scrap and waste. D) is generally preferred by behavioral scientists. E) will result in a number of favorable variances on a performance report.

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8) Consider the following statements: 1.I. Behavioral scientists find that perfection standards often discourage employees and result in low worker morale. 2.II. Practical standards are also known as attainable standards. 3.III. Practical standards incorporate a certain amount of inefficiency such as that caused by an occasional machine breakdown. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) II and III. E) I, II, and III.

9) Which of the following would be considered if a company desires to establish a series of practical manufacturing standards? A) The productivity loss associated with a short-term worker slowdown. B) Normal defect rates in an assembly process. C) Highly unusual spoilage rates of direct materials. D) Quantity discounts associated with purchases of direct materials. E) Both normal defect rates in an assembly process and quantity discounts associated with purchases of direct materials.

10) Which of the following would not be considered if a company desires to establish a series of practical manufacturing standards? A) Production time lost during unusual machinery breakdowns. B) Normal worker fatigue. C) Freight charges on incoming raw materials. D) Production time lost during setup procedures for new manufacturing runs. E) The historical 2% defect rate associated with raw material inputs.

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11) Which of the following choices correctly notes a characteristic associated with perfection standards and one associated with practical standards? Perfection Standards

Practical Standards

Attainable in an ideal environment.

Incorporate abnormal occurrences when setting quantity and efficiency targets.

Result in many unfavorable variances.

Are often attainable by workers.

Tend to boost worker morale over the long-run.

Generally, are preferred by behavioral scientists.

Generally, are easily achieved by workers.

Result in both favorable and unfavorable variances.

Generally, are preferred by behavioral scientists.

Are easier to achieve than perfection standards.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

12) Consider the following statements: 1.I. The standard cost per unit of materials is used to calculate a materials price variance. 2.II. The standard cost per unit of materials is used to calculate a materials quantity variance. 3.III. The standard cost per unit of materials cannot be determined until the end of the period. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) I and II. E) I, II, and III.

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13) Which of the following choices correctly indicates the use of the standard price per unit of direct material when calculating the materials price variance and the material quantity variance? Price Variance

Quantity Variance

Used

Always used

Used

Occasionally used

Used

Not used

Always used

Not used

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

14)

Most companies base the calculation of the material price variance on the: A) quantity of direct materials purchased. B) quantity of direct materials spoiled. C) quantity of direct materials that should have been used in achieving actual production. D) quantity of direct materials actually used. E) quantity of direct materials to be purchased during the next accounting period.

15) When the quantity of materials purchased is not equal to the quantity of material used, most companies base the calculation of the material quantity variance on the:

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A) quantity of direct materials purchased. B) quantity of direct materials spoiled. C) quantity of direct materials that should have been used in achieving actual production. D) quantity of direct materials actually used. E) none of the other answers are correct.

16) Which of the following correctly lists all the information needed to calculate a labor rate variance? A) Standard labor rate and actual hours worked. B) Actual hours worked and actual units produced. C) Standard labor rate, actual labor rate, and actual units produced. D) Actual labor rate and actual hours worked. E) Actual labor rate, standard labor rate, and actual hours worked.

17) Which of the following variances are most similar with respect to the manner in which they are calculated? A) Labor rate variance and labor efficiency variance. B) Material price variance and material quantity variance. C) Material price variance, material quantity variance, and total material variance. D) Material price variance and labor efficiency variance. E) Material quantity variance and labor efficiency variance.

18) Which of the following variances are most similar with respect to the manner in which they are calculated?

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A) Labor rate variance and labor efficiency variance. B) Material price variance and material quantity variance. C) Material price variance, material quantity variance, and total material variance. D) Material price variance and labor rate variance. E) Material price variance and labor efficiency variance.

19) Which of the following variances cannot occur together during the same accounting period? A) Unfavorable labor rate variance and favorable labor efficiency variance. B) Unfavorable labor efficiency variance and favorable material quantity variance. C) Favorable labor rate variance and unfavorable total labor variance. D) Favorable labor efficiency variance and favorable material quantity variance. E) None of the other answers are correct, because all of these variance combinations are possible.

20)

If a company has an unfavorable direct-material quantity variance, then: A) the direct-material price variance is favorable. B) the total direct-material variance is unfavorable. C) the total direct-material variance is favorable. D) the direct-labor efficiency variance is unfavorable. E) any of the other answers can occur.

21)

A favorable labor efficiency variance is created when: A) actual labor hours worked exceed standard hours allowed. B) actual hours worked are less than standard hours allowed. C) actual wages paid are less than amounts that should have been paid. D) actual units produced exceed budgeted production levels. E) actual units produced exceed standard hours allowed.

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22)

An unfavorable labor efficiency variance is created when: A) actual labor hours worked exceed standard hours allowed. B) actual hours worked are less than standard hours allowed. C) actual wages paid are less than amounts that should have been paid. D) actual units produced exceed budgeted production levels. E) actual units produced exceed standard hours allowed.

23)

A favorable labor rate variance is created when:

A) actual labor hours worked exceed standard hours allowed. B) actual hours worked are less than standard hours allowed. C) actual wages paid are less than amounts that should have been paid for the number of hours worked. D) actual units produced exceed budgeted production levels. E) actual units produced exceed standard hours allowed.

24)

An unfavorable labor rate variance is created when:

A) actual labor hours worked exceed standard hours allowed. B) actual hours worked are less than standard hours allowed. C) actual wages paid are less than amounts that should have been paid. D) actual units produced exceed budgeted production levels. E) actual wages paid exceed amounts that should have been paid for the number of hours worked.

25) Perez, Inc. recently completed 56,000 units of a product that was expected to consume four pounds of direct material per finished unit. The standard price of the direct material was $8.50 per pound. If the firm purchased and consumed 228,000 pounds in manufacturing (cost = $1,881,000), the direct-material quantity variance would be figured as:

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A) $34,000U. B) $34,000F. C) $57,000U. D) $57,000F. E) None of the answers is correct.

26) Vasquez, Inc. is establishing the direct materials and direct labor standards for its leading product. Materials cost from the supplier are $5 per square foot, net of purchase discount. Freight-in amounts to $0.10 per square foot. Basic wages of the assembly line personnel are $10 per hour. Payroll taxes are approximately 20% of wages. Benefits amount to $2 per hour. How much is the direct material cost standard per square foot? A) $5.00 per square foot. B) $5.10 per square foot. C) $12.00 per square foot. D) $17.10 per square foot. E) None of the answers is correct.

27) Vasquez, Inc. is establishing the direct materials and direct labor standards for its leading product. Materials cost from the supplier are $5 per square foot, net of purchase discount. Freight-in amounts to $0.10 per square foot. Basic wages of the assembly line personnel are $10 per hour. Payroll taxes are approximately 20% of wages. How much is the direct labor cost standard per hour? A) $5.00 per hour. B) $10.00 per hour. C) $12.00 per hour. D) $17.10 per hour. E) None of the answers is correct.

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28) Waterstone Industries is setting standard costs for one of its products. The main material is fiber board sold by the square foot. The current cost of fiber board is $4.00 per square foot from Waterstone’s preferred supplier. Delivery costs are $0.25 per board foot. Waterstone’s wages per hour are $25.00. Payroll costs are $3.60 per hour and benefits are $5.00 per hour. How much is the direct materials cost standard per square foot? A) $9.25 per sq. ft. B) $4.00 per sq. ft. C) $4.25 per sq. ft. D) $7.85 per sq. ft. E) None of the answers is correct.

29) Waterstone Industries is setting standard costs for one of its products. The main material is fiber board sold by the square foot. The current cost of fiber board is $4.00 per square foot from Waterstone’s preferred supplier. Delivery costs are $0.25 per board foot. Waterstone’s wages per hour are $25.00. Payroll costs are $3.60 per hour and benefits are $5.00 per hour. How much is the direct labor cost standard per hour? A) $33.60 per hour. B) $28.00 per hour. C) $25.00 per hour. D) $25.60 per hour. E) None of the answers is correct.

30) Joiner Corporation recently purchased 25,000 gallons of direct material at $5.60 per gallon. Usage by the end of the period amounted to 23,000 gallons. If the standard cost is $6.00 per gallon and the company believes in computing variances at the earliest point possible, the direct-material price variance would be calculated as: A) $800 F. B) $9,200 F. C) $9,200 U. D) $10,000 F. E) $10,000 U.

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31)

The following data relate to product no. 89 of Mansion Corporation:

Direct material standard: 3 square feet at $2.50 per square foot Direct material purchased: 30,000 square feet at $2.60 per square foot Direct material consumed: 29,200 square feet Manufacturing activity: 9,600 units completed Use the information to calculate the following variances. The direct-material quantity variance is: A) $1,000 F. B) $1,000 U. C) $1,040 F. D) $1,040 U. E) $2,000 F.

32)

The following data relate to product no. 89 of Mansion Corporation:

Direct material standard: 3 square feet at $2.50 per square foot Direct material purchased: 30,000 square feet at $2.60 per square foot Direct material consumed: 29,200 square feet Manufacturing activity: 9,600 units completed Use the information to calculate the following variances. The direct-material price variance is: A) $2,880 U. B) $2,920 F. C) $2,920 U. D) $3,000 F. E) $3,000 U.

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33)

Consider the following information:

Direct material purchased and used, 80,000 gallons Standard quantity of direct material allowed for May production, 76,000 gallons Actual cost of direct materials purchased and used, $176,000 Unfavorable direct-material quantity variance, $9,400 The direct-material price variance is: A) $11,400 F. B) $11,400 U. C) $12,000 F. D) $12,000 U. E) None of the answers is correct.

34) Digital Art manufactures wall hangings. The company uses standard costs to prepare its flexible budget. For the second quarter of 20x8, direct material and direct labor standards for the company’s most popular product were as follows: Direct material: 1 pound per unit; $12 per pound Direct labor: 4 hours per unit; $15 per hour During the quarter, Digital produced 5,000 units. At the end of the quarter, materials records showed that the company used 7,000 pounds of materials, with actual materials costs of $98,000. Based on these data, what is the direct materials cost variance? A) $38,000 F. B) $38,000 U. C) $14,000 U. D) $14,000 F. E) None of the answers is correct.

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35) Enrique Industries purchased and consumed 50,000 gallons of direct material that was used in the production of 11,000 finished units of product. According to engineering specifications, each finished unit had a manufacturing standard of five gallons. If a review of Enrique's accounting records at the end of the period disclosed a material price variance of $5,000U and a material quantity variance of $3,000F, what is the actual price paid for a gallon of direct material? A) $0.50. B) $0.60. C) $0.70. D) None of the answers is correct. E) Not enough information to judge.

36) Digital Art manufactures decorative wall hangings. The company uses standard costs to prepare its flexible budget. For the second quarter of 20x8, direct material and direct labor standards for the company’s most popular product were as follows: Direct material: 1 pound per unit; $12 per pound Direct labor: 4 hours per unit; $15 per hour During the quarter, Digital produced 5,000 units. At the end of the quarter, materials records showed that the company used 7,000 pounds of materials, with actual materials costs of $98,000. Based on these data, what is the direct materials efficiency variance? A) $24,000 F. B) $24,000 U. C) $2,000 U. D) $2,000 F. E) None of the answers is correct.

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37) Elegant Designs manufactures decorative chains for all types of clothing and household needs. The company uses standard costs to prepare its flexible budget. For the second quarter of 20x8, direct material and direct labor standards for the company’s most popular product were as follows: Direct material: 3 pounds per unit; $4 per pound Direct labor: 4 hours per unit; $20 per hour During the quarter, Elegant Designs produced 5,000 units. At the end of the quarter, direct labor costs recorded were $375,000 for 25,000 direct labor hours used. Based on these data, what is the direct labor cost variance? A) $125,000 U. B) $125,000 F. C) $300,000 U. D) $300,000 F. E) None of the answers is correct.

38) Elegant Designs manufactures decorative chains for all types of clothing and household needs. The company uses standard costs to prepare its flexible budget. For the second quarter of 20x8, direct material and direct labor standards for the company’s most popular product were as follows: Direct material: 3 pounds per unit; $4 per pound Direct labor: 4 hours per unit; $20 per hour During the quarter Elegant Designs produced 5,000 units. At the end of the quarter, direct labor costs recorded were $375,000 for 25,000 direct labor hours used. Based on these data, what is the direct labor efficiency variance? A) $100,000 U. B) $100,000 F. C) $600,000 U. D) $600,000 F. E) None of the answers is correct.

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39) Van Buren Frames manufactures hardwood luxury picture frames. The company uses standard costs to prepare its flexible budget. For the company’s the first quarter of 20x8, direct material and direct labor standards for one of their most popular frames were as follows: Materials: 1.5 board feet per unit; $4.00 per board foot Labor: 2.0 hours per unit; $18.00 per hour During the first quarter, Van Buren produced 5,000 units of this product. At the end of the quarter, an examination of the materials records showed that the company used 7,000 board feet of materials and the direct materials cost variance was $1,750 U. Which of the following would be a logical explanation for this variance? A) The company paid a higher price for the materials than allowed by the standards. B) The company used greater quantity of materials than allowed by the standards. C) The company paid a higher rate for labor than allowed by the standards. D) The company used more labor hours than allowed by the standards. E) None of the answers is correct.

40) Van Buren Frames manufactures hardwood luxury picture frames. The company uses standard costs to prepare its flexible budget. For the company’s the first quarter of 20x8, direct material and direct labor standards for one of their most popular frames were as follows: Materials: 1.5 board feet per unit; $4.00 per board foot Labor: 2.0 hours per unit; $18.00 per hour During the first quarter, Van Buren produced 5,000 units of this product. At the end of the quarter, an examination of the materials records showed that the company used 7,000 board feet of materials and the direct materials efficiency variance was $2,000 F. Which of the following would be a logical explanation for this variance? A) The company paid a lower rate for labor than allowed by the standards. B) The company used fewer labor hours than allowed by the standards. C) The company used a lower quantity of materials than was allowed by the standards. D) The company paid a lower price for the materials than allowed by the standards. E) None of the answers is correct.

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41) Storkin Enterprises recently used 24,000 labor hours to produce 8,600 completed units. According to manufacturing specifications, each unit is anticipated to take 2.75 hours to complete. The company's actual payroll cost amounted to $456,000. If the standard labor cost per hour is $19.20, Storkin’s labor rate variance is: A) $1,920 U. B) $1,920 F. C) $4,800 U. D) $4,800 F. E) None of the answers is correct.

42) Davner Enterprises recently used 14,000 labor hours to produce 7,500 completed units. According to manufacturing specifications, each unit is anticipated to take two hours to complete. The company's actual payroll cost amounted to $158,200. If the standard labor cost per hour is $11, Davner’s labor efficiency variance is: A) $11,000 U. B) $11,000 F. C) $11,300 U. D) $11,300 F. E) None of the answers is correct.

43)

Margo Enterprises has collected the following data from one of its products:

Direct materials standard (5 pounds @ $ 5 per finished $1/lb.) good Direct materials flexible budget variance- $ 14,000 unfavorable Actual direct materials used 100,000 pounds Actual finished goods produced

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18,000 units

Based on this information, how much is the direct materials efficiency variance? A) $10,000 F. B) $10,000 U. C) $18,000 U. D) $18,000 F. E) None of the answers is correct.

44) Action Enterprises recently used 14,000 labor hours to produce 7,500 completed units. According to manufacturing specifications, each unit is anticipated to take two hours to complete. The company's actual payroll cost amounted to $158,200. If the standard labor cost per hour is $11, Action’s labor rate variance is: A) $4,200 U. B) $4,000 F. C) $4,300 U. D) $4,300 F. E) None of the answers is correct.

45) Airon Company recently completed 10,600 units of its single product, consuming 32,000 labor hours that cost the firm $480,000. According to manufacturing specifications, each unit should have required 3 hours of labor time at $15.40 per hour. On the basis of this information, determine Airon’s labor rate variance and labor efficiency variance. Rate

Efficiency

$12,720 F

$3,000 F

$12,720 F

$3,000 U

$12,800 F

$3,080 F

$12,800 F

$3,080 U

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$12,800 U

$3,080 U

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

46) Airon Company recently completed 10,600 units of its single product, consuming 32,000 labor hours that cost the firm $480,000. According to manufacturing specifications, each unit should have required 3 hours of labor time at $15.40 per hour. On the basis of this information, determine Airon’s total labor variance. A) $15,880 U B) $9,720 F C) $15,720 F D) $9,720 U E) $15,880 F

47)

The following data relate to product no. 33 of Volusia Corporation:

Direct labor standard: 5 hours at $14 per hour Direct labor used in production: 45,000 hours at a cost of $639,000 Manufacturing activity: 8,900 units completed The direct-labor rate variance is: A) $8,900 F. B) $8,900 U. C) $9,000 F. D) $9,000 U. E) None of the answers is correct.

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48)

The following data relate to product no. 33 of Volusia Corporation:

Direct labor standard: 5 hours at $14 per hour Direct labor used in production: 45,000 hours at a cost of $639,000 Manufacturing activity: 8,900 units completed The direct-labor efficiency variance is: A) $7,000 F. B) $7,000 U. C) $7,100 F. D) $7,100 U. E) None of the answers is correct.

49)

Consider the following information:

Actual direct labor hours

34,500

Standard direct labor hours

35,000

Total actual direct labor cost

Direct-labor efficiency variance

241,500 3,200 F

The direct-labor rate variance is: A) $17,250 U. B) $20,700 U. C) $20,700 F. D) $21,000 F. E) None of the answers is correct.

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50) Rickett Corporation had a favorable direct-labor efficiency variance of $6,000 for the period just ended. The actual wage rate was $0.50 more than the standard rate of $12.00. If the company's standard hours allowed for actual production totaled 9,500, how many hours did the firm actually work? A) 9,000. B) 9,020. C) 9,980. D) 10,000. E) None of the answers is correct.

51) Thomas Enterprises purchased 56,000 pounds (cost = $420,000) of direct material to be used in the manufacture of the company's sole product. According to the production specifications, each completed unit requires five pounds of direct material at a standard cost of $7.80 per pound. Direct materials consumed by the end of the period totaled 53,500 pounds in the manufacture of 10,900 finished units. An examination of Thomas’ payroll records revealed that the company worked 22,000 labor hours (cost = $319,000) during the period, and specifications called for each completed unit requiring two hours of labor at a standard cost of $14.80 per hour. Use the information to compute the following variances. Thomas’ direct-material price variance was: A) $16,050 F. B) $16,050 U. C) $16,800 F. D) $16,800 U. E) None of the answers is correct.

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52) Thomas Enterprises purchased 56,000 pounds (cost = $420,000) of direct material to be used in the manufacture of the company's sole product. According to the production specifications, each completed unit requires five pounds of direct material at a standard cost of $7.80 per pound. Direct materials consumed by the end of the period totaled 53,500 pounds in the manufacture of 10,900 finished units. An examination of Thomas’ payroll records revealed that the company worked 22,000 labor hours (cost = $319,000) during the period, and specifications called for each completed unit requiring two hours of labor at a standard cost of $14.80 per hour. Use the information to compute the following variances. Thomas’ direct-material quantity variance was: A) $7,800 F. B) $16,800 F. C) $7,800 U. D) $16,800 U. E) None of the answers is correct.

53) Thomas Enterprises purchased 56,000 pounds (cost = $420,000) of direct material to be used in the manufacture of the company's sole product. According to the production specifications, each completed unit requires five pounds of direct material at a standard cost of $7.80 per pound. Direct materials consumed by the end of the period totaled 53,500 pounds in the manufacture of 10,900 finished units. An examination of Thomas’ payroll records revealed that the company worked 22,000 labor hours (cost = $319,000) during the period, and specifications called for each completed unit requiring two hours of labor at a standard cost of $14.80 per hour. Use the information to compute the following variances. Thomas’ direct-labor efficiency variance was: A) $2,900 F. B) $2,900 U. C) $2,960 F. D) $2,960 U. E) None of the answers is correct.

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54) Thomas Enterprises purchased 56,000 pounds (cost = $420,000) of direct material to be used in the manufacture of the company's sole product. According to the production specifications, each completed unit requires five pounds of direct material at a standard cost of $7.80 per pound. Direct materials consumed by the end of the period totaled 53,500 pounds in the manufacture of 10,900 finished units. An examination of Thomas’ payroll records revealed that the company worked 22,000 labor hours (cost = $319,000) during the period, and specifications called for each completed unit requiring two hours of labor at a standard cost of $14.80 per hour. Use the information to compute the following variances. Thomas’ direct-labor rate variance was: A) $6,600 F. B) $6,600 U. C) $2,960 F. D) $2,960 U. E) None of the answers is correct.

55)

Cost standards for one unit of product no. C77: Direct material

3 pounds at $2.50 per pound

Direct labor

5 hours at $7.50 per hour

7.50 37.50

Actual results: Units produced

7,800 units

Direct material purchased

26,000 pounds at $2.70

Direct material used

23,100 pounds at $2.70

62,370

Direct labor

40,100 hours at $7.30

292,730

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70,200

Use the information to compute the following variances. The direct-material quantity variance is: A) $750 F. B) $750 U. C) $6,500 U. D) $7,250 U. E) None of the answers is correct.

56)

Cost standards for one unit of product no. C77: Direct material

3 pounds at $2.50 per pound

Direct labor

5 hours at $7.50 per hour

7.50 37.50

Actual results: Units produced

7,800 units

Direct material purchased

26,000 pounds at $2.70

Direct material used

23,100 pounds at $2.70

62,370

Direct labor

40,100 hours at $7.30

292,730

70,200

Use the information to compute the following variances. The direct-material price variance is:

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A) $4,620 F. B) $4,620 U. C) $5,200 F. D) $5,200 U. E) None of the answers is correct.

57)

Cost standards for one unit of product no. C77: Direct material

3 pounds at $2.50 per pound

Direct labor

5 hours at $7.50 per hour

7.50 37.50

Actual results: Units produced

7,800 units

Direct material purchased

26,000 pounds at $2.70

Direct material used

23,100 pounds at $2.70

62,370

Direct labor

40,100 hours at $7.30

292,730

70,200

Use the information to compute the following variances. The direct-labor rate variance is: A) $7,800 F. B) $7,950 F. C) $8,020 F. D) $8,000 U. E) None of the answers is correct.

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58)

Cost standards for one unit of product no. C77: Direct material

3 pounds at $2.50 per pound

Direct labor

5 hours at $7.50 per hour

7.50 37.50

Actual results: Units produced

7,800 units

Direct material purchased

26,000 pounds at $2.70

Direct material used

23,100 pounds at $2.70

62,370

Direct labor

40,100 hours at $7.30

292,730

70,200

Use the information to compute the following variances. The direct-labor efficiency variance is: A) $8,000 F. B) $8,000 U. C) $8,250 F. D) $8,250 U. E) None of the answers is correct.

59)

Cost standards for one unit of product no. C77: Direct material

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3 pounds at $2.50 per pound

7.50

Direct labor

5 hours at $7.50 per hour

37.50

Actual results: Units produced

7,800 units

Direct material purchased

26,000 pounds at $2.70

Direct material used

23,100 pounds at $2.70

62,370

Direct labor

40,100 hours at $7.30

292,730

70,200

Use the information to compute the following variances. The standard hours allowed for the work performed are: A) 5. B) 5.14. C) 39,000. D) 40,100. E) None of the answers is correct.

60) When considering whether to investigate a variance, managers should consider all of the following except the variance's: A) size. B) pattern of recurrence. C) trends over time. D) nature, namely, whether it is favorable or unfavorable. E) controllability.

61) Which of the following combinations of direct-material variances might prompt management to undertake a detailed variance investigation?

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A) Price, unfavorable; quantity, unfavorable. B) Price, unfavorable; quantity, favorable. C) Price, favorable; quantity, unfavorable. D) Price favorable; quantity, favorable. E) All of the answers are correct.

62) Consider the following statements about variance investigation: 1.I. Variance investigation involves a look at only unfavorable variances. 2.II. Variance investigation is typically based on a cost-benefit analysis. 3.III. Variance investigation is often performed by establishing guidelines similar to the following: Investigate variances that are greater than $X or greater than Y% of standard cost. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) II and III. E) I, II, and III.

63)

A statistical control chart is best used for determining: A) direct-material price variances. B) direct-labor variances. C) whether a variance is favorable or unfavorable. D) who should be held accountable for specific variances. E) whether a particular variance should be investigated.

64)

The individual generally responsible for the direct-material price variance is the:

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A) sales manager. B) production supervisor. C) purchasing manager. D) finance manager. E) head of the human resources department.

65)

A production supervisor generally has little influence over the: A) direct-material quantity variance. B) direct-labor efficiency variance. C) direct-material price variance. D) number of units produced. E) All of the answers are correct.

66) Which department would normally begin an investigation regarding an unfavorable materials quantity variance? A) Quality control. B) Purchasing. C) Engineering. D) Production. E) Receiving.

67) Bender Corporation has a favorable materials quantity variance. Which department would likely be asked to explain the cause of this variance? A) Engineering. B) Purchasing. C) Production. D) Marketing. E) None, because the variance is favorable.

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68) Vito, Inc. had an unfavorable labor efficiency variance and an unfavorable materials quantity variance. Which department might be held accountable for these variances? A) Engineering B) Production only, because inefficient workers may use more materials than allowed. C) Marketing. D) Shipping. E) Both Purchasing, because bad materials can harm labor efficiency and Production, because inefficient workers may use more materials than allowed.

69)

A direct-material quantity variance can be caused by all of the following except: A) improper employee training. B) acquisition of materials that are below standard quality. C) adjustment problems with machines. D) disgruntled workers. E) All of these could result in a direct-materials quantity variance.

70)

A direct-labor efficiency variance cannot be caused by: A) inexperienced employees. B) poor quality raw materials. C) employee inefficiency. D) an out-of-date labor time standard. E) producing fewer finished units than originally planned.

71) Sandy Shores Industries uses a standard costing system and has purchased raw material of 250 units at the actual cost of $2 per unit. The standard cost per unit of raw material is $1.85. Which one of the following is the correct journal entry to record the material cost variance at the time of purchase?

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A) Raw Materials Inventory

462.50

Direct Materials Cost Variance

37.50

Accounts Payable

500

B) Raw Materials Inventory

500

Direct Materials Cost Variance

37.50

Accounts Payable

462.50

C) Accounts Payable

500

Raw Materials Inventory

462.50

Direct Materials Cost Variance

37.50

D) Raw Materials Inventory

37.50

Direct Materials Cost Variance

462.50

Accounts Payable

500

E)None of these journal entries is correct.

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72) Situation 1: Loren Company recently purchased materials from a new supplier at a very attractive price. The materials were found to be of poor quality, and the company's laborers struggled significantly as they shaped the materials into finished product. Situation 2: In a desperate move to make up for some of the time lost, the Loren Company manufacturing supervisor brought in more-senior employees from another part of the plant. Which of the following variances would have a high probability of arising from both of these situations? A) Situation 1: Material quantity variance, unfavorable; Situation 2: Material price variance, favorable. B) Situation 1: Material quantity variance, favorable; Situation 2: Material price variance, unfavorable. C) Situation 1: Material quantity variance, favorable; Situation 2: Labor rate variance favorable. D) Situation 1: Labor rate variance, favorable; Situation 2: Labor efficiency variance, unfavorable. E) Situation 1: Labor efficiency variance, favorable; Situation 2: Labor rate variance, favorable.

73) Listed below are five variances (and possible causes) that are under review by management of Knight Company. Which of the following is least likely to cause the variance indicated? A) The need to ship goods acquired from a distant supplier via overnight carrier than via common carrier truck; material price variance. B) The need to complete goods on a timely basis during a period of high absenteeism; labor rate variance. C) A work-team that is very unhappy with its supervisor; labor efficiency variance. D) The need to close a plant for two days because of blizzard conditions; material quantity variance, part no. 542. E) A malfunctioning piece of manufacturing equipment; labor efficiency variance.

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74) Lamar Corporation's purchasing manager obtained a special price on an aluminum alloy from a new supplier, resulting in a direct-material price variance of $9,500F. The alloy produced more waste than normal, as evidenced by a direct-material quantity variance of $2,000U, and was also difficult to use. This slowed worker efficiency, generating a $2,500U labor efficiency variance. To help remedy the situation, the production manager used senior line employees, which gave rise to a $900U labor rate variance. If overall product quality did not suffer, what variance amount is best used in judging the appropriateness of the purchasing manager's decision to acquire substandard material? A) $4,100F. B) $5,000F. C) $7,000F. D) $7,500F. E) $9,500F.

75)

Standard costs: A) allow a manager to assess the efficiency of operations. B) allow a company to practice management by exception. C) provide management with a basis for performance evaluations. D) if set correctly, can provide a motivational tool for employees. E) All of the answers are correct.

76) Which of the following is a criticism of standard costing, as applied to today's manufacturing environment?

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A) Standards tend to be relevant for only a short period of time because of shorter product life cycles. B) Variance information is usually aggregated (i.e., combined) rather than associated with a particular batch of goods or a specific product line. C) Traditional standard costing has a fairly narrow orientation, failing to focus on broader issues such as the overall costs of ownership. D) Standard costing pays considerable attention to labor cost and labor efficiency, which are becoming a relatively unimportant factor of production. E) All of the answers are correct.

77)

Which of the following journal entries definitely contains an error?

A) A.

Raw-Material Inventory Direct-Material Price Variance

200,000 5,000

Accounts Payable

205,000

B) B.

Raw-Material Inventory

38,000

Direct-Material Price Variance

2,000

Accounts Payable

36,000

C) C.

Raw-Material Inventory Direct-Material Price Variance Work-in-Process Inventory

156,000 8,000 148,000

D) Version 1

Work-in-Process Inventory

67,000

Direct-Material Quantity Variance

3,000

Raw-Material Inventory

70,000

E) E.

78)

Work-in-Process Inventory

79,000

Direct-Material Quantity Variance

4,000

Raw-Material Inventory

75,000

At the end of the accounting period, most companies close variance accounts to: A) Raw-Material Inventory. B) Work-in-Process Inventory. C) Finished-Goods Inventory. D) Cost of Goods Sold. E) Income Summary.

79) cost.

Variances are computed by taking the difference between the product cost and standard ⊚ ⊚

true false

80) Significant departures investigated, when using management by exception, are uniform across all size and types of organizations with varying production processes. ⊚ true ⊚ false

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81) Normal defect rates in an assembly process would be considered if a company desires to establish a series of practical manufacturing standards. ⊚ true ⊚ false

82) Managerial accountants use either task analysis or an analysis of historical data to set cost standards. ⊚ true ⊚ false

83) A favorable labor efficiency variance is created when actual labor hours worked exceed standard hours allowed. ⊚ true ⊚ false

84) When spending is lower than expected for direct materials, the amount by which spending is less than planned is called an unfavorable direct-material variance (U). ⊚ true ⊚ false

85) The absolute size of a variance is more important than the relative size when trying to decide what variances to investigate. ⊚ true ⊚ false

86) A man-ager is more likely to investigate the variance for a cost that is controllable by someone in the organization than one that is not. ⊚ true ⊚ false

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87) The Purchasing Department would normally begin an investigation regarding an unfavorable materials quantity variance. ⊚ true ⊚ false

88) Interactions among variances often occur, making it even more difficult to determine the responsibility for a particular variance. ⊚ true ⊚ false

89)

Product costs are used only in managerial accounting. ⊚ true ⊚ false

90) Product costing is the process of accumulating the costs of a production process and assigning them to the completed products. ⊚ true ⊚ false

91)

A drawback of standard costing is that standard costs often fluctuate erratically. ⊚ true ⊚ false

92) The aggregate nature of the vari-ances in standard costing is a drawback in the advanced manufacturing setting that makes it difficult for man-agers to determine their cause. ⊚ true ⊚ false Version 1

93) One of the most important conditions for the successful use of standard costing is a stable production process. ⊚ true ⊚ false

94)

Most companies close their variance accounts directly into Cost of Goods Sold. ⊚ true ⊚ false

95) Variance proration is the process of closing all variance accounts directly into Cost of Goods Sold. ⊚ true ⊚ false

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Answer Key Test name: Chap 10_6e_Cornett 1) B 2) C 3) D 4) D 5) C 6) E 7) B 8) E 9) E 10) A 11) B 12) D 13) A 14) A 15) D 16) E 17) E 18) D 19) E 20) E 21) B 22) A 23) C 24) E 25) A 26) B Version 1

27) C 28) C 29) A 30) B 31) B 32) C 33) C 34) C 35) C 36) B 37) B 38) A 39) A 40) C 41) D 42) B 43) B 44) A 45) D 46) B 47) D 48) B 49) B 50) A 51) A 52) A 53) D 54) A 55) A 56) B Version 1

57) C 58) D 59) C 60) D 61) E 62) D 63) E 64) C 65) C 66) D 67) C 68) E 69) E 70) E 71) A 72) A 73) D 74) A 75) E 76) E 77) C 78) D 79) FALSE 80) FALSE 81) TRUE 82) FALSE 83) FALSE 84) FALSE 85) FALSE 86) TRUE Version 1

87) FALSE 88) TRUE 89) FALSE 90) TRUE 91) FALSE 92) TRUE 93) TRUE 94) TRUE 95) FALSE

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Chapter 10 – 6e Cornet- Manually Graded 1) During June, Fraser Company’s material purchases amounted to 6,000 pounds at a price of $7.35 per pound. Actual costs incurred in the production of 2,000 units were as follows: Direct labor:

$116,935 ($18.20 per hour)

Direct material:

$32,340 ($7.35 per pound)

The standards for one unit of Fraser Company’s product are as follows: Direct labor:

Direct material:

Quantity, 3.1 hours per unit

Quantity, 2.1 pounds per unit

Rate, $18 per hour

Price, $7.10 per pound

Required: Compute the direct-material price and quantity variances, the direct-material purchase price variance, and the direct-labor rate and efficiency variances. Indicate whether each variance is favorable or unfavorable.

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2) James at the Mill Barn Woods produces handcrafted frames. A standard-size 11 × 14 inch frame requires 6 board feet of rustic barn wood in the finished product. In addition, 1 board foot of scrap lumber is normally left from the production of one frame. James pays a demolition company $1.50 per board foot, plus $1.00 in transportation charges per board foot. Required: Compute the standard direct-material cost of a frame.

3) Due to evaporation during production, X-treme Building Styrofoam Company requires 5 pounds of material input for every 4 pounds of styrofoam sheets manufactured. During March, the company produced 3,800 pounds of good sheets. Required: Compute the total standard allowed input quantity, given the good output produced.

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4) Jared, Inc. produces glass shelves that are used in furniture. Each shelf requires 3.6 pounds of raw material at a cost of $2 per pound. Unfortunately, given the nature of the manufacturing process, one out of every five shelves is chipped, scratched, or broken at the beginning of production and has to be scrapped. On average, 20 good shelves are completed during each hour. Laborers who work on these units are paid $15 per hour. Required: A. Distinguish between perfection standards and practical standards. B. Who within an organization would be in the best position to assist in setting the: 1. direct-material price standard? 2. direct-material quantity standard? 3. direct-labor efficiency standard? C. Calculate a practical direct-material and direct-labor standard for each good shelf produced.

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5) Donath Corporation manufactures a variety of liquid lawn fertilizers, including a very popular product called Luxury Green. Data about Luxury Green and Sheen, a major ingredient, follow. Expected operations: · Sheen is purchased in 55-gallon drums at a cost of $65 per drum. A 2% cash discount is offered by Sheen's manufacturer for prompt payment of invoices, and Donath takes advantage of all discounts offered. · Donath normally purchases 200 drums of Sheen at a time, paying shipping fees of $2,660 per shipment. · Each gallon of Luxury Green requires three quarts of Sheen; however, because of evaporation and spills, Donath loses 4% of all Sheen that enters production. (Recall that there are four quarts in a gallon.) Actual operations: · For the period just ended, Donath purchased 1,500 drums of Sheen at a total cost of $118,100, which reflects discounts and shipping. There was no beginning inventory, but an end-of-period inventory revealed that 30 drums were still on hand. · Manufacturing activity output totaled 104,000 gallons of Luxury Green. Use the information to compute the following: Required: A. Compute the standard purchase price for one gallon of Sheen. B. Compute the standard quantity of Sheen to be used in producing one gallon of Luxury Green. Express your answer in quarts. C. Compute the direct-material price variance for Sheen. D. How much Sheen was used in manufacturing activity and how much should have been used? Express your answer in quarts.

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Quinton Company has set the following standards for one unit of product:

Direct material Quantity: 6.2 pounds per unit Price per pound: $11 per pound Direct labor Quantity: 6 hours per unit Rate per hour: $23 per hour Actual costs incurred in the production of 2,800 units were as follows: Direct material: $194,350 ($11.50 per pound) Direct labor: $393,750 ($22.50 per hour) All materials purchased were consumed during the period. Required: Calculate the direct-material price and quantity variances, and the direct-labor rate and efficiency variances. Indicate whether each variance is favorable or unfavorable.

Maki, Inc. manufactures a product that has the following standard costs: Direct materials: 40 yards at $2.70 per yard

$108

Direct labor: 8 hours at $18.00 per hour

144

Total

$252

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The following information pertains to July: Direct material purchased: 42,500 yards at $2.78 per yard, or $118,150 Direct material used: 36,000 yards Direct labor: 7,500 hours at $18.30 per hour, or $137,250 Actual completed production: 1,050 units Use the information to compute the following variances: Required: Calculate the direct-material price and quantity variances, and the direct-labor rate and efficiency variances. Indicate whether each variance is favorable or unfavorable.

8) Timber Enterprises purchased 67,000 pounds (cost = $616,400) of direct material to be used in the manufacture of the company's only product. According to the production specifications, each completed unit requires four pounds of direct material at a standard cost of $9 per pound. Direct materials consumed by the end of the period totaled 65,500 pounds in the manufacture of 16,050 finished units. An examination of Timber’s payroll records revealed that the company worked 42,000 labor hours (cost = $621,600) during the period, and specifications called for each completed unit requiring 2.6 hours of labor at a standard cost of $15 per hour. Use the information to compute the following variances: Required: Calculate the direct-material price and quantity variances, and the direct-labor rate and efficiency variances. Indicate whether each variance is favorable or unfavorable.

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9) Alberto Gonzalez operates a commercial painting business in Tampa, which has a very tight labor market. Much of his work focuses on newly constructed apartments and townhouses. The following data relate to crew no. 5 for a recently concluded period when 85 apartment units were painted: · Three new employees were assigned to crew no. 5. Wages averaged $18.80 per hour for each employee; the crew took 2,550 hours to complete the work. · Based on his knowledge of the operation, articles in trade journals, and conversations with other painters, Gonzalez established the following standards: Typical hourly wage rate of crew personnel: $15 Anticipated crew time for each unit: 34 hours · The paint quantity variance was $6,070F. · The operation did not go as smoothly as planned, with customer complaints and problems being much higher than expected. Required: A. Compute Gonzalez’s direct-labor variances. B. Is the direct-labor rate variance consistent with what you might expect in a tight labor market? Explain. C. Analyze the information given and that you calculated, and determine what likely happened that would give rise to customer complaints.

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10) Venazio Products uses a standard costing system to assist in the evaluation of operations. The company has had considerable employee difficulties in recent months, so much so that management has hired a new production supervisor (Ralph Moreno). Moreno has been on the job for six months and has seemingly brought order to an otherwise chaotic situation. The vice-president of manufacturing recently commented that "Moreno has really done the trick. Ralph’s team-building/morale-boosting exercises have truly brought things under control." The vice-president's comments were based on both a plant tour, where he observed a contented work force, and review of a performance report that showed a total labor variance of $14,000F. This variance is truly outstanding, given that it is less than 2% of the company's budgeted labor cost. Additional data follow. · Total completed production amounted to 20,000 units. · A review of the firm's standard cost records found that each completed unit requires 2.75 hours of labor at $14 per hour. Venazio’s production actually required 42,000 labor hours at a total cost of $756,000. Required: A. As judged by the information contained in the performance report, should the vice-president be concerned about the company's labor variances? Why? B. Calculate Venazio’s direct-labor variances. C. On the basis of your answers to requirement "B," should Venazio be concerned about its labor situation? Why? D. Briefly analyze and explain the direct-labor variances.

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11) A manufacturing company is expected to complete a task in 45 minutes. During a recent accounting period, 3,200 completed units were produced, resulting in the following labor variances: Labor rate variance: $520 favorable Labor efficiency variance: $2,800 unfavorable The standard labor rate is $14 per hour. Required: Calculate (1) the standard hours allowed for the work performed, (2) the actual hours worked, and (3) the actual wage rate.

12) Too-Jay Enterprises recently experienced a fire, forcing the company to use incomplete information to analyze operations. Consider the following data and assume that all materials purchased during the period were used in production: Direct materials: Standard price per pound: $9 Actual price per pound: $8 Price variance: $20,000F Total of direct-material variances: $2,000F Direct labor: Actual hours worked: 40,000 Actual rate per hour: $15 Efficiency variance: $28,000F Total of direct-labor variances: $12,000U Halo completed 12,000 units. Required: Determine the following: (1) actual materials used, (2) direct-material quantity variance, (3) direct-labor rate variance, (4) standard labor rate per hour, and (5) standard labor time per finished unit.

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13) Danielle Augusta is the long-time catering director of Windamere, a hotel noted throughout the industry for quality, profitability, and cost control. The hotel recently catered a steak dinner for a 2,000-person convention. Strict standards were in place for the dinner: 0.75 pounds of beef per plate at $9 per pound. A review of the accounting records shortly after the convention showed that 1,680 pounds of beef were purchased and consumed, costing the hotel $13,440. Required: A. Calculate the cost of beef budgeted for the dinner and the total beef variance (i.e., the difference between budgeted and actual cost). Should this variance be of concern to the hotel? Why? B. Assess the job that Augusta did in "managing" the beef purchase by performing a variance analysis. Comment on your findings. C. Assume that the hotel received a number of complaints shortly after the dinner concluded. Explain a possible reason behind the conventioneers' unhappiness.

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14) The following events occurred at Eureka Manufacturing (EM), an assembler of engine parts, during March: 1. Because of a stock shortage at its regular supplier, EM had to rely on a new vendor for two purchases of raw material parts. The vendor required EM to pay air-freight charges; however, upon arrival, the company found the goods to be above-average in quality. 2. The local municipality raised its property tax rates by 2%. 3. A flu outbreak on the assembly line forced management to use more experienced, senior personnel to complete production orders on a timely basis. These workers more than made up for lost time. 4. A shoddy maintenance program resulted in an abnormally high number of breakdowns on machine no. 76 and slowed production. 5. The implementation of a new program had positive effects for the company with respect to material usage and worker productivity. Required: Create a table with the following headings: material price variance, material quantity variance, labor rate variance, and labor efficiency variance. Determine which of these variances would be affected by the individual events and whether the variance would be favorable or unfavorable.

15) Standard costs are said to be useful in performance evaluation. Assume that the standard direct materials cost per unit of finished product is $6 (three pounds at $2 per pound). Required: A. Explain how such a standard can be used to evaluate performance. B. Why is the degree of controllability important when utilizing standard costs to evaluate performance?

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16) For the quarter just ended, Halston, Inc. reported the following variances in one of its manufacturing departments: Material price variance, U Material quantity variance, F Labor efficiency variance, F Labor rate variance, negligible Machine hours efficiency, F The sum of the favorable variances exceeded the unfavorable materials price variance by a considerable amount. The quality of the output from the department was the same as usual. Halston operates very close to a JIT system for materials purchases, with virtually all material acquired during the quarter being used in manufacturing activities. Required: Is there any connection among these variances? If so, explain.

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17) Standard cost systems can have motivational effects; some are desirable, some are not. Consider the following situation: The materials purchasing manager is paid a salary plus a bonus based on the net favorable materials price variance. Generally, this bonus amounts to 30 - 40% of the manager's total compensation. Due to the bankruptcy of a company in a related field, there is an opportunity to buy a key raw material. The standards for this material call for grade 2A, usually purchased for $56 per ton. Because of the bankruptcy, the company can obtain a higher grade, 4A, for $62 per ton. While the quality of the final product will be the same regardless of the grade of material used, there will be substantial savings in material yield and labor productivity if 4A is used. These savings are expected to be two-to-three times the additional cost of $6 per ton. Required: A. How would an unfavorable price variance on a particular purchase affect the overall price variance for the year and the manager's bonus? B. Would the use of the materials price variance as a basis for the manager's bonus lead to a desirable or undesirable behavioral outcome? Explain, being sure to note whether the manager would likely pursue acquisition of the grade 4A material.

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18)

Howard Company has established the following standards:

Direct materials: 2.0 pounds at $4.10 Direct labor: 1.5 hours at $7 per hour Additional information was extracted from the accounting records: Actual production: 32,000 completed units Direct materials purchased: 70,000 pounds at $3.82, or $267,400 Direct materials consumed: 65,000 pounds Actual labor incurred: 51,000 hours at $6.30, or $321,300 Direct-labor rate variance: $35,700 favorable Direct-labor efficiency variance: $21,000 unfavorable Use the information to compute the following variances: Required: A. What is the amount of Direct Material Purchase Price Variance? B. Prepare the journal entry to record the usage of direct materials. C. Prepare the journal entry to record the incurrence of direct labor costs.

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Answer Key Test name: Chap 10_6e_Cornett_Manually Graded

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Chapter 11 – 6e Cornett 1)

A static budget:

A) is based totally on prior year's costs. B) is based on one anticipated activity level. C) is based on a range of activity. D) is preferred over a flexible budget in the evaluation of performance. E) presents a clear measure of performance when planned activity differs from actual activity.

Flexible budgets reflect a company's anticipated costs based on variations in: A) activity levels. B) inflation rates. C) managers. D) anticipated capital acquisitions. E) standards.

A flexible budget:

A) parallels a static budget with respect to format and advantages of use. B) is preferred over a static budget in the evaluation of performance. C) gives management flexibility in terms of meeting budget goals. D) can be used to compare actual and budgeted costs at various levels of activity. E) is both preferred over a static budget in the evaluation of performance and can be used to compare actual and budgeted costs at various levels of activity.

4) Barrington Industries anticipated selling 29,000 units of a major product and paying sales commissions of $6 per unit. Actual sales and sales commissions totaled 31,500 units and $182,700, respectively. If the company used a static budget for performance evaluations, Barrington would report a cost variance of:

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A) $6,300U. B) $6,300F. C) $8,700U. D) $8,700F. E) None of the answers is correct.

5) Strongheart Enterprises anticipated selling 27,000 units of a major product and paying sales commissions of $6 per unit. Actual sales and sales commissions totaled 27,500 units and $171,400, respectively. If the company used a flexible budget for performance evaluations, Strongheart would report a cost variance of: A) $6,400U. B) $6,400F. C) $9,400U. D) $9,400F. E) None of the answers is correct.

6) Chong Corporation recently prepared a flexible budget for water usage at its manufacturing plant. Budgeted water cost at various projected production levels is as follows:

50,000 units

$ 4,000

75,000 units

6,000

90,000 units

7,200

Actual units produced amounted to 60,000. Actual cost incurred for water usage was $4,500. What was Chong’s cost variance for water?

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A) $300 favorable. B) $500 unfavorable. C) $1,500 favorable. D) $2,700 favorable. E) None of the answers is correct.

7) Zhou, Inc. is planning its overhead costs for an upcoming period when 85,000 machine hours are expected to be worked. Activity may drop as low as 78,000 hours if some overdue equipment maintenance procedures are performed; on the other hand, activity could jump to 94,000 hours if one of Zhou's major competitors likely goes bankrupt. A flexible overhead budget would best be based on: A) 78,000 hours. B) 85,000 hours. C) 94,000 hours. D) 78,000 hours and 94,000 hours. E) 78,000 hours, 85,000 hours, and 94,000 hours.

8) Commerce Corporation has a high probability of operating at 40,000 activity hours during the upcoming period, and lower probabilities of operating at 30,000 hours and 50,000 hours. The company's flexible budget revealed the following:

Variable costs Fixed costs

30,000 Hours

40,000 Hours

50,000 Hours

$ 135,000

$ 180,000

$ 225,000

720,000

Commerce’s flexible-budget formula, where Y is defined as total cost and AH represents activity hours, is:

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A) Y = $4.50AH + $24AH. B) Y = $4.50AH + $720,000. C) Y = $22.50AH. D) Y = $180,000 + $18AH. E) Y = $945,000.

9) Commerce Corporation has a high probability of operating at 40,000 activity hours during the upcoming period, and lower probabilities of operating at 30,000 hours and 50,000 hours. The company's flexible budget revealed the following:

Variable costs Fixed costs

30,000 Hours

40,000 Hours

50,000 Hours

$ 135,000

$ 180,000

$ 225,000

720,000

If Commerce operated at 35,000 hours, its total budgeted cost would be: A) $877,500. B) $945,000. C) $787,500. D) $997,500. E) $810,000.

10)

Seven Falls Cuisines has the following flexible-budget formula:

Y = $13PH + $450,000 where PH is defined as process hours. Which of the following statements is (are) true?

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A) Seven Falls has $450,000 of fixed costs. B) Each additional hour of process time is expected to cost Seven Falls $13. C) Y would equal the amount shown as "total cost" in the company's flexible budget. D) Seven Falls has $450,000 of fixed costs and each additional hour of process time is expected to cost Seven Falls $13. E) All of the answers are correct.

11)

Seven Falls Cuisines has the following flexible-budget formula:

Y = $13PH + $450,000 where PH is defined as process hours. What is Seven Falls’ budgeted total cost if its process hours equal 25,000? A) $325,000. B) $450,000. C) $775,000. D) $1,225,000. E) Answer cannot be determined from the information provided.

12) Dealer Enterprises (DE) anticipated that 84,000 process hours would be worked during an upcoming accounting period when, in fact, 92,000 hours were actually worked. One of the company's cost functions is expressed as follows: Y = $16PH + $640,000 where PH is defined as process hours What budgeted dollar amount would appear in DE's static budget and flexible budget for the preceding cost function? Static

Flexible

$ 1,984,000

$ 2,112,000

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$ 2,112,000

$ 1,984,000

$ 2,112,000

None of the answers is correct.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

13) Nerve Pain Innovations anticipated that 84,000 process hours would be worked during an upcoming accounting period when, in fact, 90,000 hours were actually worked. One of the company's cost functions is expressed as follows: Y = $16PH + $640,000 where PH is defined as process hours What is Nerve Pain’s flexible budget (Y) for the preceding cost function? A) $1,280,000 B) $2,080,000 C) $1,984,000 D) $1,221,000 E) $2,112,000

14) Which of the following mathematical expressions is found in a typical flexible-budget formula for overhead?

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A) Total activity units + budgeted fixed overhead cost per unit. B) Budgeted variable overhead cost per unit + budgeted fixed overhead cost. C) (Budgeted variable overhead cost per unit × total activity units) + budgeted fixed overhead costs. D) (Budgeted fixed overhead cost per unit × total activity units) + (budgeted variable overhead cost per unit × total activity units). E) None of the answers is correct.

15) A flexible budget for 15,000 hours revealed variable manufacturing overhead of $90,000 and fixed manufacturing overhead of $120,000. The budget for 25,000 hours would reveal total overhead costs of: A) $210,000. B) $270,000. C) $290,000. D) $350,000. E) None of the answers is correct.

16) A flexible budget for 15,000 hours revealed variable manufacturing overhead of $90,000 and fixed manufacturing overhead of $120,000. The budget for 20,000 hours would reveal total overhead costs of: A) $240,000. B) $270,000. C) $290,000. D) $350,000. E) $210,000.

17)

A flexible overhead budget might include which of the following items: Direct Materials

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Electricity

Insurance and Property

Taxes A.

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

18) Panama Co. prepared the following flexible overhead budget where PH is process hour. Which of the answers provided correctly completes the table? Budgeted overhead cost Cost per PH Indirect labor, (1 ) maintenance Supplies $ 0.33

A. B. C. D. E.

12,000 PH $ 6,000

15,000PH $ 7,500

18,000PH $ 9,000

(2 )

4,950

5,940

(1 ) = $ 0.50 ; (2 ) = $ 3,960 . (1 ) = $ 2.00 ; (2 ) = $ 6,000 . (1 ) = $ 0.50 ; (2 ) = $ 6,000 . (1 ) = $ 2.00 ; (2 ) = $ 3,960 . None of the answers is correct.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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19) The manufacturing overhead applied to Work-in-Process Inventory by a company that uses standard costing would be computed as: A) actual hours times a predetermined (standard) overhead rate. B) standard hours times a predetermined (standard) overhead rate. C) actual hours times an actual overhead rate. D) standard hours times an actual overhead rate. E) $0, because users of standard costing do not apply overhead to work in process.

20) With respect to overhead, what is the difference between normal costing and standard costing? A) Use of a predetermined overhead rate. B) Use of standard hours versus actual hours. C) Use of a standard rate versus an actual rate. D) The choice of an activity measure. E) There is no difference.

21) Which of the following statements is/are correct concerning the application of overhead in a standard costing system driven by process hours? A) A predetermined overhead rate is allowed only for fixed overhead. B) Overhead application is based on standard process hours allowed. C) Overhead application is based on actual process hours incurred. D) Only prime costs are considered to be product costs in a standard costing system. E) Only variable overhead costs are applied to production.

22)

The activity measure selected for use in a variable- and fixed-overhead flexible budget:

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A) should be stated in sales dollars. B) should be approved by the company's president. C) should vary in a similar behavior pattern to the way that variable overhead varies. D) should remain fixed. E) should produce the most attractive results for the individual who will use the budget in managerial applications.

23) Which of the following should have the strongest cause and effect relationship with overhead costs? A) Cost followers. B) Non-value-added costs. C) Cost drivers. D) Units of output. E) Value-added costs.

24)

Which of the following is not an overhead variance? A) Variable-overhead spending variance. B) Variable-overhead volume variance. C) Variable-overhead efficiency variance. D) Fixed-overhead budget variance. E) Fixed-overhead volume variance.

25)

Which of the following is not an overhead variance? A) Variable-overhead spending variance. B) Variable-overhead efficiency variance. C) Fixed-overhead efficiency variance. D) Fixed-overhead budget variance. E) Fixed-overhead volume variance.

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26) Which of the following is used in the computation of the variable-overhead spending variance? Actual Variable Overhead Cost

Budgeted Variable Overhead Based on Actual Hours

Standard Variable Overhead Applied

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

27) Which of the following elements is (are) needed in a straightforward calculation of the variable-overhead spending variance? A) Variable overhead incurred during the period. B) Budgeted variable overhead based on actual hours worked. C) Standard variable overhead applied to production. D) Both variable overhead incurred during the period and budgeted variable overhead based on actual hours worked. E) Both variable overhead incurred during the period and standard variable overhead applied to production.

28) Assume that machine hours drive the cost for overhead. The difference between the actual variable overhead incurred and the applied variable overhead is the:

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A) volume variance. B) production variance. C) efficiency variance. D) sum of the spending and efficiency variances. E) spending variance.

29)

What will cause the variable-overhead efficiency variance?

A) Efficient or inefficient use of a specific component of variable overhead (e.g., electricity). B) Full or partial utilization of major equipment resources. C) Production of units in excess of the number of units sold. D) Efficient or inefficient use of the cost driver (e.g., machine hours) for variable overhead. E) Changes in the salary cost of manufacturing supervisors.

30) Canister Industries uses labor hours to apply variable overhead to production. If the company's workers were very inefficient during the period, which of the following statements would be true about the variable-overhead efficiency variance? A) The variance would be favorable. B) The variance would be unfavorable. C) The nature of the variance (favorable or unfavorable) would be unknown based on the facts presented. D) The variance would be the same amount as the labor efficiency variance. E) None of the answers is correct.

31) The difference between the total actual factory overhead and the total factory overhead applied to production is the:

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A) sum of the spending, efficiency, budget, and volume variances. B) controllable variance. C) efficiency variance. D) spending variance. E) volume variance.

32)

Which of the following variances would be useful to help control overhead spending? Variable-Overhead Spending Variance

Fixed-Overhead Budget Fixed-Overhead Volume Variance Variance

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

33)

The budget variance arises from a comparison of: A) budgeted fixed overhead expenditures with budgeted fixed overhead costs. B) actual fixed overhead costs with budgeted fixed overhead costs. C) actual variable overhead expenditures with budgeted variable overhead costs. D) variable overhead costs with budgeted fixed overhead costs. E) static-budget amounts with flexible-budget amounts.

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34)

Which of the following is used in the computation of the fixed overhead budget variance? Actual Fixed Overhead

Budgeted Fixed Overhead

Fixed Overhead Applied to Production

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

35) The difference between budgeted fixed manufacturing overhead and the fixed overhead applied to production is the: A) sum of the spending and efficiency variances. B) controllable variance. C) efficiency variance. D) spending variance. E) volume variance.

36)

A fixed-overhead volume variance would normally arise when: A) actual hours of activity coincide with actual units of production. B) budgeted fixed overhead is less than (or greater than) applied fixed overhead. C) there is a fixed-overhead budget variance. D) actual fixed overhead exceeds budgeted fixed overhead. E) there is a variable-overhead efficiency variance.

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37) Which variance is commonly associated with measuring the cost of under- or overutilization of plant capacity? A) The variable-overhead spending variance. B) The variable-overhead efficiency variance. C) The fixed-overhead budget variance. D) The fixed-overhead volume variance. E) The total fixed-overhead variance.

38)

Bannister Motors Corporation reported the following variances for the period just ended:

Variable-overhead spending variance: $50,000U Variable-overhead efficiency variance: $28,000U Fixed-overhead budget variance: $70,000U Fixed-overhead volume variance: $30,000U If Bannister desires to analyze variances that arose primarily from managers' expenditures in excess of anticipated amounts, the company should focus on variances that total: A) $50,000U. B) $70,000U. C) $120,000U. D) $178,000U. E) None of the answers is correct.

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39)

Bannister Motors Corporation reported the following variances for the period just ended:

Variable-overhead spending variance: $50,000U Variable-overhead efficiency variance: $28,000U Fixed-overhead budget variance: $70,000U Fixed-overhead volume variance: $30,000U If Bannister prepared an overhead cost performance report, which of these overhead variances is likely to be excluded from the report? A) Variable-overhead spending variance. B) Variable-overhead efficiency variance. C) Fixed-overhead budget variance. D) Fixed-overhead volume variance. E) None of the variances would be excluded.

40) Orlando Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended: Actual units produced: 12,000 Actual variable overhead incurred: $77,700 Actual machine hours worked: 18,800 Standard variable overhead cost per machine hour: $4.50 If Orlando estimates 1.5 hours to manufacture a completed unit, the company's variableoverhead spending variance is: A) $3,600 favorable. B) $3,600 unfavorable. C) $6,900 favorable. D) $6,900 unfavorable. E) None of the answers is correct.

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41) Priority Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended: Actual units produced: 9,000 Actual variable overhead incurred: $54,400 Actual machine hours worked: 16,000 Standard variable overhead cost per machine hour: $3.50 If Priority estimates two hours to manufacture a completed unit, the company's variableoverhead efficiency variance is: A) $1,600 favorable. B) $1,600 unfavorable. C) $7,000 favorable. D) $7,000 unfavorable. E) None of the answers is correct.

42) Admac Technologies has a standard variable overhead rate of $4.50 per machine hour, and each unit produced has a standard time allowed of three hours. The company's static budget was based on 46,000 units. Actual results for the year follow. Actual units produced: 42,000 Actual machine hours worked: 120,000 Actual variable overhead incurred: $520,000 Admac’s variable-overhead spending variance is: A) $20,000 favorable. B) $20,000 unfavorable. C) $27,000 favorable. D) $27,000 unfavorable. E) None of the answers is correct.

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43) Admac Technologies has a standard variable overhead rate of $4.50 per machine hour, and each unit produced has a standard time allowed of three hours. The company's static budget was based on 46,000 units. Actual results for the year follow. Actual units produced: 42,000 Actual machine hours worked: 120,000 Actual variable overhead incurred: $520,000 Admac’s variable-overhead efficiency variance is: A) $20,000 favorable. B) $20,000 unfavorable. C) $27,000 favorable. D) $27,000 unfavorable. E) None of the answers is correct.

44) Messenger, Inc. has a standard variable overhead rate of $5 per machine hour, with each completed unit expected to take three machine hours to produce. A review of the company's accounting records found the following: Actual production: 19,500 units Variable-overhead efficiency variance: $9,000U Variable-overhead spending variance: $21,000F What was Messenger’s actual variable overhead during the period? A) $262,500. B) $280,500. C) $304,500. D) $322,500. E) None of the answers is correct.

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45) Hope, Inc. has a standard variable overhead rate of $4 per machine hour, with each completed unit expected to take three machine hours to produce. A review of the company's accounting records found the following: Actual variable overhead: $210,000 Variable-overhead efficiency variance: $18,000U Variable-overhead spending variance: $30,000F How many units did Hope actually produce during the period? A) 13,500. B) 16,500. C) 18,500. D) 21,500. E) None of the answers is correct.

46) Campaign Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended: Actual units produced: 12,000 Actual fixed overhead incurred: $730,000 Actual machine hours worked: 60,000 Budgeted fixed overhead: $720,000 Planned level of machine-hour activity: 50,000 If Campaign estimates four hours to manufacture a completed unit, the company's standard fixed overhead rate per machine hour would be: A) $12.00. B) $14.40. C) $14.60. D) $15.00. E) None of the answers is correct.

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47) Auditory Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended: Actual units produced: 13,000 Actual fixed overhead incurred: $742,000 Standard fixed overhead rate: $15 per hour Budgeted fixed overhead: $720,000 Planned level of machine-hour activity: 48,000 If Auditory estimates four hours to manufacture a completed unit, the company's fixed-overhead budget variance would be: A) $22,000 favorable. B) $22,000 unfavorable. C) $60,000 favorable. D) $60,000 unfavorable. E) None of the answers is correct.

48) Approach Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended: Actual units produced: 14,800 Actual fixed overhead incurred: $791,000 Standard fixed overhead rate: $13 per hour Budgeted fixed overhead: $780,000 Planned level of machine-hour activity: 60,000 If Approach estimates four hours to manufacture a completed unit, the company's fixedoverhead volume variance would be: A) $10,400 negative. B) $10,400 positive. C) $11,000 negative. D) $11,000 positive. E) None of the answers is correct.

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49) Forward Venture Company, which uses a standard cost system, budgeted $600,000 of fixed overhead when 40,000 machine hours were anticipated. Other data for the period were: Actual units produced: 10,000 Standard production time per unit: 3.9 machine hours Fixed overhead incurred: $620,000 Actual machine hours worked: 42,000 Forward Venture Company’s fixed-overhead budget variance is: A) $10,000 favorable. B) $15,000 favorable. C) $15,000 unfavorable. D) $20,000 favorable. E) $20,000 unfavorable.

50) Forward Venture Company, which uses a standard cost system, budgeted $600,000 of fixed overhead when 40,000 machine hours were anticipated. Other data for the period were: Actual units produced: 10,000 Standard production time per unit: 3.9 machine hours Fixed overhead incurred: $620,000 Actual machine hours worked: 42,000 Forward Venture Company’s fixed-overhead volume variance is: A) $10,000 negative. B) $15,000 negative. C) $15,000 positive. D) $20,000 negative. E) $20,000 positive.

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51) Solution Enterprises incurred $828,000 of fixed overhead during the period. During that same period, the company applied $845,000 of fixed overhead to production and reported an unfavorable budget variance of $41,000. How much was Solution’s budgeted fixed overhead? A) $787,000. B) $804,000. C) $869,000. D) $886,000. E) Not enough information to judge.

52) Sigmo Company, which uses a standard cost system, budgeted $800,000 of fixed overhead when 50,000 machine hours were anticipated. Other data for the period were: Actual units produced: 10,600 Actual machine hours worked: 51,800 Actual variable overhead incurred: $475,000 Actual fixed overhead incurred: $790,100 Standard variable overhead rate per machine hour: $8.50 Standard production time per unit: 5 hours Sigmo’s variable-overhead efficiency variance is: A) $10,200U. B) $10,200F. C) $15,300U. D) $15,300F. E) None of the answers is correct.

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53) Sigmo Company, which uses a standard cost system, budgeted $800,000 of fixed overhead when 50,000 machine hours were anticipated. Other data for the period were: Actual units produced: 10,600 Actual machine hours worked: 51,800 Actual variable overhead incurred: $475,000 Actual fixed overhead incurred: $790,100 Standard variable overhead rate per machine hour: $8.50 Standard production time per unit: 5 hours Sigmo’s fixed-overhead budget variance is: A) $9,900U. B) $9,900F. C) $28,800U. D) $28,800F. E) None of the answers is correct.

54) Theory Enterprises uses a standard cost system and prepared the following budget for May when 24,000 machine hours of activity were anticipated: variable overhead, $48,000; fixed overhead: $240,000. Actual data for May were: Standard machine hours allowed for output attained: 25,000 Actual machine hours worked: 24,000 Variable overhead incurred: $50,000 Fixed overhead incurred: $250,000 The standard variable overhead rate for May is: A) $2.00. B) $2.08. C) $3.00. D) $5.00. E) $5.21.

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55) Theory Enterprises uses a standard cost system and prepared the following budget for May when 24,000 machine hours of activity were anticipated: variable overhead, $48,000; fixed overhead: $240,000. Actual data for May were: Standard machine hours allowed for output attained: 25,000 Actual machine hours worked: 24,000 Variable overhead incurred: $50,000 Fixed overhead incurred: $250,000 The variable-overhead spending and efficiency variances for Theory are: Variable-Overhead Spending Variance $ 0

Variable-Overhead Efficiency Variance $ 0

$ 2,000 unfavorable

$ 2,000 favorable

$ 2,000 unfavorable

$ 2,000 favorable

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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56) Theory Enterprises uses a standard cost system and prepared the following budget for May when 24,000 machine hours of activity were anticipated: variable overhead, $48,000; fixed overhead: $240,000. Actual data for May were: Standard machine hours allowed for output attained: 25,000 Actual machine hours worked: 24,000 Variable overhead incurred: $50,000 Fixed overhead incurred: $250,000 The fixed-overhead budget and volume variances for Theory are: Fixed-Overhead Budget Variance 0

Fixed-Overhead Volume Variance

$ 10,000 negative

$ 10,000 favorable

$ 10,000 positive

$ 10,000 unfavorable

$ 10,000 negative

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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57)

Match Point, Inc. has the following overhead standards:

Variable overhead: 4 hours at $8 per hour Fixed overhead: 4 hours at $10 per hour The standards were based on a planned activity of 20,000 machine hours when 5,000 units were scheduled for production. Actual data follow. Variable overhead incurred: $167,750 Fixed overhead incurred: $210,000 Machine hours worked: 19,800 Actual units produced: 5,100 Match Point’s fixed-overhead budget variance is: A) $6,000 unfavorable. B) $7,000 unfavorable. C) $10,000 unfavorable. D) $12,000 unfavorable. E) None of the answers is correct.

58)

Match Point, Inc. has the following overhead standards:

Variable overhead: 4 hours at $8 per hour Fixed overhead: 4 hours at $10 per hour The standards were based on a planned activity of 20,000 machine hours when 5,000 units were scheduled for production. Actual data follow. Variable overhead incurred: $167,750 Fixed overhead incurred: $210,000 Machine hours worked: 19,800 Actual units produced: 5,100 Match Point’s fixed-overhead volume variance is: A) $4,000 negative. B) $4,000 positive. C) $10,000 negative. D) $10,000 positive. E) None of the answers is correct.

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59)

Match Point, Inc. has the following overhead standards:

Variable overhead: 4 hours at $8 per hour Fixed overhead: 4 hours at $10 per hour The standards were based on a planned activity of 20,000 machine hours when 5,000 units were scheduled for production. Actual data follow. Variable overhead incurred: $167,750 Fixed overhead incurred: $210,000 Machine hours worked: 19,800 Actual units produced: 5,100 Match Point’s variable-overhead spending variance is: A) $550 favorable. B) $4,550 unfavorable. C) $4,800 favorable. D) $9,350 unfavorable. E) None of the answers is correct.

60)

Match Point, Inc. has the following overhead standards:

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A) $550 favorable. B) $550 unfavorable. C) $4,800 favorable. D) $4,800 unfavorable. E) None of the answers is correct.

61)

Match Point, Inc. has the following overhead standards:

Variable overhead: 4 hours at $8 per hour Fixed overhead: 4 hours at $10 per hour The standards were based on a planned activity of 20,000 machine hours when 5,000 units were scheduled for production. Actual data follow. Variable overhead incurred: $167,750 Fixed overhead incurred: $210,000 Machine hours worked: 19,800 Actual units produced: 5,100 The amount of variable overhead that Match Point applied to production is: A) $158,400. B) $160,000. C) $163,200. D) $167,750. E) None of the answers is correct.

62) Institute Technologies is choosing new cost drivers for its accounting system. One driver is labor hours; the other is a combination of machine hours for unit variable costs and number of setups for a pool of batch-level costs. Data for the past year follow. Budget

Actual

Labor hours

200,000

Machine hours

360,000

450,000

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Number of setups

3,000

3,300

Unit variable cost pool

$ 1,600,000

$ 2,000,000

Batch-level cost pool

900,000

990,000

Assume that both cost pools for Institute are combined into a single pool, and labor hours is the driver. The total flexible budget for the actual level of labor hours and the total variance for the combined pool are: Flexible Budget

Variance

$ 1,600,000

$ 400,000 U

$ 2,500,000

$ 490,000 U

$ 2,590,000

$ 400,000 U

$ 2,900,000

$ 2,990,000

90,000 U 0

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

63) Institute Technologies is choosing new cost drivers for its accounting system. One driver is labor hours; the other is a combination of machine hours for unit variable costs and number of setups for a pool of batch-level costs. Data for the past year follow. Budget Labor hours

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200,000

Actual 200,000

Machine hours

360,000

450,000

3,000

3,300

Unit variable cost pool

$ 1,600,000

$ 2,000,000

Batch-level cost pool

Number of setups

900,000

990,000

Assume that the two separate pools are used for Institute. The flexible budget dollar amounts for the actual level of machine hours and actual number of setups are: Unit Variable Cost Pool A.

$ 1,600,000

Batch-Level Cost Pool $ 900,000

$ 1,600,000

$ 990,000

$ 2,000,000

$ 900,000

$ 2,000,000

$ 990,000

$ 2,500,000

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

64) What is the most common treatment of the fixed-overhead budget variance at the end of the accounting period?

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A) Reported as a deferred charge or credit. B) Allocated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold. C) Charged or credited to Cost of Goods Sold. D) Allocated among Cost of Goods Manufactured, Finished-Goods Inventory, and Cost of Goods Sold. E) Charged or credited to Income Summary.

65) In an effort to reduce record-keeping, companies that sell perishable goods will often enter the standard cost of direct material, direct labor, and manufacturing overhead directly into what account? A) Work-in-Process Inventory. B) Finished-Goods Inventory. C) Cost of Goods Sold. D) Cost of Goods Manufactured. E) Sales Revenue.

66) When actual variable cost per unit equals standard variable cost per unit, the difference between actual and budgeted contribution margin is explained by a combination of which two variances? A) The sales-volume variance and the fixed-overhead volume variance. B) The sales-volume variance and the fixed-overhead budget variance. C) The sales-price variance and the fixed-overhead volume variance. D) The sales-price variance and sales-volume variance. E) The sales-price variance and fixed-overhead budget variance.

67)

The sales-volume variance equals:

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A) (actual sales volume − budgeted sales volume) × actual sales price. B) (actual sales volume − budgeted sales volume) × actual contribution margin. C) (actual sales volume − budgeted sales volume) × budgeted sales price. D) (actual sales price − budgeted sales price) × budgeted sales volume. E) (actual sales price − budgeted sales price) × fixed-overhead volume variance.

68)

The Step Company has the following information for the year just ended: Budget

Actual

15,000

14,000

$ 150,000

$ 147,000

90,000

82,600

Sales in units Sales Less: Variable Expenses Contribution Margin

Less: Fixed Expenses Operating Income

60,000

35,000 $

25,000

64,400 40,000

24,400

The Step Company's sales-volume variance is: A) $3,000 unfavorable. B) $4,000 unfavorable. C) $4,400 favorable. D) $10,000 unfavorable. E) $10,000 favorable.

69)

The Step Company has the following information for the year just ended:

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Budget

Actual

15,000

14,000

$ 150,000

$ 147,000

90,000

82,600

Sales in units Sales Less: Variable Expenses Contribution Margin

Less: Fixed Expenses Operating Income

60,000

35,000 $

25,000

64,400 40,000

24,400

The Step Company's sales-price variance is: A) $3,000 unfavorable. B) $7,000 unfavorable. C) $7,000 favorable. D) $7,500 unfavorable. E) $7,500 favorable.

70) Holiday Company prepares packed lunches for hikers in Yosemite. Hikers order their lunches by 10 pm and their lunch is left at their hotel room door in a re-useable insulated bag by 5 am the following morning. Holiday budgeted 5,000 lunches for July and each lunch requires 0.50 process hours. Holiday’s static budget for electricity for the month is $3,000. Actual sales, process hours, and electricity cost totaled 5,100 lunches, 2,480 PH, and $3,040, respectively. If the company used a static budget for performance evaluations, Holiday would report a cost variance of: A) $24U. B) $24F. C) $40U. D) $40F. E) None of the answers is correct.

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71) Holiday Company prepares packed lunches for hikers in Yosemite. Hikers order their lunches by 10 pm and their lunch is left at their hotel room door in a re-useable insulated bag by 5 am the following morning. Holiday budgeted 5,000 lunches for July and each lunch requires 0.50 process hours. Holiday’s static budget for electricity for the month is $3,000. Actual sales, process hours, and electricity cost totaled 5,100 lunches, 2,480 PH, and $3,040, respectively. If the company used a flexible budget for performance evaluations, Holiday would report a cost variance of: A) $84U. B) $84F. C) $20F. D) $20U. E) None of the answers is correct.

72) Jerome Copper Company budgeted 126,000 process hours for the month of October when one of the company’s cost functions was budgeted to be $2,976,000. The process hours actually worked during October were 135,000. Jerome Copper Company experienced a cost variance of $40,000 unfavorable related to this cost function. If the company’s cost function includes a $16 per process hour rate, what is the formula used by Jerome Copper Company to derive its flexible budget? A) Y = $16(Total process hours) + $920,000 B) Y = $16(Total process hours) + $960,000 C) Y = $16(Total process hours) + $816,000 D) Y = $16(Total process hours) + $856,000 E) Y = $16(Total process hours) + $2,976,000

73) Eyelet Industries produces specialized laces for running shoes, hiking shoes, and work boots. Eyelet budgeted $112,500 for variable overhead and $45,000 for fixed overhead when the monthly planned activity was 7,500 process hours to produce 15,000 laces. Actual lace production was 15,400 laces and 7,680 process hours were used. If the company applies overhead using standard costing, how much overhead was applied during the month?

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A) $157,500. B) $161,280. C) $161,700. D) $157,910. E) None of the answers is correct.

74) Pocono Co. uses a standard costing system and a standard overhead rate of $12 per process hour. Pocono’s Production Overhead account shows a debit of $365,780 for the month. The company produced 7,900 products and used 30,800 process hours. The standard for each product is 4 process hours. What amount did Pocono Co. credit to the Production Overhead account for the month? A) $3,820. B) $369,600. C) $379,200. D) $13,420. E) None of the answers is correct.

75) One of the accountants at Agave Industries is attempting to identify the activity measure best suited to use for the flexible budget. Based on the limited information provided, which of the following activity measures should be used for the flexible budget? Activity Machine hours

Variable overhead cost 168,113

Labor hours Set-ups Labor cost Machine hours Labor hours

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236,018

Activity measure 1,368

Month January

6,432

January

112

January

96,555

January

1,920

February

6,498

February

Set-ups Labor cost

104

February

97,897

February

A) Labor cost. B) Set-ups. C) Machine hours. D) Labor hours. E) None of the answers is correct.

76) Sugarland Company is using new cost drivers for its accounting system. One driver material handling for unit variable costs and number of inspections for a pool of batch-level costs. Data for the past year follow. Budget Material handling

Actual

180,000

225,000

6,000

6,600

Unit variable cost pool

$ 810,000

$ 1,035,000

Batch-level cost pool

$ 115,200

Number of inspections

126,060

What is the total flexible budget dollar amount for the actual level of material handling and actual number of inspections? A) $1,017,720. B) $1,031,500. C) $1,139,220. D) $1,161,060. E) None of the answers is correct.

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77) Flexible budgets reflect a company's anticipated costs based on variations in activity levels. ⊚ true ⊚ false

78)

The units of output are meaningful measures in multiproduct firms. ⊚ true ⊚ false

79) A flexible budget for 15,000 hours revealed variable manufacturing overhead of $90,000 and fixed manufacturing overhead of $120,000. The budget for 25,000 hours would reveal total overhead costs of $210,000. ⊚ true ⊚ false

80) The formula flexible budget is more general than the columnar flexible budget, because the formula allows managers to compute budgeted overhead costs at any activity level. ⊚ true ⊚ false

81) The manufacturing overhead applied to Work-in-Process Inventory by a company that uses standard costing would be computed as actual hours times a predetermined (standard) overhead rate. ⊚ true ⊚ false

82)

Both normal- and standard-costing systems use a predetermined overhead rate.

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⊚ ⊚

true false

83) From a traditional perspective, dollars of raw material have been a popular activity measure in manufacturing firms. ⊚ true ⊚ false

84) The advantage of dollar measures as a basis for flexible overhead budgeting is that they are relatively stable overtime. ⊚ true ⊚ false

85) Efficient or inefficient use of a specific component of variable overhead (e.g., electricity) will cause the firm to have a variable-overhead efficiency variance. ⊚ true ⊚ false

86) The budget variance arises from a comparison of actual variable overhead expenditures with budgeted variable overhead costs. ⊚ true ⊚ false

87) The overhead cost performance report presents itemized variances along with actual and budgeted costs for each overhead item. ⊚ true ⊚ false

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88) The overhead cost performance report includes spending and efficiency variances for both variable and fixed items. ⊚ true ⊚ false

89) The activity-based flexible budget provides a more accurate benchmark against which to compare actual costs than does a conventional flexible budget. ⊚ true ⊚ false

90) In an activity-based flexible budget, each overhead item has the same cost driver, identified by flexible overhead budget for that cost item. ⊚ true ⊚ false

91) In a standard-costing system, the standard costs are used for product costing as well as for cost control. ⊚ true ⊚ false

92) The right (credit) side of the production-overhead account accumulates actual overhead costs incurred. ⊚ true ⊚ false

93) The sales-price variance is the difference between the actual and budgeted sales prices multiplied by the actual sales volume. ⊚ true ⊚ false

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94)

The sales-volume variance measures the effect on sales revenue of sales price deviations. ⊚ true ⊚ false

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Answer Key Test name: Chap 11_6e_Cornett 1) B 2) A 3) E 4) C 5) A 6) A 7) E 8) B 9) A 10) E 11) C 12) B 13) B 14) C 15) B 16) A 17) D 18) A 19) B 20) B 21) B 22) C 23) C 24) B 25) C 26) D Version 1

27) D 28) D 29) D 30) B 31) A 32) B 33) B 34) B 35) E 36) B 37) D 38) C 39) D 40) C 41) C 42) A 43) C 44) B 45) C 46) B 47) B 48) B 49) E 50) C 51) A 52) B 53) B 54) A 55) E 56) E Version 1

57) C 58) A 59) D 60) C 61) C 62) B 63) D 64) C 65) C 66) D 67) C 68) D 69) C 70) C 71) C 72) B 73) C 74) C 75) C 76) C 77) TRUE 78) FALSE 79) FALSE 80) TRUE 81) FALSE 82) TRUE 83) FALSE 84) FALSE 85) TRUE 86) FALSE Version 1

87) TRUE 88) FALSE 89) TRUE 90) FALSE 91) TRUE 92) FALSE 93) TRUE 94) FALSE

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Chapter 11 – 6e Cornet- Manually Graded 1) Prevlar’s budget for variable overhead and fixed overhead revealed the following information for an anticipated 40,000 hours of activity: variable overhead, $348,000; fixed overhead, $600,000. The company actually worked 43,000 hours and actual overhead incurred was: variable, $365,500; fixed, $608,000. Required: A. Compute the company's total cost variance for variable overhead and fixed overhead if the firm uses a static budget to help assess performance. B. Repeat part "A" assuming the use of a flexible budget. C. Which of the two budgets (static or flexible) is preferred for performance evaluations? Why?

2) The City Symphony Orchestra presents a series of concerts throughout the year. Budgeted fixed costs total $300,000 for the concert season; variable costs are expected to average $5 per patron. The orchestra uses flexible budgeting. Required: A. Prepare a flexible budget that shows the expected costs of 8,000, 8,500, and 9,000 patrons. B. Construct the orchestra's flexible budget formula. C. Assume that 8,700 patrons attended concerts during the year just ended, and actual costs were: variable, $42,000; fixed, $307,500. Evaluate the orchestra's financial performance by computing variances for variable costs and fixed costs.

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3) Super Fast Insurance uses budgets to forecast and monitor overhead throughout the organization. The following budget formula relates to the processing of applications for automobile policies in any given month: Total overhead = $6.80APH + $13,500 where APH = application processing hours The typical automobile insurance policy has an estimated processing time of 1.5 hours. During June, management originally anticipated that 320 applications would be processed. Activity was lower than expected, with only 280 applications completed by month-end, and the following costs were incurred: variable overhead, $2,950; fixed overhead, $13,700. Required: A. What volume level of applications and processing hours would have been used if Super Fast had constructed a static budget? B. Construct a flexible budget that shows the expected monthly variable and fixed overhead costs of processing 270, 300, and 330 applications. C. From a cost perspective, did the company perform better or worse than anticipated in June? Show calculations to support your answer.

4) The International Students Club at Eastern University recently held an end-of-year dinner and swim party, which the treasurer declared to be a financial success. "Attendance was an alltime high, 60 members, and the results were much better than expected." The treasurer presented the following performance report at the executive board's June meeting: Budget

Actual

Variance

Revenue

$1,575

$2,205

$630F

Food

$675

$870

$195U

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Beverages

315

480

165U

Disc jockey

150

175

25U

Facility rental

200

---

Total costs

$1,340

$1,725

$385U

Profit

$235

$480

$245F

The budget was based on the assumptions that follow. · Forty-five members would attend at a fixed ticket price of $35. · Food and beverage costs were anticipated to be $15 and $7 per attendee, respectively. · A disc jockey was hired via a written contract at $50 per hour. Required: A. Briefly evaluate the meaningfulness of the treasurer's performance report. B. Prepare a performance report by using flexible budgeting and determine whether the end-ofyear party was as successful as originally reported. C. Based on your answer in requirement "B," present a possible explanation for the variances in revenue, food costs, beverage costs, and the disc jockey.

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5) Practical Products plans to manufacture 8,000 units over the next month at the following costs: direct materials, $480,000; direct labor, $60,000; variable manufacturing overhead, $150,000; straight-line depreciation, $24,000, and other fixed manufacturing overhead, $276,000. The result is total budgeted cost of $990,000. Shortly after the conclusion of the month, Practical Products reported the following costs: Direct materials used

$490,500

Direct labor

69,600

Variable manufacturing overhead

132,000

Depreciation

24,000

Other fixed manufacturing overhead

272,000

Total

$988,100

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Supervisor, Calvin Moore and his crews turned out 7,200 units—a remarkable feat given that the company's manufacturing plant was closed for several days because of blizzards and impassable roads. Moore was especially pleased with the fact that total actual costs were less than budget. He was thus very surprised when Practical’s general manager expressed unhappiness about the plant's financial performance. Required: A. Prepare a performance report that fairly compares budgeted and actual costs for the period just ended—namely, the report that the general manager likely used when assessing performance. B. Should Moore be praised for "having met the budget" or is the general manager's unhappiness justified? Explain, citing any apparent problems for the firm.

6) Advanced University operates a motor pool for the convenience of its faculty and staff. The following budget was prepared for an upcoming period: Gasoline and oil

$40,000

Minor repairs

6,000

Insurance

20,000

Office help

24,000

Depreciation

30,000

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Total

$120,000

The budget was based on the assumptions of 20 vehicles, with each vehicle being driven 8,000 miles. Advanced acquired two additional vehicles early in the period under study. Actual miles driven during the period totaled 180,000. Discussions with the motor pool manager revealed that pool costs are variable and fixed in nature. The manager believed that miles driven was the most appropriate cost driver for studying gasoline and oil expense. In contrast, the number of vehicles in the pool was the best base to use when studying minor repairs, insurance, and depreciation. Office help is a fixed cost. Required: A. Contrast a static budget with a flexible budget. B. Suppose that the university's budget officer desired to prepare a report that compared budgeted and actual costs. Should the report be based on a static budget or a flexible budget? Why? C. On the basis of the information presented, determine the budgeted amounts for the five preceding costs that would be used in a flexible budget.

Pizzazz Pizza Inc.’s activity based flexible budget is as follows: Pizzazz Pizza, Inc.

Monthly Flexible Overhead Budget

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Budgeted Cost

Level of Activity

Cost Pool I (cost driver: process hours)

6,000

7,500

9,000

Nonstick cooking spray

$ 12,000

$ 15,000

$ 18,000

Foil

2,000

2,500

3,000

Other paper products.

2,000

2,500

3,000

Miscellaneous supplies

6,000

7,500

9,000

Indirect labor: maintenance

4,000

5,000

6,000

3,000

3,750

4,500

Indirect material:

Utilities:

Electricity

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Natural gas

1,000

1,250

1,500

Total of cost pool I

$ 30,000

$ 37,500

$ 45,000

Cost Pool II (cost driver: production runs)

Inspection

$ 2,200

$ 3,300

$ 4,400

Setup

3,000

4,500

6,000

Total of cost pool II

$ 5,200

$ 7,800

$ 10,400

Cost Pool III (cost driver: new Pizzas tested)

Test kitchen

$ 1,200

$ 1,800

$ 2,400

Total of cost pool III

$ 1,200

$ 1,800

$ 2,400

Indirect labor:

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Cost Pool IV (cost driver: pounds of material handled)

20,000

30,000

40,000

Material handling

$ 2,000

$ 3,000

$ 4,000

Total of cost pool IV

$ 2,000

$ 3,000

$ 4,000

Indirect labor: production supervisors

$ 6,000

Depreciation: plant and equipment

500

Insurance and property taxes

100

Total of cost pool V

$ 6,600

Total overhead cost

$45,000

$56,700

$68,400

Cost Pool V (facility level costs)

Pizzazz’s activity for September is as follows:

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Process Hours

7,500

Production Runs

New Pizza combinations tested

Direct material handled (in pounds)

40,000

Required: 1. Determine the flexible budgeted cost for each of the following: a. Indirect material b. Utilities c. Inspection d. Test kitchen e. Material handling f. Total overhead cost 2. Compute the variance for setup cost during the month, assuming that the actual setup cost was $3,000: Using the activity-based flexible budget.

8) Briefly describe the procedures that are used to apply manufacturing overhead to production for companies that use (1) normal costing systems and (2) those that use standard costing systems.

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9) Camelback Industries operates a delivery service for local restaurants, delivering call-in, to-go meals for restaurant customers. Variable overhead costs are applied at the budgeted rate of $3 per driving hour. The typical round trip takes a driver 45 minutes to complete. Actual results for March follow. Number of round trips run: 1,560 Hours of delivery time: 1,250 Variable overhead cost incurred: $3,450 Camelback uses flexible budgets and variance analysis to monitor performance. Required: A. Prepare a flexible-budget performance report that shows (1) actual variable overhead, (2) the amount of variable overhead that should have been incurred for the number of round trips taken, and (3) the variance between these amounts. B. Compute the company's variable-overhead spending and efficiency variances. C. Compare the variances that you computed in requirements "A" and "B," and comment on your findings.

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10) Tyrant Enterprises, Inc. uses a standard cost system when accounting for its sole product. Manufacturing overhead is applied to production on the basis of process hours. Planned activity is 60,000 process hours per month, which gives rise to the following per-unit standards: Variable overhead: 13 hours at $15 per hour Fixed overhead: 13 hours at $7 per hour During September, 5,100 units were produced and the company incurred the following overhead costs: variable, $942,500; fixed, $429,000. Actual process hours totaled 65,000. Required: A. Calculate the spending and efficiency variances for variable overhead. B. Calculate the budget and volume variances for fixed overhead.

11) Amnesty Elements uses a standard cost system, applying manufacturing overhead on the basis of machine hours. The company's overhead standards per unit are shown below. Variable overhead: 4 hours at $9 per hour Fixed overhead: 4 hours at $6* per hour *Based on planned monthly activity of 120,000 machine hours Actual data for May were: Number of units produced: 29,000 Number of machine hours worked: 125,000 Variable overhead costs incurred: $1,085,000 Fixed overhead costs incurred: $755,000 Required: A. Calculate the spending and efficiency variances for variable overhead. B. Calculate the budget and volume variances for fixed overhead.

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12)

The following information relates to Joplin Company for the period just ended:

Standard variable overhead rate per hour

Standard fixed-overhead rate per hour

Planned monthly activity

40,000 machine hours

Actual production completed

82,000 units

Standard machine processing time

Two units per hour

Actual variable overhead

$37,000

Actual total overhead

$121,000

Actual machine hours worked

40,500

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All of the company's overhead is variable or fixed in nature. Required: A. Calculate the spending and efficiency variances for variable overhead. B. Calculate the budget and volume variances for fixed overhead.

13)

Consider the seven statements that follow.

1. An analysis of fixed overhead will typically result in the computation of the fixed-overhead spending variance and the fixed-overhead volume variance. 2. The standard rate for fixed overhead is computed by dividing a company's budgeted fixed overhead for the period by the planned manufacturing activity. 3. A company uses direct labor hours to apply manufacturing overhead to units of production. If the company reports an unfavorable labor efficiency variance, that same firm might report a favorable variable-overhead efficiency variance in the same accounting period. 4. The amount of actual fixed overhead for an accounting period is used to compute the fixedoverhead volume variance. 5. If a company's standard hours allowed for the manufacturing activity attained exceeds the planned manufacturing activity, the firm will report a favorable fixed-overhead volume variance. 6. The amount of fixed overhead that a company has budgeted for an accounting period will increase or decrease with the actual number of units produced. 7. The fixed-overhead volume variance indicates whether the level of production activity attained is higher or lower than the level originally anticipated. Required: Determine whether the preceding statements are true or false. If a statement is false, briefly explain why it is false.

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14) The following selected information was extracted from the accounting records of Comprehensive Technologies, Inc.: Planned manufacturing activity: 40,000 machine hours Standard variable-overhead rate per machine hour: $16 Budgeted fixed overhead: $100,000 Variable-overhead spending variance: $92,000U Variable-overhead efficiency variance: $102,000F Fixed-overhead budget variance: $25,000U Total actual overhead: $675,000 Required: Determine the following: actual fixed overhead, actual variable overhead, actual machine hours worked, standard machine hours allowed for actual production, and the fixed-overhead volume variance.

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15) Waldren Corporation applies fixed manufacturing overhead to production on the basis of machine hours worked. The following data relate to the month just ended: Actual fixed overhead incurred: $1,245,000 Budgeted fixed overhead: $1,200,000 Anticipated machine hours: 240,000 Standard machine hours per finished unit: 8 Actual finished units completed: 31,250 Required: A. Compute Waldren’s standard fixed-overhead rate per machine hour. B. Determine Waldren’s fixed-overhead budget variance and fixed-overhead volume variance. C. Calculate the amount of fixed overhead applied to production. D. Consider the two events that follow and determine whether the event will affect the fixedoverhead budget variance, the fixed-overhead volume variance, both variances, or neither variance. Assume that Waldren has not yet revised its standards to reflect these events if a revision is warranted. 1. A raw material shortage halted production for two days. 2. An additional assembly-line supervisor was hired at the beginning of the month.

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16) Halt Company uses a standard cost system and applies manufacturing overhead to products on the basis of machine hours. The following information is available for the year just ended: Standard variable-overhead rate per machine hour: $2.50 Standard fixed-overhead rate per machine hour: $5.00 Planned activity during the period: 30,000 machine hours Actual production: 10,700 finished units Production standard: Three machine hours per unit Actual variable overhead: $86,200 Actual total overhead: $225,500 Actual machine hours worked: 35,100 Required: A. Calculate the budgeted fixed overhead for the year. B. Did Halt spend more or less than anticipated for fixed overhead? How much? C. Was variable overhead under- or overapplied during the year? By how much? D. Was Halt efficient in its use of machine hours? Briefly explain. E. Would the company's efficiency or inefficiency in the use of machine hours have any effect on Halt’s overhead variances? If "yes," which one(s)?

17) A production manager was recently given a performance report that showed a sizable unfavorable variable-overhead efficiency variance. The manager was puzzled as to how the department could be inefficient in the use/incurrence of this cost. Required: Briefly explain the nature of this variance to the manager. Does the variance really have much to do with variable overhead efficiencies or inefficiencies? Discuss.

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18) Briefly explain the nature of the fixed-overhead volume variance. Be sure to address the issue of capacity utilization in your response.

19)

Riviera Beach Pink Flamingos has the following standards and flexible-budget data.

Standard variable-overhead rate

$6.00 per direct-labor hour

Standard quantity of direct labor

2 hours per unit of output

Budgeted fixed overhead

$100,000

Budgeted output

25,000 units

Actual results for April are as follows: Actual output

20,000 units

Actual variable overhead

$320,000

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Actual fixed overhead

$97,000

Actual direct labor

50,000 hours

Required: 1. Use the variance formulas to compute the following variances. Indicate whether each vari¬ance is favorable or unfavorable, where appropriate. (a) Variable-overhead spending variance. (b) Variable-overhead efficiency variance. (c) Fixed-overhead budget variance. (d) Fixed-overhead volume variance. 2. Prepare journal entries to (a) Record the incurrence of actual variable overhead and actual fixed overhead. (b) Add variable and fixed overhead to Work-in-Process Inventory. (c) Close underapplied or overapplied overhead into Cost of Goods Sold.

20)

The following data pertain to Auxilary Backup Computers for the month of April. Static Budget

Actual

Units sold

10,000

9,000

Sales revenue

$120,000

$103,500

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Variable manufacturing cost

40,000

36,000

Fixed manufacturing cost

20,000

Variable selling and administrative cost

10,000

9,000

Fixed selling and administrative cost

10,000

Required: Compute the sales-price and sales-volume variances for April.

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Answer Key Test name: Chap 11_6e_Cornett_Manually Graded

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Chapter 12 – 6e Cornett 1) When managers of subunits throughout an organization strive to achieve the goals set by top management, the result is: A) goal congruence. B) planning and control. C) responsibility accounting. D) delegation of decision making. E) strategic control.

2) The concepts and tools used to measure the performance of people and departments are known as: A) goal congruence. B) planning and control. C) responsibility accounting. D) delegation of decision making. E) strategic control.

Which of the following is not an example of a responsibility center? A) Cost center. B) Revenue center. C) Profit center. D) Investment center. E) Contribution center.

A manufacturer's raw-material purchasing department would likely be classified as a:

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A) cost center. B) revenue center. C) profit center. D) investment center. E) contribution center.

5) Halpern Corporation is in the process of overhauling the performance evaluation system for its San Diego manufacturing division, which produces and sells parts that are popular in the aerospace industry. Which of the following classifications is least likely to be chosen to evaluate the overall operations of the San Diego division? A) Cost center. B) Responsibility center. C) Profit center. D) Investment center. E) The profit center and investment center are equally unlikely to be chosen.

A cost center manager: A) does not have the ability to produce revenue. B) may be involved with the sale of new marketing programs to clients. C) would normally be held accountable for producing an adequate return on invested

capital. D) often oversees divisional operations. E) may be the manager who oversees the operations of a retail store.

7) The Telemarketing Department of a residential remodeling company would most likely be evaluated as a:

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A) cost center. B) revenue center. C) profit center. D) investment center. E) contribution center.

A revenue center manager: A) does not have the ability to produce revenue. B) may be involved with the sale of new marketing programs to clients. C) would normally be held accountable for producing an adequate return on invested

capital. D) often oversees divisional operations. E) may be the manager who oversees the operations of a retail store.

9) If the head of a hotel's food and beverage operation is held accountable for revenues and costs, the food and beverage operation would be considered a (n): A) cost center. B) revenue center. C) profit center. D) investment center. E) contribution center.

10)

A profit center manager:

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A) does not have the ability to produce revenue. B) may be involved with the sale of new marketing programs to clients. C) would normally be held accountable for producing an adequate return on invested capital. D) often oversees divisional operations. E) may be the manager who oversees the operations of a retail store.

11) Which of the following would have a low likelihood of being organized as a profit center? A) A movie theater of a company that operates a chain of theaters. B) A maintenance department that charges users for its services. C) The billing department of an Internet Services Provider (ISP). D) The mayor's office in a large city. E) Both the billing department of an Internet Services Provider (ISP) and the mayor's office in a large city.

12) Swift Software operates stores within five regions. Regional managers are held accountable for marketing, advertising, and sales decisions, and all costs incurred within their region. In addition, regional managers decide whether new stores will open, where the stores will be located, and whether the stores will lease or purchase the facilities. Store managers, in contrast, are accountable for marketing, advertising, sales decisions, and costs incurred within their stores. Ideally, on the basis of this information, what type of responsibility center should the software company use to evaluate its regions and stores? Regions

Stores

Profit center

Cost center

Profit center

Revenue center

Investment center

Profit center

Investment center

Cost center

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A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

13) Decentralized firms can delegate authority by structuring an organization into responsibility centers. Which of the following organizational segments is most like a totally independent, standalone business where managers are expected to "make it on their own"? A) Cost center. B) Revenue center. C) Profit center. D) Investment center. E) Contribution center.

14) A responsibility center in which the manager is held accountable for the profitable use of assets and capital is commonly known as a (n): A) cost center. B) revenue center. C) profit center. D) investment center. E) contribution center.

15)

Which of the following statements is incorrect regarding an investment center?

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A) An investment center manager would normally be held accountable for producing an adequate return on invested capital. B) An investment center manager may be involved with the sale of new marketing programs to clients. C) An investment center manager does not have the ability to produce revenue. D) An investment center manager often oversees divisional operations. E) An investment center may be a large corporation.

16) The Asian Division of a multinational manufacturing organization would likely be classified as a: A) cost center. B) revenue center. C) profit center. D) investment center. E) contribution center.

17)

Performance reports help managers: A) use management by exception and effectively control operations. B) decide whether a cost, profit, or investment center framework is appropriate. C) design their organizational hierarchy. D) pinpoint trouble spots. E) use management by exception and effectively control operations and pinpoint trouble

spots.

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18) Consider the following statements about performance reports: 1.I. Performance reports provide feedback to managers and allow them to better control operations. 2.II. Many performance reports have budget, actual, and variance data. 3.III. Performance reports are often structured around a firm's organizational hierarchy—that is, data relating to lower-level units (e.g., departments) are combined and flow into higher-level units (e.g., stores). Which of the above statements is (are) true? A) I only. B) I and II. C) I and III. D) II and III. E) I, II, and III.

19) Republic Resorts owns numerous hotels on each of the Hawaiian Islands. The company's performance reporting system is structured around the firm's organizational structure, with information flowing from operating departments at a particular property and later respectively grouped by individual hotel, island operation (i.e., division), and the company as a whole. Which of the following best depicts the detail level of the information given to a department manager versus that reported to a company vice-president? Department Manager

Company Vice-President

Somewhat detailed

Somewhat summarized

Somewhat detailed

Somewhat summarized

None of the answers is correct.

A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

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20) Tranquil Beaches owns six hotels in Hawaii, collectively known as the Hawaiian Division. The various hotels, including the Surf & Sun, have operating departments (such as Maintenance, Housekeeping, and Food and Beverage) that are evaluated as either cost centers or profit centers. The Food and Beverage Department, for example, is a profit center, with activities divided into three segments: Banquets and Catering, Restaurants, and Kitchen. If Tranquil Beaches uses a performance-reporting system that is based on responsibility accounting, which of the following disclosures is likely to occur? A) The detailed operating costs of the Surf & Sun's Kitchen Department will appear on the Hawaiian Division's performance report. B) The Food and Beverage Department's profit will appear on Kitchen's performance report. C) The profit of the Surf & Sun hotel will appear on the Hawaiian Division's performance report. D) The Food and Beverage profit at the Surf & Sun will appear on Tranquil Beaches’ performance report. E) The profit of the Surf & Sun hotel will appear on Food and Beverage's performance report.

21)

A cost pool is:

A) a collection of costs to be assigned. B) almost always the combined result of decisions made by different responsibility center managers. C) the primary function of a responsibility accounting system. D) the amount of cost that has been allocated, say, 10%, to a user department. E) the tool used to allocate cost dollars to user departments.

22)

A cost object is:

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A) a collection of costs to be assigned. B) a responsibility center, product, or service to which cost is to be assigned. C) the tool used to charge cost dollars to user departments. D) the primary function of a responsibility accounting system. E) a common cost.

23) Compton Corporation, with operations throughout the country, will soon allocate corporate overhead to the firm's various responsibility centers. Which of the following is definitely not a cost object in this situation? A) The maintenance department. B) Product no. 675. C) Compton Corporation. D) The Midwest division. E) The telemarketing center.

24)

An allocation base for a cost pool should ideally be: A) machine hours. B) a cost object. C) a common cost. D) a cost driver. E) direct labor, either cost or hours.

25) Which of the following is an appropriate base to distribute the cost of building depreciation to responsibility centers?

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A) Number of employees in the responsibility centers. B) Budgeted sales dollars of the responsibility centers. C) Square feet occupied by the responsibility centers. D) Budgeted net income of the responsibility centers. E) Total budgeted direct operating costs of the responsibility centers.

26) Crimson Industries is in the process of evaluating allocation bases so that selected costs can be charged to responsibility centers. Would the number of employees likely be a good base for allocating the costs of Human Resources, Building and Grounds, and Repairs and Maintenance to user centers? Human Resources

Buildings and Grounds

Repairs and Maintenance

Yes

A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

27)

Cost pools should be charged to responsibility centers by using:

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A) budgeted amounts of allocation bases because the behavior of one responsibility center should influence the allocations to other responsibility centers. B) budgeted amounts of allocation bases because the behavior of one responsibility center should not influence the allocations to other responsibility centers. C) actual amounts of allocation bases because the behavior of one responsibility center should influence the allocations to other responsibility centers. D) actual amounts of allocation bases because the behavior of one responsibility center should not influence the allocations to other responsibility centers. E) some other approach.

28) Management of Wee Ones (WO), an operator of day-care facilities, wants the company's profit to be subdivided by center. The firm's accountant has provided the following data: Center Downtown

Budgeted Revenue $

320,000

Actual Revenue $

340,200

Budgeted Direct Costs $

300,000

Actual Direct Costs $

300,000

Irvine

560,000

534,600

510,000

440,000

H.Beach

720,000

745,200

690,000

740,000

Totals

$ 1,600,000

$ 1,620,000

1,500,000

1,480,000

WO's advertising, which is handled by the home office, is not reflected in the preceding figures and amounted to $60,000. If advertising expense were allocated to centers based on actual center profitability, the amount of advertising expense allocated to the Irvine center would be closest to: A) $17,820. B) $19,800. C) $30,000. D) $40,543. E) None of the answers is correct.

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29) Management of Wee Ones (WO), an operator of day-care facilities, wants the company's profit to be subdivided by center. The firm's accountant has provided the following data: Center Downtown

Budgeted Revenue $

320,000

Actual Revenue $

340,200

Budgeted Direct Costs $

300,000

Actual Direct Costs $

300,000

Irvine

560,000

534,600

510,000

440,000

H. Beach

720,000

745,200

690,000

740,000

$ 1,600,000

$ 1,620,000

Totals

1,500,000

1,480,000

WO's advertising, which is handled b y the home office, is not reflected in the preceding figures and amounted to $60,000. Assume that management used the allocation base that is most influenced by advertising effort and consistent with sound managerial accounting practices. How much advertising would be allocated to the Irvine center? A) $17,838. B) $19,800. C) $20,000. D) $20,400. E) $21,000.

30)

Responsibility accounting systems strive to:

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A) place blame on guilty individuals. B) provide information to managers. C) hold managers accountable for both controllable and noncontrollable costs. D) identify unfavorable variances. E) provide information so that managers can make decisions that are in the best interest of their individual centers rather than in the best interests of the firm as a whole.

31)

Controllable costs, as used in a responsibility accounting system, consist of: A) only fixed costs. B) only direct materials and direct labor. C) those costs that a manager can influence in the time period under review. D) those costs about which a manager has some knowledge. E) those costs that are influenced by parties external to the organization.

32) Distinguishing between controllable and noncontrollable costs on a performance report may result in: A) an increase in the effectiveness of a cost management system. B) a decrease in goal congruent behavior by managers. C) an increase in the quality of performance information. D) an increase in feelings of blame by managers. E) an increase in the effectiveness of a cost management system and an increase in the quality of performance information.

33) For a company that uses responsibility accounting, which of the following costs is least likely to appear on a performance report of an assembly-line supervisor?

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A) Direct materials used. B) Departmental supplies. C) Assembly-line labor. D) Repairs and maintenance. E) Assembly-line facilities depreciation.

34)

Common costs:

A) are not easily related to a segment's activities. B) are easily related to a segment's activities. C) are charged to a company's operating segments when preparing a segmented income statement. D) are not charged to a company's operating segments when preparing a segmented income statement. E) are not easily related to a segment's activities and also are not charged to a company's operating segments when preparing a segmented income statement.

35) Pride Company is preparing a segmented income statement, subdivided into departments (billing, purchasing, and telemarketing). Which of the following choices correctly describes the accounting treatment of the firm's compensation cost for key executives (president and vicepresidents)? A) The cost is charged to the departments. B) The cost is not charged to the departments because, although easily traceable to the departments, it is not controllable at the departmental level. C) The cost is not charged to the departments because, although controllable at the departmental level, it is not easily traceable to the departments. D) The cost is not charged to the departments because it is both easily traceable to the departments and controllable by the departments. E) The cost is not charged to the departments because it is neither easily traceable to the departments nor controllable by the departments.

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36) Gulf Coast Enterprises (GCE) operates 87 stores and has three divisions: Florida, Georgia, and Alabama. Which of the following costs would not appear on Georgia’s portion of GCE's segmented income statement? A) Costs related to statewide advertising contracts, negotiated by Georgia’s divisional manager. B) Variable sales commissions paid to Georgia’s salespeople. C) Compensation paid to Georgia’s chief operating officer, as determined by GCE's management. D) Georgia’s allocated share of general GCE corporate overhead. E) Compensation paid to Georgia’s chief operating officer, as determined by GCE's management and Georgia’s allocated share of general GCE corporate overhead.

37) The difference between the profit margin controllable by a segment manager and the segment profit margin is caused by: A) variable operating expenses. B) allocated common expenses. C) fixed expenses controllable by the segment manager. D) fixed expenses traceable to the segment but controllable by others. E) sales revenue.

38)

The profit margin controllable by the segment manager would not include: A) variable operating expenses. B) fixed expenses controllable by the segment manager. C) a share of the company's common fixed expenses. D) income tax expense. E) a share of the company's common fixed expenses and income tax expense.

39)

A segment contribution margin would reflect the impact of:

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A) variable operating expenses. B) fixed expenses controllable by the segment manager. C) fixed expenses traceable to the segment but controllable by others. D) common fixed expenses. E) All answers except common fixed expenses are correct.

40) Thurmon Retail has three stores in West Virginia. Which of the following costs would likely be included when computing the profit margin controllable by store no. 3's manager? A) Store no. 3’s allocated portion of common fixed expenses. B) Property taxes attributable to store no. 3. C) The salary of Thurmon’s president. D) The income tax expense attributable to store no. 3’s profit. E) Hourly labor costs incurred by personnel at store no. 3.

41) On a segmented income statement, common fixed expenses will have an effect on a company's: A) segment contribution margin. B) profit margin controllable by the segment manager. C) segment profit margin. D) segment contribution margin and segment profit margin. E) net income.

42) Which of the following measures would reflect the variable costs incurred by a business segment? Segment Contribution Margin

Profit Margin Controllable by Segment Manager

Segment Profit Margin

Yes

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Yes

A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

43) Which of the following measures would reflect the fixed costs controllable by a segment manager? Segment Contribution Margin

Profit Margin Controllable by Segment Manager

Segment Profit Margin

Yes

A) Choice A. B) Choice B. C) Choice C. D) Choice D. E) Choice E.

44) Which of the following would be the best measure on which to base a segment manager's performance evaluation for purposes of granting a bonus?

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A) Segment sales revenue. B) Segment contribution margin. C) Profit margin controllable by the segment manager. D) Segment profit margin. E) Segment net income.

45) Sandy Shores Corporation operates two stores: J and K. The following information relates to J:

Sales revenue Variable operating expenses

$ 1,300,000 600,000

Fixed expenses: Traceable to J and controllable by J

275,000

Traceable to J and controllable by others

80,000

J's segment contribution margin is: A) $345,000. B) $425,000. C) $620,000. D) $700,000. E) $745,000.

46) Miracle Green Corporation operates two garden supply stores: A and B. The following information relates to store A:

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Sales revenue

$ 900,000

Variable operating expenses

400,000

Fixed expenses: Traceable to A and controllable by A

275,000

Traceable to A and controllable by others

120,000

A's segment profit margin is: A) $105,000. B) $225,000. C) $380,000. D) $500,000. E) $505,000.

47)

The following data relate to Department no. 3 of Winslett Corporation:

Segment contribution margin

$ 540,000

Profit margin controllable by the segment manager

310,000

Segment profit margin

150,000

On the basis of this information, Department no. 3's variable operating expenses are:

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A) $80,000. B) $160,000. C) $230,000. D) $390,000. E) Not determinable.

48)

The following data relate to Department no. 2 of Velma Corporation:

Segment contribution margin

$ 540,000

Profit margin controllable by the segment manager

320,000

Segment profit margin

60,000

On the basis of this information, fixed costs traceable to Department no. 2 but controllable by others are: A) $160,000. B) $220,000. C) $260,000. D) $480,000. E) Not determinable.

49) The following information was taken from the segmented income statement of Restin, Inc., and the company's three divisions:

Revenues

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Restin, Inc.

Los Angeles Division

$ 750,000

$ 200,000

Bay Area Division

Central Valley Division

$ 325,000

235,000

Variable operating expenses

410,000

110,000

120,000

180,000

Controllable fixed expenses

210,000

65,000

75,000

70,000

Noncontrollable fixed expenses

60,000

15,000

20,000

25,000

In addition, the company incurred common fixed costs of $18,000. Bay Area's segment profit margin is: A) $14,000. B) $18,000. C) $20,000. D) $40,000. E) $115,000.

50) The following information was taken from the segmented income statement of Restin, Inc., and the company's three divisions: Restin, Inc.

Los Angeles Division

$ 750,000

$ 200,000

Variable operating expenses

410,000

Controllable fixed expenses Noncontrollable fixed expenses

Revenues

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Bay Area Division

Central Valley Division

235,000

$ 325,000

110,000

120,000

180,000

210,000

65,000

75,000

70,000

60,000

15,000

20,000

25,000

In addition, the company incurred common fixed costs of $18,000. The profit margin controllable by the Central Valley segment manager is: A) $32,000. B) $44,000. C) $50,000. D) $75,000. E) $145,000.

51) The following information was taken from the segmented income statement of Restin, Inc., and the company's three divisions: Restin, Inc.

Los Angeles Division

$ 750,000

$ 200,000

Variable operating expenses

410,000

Controllable fixed expenses Noncontrollable fixed expenses

Revenues

Bay Area Division

Central Valley Division

235,000

$ 325,000

110,000

120,000

180,000

210,000

65,000

75,000

70,000

60,000

15,000

20,000

25,000

In addition, the company incurred common fixed costs of $18,000. Assuming use of a responsibility accounting system, which of the following amounts should be used to evaluate the performance of the Los Angeles division manager?

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A) $4,000. B) $8,000. C) $10,000. D) $25,000. E) $90,000.

52) The following information was taken from the segmented income statement of Restin, Inc., and the company's three divisions: Restin, Inc.

Los Angeles Division

$ 750,000

$ 200,000

Variable operating expenses

410,000

Controllable fixed expenses Noncontrollable fixed expenses

Revenues

Bay Area Division

Central Valley Division

235,000

$ 325,000

110,000

120,000

180,000

210,000

65,000

75,000

70,000

60,000

15,000

20,000

25,000

In addition, the company incurred common fixed costs of $18,000. Which of the following amounts should be used to evaluate whether Restin, Inc., should continue to invest company resources in the Los Angeles division? A) $4,000. B) $8,000. C) $10,000. D) $25,000. E) $90,000.

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53) The following information was taken from the segmented income statement of Restin, Inc., and the company's three divisions: Restin, Inc.

Los Angeles Division

$ 750,000

$ 200,000

Variable operating expenses

410,000

Controllable fixed expenses Noncontrollable fixed expenses

Revenues

Bay Area Division

Central Valley Division

235,000

$ 325,000

110,000

120,000

180,000

210,000

65,000

75,000

70,000

60,000

15,000

20,000

25,000

In addition, the company incurred common fixed costs of $18,000. Assume that the Los Angeles division increases its promotion expense, a controllable fixed cost, by $10,000. As a result, revenues increased by $50,000. If variable expenses are tied directly to revenues, the new Los Angeles segment profit margin is: A) $12,500. B) $22,500. C) $32,500. D) $50,000. E) $60,000.

54) An increasingly popular approach that integrates financial and customer performance measures with measures in the areas of internal operations, learning, and growth is known as: A) the integrated performance measurement tool (IPMT). B) the balanced scorecard. C) gain sharing. D) cycle efficiency. E) overall quality assessment (OQA).

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55)

The typical balanced scorecard is best described as containing: A) financial performance measures. B) nonfinancial performance measures. C) neither financial nor nonfinancial performance measures. D) both financial and nonfinancial performance measures. E) either financial or nonfinancial performance measures but not both.

56) Norwegian Resort Tours (NRT), which operates in a very competitive marketplace, is considering four categories of performance measures: (1) profitability measures, (2) customersatisfaction measures, (3) efficiency and quality measures, and (4) learning and growth measures. The company assigns one manager to each resort to oversee the resort’s general operations. If NRT desired to adopt a balanced-scorecard approach, which measures should the firm use in the evaluation of its managers? A) 1. B) 1, 2. C) 2, 3. D) 1, 2, 4. E) 1, 2, 3, 4.

57)

Lead indicators guide management to: A) take actions now that will have positive effects on organizational performance now. B) take actions now that will have positive effects on organizational performance in the

future. C) take actions in the future that will have positive effects on organizational performance now. D) take actions in the past that will have positive effects on organizational performance in the future. E) pursue identical strategies as those implemented with lag indicators.

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58) When using a balanced scorecard, a company's market share is typically classified as an element of the firm's: A) financial performance measures. B) customer performance measures. C) learning and growth performance measures. D) internal-operations performance measures. E) interdisciplinary performance measures.

59) When using a balanced scorecard, which of the following is typically classified as an internal business process performance measure? A) Cash flow. B) Number of customer complaints. C) Employee training hours. D) Number of employee suggestions. E) Number of suppliers used.

60) Which of the following balanced-scorecard perspectives is influenced by a company's vision and strategy? A) Financial. B) Customer. C) Internal business process. D) Learning and growth. E) All of the answers are correct.

61)

Which of the following would not be considered a proper financial perspective measure?

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A) Percentage of profit growth. B) Percentage of revenue growth. C) Increased percentage of return on assets. D) Percentage of automated transactions. E) Increased percentage of segment contribution margins.

62) Cloud Services uses a balanced scorecard to report to its investors at the end of each quarter. During the 3rd and 4th quarter, the company had the following results: Quarter 3

Quarter 4

During the quarter: Revenue

675,000 $

810,000

Cost of goods sold

450,000

562,500

Sales and marketing costs

225,000

283,500

General and administrative costs

145,000

495,000

22,500,000

20,250,000

12,375,000

11,025,000

27,000

33,750

Total market revenue At the end of the quarter: Cash Number of revenue-generating customers Number of employees

What was Cloud’s cash burn rate at the end of the 4th quarter?

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A) $3,900,000. B) $45,000. C) $225,000. D) $450,000. E) $1,350,000.

63) Cloud Services uses a balanced scorecard to report to its investors at the end of each quarter. During the 3rd and 4th quarter, the company had the following results: Quarter 3

Quarter 4

During the quarter: Revenue

675,000 $

810,000

Cost of goods sold

450,000

562,500

Sales and marketing costs

225,000

283,500

General and administrative costs

145,000

495,000

22,500,000

20,250,000

12,375,000

11,025,000

27,000

33,750

Total market revenue

At the end of the quarter: Cash Number of revenue-generating customers Number of employees

What was Cloud’s cash runway at the end of the 4th quarter?

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A) 8.2 months. B) 55 months. C) 49 months. D) 27.5 months. E) 24.5 months.

64) Cloud Services uses a balanced scorecard to report to its investors at the end of each quarter. During the 3rd and 4th quarter, the company had the following results: Quarter 3

Quarter 4

During the quarter: Revenue

675,000 $

810,000

Cost of goods sold

450,000

562,500

Sales and marketing costs

225,000

283,500

General and administrative costs

145,000

495,000

22,500,000

20,250,000

12,375,000

11,025,000

27,000

33,750

Total market revenue

At the end of the quarter: Cash Number of revenue-generating customers Number of employees

What was Cloud’s churn rate at the end of the 4th quarter?

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A) 20%. B) Cannot be computed based on the information provided. C) 25%. D) 49%. E) 33%.

65) Cloud Services uses a balanced scorecard to report to its investors at the end of each quarter. During the 3rd and 4th quarter, the company had the following results: Quarter 3

Quarter 4

During the quarter: Revenue

675,000 $

810,000

Cost of goods sold

450,000

562,500

Sales and marketing costs

225,000

283,500

General and administrative costs

145,000

495,000

22,500,000

20,250,000

12,375,000

11,025,000

27,000

33,750

Total market revenue

At the end of the quarter: Cash Number of revenue-generating customers Number of employees

What was Cloud’s market share at the end of the 4th quarter?

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A) 17%. B) 20%. C) 3%. D) 6%. E) 4%.

66) Cloud Services uses a balanced scorecard to report to its investors at the end of each quarter. During the 3rd and 4th quarter, the company had the following results: Quarter 3

Quarter 4

During the quarter: Revenue

675,000 $

810,000

Cost of goods sold

450,000

562,500

Sales and marketing costs

225,000

283,500

General and administrative costs

145,000

495,000

22,500,000

20,250,000

12,375,000

11,025,000

27,000

33,750

Total market revenue

At the end of the quarter: Cash Number of revenue-generating customers Number of employees

What was Cloud’s customer acquisition cost at the end of the 4th quarter?

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A) $33.34. B) $42.00. C) $20.00. D) $24.00. E) $8.67.

67) Stargazer Services Co. is organized in three segments: Sky Mountain, Diamond View, and Star Party. Data for the company and for these segments follow: Segments of Company

Service revenue

Stargazer Services Co. $

Less: Variable costs Segment contribution margin Less: Controllable fixed costs Controllable profit margin

Sky Mountain

Diamond View

Star Party

$ 400

$ 320

$ 160

180 $

160 $ 352

$ 160

128 $

Less: Noncontrollable fixed costs Segment profit margin

60 $ 60

80 $ 144

$ 68

$ 24

What are Sky Mountain’s variable costs and noncontrollable fixed costs? A) Variable costs = $240; noncontrollable fixed costs = $92. B) Variable costs = $80; noncontrollable fixed costs = $228. C) Variable costs = $240; noncontrollable fixed costs = $228. D) Variable costs = $80; noncontrollable fixed costs = $92. E) Cannot be determined.

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68) Stargazer Services Co. is organized in three segments: Sky Mountain, Diamond View, and Star Party. Data for the company and for these segments follow: Segments of Company

Service revenue

Stargazer Services Co. $

Less: Variable costs Segment contribution margin Less: Controllable fixed costs Controllable profit margin

Sky Mountain

Diamond View

Star Party

$ 400

$ 320

$ 160

180 $

160 $ 352

$ 160

128 $

Less: Noncontrollable fixed costs Segment profit margin

60 $ 60

80 $ 144

$ 68

$ 24

What are Star Party’s segment contribution margin and noncontrollable fixed costs? A) Segment contribution margin = $120; noncontrollable fixed costs = $84. B) Segment contribution margin = $144; noncontrollable fixed costs = $36. C) Segment contribution margin = $144; noncontrollable fixed costs = $84. D) Segment contribution margin = $120; noncontrollable fixed costs = $36. E) Cannot be determined.

69) Stargazer Services Co. is organized in three segments: Sky Mountain, Diamond View, and Star Party. Data for the company and for these segments follow Segments of Company

Version 1

Service revenue

Stargazer Services Co. $

Less: Variable costs Segment contribution margin Less: Controllable fixed costs Controllable profit margin

Sky Mountain

Diamond View

Star Party

$ 400

$ 320

$ 160

180 $

160 $ 352

$ 160

128 $

Less: Noncontrollable fixed costs Segment profit margin

60 $ 60

80 $ 144

$ 68

$ 24

What are Diamond View’s controllable profit margin and segment profit margin? A) Controllable profit margin = $208; segment profit margin = $128. B) Controllable profit margin = $132; segment profit margin = $52. C) Controllable profit margin = $132; segment profit margin = $128. D) Controllable profit margin = $208; segment profit margin = $52. E) Cannot be determined.

70) Each department, responsible for different processes, should have goals different from the company as a whole. ⊚ true ⊚ false

71) Responsibility accounting refers to the various concepts and tools used by managers to measure the performance of people and departments in order to foster goal congruence. ⊚ true ⊚ false

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72)

A cost center manager does not have the ability to produce revenue. ⊚ true ⊚ false

73)

A company-owned restaurant in a fast-food chain is considered an investment center. ⊚ true ⊚ false

74) Performance reports help managers use management by exception and effectively control operations. ⊚ true ⊚ false

75) Performance reports are unique in that they do not incorporate budgets and variance analysis. ⊚ true ⊚ false

76)

An allocation base for a cost pool should ideally be a cost object. ⊚ true ⊚ false

77)

A collection of costs to be assigned is called a cost pool. ⊚ true ⊚ false

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78) Common costs are charged to a company's operating segments when preparing a segmented income statement. ⊚ true ⊚ false

79) Costs that are traceable to a segment and are completely beyond the influence of the segment manager can be advantageously divided in segment reports into two distinct responsibilities - those for segments and those for segment managers. ⊚ true ⊚ false

80)

A lead indicator measures the final outcomes of earlier management decisions. ⊚ true ⊚ false

81) Online businesses assess their ability to keep the customers they have reached using customer acquisition cost (CAC). ⊚ true ⊚ false

82) The typical balanced scorecard is best described as containing both financial and nonfinancial performance measures. ⊚ true ⊚ false

83) A company’s balanced scorecard should focus on the performance measurements that are most important to its key competitor.

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⊚ ⊚

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true false

Answer Key Test name: Chap 12_6e_Cornett 1) A 2) A 3) E 4) A 5) A 6) A 7) B 8) B 9) C 10) E 11) E 12) D 13) D 14) D 15) C 16) D 17) E 18) E 19) B 20) C 21) A 22) B 23) C 24) D 25) C 26) C Version 1

27) B 28) D 29) E 30) B 31) C 32) E 33) E 34) E 35) E 36) D 37) D 38) E 39) A 40) E 41) E 42) D 43) E 44) C 45) D 46) A 47) E 48) C 49) C 50) D 51) D 52) C 53) B 54) B 55) D 56) E Version 1

57) B 58) B 59) E 60) E 61) D 62) D 63) E 64) B 65) E 66) B 67) D 68) D 69) B 70) FALSE 71) TRUE 72) TRUE 73) FALSE 74) TRUE 75) FALSE 76) FALSE 77) TRUE 78) FALSE 79) TRUE 80) FALSE 81) FALSE 82) TRUE 83) FALSE

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Chapter 12 – 6e Cornet- Manually Graded 1) Startup, Inc. provides a variety of telecommunications services to residential and commercial customers from its massive campus-like headquarters in suburban Tampa. For a number of years the firm's maintenance group has been organized as a cost center, rendering services free of charge to the company's user departments (sales, billing, accounting, marketing, research, and so forth). Requests for maintenance have grown considerably, and demand is approaching the point where quality and timeliness of services provided are becoming an issue. As a result, management is studying whether the maintenance operation should be converted from a cost center to a profit center, with users to be billed for services performed. Required: A. Differentiate between a cost center and a profit center. How is each of these centers evaluated? B. What will likely happen to the number of user service requests if the company makes the switch to a profit-center form of organization? Why? C. Assume that a user department has requested a particular service, one that is time consuming and costly to perform. The maintenance group's actual cost incurred in providing this service is $17,800, and the user has agreed to pay $20,800 if the switch to a profit center is made. If this case is fairly typical within the firm, which of the two forms of organization (cost center or profit center) will result in a more responsive, service-oriented maintenance group for Startup? Why?

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2) Brilliant Stone Corporation (BSC) manufactures decorative, sculpted accessories that are sold by interior decorators and home furnishing stores. The following situation concerns two BSC employees: Mika George, head of the company's Billing Department, and Frank Merser, the firm's general manager. George’s Billing Department makes heavy use of hourly employees and is evaluated as a cost center. Understanding the need for prompt collection of receivables, George strives to run a firstclass operation. George also understands the need to contribute in a big way to BSC's financial performance so she continually strives to minimize Billing Department expenses. Unfortunately, George experienced a heated discussion with Merser several weeks ago, the subject being the shoddy operation that she is running. Merser complained loudly about the lack of timely billings to customers and the general lack of attention to detail, as many complaints have surfaced about erroneous invoices and customer statements. Required: A. What is meant by the term "responsibility accounting?" B. What measure(s) of performance would companies normally use to evaluate a cost-center manager? C. Does Merser have a valid reason to be upset with George? Given the nature of the Billing Department, did George err in her quest to minimize expenses? Explain. D. Is it likely that the Billing Department could be evaluated as a profit center? Why?

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Consider the following situation:

The marketing manager of Gramblin, Inc. accepted a rush order for a nonstock item from a valued customer. The manager filed the necessary paperwork with the production department, and a production manager did the same with purchasing for needed raw materials. Unfortunately, a purchasing clerk temporarily lost the paperwork; by the time it was found, it was too late to order from Gramblin’s regular supplier. A new supplier was located that quoted a very attractive price. The materials soon arrived and were found to be of poor quality, thus giving rise to a favorable materials price variance, an unfavorable materials quantity variance, and an unfavorable labor efficiency variance. These latter two variances, based on normal practice, appeared on the production manager's performance report for the period just ended. Required: A. Given that the company uses a responsibility accounting system, should the production manager be penalized for poor performance? Briefly discuss, keeping in mind that a production manager is generally in a very good position to control material usage and labor efficiency. B. Should anything be done to correct the situation? If "yes," briefly explain.

4) The performance reports generated by a responsibility accounting system often form a "hierarchy of performance reports." Explain what is meant by this term.

5) The allocation of costs gives rise to several unique terms. Briefly discuss the following: cost object, cost allocation base, and cost allocation.

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6) Gator Country Cable, Inc. is organized in three segments: Metro, Suburban, and Outlying. Data for the company and for these segments follow. Segments of Company

Gator Country Cable, Inc.

Metro

Suburban

Outlying

Service revenue

$______

$ 500

$ 400

$ 200

Less: Variable costs

225

____

_____

____

Segment contribution margin

$______

$____

$_____

$____

Less: Controllable fixed costs

______

200

160

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Controllable profit margin

$ 440

$ 200

$_____

$ 75

Less: Noncontrollable fixed costs

______

____

100

____

Segment profit margin

$ 180

$ 85

$_____

$ 30

Less: Common fixed costs

______

Income before taxes

$______

Less: Income tax expense

Net income

$ 55

Variable costs as a percentage of service revenue are: Metro, 20%; Suburban, 18.75%; and Outlying, 25.0%. Required: A. Complete the segmented income statement for Gator Country Cable. B. Evaluate the three segment managers for consideration of a pay raise. Base the managers' performance on (1) absolute dollars of the appropriate profit measure, and (2) the appropriate profit measure as a percentage of service revenue. What causes any difference in rankings between the two approaches?

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7) Midtown Retail operates a retail store in Kansas City, MO., and St. Louis, MO. The following information relates to the Kansas City facility: · The store sold 65,000 units at $18.00 each, after having purchased the units from various suppliers for $12.50. Kansas City salespeople are paid a 5% commission based on gross sales dollars. · Kansas City’s sales manager oversees the placement of local advertising contracts, which totaled $54,000 for the year. Local property taxes amounted to $14,500. · The sales manager's $65,000 salary is set by Kansas City’s store manager. In contrast, the store manager's $134,000 salary is determined by Midtown’s vice president. · Kansas City incurred $6,800 of other noncontrollable costs. · Nontraceable (common) corporate overhead totaled $68,000. Midtown’s corporate headquarters is located in St. Louis, and the company uses responsibility accounting to evaluate performance. Required: Prepare a segmented income statement for the Kansas City store, being sure to disclose the segment contribution margin, the segment controllable profit margin, and segment profit margin.

The following selected data relate to the Ohio Division of Midwest Industries (MWI): Sales revenue

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$4,580,000

Uncontrollable fixed costs traceable to the division

1,360,000

Allocated corporate overhead

590,000

Controllable fixed costs traceable to the division

1,120,000

Variable costs

40% of revenue

Required: A. Compute the following for the Ohio Division: 1. Segment contribution margin. 2. Controllable profit margin. 3. Segment profit margin. B. Which of the three preceding measures should be used when evaluating the Ohio Division as an investment of MWI's resources? Why? C. Assume that management made the decision to prepare a segmented income statement that reflected Ohio’s five operating departments. Would all $1,120,000 of the controllable fixed costs be easily traced to the departments? Briefly explain. D. Which of the five-dollar amounts presented in the body of the problem would be used in computing the income before taxes of MWI?

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9) Parson, Inc. operates a chain of 80 retail stores throughout the Southeast that specializes in the sale of sports equipment. The following costs relate to store no. 19 in Atlanta, Georgia: 1. Salary of store manager: $58,000 2. Allocated corporate overhead: $55,000 3. Cost of goods sold: $2,560,000 4. Landscaping and grounds costs (yearly contract): $6,800 5. Hourly wages of sales clerks: $343,000 6. Local advertising (negotiated by store manager): $76,000 7. Property taxes: $25,800 8. Sales commissions: $221,000 Required: Which of the preceding costs would be used in computing: A. Store no. 19's segment contribution margin? B. Store no. 19's controllable profit margin? C. Store no. 19's segment profit margin? D. The net income of Parson, Inc.?

10) Flex, Inc., which is headquartered in Hoboken, New Jersey, operates a chain of 125 shoe stores throughout the United States. Consider the costs that appear in the following table, many of which pertain to the company's sole operation in Pottersville, New Jersey: Performance Measure

Pottersville Segment Contribution Margin

Pottersville Controllable Profit

Pottersville Segment Profit

Flex Margin Margin

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Cost

Net

Income

Pottersville property taxes

Sales commissions paid to Pottersville employees

Allocated corporate overhead to individual store sites

Wages of Pottersville hourly employees

Salary of Pottersville manager

Pottersville Cost of Goods Sold

Local advertising handled by Pottersville manager

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Flex income tax expense

Pottersville store maintenance costs as agreed upon in yearly maintenance contract negotiated by Pottersville manager

Required: Analyze each of the costs and determine whether the cost affects Pottersville segment contribution margin, controllable profit margin, and segment profit margin, and/or the net income of Flex, Inc. Place an "X" in the appropriate cell(s).

11) Terrific Threads is an upscale boutique that operates various stores throughout Florida. The company, which has three divisions (Miami, Naples, and Tampa), reported the following information for the year just ended (in thousands): Miami

Naples

Tampa

Sales Revenue

$9,000

$6,000

$5,000

Divisional contribution margin

6,400

4,400

3,500

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Profit margin controllable by division manager

1,500

1,900

1,000

Divisional profit margin

1,000

700

200

Terrific Threads also reported $600 of common fixed expenses that top management wants to allocate to the divisions on the basis of sales revenue. As the company's chief executive officer notes, "Each division helped to incur a portion of these costs and, as a result, each should absorb its fair share." The firm has adopted various responsibility accounting procedures to evaluate division personnel. Required: A. Compute the company's total sales revenue. B. Calculate the amount of variable operating expense incurred by the Naples Division. C. Calculate the fixed costs controllable by Miami's management. D. Calculate the fixed costs traceable to the Tampa Division but controllable by others. E. Terrific Threads desires to promote a division manager to the corporate office to oversee selected operations. In determining which individual to promote, should Terrific Threads’ top management focus on the profit margin controllable by the division manager or the overall divisional profit margin? Briefly explain. F. If the company follows the desires of top management, how much of the common fixed expenses would be allocated to the Tampa Division? G. Do cost allocations such as those in part "F" typically appear on a segmented income statement?

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12) Segmented income statements are used to show revenues, expenses, and income for major parts of an organization. Required: A. Consider a regional chain of department stores that has two or three stores in each of several cities. One way to segment this business is geographically. Describe another way of segmenting the firm. B. Segmented income statements often distinguish between "fixed expenses controllable by the segment manager" and "fixed expenses traceable to the segment, but controllable by others." Assume that the Cleveland district has three retail stores. Give two examples of each type of fixed cost. C. Common costs create difficulties when preparing segmented income statements. Define "common costs," give an example for the regional chain of department stores, and explain in general terms why such costs create a problem.

13) Air Comfort manufactures air conditioning compressors in St. Louis, Missouri. The following information pertains to operations in March: Processing time (average per batch)

8.5 hours

Inspection time (average per batch)

.5 hour

Waiting time (average per batch)

.5 hour

Move time (average per batch)

.5 hour

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Units per batch

20 units

Required: Compute the following operational measures: (1) manufacturing cycle efficiency; (2) man-ufacturing cycle time; (3) velocity.

14) Technologistic Enterprises is a highly automated manufacturing firm. The CFO has decided that traditional standards are inappropriate for performance measures in this automated envi-ronment. Labor is insignificant in terms of the total cost of production and tends to be fixed, material quality is considered more important than minimizing material cost, and customer satisfaction is the number one priority. As a result, production and delivery performance measures have been chosen to evaluate performance. The following information is considered typical of the time involved to complete and ship orders. Waiting time:

From order being placed to start of production

8.0 days

From start of production to completion

7.0 days

Inspection time

1.5 days

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Processing time

3.0 days

Move time

2.5 days

Required: 1. Calculate the manufacturing cycle efficiency. 2. Calculate the delivery cycle time.

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15) Balanced scorecards contain a number of factors that are important to the success of a business. These factors are often divided into four categories: financial, internal operations, customer, and learning and growth? Consider the twelve factors that follow. 1. Market share 2. Earnings per share 3. Manufacturing cycle efficiency 4. Machine downtime 5. Number of patents held 6. Employee suggestions 7. Number of repeat sales 8. Levels of inventories held 9. Number of vendors used 10. Cash flow from operations 11. Employee training hours 12. Gross margin Required: Determine the proper classification (financial, internal business process, customer, and learning and growth?) for each of the twelve factors listed.

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16) Phyllis’ Philly Steaks, a national fast-food chain, has experienced a number of problems in the past few years, and management is considering the adoption of a balanced scorecard as part of a turnaround effort. Required: A. Briefly explain the concept of a balanced scorecard. What general factors are included in a typical balanced scorecard? B. Independent of your answer in requirement "A," assume that Phyllis’ is very concerned about customer satisfaction. List four different (and specific) customer-satisfaction measures that may be appropriate for the firm (and for other fast-food providers). C. Independent of requirement "A," assume that Phyllis’ wants to return to former levels of profitability. List several financial measures that would allow management to assess success or failure with respect to the following goals: (1) pay creditors on a timely basis, (2) keep shareholders happy, and (3) improve profitability over time at stores that have been open at least one year.

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Answer Key Test name: Chap 12_6e_Cornett_Manually Graded

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Chapter 13 – 6e Cornett 1)

The biggest challenge in making a decentralized organization function effectively is: A) earning maximum profits through fair practices. B) minimizing losses. C) taking advantage of the specialized knowledge and skills of highly talented managers. D) obtaining goal congruence among division managers. E) developing an adequate budgetary control system.

2) What practice best describes when divisional managers throughout an organization work together to achieve the organization's goals? A) Participatory management. B) Goal attainment. C) Goal congruence. D) Centralization of objectives. E) Negotiation by subordinates.

3) Consider the following statements about goal congruence: 1.I. Goal congruence is obtained when managers of subunits throughout an organization strive to achieve the goals set by top management. 2.II. Managers are often more concerned about the performance of their own subunits rather than the performance of the entire organization. 3.III. Achieving goal congruence in most organizations is relatively straightforward and easy to accomplish. Which of the above statements is (are) true? A) I only. B) II only. C) I and II. D) II and III. E) I, II, and III.

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4) Which of the following performance measures is (are) used to evaluate the general financial success or failure of investment centers? A) Residual income. B) Return on investment. C) Number of suppliers. D) Economic value added. E) All of these measures are used except number of suppliers.

ROI is most appropriately used to evaluate the performance of: A) cost center managers. B) revenue center managers. C) profit center managers. D) investment center managers. E) Both profit center managers and investment center managers.

Which of the following is not considered in the calculation of divisional ROI? A) Divisional income. B) Earnings velocity. C) Capital turnover. D) Sales margin. E) Sales revenue.

Which of the following is the correct mathematical expression for return on investment?

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A) Sales margin ÷ capital turnover. B) Sales margin + capital turnover. C) Sales margin − capital turnover. D) Sales margin × capital turnover. E) Capital turnover ÷ sales margin.

The ROI calculation will indicate: A) the percentage of each sales dollar that is invested in assets. B) the sales dollars generated from each dollar of income. C) how effectively a company used its invested capital. D) the invested capital generated from each dollar of income. E) the overall quality of a company's earnings.

A company's sales margin: A) must, by definition, be greater than the firm's net sales. B) has basically the same meaning as the term "contribution margin." C) is computed by dividing sales revenue by income. D) is computed by dividing income by sales revenue. E) shows the sales dollars generated from each dollar of income.

10) Which of the following is the correct mathematical expression to derive a company's capital turnover? A) Sales revenue ÷ invested capital. B) Contribution margin ÷ invested capital. C) Income ÷ invested capital. D) Invested capital ÷ sales revenue. E) Invested capital ÷ income.

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11)

Capital turnover shows: A) the income generated by each dollar of capital investment. B) the sales dollars generated by each dollar of capital investment. C) the contribution margin generated by each dollar of capital investment. D) the capital investment generated by each sales dollar. E) the capital investment generated by each dollar of income.

12)

Sales margin shows:

A) the amount of income generated by each dollar of capital investment. B) the number of sales dollars generated by each dollar of capital investment. C) the percentage of each sales dollar that remains as profit after all expenses are covered. D) the amount of capital investment generated by each sales dollar. E) the amount of capital investment generated by each dollar of income.

13) Jamison Company had sales revenue and operating expenses of $5,000,000 and $4,200,000, respectively, for the year just ended. If invested capital amounted to $6,000,000, the firm's ROI was: A) 13.33%. B) 83.33%. C) 120.00%. D) 750.00%. E) None of the answers is correct.

14) Tempest Enterprises had a sales margin of 5%, sales of $4,000,000, and invested capital of $5,000,000. The company's ROI was:

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A) 4.00%. B) 6.25%. C) 16.00%. D) 25.00%. E) None of the answers is correct.

15) Vello, Inc. reported a return on investment of 12%, a capital turnover of 5, and income of $180,000. On the basis of this information, the company's invested capital was: A) $300,000. B) $900,000. C) $1,500,000. D) $7,500,000. E) None of the answers is correct.

16)

The information that follows relates to Khan Corporation:

Sales margin: 7.5% Capital turnover: 2 Invested capital: $20,000,000 On the basis of this information, the company's sales revenue is: A) $1,500,000. B) $3,000,000. C) $10,000,000. D) $40,000,000. E) None of the answers is correct.

17)

A division's return on investment may be improved by increasing:

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A) cost of goods sold and expenses. B) sales margin and cost of capital. C) sales revenue and cost of capital. D) capital turnover or sales margin. E) capital turnover or cost of capital.

18)

All of the following actions are likely to increase ROI except: A) an increase in sales revenues. B) a decrease in operating expenses. C) a decrease in a company's invested capital. D) a decrease in the number of units sold. E) an increase in the unit sale price.

19) Which of the following is used in the calculation of both return on investment and residual income? A) Total stockholders' equity. B) Retained earnings. C) Invested capital. D) Total liabilities. E) The cost of capital.

20) Consider the following statements about residual income: 1.I. Residual income incorporates a firm's cost of acquiring investment capital. 2.II. Residual income is a percentage measure, not a dollar measure. 3.III. If used correctly, residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm. Which of the above statements is (are) true?

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A) I only. B) II only. C) I and II. D) II and III. E) I and III.

21)

The basic idea behind residual income is to have a division maximize its: A) earnings per share. B) income in excess of a corporate imputed interest charge. C) cost of capital. D) cash flows. E) invested capital.

22) Beach Corporation has a return on investment of 15%. A Beach division, which currently has a 13% ROI and $750,000 of residual income, is contemplating a massive new investment that will (1) reduce divisional ROI and (2) produce $120,000 of residual income. If Beach strives for goal congruence, the investment: A) should not be acquired because it reduces divisional ROI. B) should not be acquired because it produces $120,000 of residual income. C) should not be acquired because the division's ROI is less than the corporate ROI before the investment is considered. D) should be acquired because it produces $120,000 of residual income for the division. E) should be acquired because although the division's ROI will be reduced, it will still be a positive number.

23) The Holder Division of Extraordinary Enterprises has a negative residual income of $540,000. Holder’s management is contemplating an investment opportunity that will reduce this negative amount to $400,000. The investment:

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A) should be pursued because it is attractive from both the divisional and corporate perspectives. B) should be pursued because it is attractive from the divisional perspective although not from the corporate perspective. C) should be pursued because it is attractive from the corporate perspective although not from the divisional perspective. D) should not be pursued because it is unattractive from both the divisional and corporate perspectives. E) should not be pursued because it is unattractive from the divisional perspective although it is attractive from the corporate perspective.

24) The Markham Division of World Corporation, which has income of $250,000 and an asset investment of $1,562,500, is studying an investment opportunity that will cost $450,000 and yield a profit of $67,500. Assuming that World uses an imputed interest charge of 14%, would the investment be attractive to: 1—Divisional management if ROI is used to evaluate divisional performance? 2—Divisional management if residual income (RI) is used to evaluate divisional performance? 3—The management of World Corporation? Attractive to Markham: Attractive to Markham: ROI RI

Attractive to World Corp.

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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25) The Nashville Division of Country Classics currently reports a profit of $3.6 million. Divisional invested capital totals $9.5 million; the imputed interest rate is 12%. On the basis of this information, Nashville’s residual income is: A) $432,000. B) $708,000. C) $1,140,000. D) $2,460,000. E) None of the answers is correct.

26)

The following information relates to the Corner Division of Hometown Enterprises:

Income for the period just ended: $1,500,000 Invested capital: $12,000,000 If the company has an imputed interest rate of 11%, Corner’s residual income would be: A) $165,000. B) $180,000. C) $187,500. D) Some other dollar amount other than the ones given. E) A percentage greater than 11%.

27) Concert Division reported a residual income of $200,000 for the year just ended. The division had $8,000,000 of invested capital and $1,000,000 of income. On the basis of this information, the imputed interest rate was: A) 2.5%. B) 10.0%. C) 12.5%. D) 20.0%. E) None of the answers is correct.

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28) Foxmoor Corporation uses an imputed interest rate of 13% in the calculation of residual income. Division X, which is part of Foxmoor, had invested capital of $1,200,000 and an ROI of 16%. On the basis of this information, X's residual income was: A) $24,960. B) $36,000. C) $156,000. D) $192,000. E) None of the answers is correct.

29)

Imputed interest can best be described as: A) the company's weighted average cost of capital. B) the prime interest rate on the date of the transaction. C) the interest rate charged for the company's bonds. D) the minimum required rate of return on invested capital. E) the after-tax cost of the interest payments on debt.

30)

The following information pertains to Travis Concrete:

Sales revenue

$ 1,500,000

Gross margin

600,000

Income

90,000

Invested capital

450,000

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The company's imputed interest rate is 8%. The capital turnover is: A) 3.33. B) 5.00. C) 16.67. D) 20.00. E) 30.00.

31)

The following information pertains to Travis Concrete:

Sales revenue

$ 1,500,000

Gross margin

600,000

Income

90,000

Invested capital

450,000

The company's imputed interest rate is 8%. The sales margin is: A) 6%. B) 15%. C) 20%. D) 30%. E) 40%.

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32)

The following information pertains to Travis Concrete:

Sales revenue

$ 1,500,000

Gross margin

600,000

Income

90,000

Invested capital

450,000

The company's imputed interest rate is 8%. The ROI is: A) 6%. B) 15%. C) 20%. D) 30%. E) 40%.

33)

The following information pertains to Travis Concrete:

Sales revenue

$ 1,500,000

Gross margin

600,000

Income

90,000

Invested capital

450,000

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The company's imputed interest rate is 8%. The residual income is: A) $30,000. B) $36,000. C) $42,000. D) $54,000. E) $82,800.

34) For the period just ended, Global Industries’ Western Division reported profit of $31.9 million and invested capital of $220 million. Assuming an imputed interest rate of 12%, which of the following choices correctly denotes Western’s return on investment (ROI) and residual income? ROI

Residual Income

A. 12.0%

$(5.5 million)

B. 12.0%

$5.5 million

C. 14.5%

$(5.5 million)

D. 14.5%

$5.5 million

E. 14.5%

$26.4 million

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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35) For the period just ended, Trek Corporation's Trailer Division reported profit of $54 million and invested capital of $450 million. Assuming an imputed interest rate of 10%, which of the following choices correctly denotes Trailer’s return on investment (ROI) and residual income? ROI

Residual Income

A. 12.0%

$9 million

B. 12.0%

$(9 million)

C. 10.0%

$9 million

D. $9 million

12%

E. None of the answers is correct.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

36) Which of the following elements is not used when calculating the weighted-average cost of capital? A) Before-tax cost of debt capital. B) After-tax cost of debt capital. C) Cost of equity capital. D) Market value of debt capital. E) Market value of equity capital.

37)

The following information relates to the Falcon Division of Xenon Enterprises:

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Interest rate on debt capital

Cost of equity capital

12 %

Market value of debt capital

$ 50 million

Market value of equity capital

$ 80 million

Income tax rate

30 %

On the basis of this information, Falcon’s weighted-average cost of capital is closest to: A) 7.3%. B) 8.3%. C) 9.5%. D) 10.8%. E) None of the answers is correct.

38) The market value of Galleon’s debt and equity capital totals $180 million, 80% of which is equity related. An analysis conducted by the company's finance department revealed a 7% after-tax cost of debt capital and a 10% cost of equity capital. On the basis of this information, Galleon’s weighted-average cost of capital: A) is 7.6%. B) is 8.5%. C) is 9.4%. D) cannot be determined based on the data presented because the cost of debt capital must be stated on a before-tax basis. E) cannot be determined based on the data presented because the cost of equity capital must be stated on an after-tax basis.

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39) Which of the following measures of performance is, in part, based on the weightedaverage cost of capital? A) Return on investment. B) Capital turnover. C) Book value. D) Economic value added (EVA). E) Gross margin.

40)

Economic value added:

A) is a dollar amount rather than a percentage. B) uses a firm's weighted-average cost of capital. C) uses total assets in its computation and ignores current liabilities. D) cannot be negative. E) is both a dollar amount rather than a percentage and uses a firm's weighted-average cost of capital.

41) Which of the following elements is not used in the calculation of economic value added for an investment center? A) An investment center's after-tax operating income. B) An investment center's total assets. C) An investment center's return on investment. D) An investment center's current liabilities. E) A company's weighted-average cost of capital.

42) Endotrope Corporation has an after-tax operating income of $3,200,000 and a 9% weighted-average cost of capital. Assets total $7,000,000 and current liabilities total $1,800,000. On the basis of this information, Endotrope’s economic value added is:

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A) $2,408,000. B) $2,732,000. C) $3,668,000. D) $3,992,000. E) None of the answers is correct.

43)

The following information relates to Attor, Inc.:

Total assets After-tax operating income Current liabilities

$ 9,000,000 1,500,000 800,000

If the company has a 10% weighted-average cost of capital, its economic value added would be: A) $(200,000). B) $530,000. C) $680,000. D) $970,000. E) None of the answers is correct.

44)

Economic value added (EVA) analysis indicates:

A) the amount of income generated by each dollar of capital investment. B) the number of sales dollars generated by each dollar of capital investment. C) the percentage of each sales dollar that remains as profit after all expenses are covered. D) the amount of increased capital generated by each dollar of income. E) how much shareholder wealth is being created.

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45) Given that ROI measures performance over a period of time, invested capital would most appropriately be figured by using: A) beginning-of-year assets. B) average assets. C) end-of-year assets. D) total assets. E) only current assets.

46) When an organization allows divisional managers to be responsible for short-term loans and credit, the division's invested capital should be measured by: A) total assets minus total liabilities. B) average total assets minus average current liabilities. C) average total assets minus average total liabilities. D) average total liabilities minus average current assets. E) average total liabilities minus total assets.

47) Horner Division has been stagnant over the past five years, neither growing nor contracting in size and profitability. Investments in new property, plant, and equipment have been minimal. Would the division's use of total assets (valued at net book value) when measuring ROI result in (1) using numbers that are consistent with those on the balance sheet and (2) a rising ROI over time? Consistent with Numbers on the Balance Sheet?

Produce a Rising Return on Investment Over Time?

Yes

Need more information to judge

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A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

48)

The income calculation for a division manager's ROI should be based on: A) divisional contribution margin. B) profit margin controllable by the division manager. C) profit margin traceable to the division. D) divisional income before interest and taxes. E) divisional net income.

49) To partially eliminate the problems that are associated with the short-term focus of return on investment, residual income, and EVA, the performance of a division's major investments is commonly evaluated through: A) postaudits. B) sensitivity analysis. C) performance operating plans. D) horizontal analysis. E) segmented reporting.

50) as:

The amounts charged for goods and services exchanged between two divisions are known

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A) opportunity costs. B) transfer prices. C) standard variable costs. D) residual prices. E) target prices.

51) Nevada, Inc. has two divisions, one located in Las Vegas and the other located in Reno. Las Vegas sells selected goods to Reno for use in various end-products. Assume that the transfer between the two divisions takes place regardless of the transfer price set by Las Vegas. Which of the following correctly describes the impact of the transfer prices on divisional profits and overall company profit? Las Vegas Profit

Reno Profit

Nevada Profit

Affected

Not affected

Affected

Not affected

Affected

Not affected

Affected

Not affected

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

52) Thurmond, Inc. has two divisions, one located in New York and the other located in Arizona. New York sells a specialized circuit to Arizona and just recently raised the circuit's transfer price. This price hike had no effect on either the volume of circuits transferred or on Arizona's decision of whether to acquire the circuit from either New York or from an external supplier. On the basis of this information, which of the following correctly shows the effect of the transfer price on divisional profit and overall company profit?

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New York Profit

Arizona Profit

Thurmond Profit

Increase

Decrease

Increase

Decrease

No Effect

Decrease

Increase

No Effect

Increase

No Effect

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

53) Which of the following describes the goal that should be pursued when setting transfer prices? A) Maximize profits of the buying division. B) Maximize profits of the selling division. C) Allow top management to become actively involved when calculating the proper dollar amounts. D) Establish incentives for autonomous division managers to make decisions that are in the overall organization's best interests (i.e., goal congruence). E) Minimize opportunity costs.

54) A general calculation method for transfer prices that achieves goal congruence begins with the additional outlay cost per unit incurred because goods are transformed and then: A) adds the opportunity cost per unit to the organization because of the transfer. B) subtracts the opportunity cost per unit to the organization because of the transfer. C) adds the sunk cost per unit to the organization because of the transfer. D) subtracts the sunk cost per unit to the organization because of the transfer. E) adds the sales revenue per unit to the organization because of the transfer.

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55) Macon Corporation has no excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to: A) zero. B) the direct expenses incurred in producing the goods. C) the total difference in the cost of production between two divisions. D) the contribution margin forgone from the lost external sale. E) the summation of variable cost plus fixed cost.

56) Racine Corporation has excess capacity. If the firm desires to implement the general transfer-pricing rule, opportunity cost would be equal to: A) zero. B) the direct expenses incurred in producing the goods. C) the total difference in the cost of production between two divisions. D) the contribution margin forgone from the lost external sale. E) the summation of variable cost plus fixed cost.

57) Buzz’s Florida Division is currently purchasing a part from an outside supplier. The company's Georgia Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $22 and a selling price of $34. If Georgia begins sales to Florida, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $4. If sales to outsiders will not be affected, Georgia would establish a transfer price of: A) $18. B) $22. C) $30. D) $34. E) None of the answers is correct.

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58) Darrin’s Auto Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has no excess capacity, makes and sells this part for external customers at a variable cost of $19 and a selling price of $31. If Southern begins sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On the basis of this information, Southern would establish a transfer price of: A) $16. B) $19. C) $28. D) $31. E) None of the answers is correct.

59) Grand’s Auto Northern Division is currently purchasing a part from an outside supplier. The company's Southern Division, which has excess capacity, makes and sells this part for external customers at a variable cost of $19 and a selling price of $31. If Southern begins sales to Northern, it (1) will use the general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On the basis of this information, Southern would establish a transfer price of: A) $16. B) $19. C) $28. D) $31. E) None of the answers is correct.

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60) Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be: A) $2.00. B) $2.10. C) $2.60. D) $2.90. E) $3.00.

61) Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. Assume the Bottle Division has no excess capacity and could sell everything it produced externally. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be: A) $2.00. B) $2.10. C) $2.60. D) $2.90. E) $3.00.

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62) Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. The maximum amount the Cologne Division would be willing to pay for each bottle transferred would be: A) $2.00. B) $2.10. C) $2.60. D) $2.90. E) $3.00.

63)

Transfer prices can be based on: A) variable cost. B) full cost. C) an external market price. D) a negotiated settlement between the buying and selling divisions. E) All of the answers are correct.

64) Which of the following transfer-pricing methods can lead to dysfunctional decisionmaking behavior by managers? A) Variable cost. B) Full cost. C) External market price. D) A professionally negotiated, amicable settlement between the buying and selling divisions. E) None of the answers is correct.

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65) The Altamonte Division of Custom Industries is in need of a particular service. The service can be obtained from another division of Custom at "cost," with cost defined as the summation of variable cost ($9) and fixed cost ($3). Alternatively, Altamonte can secure the service from a source external to Custom for $10. Which of the following statements is true? A) Altamonte should compare $10 versus $3 in deciding where to acquire the service. B) Altamonte should compare $10 versus $9 in deciding where to acquire the service. C) Altamonte should compare $10 versus $12 in deciding where to acquire the service. D) From Custom's perspective, the proper decision is reached by comparing $10 versus $9. E) Both Altamonte should compare $10 versus $12 in deciding where to acquire the service and from Custom's perspective, the proper decision is reached by comparing $10 versus $9.

66) Clariton Corporation has two divisions, Kissimmee and Grant, and evaluates management on the basis of return on investment. Kissimmee currently makes a part that it sells to both Grant and outsiders. Selected data follow.

Selling price to Grant Variable cost Fixed costs

25 18 80,000

Kissimmee is seeking an increase in its selling price to $28 per unit because of rising costs. Grant can obtain comparable units from an outside supplier for $26; however, if Grant uses the supplier, Kissimmee will have idle capacity because of an inability to increase sales to outsiders. From the perspective of Clariton Corporation:

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A) Kissimmee should continue to do business with Grant and charge $28 per unit. B) Kissimmee should continue to do business with Grant and charge $25 per unit. C) Kissimmee should continue to do business with Grant because Kissimmee’s variable cost per unit is only $18. D) Grant should do business with the outside supplier. E) Grant should split its business between Kissimmee and the outside supplier.

67)

Division A transfers item no. 78 to Division B. Consider the following situations:

1—A is located in Texas and B is located in California. 2—A is located in Texas and B is located in Mexico. Assuming that item no. 78 is unavailable in the open market, which of the following choices correctly depicts the probable importance of federal income taxes when determining the transfer price that is established for item no. 78? Situation 1

Situation 2

Important

Not important

Important

Not important

It is not possible to judge based on the information presented.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

68) Standard costs rather than actual costs should be used in transfer-pricing methods because:

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A) financial accounting rules (GAAP) require the use of standard costs. B) tax rules require the use of standard costs. C) standard costs are more readily available than actual costs. D) standard costs facilitate a professionally negotiated, amicable settlement between the buying and selling divisions. E) inefficient producing divisions could pass on their inefficiencies to buying divisions in the transfer price.

69) Division A transfers a profitable subassembly to Division B, where it is assembled into a final product. A is located in a European country that has a high tax rate; B is located in an Asian country that has a low tax rate. Ideally, (1) what type of before-tax income should each division report from the transfer and (2) what type of transfer price should Division A set for the subassembly? Division A Income

Division B Income

Transfer Price set by A

Low

High

Low

High

Low

High

Low

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

70) Consider the following statements about transfer pricing: 1.I. Income taxes and import duties are an important consideration when setting a transfer price for companies that pursue international commerce. 2.II. Transfer prices cannot be used by organizations in the service industry. 3.III. Transfer prices are totally cost-based in nature, not market-based. Which of the above statements is (are) true? Version 1

A) I only. B) II only. C) I and II. D) II and III. E) I, II, and III.

71) Overton Company uses cost-based transfer pricing. Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25. The Processing Division, which has excess capacity, sells its output to external customers for $12.00 per case. If Overton uses variable costs as its base, the transfer price charged to its Retail Division should be: A) $14.25. B) $12.00 plus a markup. C) $10.75 plus a markup. D) $8.50 plus a markup. E) negotiated between the managers of the Processing and Retail Divisions.

72) Overton Company uses cost-based transfer pricing. Its Food Processing Division has a standard variable cost of $8.50 per case and allocated fixed overhead of $2.25. The Processing Division, which has excess capacity, sells its output to external customers for $12.00 per case. If Overton uses full (or absorption) cost as its base, the transfer price charged to its Retail Division should be: A) $14.25. B) $12.00. C) $10.75. D) $8.50 plus a markup. E) negotiated between the managers of the Processing and Retail Divisions.

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73) Summit Co. reported sales revenue of $15,000,000 and a 4% sales margin. Summit’s return on investment was 15%. What is Summit’s capital turnover? A) 3.75. B) 6.25. C) 2.67. D) 9.00. E) Cannot be determined based on the data presented.

74) Summit Co. reported sales revenue of $15,000,000 and a 4% sales margin. Summit’s return on investment was 15%. What is Summit’s invested capital? A) $2,400,000. B) $5,625,000. C) $4,000,000. D) $9,000,000. E) Cannot be determined based on the data presented.

75) Summit Co. reported sales revenue of $15,000,000 and a 4% sales margin. Summit’s return on investment was 15%. What is Summit’s income? A) $600,000. B) $2,250,000. C) $90,000. D) $2,850,000. E) Cannot be determined based on the data presented.

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76) Summit Co. reported sales revenue of $15,000,000 and a 4% sales margin. Summit’s return on investment was 15%. Summit’s manager receives a bonus if ROI is 20% or greater. In which of the following circumstances would the manager receive a bonus? A) Invested capital is $3,000,000. B) Sales margin is 5%. C) Invested capital is $3,500,000. D) Sales margin is 4.5%. E) Cannot be determined based on the data presented.

77) Granite Preserve Corporation has two divisions, Copper and Silver. Silver transfers components to Copper at a predetermined transfer price. Silver’s standard variable cost of production per unit is $240. Silver could sell all its production to outside buyers for $304 per unit. Copper incurs $80 of variable costs in addition to the transfer price for Silver’s components. Assume Silver has excess capacity. Using the general rule and assuming a perfectly competitive market, the transfer price would be: A) $304. B) $240. C) $272. D) $320. E) None of the answers is correct.

78) Granite Preserve Corporation has two divisions, Copper and Silver. Silver transfers components to Copper at a predetermined transfer price. Silver’s standard variable cost of production per unit is $240. Silver could sell all its production to outside buyers for $304 per unit. Copper incurs $80 of variable costs in addition to the transfer price for Silver’s components. Assume that Silver has no excess capacity. Using the general rule and assuming a perfectly competitive market, the transfer price would be: Version 1

A) $272. B) $320. C) $240. D) $304. E) None of the answers is correct.

79) Granite Preserve Corporation has two divisions, Copper and Silver. Silver transfers components to Copper at a predetermined transfer price. Silver’s standard variable cost of production per unit is $240. Silver could sell all its production to outside buyers for $304 per unit. Copper incurs $80 of variable costs in addition to the transfer price for Silver’s components. Assume that Silver has no excess capacity and that Silver was able to reduce the variable cost of internal transfers by $20 per unit. Using the general rule and assuming a perfectly competitive market, the transfer price would be: A) $284. B) $304. C) $204. D) $300. E) None of the answers is correct.

80) Cachet is a division of Estate Industries. Estate has a required rate of return on capital of 8 percent. Cachet’s income is $320,000, its sales margin is 20%, and its capital turnover is 1. What is Cachet’s residual income? A) $448,000. B) $128,000. C) $192,000. D) $64,000. E) Cannot be determined based on the data presented.

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81) Bumble Company has two divisions, Grumble and Humble. Bumble’s required rate of return on capital is 11 percent. Grumble has a 25% sales margin, 20% ROI, and income of $200,000. What is Grumble’s residual income? A) $88,000. B) $112,000. C) $156,000. D) $90,000. E) Cannot be determined based on the data presented.

82) The biggest challenge in making a decentralized organization function effectively is to obtain goal congruence among the organization’s autonomous managers. ⊚ true ⊚ false

83) As an organization grows, its managers need less formal information systems, including managerial accounting information, in order to maintain control. ⊚ true ⊚ false

84)

Economic value added uses a firm's weighted-average cost of capital. ⊚ true ⊚ false

85)

Income divided by sales revenue is called capital turnover. ⊚ true ⊚ false

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86) A division's return on investment may be improved by increasing sales margin or capital turnover. ⊚ true ⊚ false

87)

Improving ROI is a balancing act that requires all the skills of an effective manager. ⊚ true ⊚ false

88) One benefit of residual income is that it can be used to compare the performance of different-sized investment centers. ⊚ true ⊚ false

89)

Residual income facilitates goal congruence while ROI does not. ⊚ true ⊚ false

90) The income calculation for a division manager's ROI should be based on profit margin traceable to the division. ⊚ true ⊚ false

91)

ROI, residual income, and EVA are computed for a period of time. ⊚ true ⊚ false

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92) ROI is one performance measure that can motivate a manager to make decisions about costs he or she cannot control. ⊚ true ⊚ false

93) The maximization of profits of the buying division is one of the goals that should be pursued when setting transfer prices. ⊚ true ⊚ false

94) If the transfer price is set at the market price, the producing division should have the option of either producing goods for internal transfer or selling in the external market. ⊚ true ⊚ false

95) The external market price transfer-pricing method can lead to dysfunctional decisionmaking behavior by managers. ⊚ true ⊚ false

96) Since most people exhibit risk aversion, managers must be compensated for the risk they must bear. ⊚ true ⊚ false

97)

Activities such as bribery and kickbacks are types of corruption. ⊚ true ⊚ false

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Answer Key Test name: Chap 13_6e_Cornett 1) D 2) C 3) C 4) E 5) D 6) B 7) D 8) C 9) D 10) A 11) B 12) C 13) A 14) A 15) C 16) D 17) D 18) D 19) C 20) A 21) B 22) D 23) A 24) D 25) D 26) B Version 1

27) B 28) B 29) D 30) A 31) A 32) C 33) D 34) D 35) A 36) A 37) C 38) C 39) D 40) E 41) C 42) B 43) C 44) E 45) B 46) B 47) A 48) B 49) A 50) B 51) B 52) B 53) D 54) A 55) D 56) A Version 1

57) A 58) C 59) A 60) A 61) D 62) C 63) E 64) B 65) E 66) C 67) C 68) E 69) B 70) A 71) D 72) C 73) A 74) C 75) A 76) A 77) B 78) D 79) A 80) C 81) D 82) TRUE 83) FALSE 84) TRUE 85) FALSE 86) TRUE Version 1

87) TRUE 88) FALSE 89) TRUE 90) FALSE 91) TRUE 92) FALSE 93) FALSE 94) TRUE 95) FALSE 96) TRUE 97) TRUE

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Chapter 13 – 6e Cornet- Manually Graded 1)

The following data pertain to Caldron Corporation: Income

$8,000,000

Sales revenue

40,000,000

Average invested capital

50,000,000

Required: Calculate Caldron Corporation's sales margin, capital turnover, and return on investment.

Consider the following data of Twisted Corporation's Northern Division: Sales revenue

$18,750,000

Capital turnover

Average invested capital

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Sales margin

Income

Return on investment

15%

Residual income

Twisted’s imputed interest rate

12%

Required: A. Calculate Northern’s capital turnover. B. Calculate Northern’s average invested capital. C. Calculate Northern’s income. D. Calculate residual income.

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3) Ragtime Division, which is part of Conquer Enterprises, recently reported a sales margin of 30% and an ROI of 21%. Required: A. Briefly define sales margin, capital turnover, and return on investment. B. Assume that Ragtime has residual income of $220,000 and that Conquer uses an imputed interest rate of 10%. Compute Ragtime’s capital turnover and invested capital. C. In answering this question, ignore the assumptions stated in requirement "B," and your answer. Instead, assume that Ragtime’s invested capital amounted to $2,500,000. On the basis of this information, calculate income and sales revenue.

4) The following data pertain to Darwin Industries: Interest rate on debt capital: 9% Cost of equity capital: 12% Before-tax operating income: $35 million Market value of debt capital: $60 million Market value of equity capital: $120 million Total assets: $150 million Income tax rate: 30% Total current liabilities: $15 million Required: A. Compute Darwin’s weighted-average cost of capital. B. Compute Darwin’s economic value added. C. Briefly explain the meaning of economic value added.

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The following data pertain to Napal Company for 20x1: Sales revenue

$1,000,000

Cost of goods sold

550,000

Operating expenses

400,000

Average invested capital

500,000

Required: A. Calculate the company's sales margin, capital turnover, and return on investment for 20x1. B. If the sales and average invested capital remain the same, to what level would total costs and expenses have to be reduced in 20x2 to achieve a 15% return on investment? C. Assume that costs and expenses are reduced, as calculated in requirement "B." Calculate the firm's new sales margin. D. Suggest two possible actions that will improve the company's capital turnover.

The following data pertain to the Ouster Division of Klandestine Company: Divisional contribution margin

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$700,000

Profit margin controllable by the divisional manager

320,000

Profit margin traceable to the division

294,400

Average asset investment

1,280,000

The company uses responsibility accounting concepts when evaluating performance; Ouster’s division manager is contemplating the following three investments. He can invest up to $400,000. No. 1

No. 2

No. 3

Cost

$250,000

$300,000

$400,000

Expected income

50,000

54,000

96,000

Required: A. Calculate the ROIs of the three investments. B. What is the division manager's current ROI, computed by using responsibility accounting concepts? C. Which of the three investments would be selected if the manager's focus is on Ouster’s divisional performance, as judged by ROI? Why? D. If Klandestine has an imputed interest charge of 22%, compute the residual income of investment no. 3. If Ouster’s Division manager is evaluated by residual income, is this investment attractive from Ouster’s perspective? From Klandestine’s perspective? Why?

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7) Compuwork Corporation is organized in three separate divisions. The three divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the overall company produced a 12% return on its investment. Managers of Compuwork’s Iowa Division recently studied an investment opportunity that would assist in the division's future growth. Relevant data follow. Iowa Division

Investment Opportunity

Income

$12,800,000

$4,200,000

Invested capital

80,000,000

30,000,000

Required: A. Compute the current ROI of the Iowa Division and the division's ROI if the investment opportunity is pursued. B. What is the likely reaction of divisional management toward the acquisition? Why? C. What is the likely reaction of Compuwork’s corporate management toward the investment? Why? D. Assume that Compuwork uses residual income to evaluate performance and desires an 11% minimum return on invested capital. Compute the current residual income of the Iowa Division and the division's residual income if the investment is made. Will divisional management likely change its attitude toward the acquisition? Why?

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8) Arlene Clanston, general manager of the Northwest Division of Blanton Enterprises, has significant authority over pricing decisions as well as programs that involve cost reduction/control. The data that follow relate to upcoming divisional operations: Average invested capital: $15,000,000 Annual fixed costs: $3,900,000 Variable cost per unit: $80 Number of units expected to be sold: 120,000 Required: A. Top management will promote Clanston if she can earn a 14% return on investment for the year. What unit selling price should she establish to get her promotion? B. Independent of part "A," assume the unit selling price is $132 and that Blanton has a 16% imputed interest charge. Top management will promote Clanston to corporate headquarters if her division can generate $200,000 of residual income. If Clanston desires to move to corporate, what must the division do to the amount of annual fixed costs incurred? Show your calculations.

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9) Neosho Corporation's Gauge Division manufactures and sells product no. 24, which is used in refrigeration systems. Per-unit variable manufacturing and selling costs amount to $23 and $7, respectively. The Division can sell this item to external domestic customers for $40 or, alternatively, transfer the product to the company's Refrigeration Division. Refrigeration is currently purchasing a similar unit from Taiwan for $36. Assume use of the general transferpricing rule. Required: A. What is the most that the Refrigeration Division would be willing to pay the Gauge Division for one unit? B. If Gauge had excess capacity, what transfer price would the Division's management set? C. If Gauge had no excess capacity, what transfer price would the Division's management set? D. Repeat part "C," assuming that Gauge was able to reduce the variable cost of internal transfers by $5 per unit.

10) Gamma Division of Fava Corporation produces electric motors, 20% of which are sold to Fava’s Omega Division and 80% to outside customers. Fava treats its divisions as profit centers and allows division managers to choose whether to sell to or buy from internal divisions. Corporate policy requires that all interdivisional sales and purchases be transferred at variable cost. Gamma Division's estimated sales and standard cost data for the year ended December 31, based on a capacity of 60,000 units, are as follows: Omega

Outsiders

Sales

$660,000

$5,760,000

Less: Variable costs

660,000

2,640,000

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Contribution margin

$ -----

$3,120,000

Less: Fixed costs

175,000

900,000

Operating income (loss)

$(175,000)

$2,220,000

Unit sales

12,000

48,000

Gamma has an opportunity to sell the 12,000 units shown above to an outside customer at $80 per unit. Omega can purchase the units it needs from an outside supplier for $92 each. Required: A. Assuming that Gamma desires to maximize operating income, should it take on the new customer and discontinue sales to Omega? Why? (Note: Answer this question from Gamma's perspective.) B. Assume that Fava allows division managers to negotiate transfer prices. The managers agreed on a tentative price of $80 per unit, to be reduced by an equal sharing of the additional Gamma income that results from the sale to Omega of 12,000 motors at $80 per unit. On the basis of this information, compute the company's new transfer price.

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11) Sierra Corporation is a multi-divisional company whose managers have been delegated full profit responsibility and complete autonomy to accept or reject transfers from other divisions. Division X produces 2,000 units of a subassembly that has a ready market. One of these subassemblies is currently used by Division Y for each final product manufactured, the latter of which is sold to outsiders for $1,600. Y's sales during the current period amounted to 2,000 completed units. Division X charges Division Y the $1,100 market price for the subassembly; Division Y has additional variable costs of $600 per unit. Variable costs for Division X are $850 per unit. The manager of Division Y feels that X should transfer the subassembly at a lower price because Y is currently unable to make a profit. Required: A. Calculate the contribution margins (total dollars and per unit) of Divisions X and Y, as well as the company as a whole, if transfers are made at market price. B. Assume that conditions have changed and X can sell only 1,000 units in the market at $900 per unit. From the company's perspective, should X transfer all 2,000 units to Y or sell 1,000 in the market and transfer the remainder? Note: Y's sales would decrease to 1,000 units if the latter alternative is pursued.

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12) Tyke Corporation has two divisions: Springfield and Chicago. Springfield currently sells a condenser to manufacturers of cooling systems for $520 per unit. Variable costs amount to $380, and demand for this product currently exceeds the division's ability to supply the marketplace. Tyke is considering another use for the condenser, namely, integration into an enhanced refrigeration system that would be made by Chicago. Related information about the enhanced system follows: Selling price of refrigeration system: $1,285 Additional variable manufacturing costs required: $820 Transfer price of condenser: $490 Top management is anxious to introduce the enhanced system; however, unless the transfer is made, an introduction will not be possible because of the difficulty of obtaining condensers in the quality and quantity desired. The company uses responsibility accounting and ROI when measuring divisional performance, and awards bonuses to divisional management. Required: A. How would Springfield’s divisional manager likely react to the decision to transfer condensers to Chicago? Show computations to support your answer. B. How would Chicago’s divisional management likely react to the $490 transfer price? Show computations to support your answer. C. Assume that a lower transfer price is desired. What parties should be involved in setting the new price? D. From a contribution margin perspective, does Tyke benefit more if it sells the condensers externally or transfers the condensers to Chicago? By how much?

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13) Valient, Inc. has a Pennsylvania-based division that produces electronic components, with a very strong domestic market for circuit no. 222. The variable production cost is $140, and the division can sell its entire output for $190. Valient is subject to a 30% income tax rate. Alternatively, the Pennsylvania division can ship the circuit to a division that is located in Mississippi, to be used in the manufacture of a global positioning system (GPS). Information about the global positioning system and Mississippi's costs follow. Selling price: $380 Circuit shipping and handling fees to Mississippi: $10 Labor, overhead, and additional material costs of GPS: $120 Required: A. Assume that the transfer price for the circuit was $160. How would Pennsylvania's divisional manager likely react to a corporate decision to transfer the circuits to Mississippi? Why? B. Calculate Pennsylvania income, Mississippi income, and income for the company as a whole if the transfer took place at $160 per circuit. C. Assuming that transfers took place at a price higher than $160, would the revised price increase, decrease, or have no effect on Valient’s income? Briefly explain. D. Assume that Valient moved its GPS production facility to a division located in Germany, which is subject to a 45% tax rate. The transfer took place at $180. Shipping fees (absorbed by the overseas division) doubled to $20; the German division paid an import duty equal to 10% of the transfer price; and labor, overhead, and additional material costs were $150 per GPS. If the German selling price of the GPS amounted to $450, calculate Pennsylvania income, German income, and income for Valient as a whole. E. Suppose that U.S. and German tax authorities allowed some discretion in how transfer prices were set. Given the difference in tax rates, should Valient attempt to generate the majority of its income in Pennsylvania or Germany? Why?

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14) Roger Corporation produces goods in the United States, to be sold by a separate division located in Italy. More specifically, the Italian division imports units of product X34 from the U.S. and sells them for $950 each. (Imports of similar goods sell for $850.) The Italian division is subject to a 40% tax rate whereas the U.S. tax rate is only 30%. The manufacturing cost of product X34 in the United States is $720. Furthermore, there is a 10% import duty computed on the transfer price that will be paid by the Italian division and is deductible when computing Italian income. Tax laws of the two countries allow transfer prices to be set at U.S. manufacturing cost or the selling prices of comparable imports in Italy. Required: Analyze the profitability of the U.S. division, the Italian division, and Roger as a whole to determine if the overall corporation would be better off if transfers took place at (1) U.S. manufacturing cost or (2) the selling price of comparable imports.

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15) Carson, Inc., which produces electronic parts in the United States, has a very strong local market for part no. 54. The variable production cost is $40, and the company can sell its entire supply domestically for $110. The U.S. tax rate is 30%. Alternatively, Carson can ship the part to a division that is located in Switzerland, to be used in a product that the Swiss division will distribute throughout Europe. Information about the Swiss product and the division's operating environment follows: Selling price of final product: $400 Shipping fees to import part no. 54: $20 Labor, overhead, and additional material costs of final product: $230 Import duties levied on part no. 54 (to be paid by the Swiss division): 10% of transfer price Swiss tax rate: 40% Based on U.S. and Swiss tax laws, the company has established a transfer price for part no. 54 equal to the U.S. market price. Assume that the Swiss division can obtain part no. 54 in Switzerland for $125. Required: A. If you were the head of the Swiss division, would you be better off financially to conduct business with your U.S. division or buy part no. 54 locally? Why? Show computations. B. Carson’s accounting department has figured that the company will make $66.40 for each unit transferred and used in the Swiss division's product. Rather than proceed with a transfer, would Carson be better off to sell its goods domestically and allow the Swiss division to acquire part no. 54 in Switzerland? Show computations for both U.S. and Swiss operations to support your answer. C. Generally speaking, when tax rates differ between countries, what income strategy should a company use in setting its transfer prices? If the seller is in a low tax-rate country, what type of price should it set? Why?

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16) Return on investment (ROI) and residual income (RI) are popular measures of divisional performance. Like any measure, there are disadvantages or weaknesses that are an inherent part of these tools. Briefly discuss a major weakness associated with each tool.

17) Return on investment (ROI) is a very popular tool to evaluate performance. The measurement of ROI is dependent, in part, on whether fixed assets are valued at acquisition cost or net book value. List several advantages of acquisition cost and net book value as ways to value long-lived assets.

18) One element of the general transfer-pricing rule is opportunity cost. Briefly define the term "opportunity cost" and then explain how it is computed for (1) companies that have excess capacity and (2) companies that have no excess capacity.

19) Although the general rule for transfer prices is the outlay cost plus opportunity cost, many companies instead use negotiated prices to price their goods and services. When are negotiated transfer prices used? Are such prices consistent or inconsistent with responsibility accounting? Explain.

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20) What are the three objectives of internal controls in preventing suboptimal decisions and the costs of undermining divisional autonomy?

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Answer Key Test name: Chap 13_6e_Cornett_Manually Graded

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Chapter 14 – 6e Cornett 1)

Managerial accountants:

A) rarely become involved in an organization's decision-making activities. B) make decisions that focus solely on an organization's accounting matters. C) collect data and provide information so that decisions can be made. D) often serve as a cross-functional team member, making a wide range of decisions. E) collect data and provide information so that decisions can be made and often serve as a cross-functional team member, making a wide range of decisions.

Factors in a decision problem that cannot be expressed in numerical terms are: A) qualitative in nature. B) quantitative in nature. C) predictive in nature. D) sensitive in nature. E) uncertain in nature.

3) At which step or steps in the decision-making process do qualitative considerations generally have the greatest impact? A) Specifying the criterion and identifying the alternatives. B) Developing a decision model. C) Collecting the data. D) Making a decision. E) Identifying the alternatives.

4) An accounting information system should be designed to provide information that is useful. To be useful the information must be:

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A) qualitative rather than quantitative. B) unique and unavailable through other sources. C) historical in nature and not purport to predict the future. D) marginal between two alternatives. E) relevant, accurate, and timely.

5) To be useful in decision making, information should possess which of the following characteristics? Relevance

Accuracy

Timeliness

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

A trade-off in a decision situation sometimes occurs between information: A) accuracy and relevance. B) relevance and uniqueness. C) accuracy and timeliness. D) sensitivity and accuracy. E) sensitivity and relevance.

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Which of the following best defines the concept of a relevant cost? A) A past cost that is the same among alternatives. B) A past cost that differs among alternatives. C) A future cost that is the same among alternatives. D) A future cost that differs among alternatives. E) A cost that is based on past experience.

8) Consider the following costs and decision-making situations: 1.I. The cost of existing inventory, in a keep vs. disposal decision. 2.II. The cost of special electrical wiring, in an equipment acquisition decision. 3.III. The salary of a supervisor who will be transferred elsewhere in the organization, in a department-closure decision. Which of the above costs is (are) relevant to the decision situation noted? A) I only. B) II only. C) III only. D) I and II. E) II and III.

The following costs are relevant to the decision situation cited except:

A) the cost of hiring a full-time staff attorney, in a decision to establish an in-house legal department or retain the services of a prominent law firm. B) the remodeling cost of existing office space, in a firm's decision to stay at its current location or move to a new building. C) the long-term salary costs demanded by Joe Torrez (a superstar) and Rip Moran (an average player) in baseball contract negotiations, in a decision that determines the amounts by which ticket prices must be raised. D) the cost to enhance an airline's beverage service, in a decision to expand existing airline service to either Salt Lake City or Phoenix. E) the commissions that could be earned by a salesperson, in a decision that involves salesperson compensation methods (i.e., commissions or flat monthly salaries).

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10)

Which of the following costs can be ignored when making a decision? A) Opportunity costs. B) Differential costs. C) Sunk costs. D) Relevant costs. E) All future costs.

11)

The book value of equipment currently owned by a company is an example of a (n): A) future cost. B) differential cost. C) comparative cost. D) opportunity cost. E) sunk cost.

12)

The cost of inventory currently owned by a company is an example of a (n): A) opportunity cost. B) sunk cost. C) relevant cost. D) differential cost. E) future cost.

13) The City of San Diego is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs. Which of the following items, all related to the transaction, would not be considered in the decision?

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A) Purchase price of the new vehicle. B) Purchase price of the old vehicle. C) Savings in operating costs as a result of the new vehicle. D) Proceeds from disposal of the old vehicle. E) All of these answer choices would be considered in the decision.

14) Cornerstone, Inc. has $125,000 of inventory that suffered minor smoke damage from a fire in the warehouse. The company can sell the goods "as is" for $45,000; alternatively, the goods can be cleaned and shipped to the firm's outlet center at a cost of $23,000. There the goods could be sold for $80,000. What alternative is more desirable and what is the relevant cost for that alternative? A) Sell "as is," $125,000. B) Clean and ship to outlet center, $23,000. C) Clean and ship to outlet center, $103,000. D) Clean and ship to outlet center, $148,000. E) Neither alternative is desirable, as both produce a loss for the firm.

15) In early July, Colin Marks purchased a $70 ticket to the December 15 game of the Sarasota Shippers. Parking for the game was expected to cost approximately $22, and Marks would probably spend another $15 for a souvenir program and food. It is now December 14. The Shippers were having a miserable season and the temperature was expected to peak at 5 degrees on game day. Marks therefore decided to skip the game and took his wife to the movies, with tickets and dinner costing $50. The sunk cost associated with this decision situation is: A) $20. B) $50. C) $70. D) $107. E) None of the answers is correct.

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16) In early July, Damon Rutton purchased a $70 ticket to the December 15 game of the Sarasota Shippers. Parking for the game was expected to cost approximately $22, and Rutton would probably spend another $15 for a souvenir program and food. It is now December 14. The Shippers were having a miserable season and the temperature was expected to peak at 5 degrees on game day. Damon is thinking about skipping the game and taking his wife to the movies and dinner, at a cost of $50. The amount of sunk cost that should influence Damon’s decision to spend some time with his wife is: A) $0. B) $20. C) $50. D) $70. E) None of the answers is correct.

17)

An opportunity cost may be described as: A) a forgone benefit. B) a historical cost. C) a specialized type of variable cost. D) a specialized type of fixed cost. E) a specialized type of semivariable cost.

18)

The term "opportunity cost" is best defined as: A) the amount of money paid for an item. B) the amount of money paid for an item, taking inflation into account. C) the amount of money paid for an item, taking possible discounts into account. D) the benefit associated with a rejected alternative when making a choice. E) an irrelevant decision factor.

19) A factory that makes a part has significant idle capacity. The factory's opportunity cost of making this part is equal to:

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A) the variable manufacturing cost per unit. B) the fixed manufacturing cost per unit. C) the semivariable cost per unit. D) the total manufacturing cost per unit. E) zero.

20) Allison is contemplating a job offer with an advertising agency where she will make $54,000 in her first year of employment. Alternatively, Allison can begin to work in her father's business where she will earn an annual salary of $38,000. If Allison decides to work with her father, the opportunity cost would be: A) $0. B) $38,000. C) $54,000. D) $92,000. E) irrelevant in deciding which job offer to accept.

21) Which of the following costs should be used when choosing between two decision alternatives? Relevant Cost

Sunk Cost

Opportunity Cost

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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22) Forte, Inc. is studying whether to expand operations by adding a new product line. Which of the following choices correctly denotes the costs that should be considered in this decision? Sunk Cost

Opportunity Cost

Yes

Sometimes

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

23)

A special order generally should be accepted if:

A) its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order. B) excess capacity exists and the revenue exceeds all variable costs associated with the order. C) excess capacity exists and the revenue exceeds allocated fixed costs. D) the revenue exceeds total costs, regardless of available capacity. E) the revenue exceeds variable costs, regardless of available capacity.

24) Two months ago, Air-tite Corporation purchased 4,500 pounds of Hydrol, paying $15,300. The demand for this product has been very strong since the acquisition, with the market price jumping to $4.05 per pound. (Air-tite can buy or sell Hydrol at this price.) The company recently received a special-order inquiry, one that would require the use of 4,200 pounds of Hydrol. Which of the following is (are) relevant in deciding whether to accept the special order?

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A) The 300-pound remaining inventory of Hydrol. B) The $4.05 market price. C) The $3.40 purchase price. D) 4,500 pounds of Hydrol. E) Two or more of the factors are relevant.

25) McAlister Company is operating at capacity and desires to add a new service to its rapidly expanding business. The service should be added as long as service revenues exceed: A) variable costs. B) fixed costs. C) the sum of variable costs and fixed costs. D) the sum of variable costs and any related opportunity costs. E) the sum of variable costs, fixed costs, and any related opportunity costs.

26) Flavor Enterprises has been approached about providing a new service to its clients. The company will bill clients $140 per hour; the related hourly variable and fixed operating costs will be $75 and $18, respectively. If all employees are currently working at full capacity on other client matters, the per-hour opportunity cost of being unable to provide this new service is: A) $0. B) $47. C) $65. D) $93. E) $140.

27) Elkhorn, Inc., which has excess capacity, received a special order for 4,000 units at a price of $15 per unit. Currently, production and sales are anticipated to be 10,000 units without considering the special order. Budget information for the current year follows.

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Sales

$ 190,000

Less: Cost of Goods Sold Gross Margin

145,000 $

45,000

Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted, the company's income will: A) increase by $2,000. B) decrease by $2,000. C) increase by $14,000. D) decrease by $14,000. E) None of the answers is correct.

28)

Brilliant, Inc. reported the following results from the sale of 24,000 units of IT-54:

Sales

528,000

Variable manufacturing costs

288,000

Fixed manufacturing costs

120,000

Variable selling costs

52,800

Fixed administrative costs

35,200

Extra Company has offered to purchase 3,000 IT-54s at $16 each. Brilliant has available capacity, and the president is in favor of accepting the order. She feels it would be profitable because no variable selling costs will be incurred. The plant manager is opposed because the "full cost" of production is $17. Which of the following correctly notes the change in income if the special order is accepted?

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A) $3,000 decrease. B) $3,000 increase. C) $12,000 decrease. D) $12,000 increase. E) None of the answers is correct.

29) Deltones, a manufacturer of computer peripherals, has excess capacity. The company's Alabama plant has the following per-unit cost structure for item no. 89:

Variable manufacturing

$ 40

Fixed manufacturing

Variable selling

Fixed selling

Traceable fixed administrative

Allocated administrative

The traceable fixed administrative cost was incurred at the Alabama plant; in contrast, the allocated administrative cost represents a "fair share" of Deltones' corporate overhead. Alabama has been presented with a special order of 5,000 units of item no. 89 on which no selling cost will be incurred. The proper relevant cost in deciding whether to accept this special order would be: A) $40. B) $59. C) $61. D) $80. E) None of the answers is correct.

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30) Forrest Corporation manufactures parts that are used in the production of washers and dryers. The following costs are associated with part no. 65:

Direct materials

$ 50

Direct labor

Variable manufacturing overhead

Fixed manufacturing overhead

Variable selling costs

The company received a special-order inquiry from an appliance manufacturer in Brazil for 15,000 units of part no. 65. The variable selling costs per unit will amount to only $8. Since Forrest has excess capacity, the minimum price that Forrest should charge the Brazil manufacturer is: A) $91. B) $99. C) $105. D) $114. E) None of the answers is correct.

31)

The term "outsourcing" is most closely associated with: A) special-order decisions. B) make-or-buy decisions. C) equipment replacement decisions. D) decisions to process joint products beyond the split-off point. E) decisions that involve limited resources.

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32) Canyon Trails is studying whether to outsource its Human Resources (H/R) activities. Salaried professionals who earn $390,000 would be terminated; in contrast, administrative assistants who earn $120,000 would be transferred elsewhere in the organization. Miscellaneous departmental overhead (e.g., supplies, copy charges, overnight delivery) is expected to decrease by $30,000, and $25,000 of corporate overhead, previously allocated to Human Resources, would be picked up by other departments. If Canyon Trails can secure needed H/R services locally for $410,000, how much would the company benefit by outsourcing? A) $10,000. B) $35,000. C) $130,000. D) $155,000. E) Nothing, as it would be cheaper to keep the department open.

33) Elkhart, a division of Indiana Enterprises, currently makes 100,000 units of a product that has created a number of manufacturing problems. Elkhart’s costs follow.

Manufacturing costs: Variable Fixed Allocated corporate administrative cost

$ 540,000 180,000 60,000

If Elkhart were to discontinue production, fixed manufacturing costs would be reduced by 70%. The relevant cost of deciding whether the division should purchase the product from an outside supplier is:

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A) $540,000. B) $594,000. C) $666,000. D) $720,000. E) $726,000.

34) Boise, a division of Price Enterprises, currently performs computer services for various departments of the firm. One of the services has created a number of operating problems, and management is exploring whether to outsource the service to a consultant. Traceable variable and fixed operating costs total $80,000 and $25,000, respectively, in addition to $18,000 of corporate administrative overhead allocated from Price. If Boise were to use the outside consultant, fixed operating costs would be reduced by 70%. The irrelevant costs in Boise’s outsourcing decision total: A) $17,500. B) $18,000. C) $25,000. D) $25,500. E) None of the answers is correct.

35)

Which of the following statements regarding costs and decision making is correct?

A) Fixed costs must be considered only on a per-unit basis. B) Per-unit fixed cost amounts are valid only for make-or-buy decisions. C) Per-unit fixed costs can be misleading because such amounts appear to behave as variable costs when, in actuality, the amounts are related to fixed expenditures. D) Sunk costs can be misleading in make-or-buy decisions because these amounts appear to be relevant differential costs. E) Opportunity costs should be ignored when evaluating decision alternatives.

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36) An architecture firm currently offers services that appeal to both individuals and commercial clients. If the firm decides to discontinue services to individuals because of ongoing losses, which of the following costs could the company likely avoid? A) General corporate overhead that was allocated to individual clients. B) Building depreciation. C) Insurance. D) Variable operating costs. E) Monthly installment payments on general-purpose, computer drafting equipment.

37) Haverton Industries is studying whether to drop a product because of ongoing losses. Costs that would be relevant in this situation would include variable manufacturing costs as well as: A) factory depreciation. B) avoidable fixed costs. C) unavoidable fixed costs. D) allocated corporate administrative costs. E) general corporate advertising.

38) Fairline Skyways has a significant presence at the Charlotte International Airport and therefore operates the Diamond Club, which is across from gate 36 in terminal 1. The Diamond Club provides food and business services for the company's frequent flyers. Consider the following selected costs of Club operation: 1.Receptionist and supervisory salaries 2.Catering 3.Terminal depreciation (based on square footage) 4.Airport fees (computed as a percentage of club revenue) 5.Allocated Fairline administrative overhead Management is exploring whether to close the club and expand the seating area for gate 36. Which of the preceding expenses would the airline classify as unavoidable?

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A) 3. B) 4. C) 5. D) 3, 5. E) None of the answers is correct.

39) The Boot Department at the Omaha Department Store is being considered for closure. The following information relates to boot activity:

Sales revenue

$ 350,000

Variable costs: Cost of goods sold

280,000

Sales commissions

30,000

Fixed operating costs

90,000

If 70% of the fixed operating costs are avoidable, should the Boot Department be closed? A) Yes, Omaha would be better off by $23,000. B) Yes, Omaha would be better off by $50,000. C) No, Omaha would be worse off by $13,000. D) No, Omaha would be worse off by $40,000. E) None of the answers is correct.

40) Carlton Corporation is composed of five divisions. Each division is allocated a share of Carlton's overhead to make divisional managers aware of the cost of running the corporate headquarters. The following information relates to the Metro Division:

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Sales revenue

$ 7,500,000

Variable operating costs

5,100,000

Traceable fixed operating costs

1,900,000

Allocated corporate overhead

300,000

If the Metro Division is closed, 100% of the traceable fixed operating costs can be eliminated. What will be the impact on Carlton’s overall profitability if the Metro Division is closed? A) Decrease by $200,000. B) Decrease by $500,000. C) Decrease by $2,100,000. D) Decrease by $2,400,000. E) None of the answers is correct.

41) San Ruiz Interiors provides design services to residential and commercial clients. The residential services produce a contribution margin of $450,000 and have traceable fixed operating costs of $480,000. Management is studying whether to drop the residential operation. If closed, the fixed operating costs will fall by $370,000 and San Ruiz’ income will: A) increase by $30,000. B) increase by $80,000. C) increase by $340,000. D) decrease by $80,000. E) decrease by $340,000.

42)

Howard Enterprises, which has three departments, recently reported the following results: A

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Sales revenue

$ 12,000

Less: Operating costs Operating income (loss)

11,400 $

600

48,000

40,000

59,800

50,500

$ (11,800 ) $ (10,500 )

The company incurred variable operating costs as well as $25,000 of fixed operating costs. The $25,000 amount was allocated to A, B, and C on the basis of sales revenue and is included in the cost figures noted above. Which department(s), if any, should be closed if none of the fixed operating costs can be avoided? A) Department A. B) Department B. C) Department C. D) Departments B and C. E) None of the departments should be closed.

43) Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow. Regular Units Sales revenue

3,700

13,700

$ 240,000

$ 740,000

$ 980,000

180,000

481,000

661,000

60,000

$ 259,000

$ 319,000

60,000

134,000

194,000

$ 125,000

Less: Selling expenses Operating income (loss)

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Total

10,000

Less: Cost of goods sold Gross Margin

Super

Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed. Omar Industries wants to drop the Regular product line. If the line is dropped, company-wide fixed manufacturing costs would fall by 10% because there is no alternative use of the facilities. What would be the impact on operating income if Regular is discontinued? A) $0. B) $10,400 increase. C) $20,000 increase. D) $39,600 decrease. E) None of the answers is correct.

44) Omar Industries manufactures two products: Regular and Super. The results of operations for 20x1 follow. Regular Units Sales revenue

3,700

13,700

$ 240,000

$ 740,000

$ 980,000

180,000

481,000

661,000

60,000

$ 259,000

$ 319,000

60,000

134,000

194,000

$ 125,000

Less: Selling expenses Operating income (loss)

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Total

10,000

Less: Cost of goods sold Gross Margin

Super

Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for Regular and $20 per unit for Super. Variable selling expenses are $4 per unit for Regular and $20 per unit for Super; remaining selling amounts are fixed. If Omar Industries eliminates Regular and uses the available capacity to produce and sell an additional 1,500 units of Super, what would be the impact on operating income? A) $28,000 increase B) $45,000 increase C) $55,000 increase D) $85,000 increase E) None of the answers is correct.

45) When deciding whether to sell a product at the split-off point or process it further, joint costs are not usually relevant because: A) such amounts do not help to increase sales revenue. B) such amounts only slightly increase a company's sales margin. C) such amounts are sunk and do not change with the decision. D) the sales revenue does not decrease to the extent that it should, if compared with separable processing. E) such amounts reflect opportunity costs.

46) Product costs incurred after the split-off point in a joint processing environment are called: A) separable processing costs. B) joint product costs. C) non-relevant costs. D) scrap costs. E) spoilage costs.

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47) Product costs incurred before the split-off point in a joint processing environment are called: A) separable processing costs. B) joint product costs. C) relevant costs. D) scrap costs. E) spoilage costs.

48) Kranston Company is considering whether to sell Retox at the split-off point or subject it to further processing and produce a more refined product known as Retox-F. Consider the following items: 1.I. The selling price of Retox-F. 2.II. The joint processing cost of Retox. 3.III. The separable cost of producing Retox-F. Which of the above items is (are) relevant to Kranston’s decision to process Retox into Retox-F? A) I only. B) II only. C) III only. D) I and II. E) I and III.

49) Phillippe Inc. manufactures A and B from a joint process (cost = $80,000). Five thousand pounds of A can be sold at split-off for $20 per pound or processed further at an additional cost of $20,000 and then sold for $25 per pound. If Phillippe decides to process A beyond the splitoff point, operating income will: A) increase by $10,000. B) increase by $20,000. C) decrease by $10,000. D) decrease by $20,000. E) increase by $5,000.

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50) Phillippe manufactures A and B from a joint process (cost = $80,000). Ten thousand pounds of B can be sold at split-off for $15 per pound or processed further at an additional cost of $20,000 and later sold for $16. If Phillippe decides to process B beyond the split-off point, operating income will: A) increase by $10,000. B) increase by $20,000. C) decrease by $10,000. D) decrease by $20,000. E) decrease by $58,000.

51) Cheyenne Enterprises manufactures Nuts and Bolts from a joint process (cost = $80,000). Five thousand pounds of Nuts can be sold at split-off for $20 per pound; ten thousand pounds of Bolts can be sold at split-off for $15 per pound. For product costing purposes Cheyenne allocates joint costs using the relative sales value method. The amount of joint cost allocated to Nuts would be: A) $32,000. B) $40,000. C) $48,000. D) $60,000. E) $80,000.

52) Cheyenne Enterprises manufactures Nuts and Bolts from a joint process (cost = $80,000). Five thousand pounds of Nuts can be sold at split-off for $20 per pound; ten thousand pounds of Bolts can be sold at split-off for $15 per pound. For product costing purposes Cheyenne allocates joint costs using the relative sales value method. The amount of joint cost allocated to Bolts would be:

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A) $32,000. B) $40,000. C) $48,000. D) $60,000. E) $80,000.

53) Cheyenne Enterprises manufactures Nuts and Bolts from a joint process (cost = $80,000). Five thousand pounds of Nuts can be sold at split-off for $20 per pound; ten thousand pounds of Bolts can be sold at split-off for $15 per pound. For product costing purposes Cheyenne allocates joint costs using the relative sales value method. The amount of joint cost allocated to Nuts and Bolts, respectively, would be: A) $32,000 and $40,000. B) $32,000 and $48,000. C) $48,000 and $32,000. D) $40,000 and $32,000. E) $40,000 and $40,000.

54) Galveston Corporation has $200,000 of joint processing costs and is studying whether to process J and K beyond the split-off point. Information about J and K follows.

Tons produced Separable variable processing costs beyond split-off Selling price per ton at split-off Selling price per ton after additional processing

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Product J

Product K

25,000

15,000

$ 64,000

$ 100,000

If Galveston desires to maximize total company income, what should the firm do with regard to Products J and K? Product J

Product K

Sell at split-off

Process beyond split-off

Sell at split-off

Process beyond split-off

There is not enough information to judge.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

55) A company that is operating at full capacity should emphasize those products and services that have the: A) lowest total per-unit costs. B) highest contribution margin per unit. C) highest contribution margin per unit of scarce resource. D) highest operating income. E) highest sales volume.

56) A firm that decides to emphasize those goods with the highest contribution margin per unit may have made an incorrect decision when the company:

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A) is highly automated. B) has excess capacity. C) has capacity constraints in the form of limited resources. D) has a high fixed-cost structure. E) has a high level of sunk costs.

57) Homer Enterprises, which produces various goods, has limited processing hours at its manufacturing plant. The following data apply to product no. 607: Sales price per unit: $9.60 Variable cost per unit: $6.20 Process time per unit: 4 hours Management is now studying whether to devote the firm's limited hours to product no. 607 or to other products. What key dollar amount should management focus on when determining no. 607's "value" to the firm and deciding the best course of action to follow? A) $0.85. B) $2.40. C) $3.40. D) $6.20. E) $9.60.

58) Kingston Manufacturing has 27,000 labor hours available for producing X and Y. Consider the following information: Product X Required labor time per unit (hours) Maximum demand (units)

Product Y

6,000

8,000

Contribution margin per unit

Contribution margin per labor hour

2.50

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If Kingston follows proper managerial accounting practices, how many units of Product X should it produce? A) 5,000. B) 1,500. C) 8,000. D) 4,500. E) 6,000.

59) Kingston Manufacturing has 27,000 labor hours available for producing X and Y. Consider the following information: Product X Required labor time per unit (hours) Maximum demand (units)

Product Y

6,000

8,000

Contribution margin per unit

Contribution margin per labor hour

2.50

If Kingston follows proper managerial accounting practices, how many units of Product Y should it produce? A) 8,000. B) 4,500. C) 6,000. D) 5,000. E) 1,500.

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60) Kingston Manufacturing has 27,000 labor hours available for producing X and Y. Consider the following information: Product X Required labor time per unit (hours) Maximum demand (units)

Product Y

6,000

8,000

Contribution margin per unit

Contribution margin per labor hour

2.50

If Kingston follows proper managerial accounting practices, which of the following production schedules should the company set? Product X

Product Y

0 units

8,000 units

1,500 units

8,000 units

6,000 units

0 units

6,000 units

5,000 units

6,000 units

8,000 units

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

61) Newton Manufacturing has 31,000 labor hours available for producing M and N. Consider the following information: Product M Required labor time per unit (hours)

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Product N 3

Maximum demand (units)

6,500

8,000

Contribution margin per unit

5.70

Contribution margin per labor hour

2.50

1.90

If Newton follows proper managerial accounting practices in terms of setting a production schedule, how much contribution margin would the company expect to generate? A) $31,450. B) $63,100. C) $66,700. D) $78,100. E) None of the answers is correct.

62) Jayleen Company makes two products: Carpet Kleen and Floor Deodorizer. Operating information from the previous year follows. Carpet Kleen

Floor Deodorizer

Units produced and sold

5,000

4,000

Machine hours used

5,000

2,000

Sales price per unit

Variable cost per unit

Fixed costs of $20,000 per year are presently allocated equally between both products. If the product mix were to change, total fixed costs would remain the same. The contribution margin per machine hour for Floor Deodorizer is:

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A) $0.25. B) $2.00. C) $4.00. D) $5.00. E) $20.00.

63) Jayleen Company makes two products: Carpet Kleen and Floor Deodorizer. Operating information from the previous year follows. Carpet Kleen

Floor Deodorizer

Units produced and sold

5,000

4,000

Machine hours used

5,000

2,000

Sales price per unit

Variable cost per unit

Fixed costs of $20,000 per year are presently allocated equally between both products. If the product mix were to change, total fixed costs would remain the same. Assuming there is unlimited demand for both products and Jayleen has 10,000 machine hours available, how many units of each product should be produced and sold? Carpet Kleen

Floor Deodorizer

0 units

20,000 units

5,000 units

10,000 units

8,000 units

4,000 units

10,000 units

0 units

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A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

64) A technique that is useful in exploring what would happen if a key decision prediction or assumption proved wrong is termed: A) sensitivity analysis. B) uncertainty analysis. C) project analysis. D) linear programming. E) the theory of constraints.

65) Which of the following characteristics would best explain the use of probabilities and expected values in a decision analysis? A) Limited resources. B) Uncertainty. C) Inflation. D) Multiple products and services. E) Production bottlenecks.

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66) Consider the following statements about relevant costing and activity-based costing: 1.I. The concept of relevant costs and benefits cannot be used in conjunction with an activitybased costing system. 2.II. The concept of relevant costs and benefits must be modified for use with an activity-based costing system. 3.III. Generally speaking, the decision maker can better associate relevant costs with the activities that drive them under an activity-based costing system than under a conventional product-costing system. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) I and II. E) II and III.

67)

Linear programming would be used by decision makers when there are: A) limited resources for labor. B) scarce resources for machine hours. C) scarce resources for both labor and machine hours. D) multiple scarce resources. E) limited resources for material.

68)

A constraint function in a linear-programming problem might focus on: A) sales dollars. B) labor hours. C) variable costs. D) fixed costs. E) qualitative factors.

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69) When using a graphical solution to a linear programming problem, the optimal solution will lie in an area commonly known as the: A) region of maximization. B) feasible region. C) objective region. D) constraint region. E) curvilinear region.

70) Technostrain Corporation manufactures two products: X and Y. The company has 4,000 hours of machine time available and can sell no more than 800 units of product X. Other pertinent data follow. Product X

Product Y

Selling price

$ 8.00

$ 19.00

Variable cost

3.00

5.00

Fixed cost

3.50

6.25

2 hours

3 hours

Machine time per unit

Which of the following is Technostrain’s objective function? A) Maximize Z = 2X + 3Y. B) Maximize Z = 8X + 19Y. C) Maximize Z = 5X + 14Y. D) Maximize Z = 1.50X + 7.75Y. E) Minimize Z = 6.50X + 11.25Y.

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71) Technostrain Corporation manufactures two products: X and Y. The company has 4,000 hours of machine time available and can sell no more than 800 units of product X. Other pertinent data follow. Product X

Product Y

Selling price

$ 8.00

$ 19.00

Variable cost

3.00

5.00

Fixed cost

3.50

6.25

2 hours

3 hours

Machine time per unit

Which of the following is a constraint function of Technostrain? A) Maximize Z = 5X + 14Y. B) Minimize Z = 6.50X + 11.25Y. C) X ≥ 800. D) 2X ≤ 4,000; 3Y ≤ 4,000. E) 2X + 3Y ≤ 4,000.

72) Stone Industries produces chemicals used in the production of granite and quartz countertops used in residential homes. In one joint process, 20,000 gallons of Benzonite is processed into 14,000 gallons of Ultralite and 6,000 gallons of Concentralite. The joint process costs are $38,000. The following information is available: Ultralite

Concentralite

Allocated joint process costs

$ 26,600

$ 11,400

Sales price per gallon at split-off point Variable cost to process further

0.85

1.25

$ 52,000

6,600

Sales price per gallon after further processing

2.20

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4.60

Should Ultralite be processed further, and why or why not? A) No, Ultralite should not be processed further because the net loss is ($14,200). B) No, Ultralite should not be processed further because the net loss is ($2,300). C) Yes Ultralite should be processed further because the net benefit is $12,400. D) Yes Ultralite should be processed further because the net benefit is $24,300. E) None of the answers is correct.

73) Stone Industries produces chemicals used in the production of granite and quartz countertops used in residential homes. In one joint process, 20,000 gallons of Benzonite is processed into 14,000 gallons of Ultralite and 6,000 gallons of Concentralite. The joint process costs are $38,000. The following information is available: Ultralite

Concentralite

Allocated joint process costs

$ 26,600

$ 11,400

Sales price per gallon at split-off point Variable cost to process further

0.85

1.25

$ 52,000

6,600

Sales price per gallon after further processing

2.20

4.60

Should Concentralite be processed further, and why or why not? A) No, Concentralite should not be processed further because the net loss is ($6,600). B) Yes Concentralite should be processed further because the net benefit is $6,600. C) No, Concentralite should not be processed further because the net loss is ($18,000). D) Yes Concentralite should be processed further because the net benefit is $14,100. E) None of the answers is correct.

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74) Stone Industries produces chemicals used in the production of granite and quartz countertops used in residential homes. In one joint process, 20,000 gallons of Benzonite is processed into 14,000 gallons of Ultralite and 6,000 gallons of Concentralite. The joint process costs are $38,000. The following information is available: Ultralite

Concentralite

Allocated joint process costs

$ 26,600

$ 11,400

Sales price per gallon at split-off point Variable cost to process further

0.85

1.25

$ 52,000

6,600

Sales price per gallon after further processing

2.20

4.60

Stone Industries allocated the joint processing costs on the basis of gallons of product produced. Using the relative-sales-value method, how much of the joint processing costs would be allocated to Ultralite? A) $8,109. B) $14,691. C) $23,309. D) $29,891. E) None of the answers is correct.

75) Brighton Company’s results of operations for its most recent year are shown below. Brighton makes two products, CJ11 and PX22. Variable selling expenses for CJ11 are $3 per unit and $16 per unit for PX22. Cost of goods sold includes $3 per unit of fixed manufacturing costs for CJ11 and $16 per unit for PX22 (remaining selling amounts are fixed). CJ11 Units Sales revenue Less: Cost of goods sold

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PX22

8,000

2,960

$ 192,000

$ 592,000

144,000

384,800

Gross Margin

Less: Selling expenses Operating income (loss)

48,000

$ 207,200

40,000

107,200

8,000

$ 100,000

Brighton is considering a proposal to drop CJ11, which would decrease the company’s fixed manufacturing costs by 25%. What would be the impact on operating income if CJ11 is discontinued? A) $8,000 decrease. B) $5,520 increase. C) $23,360 decrease. D) $30,160 decrease. E) None of the answers is correct.

76) Brighton Company’s results of operations for its most recent year are shown below. Brighton makes two products, CJ11 and PX22. Variable selling expenses for CJ11 are $3 per unit and $16 per unit for PX22. Cost of goods sold includes $3 per unit of fixed manufacturing costs for CJ11 and $16 per unit for PX22 (remaining selling amounts are fixed). CJ11 Units Sales revenue

8,000

2,960

$ 192,000

$ 592,000

144,000

384,800

48,000

$ 207,200

40,000

107,200

8,000

$ 100,000

Less: Cost of goods sold Gross Margin

Less: Selling expenses Operating income (loss)

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PX22

If Brighton eliminates CJ11 and uses the available capacity to produce and sell an additional 1,200 units of PX22, what would be the impact on operating income? A) $76,000 increase B) $48,000 decrease C) $36,000 increase D) $84,000 increase E) None of the answers is correct.

77) Forest River produces 3 products, Aspen, Oak, and Pine. The company has accumulated the following information about each of its products:

Sales price per unit Variable cost per unit Contribution margin per unit

Aspen

Oak

Pine

$ 12.00

$ 9.60

$ 8.00

8.00

6.40

5.60

$ 4.00

$ 3.20

$ 2.40

Each unit requires 2 machine hours and the company has 1,440 machine hours available each year. The demand for each product is 500 units. Which of the following statements is correct regarding Forest River’s production? A) Forest River should produce equal amounts of each product since they all require 2 machine hours per unit. B) Forest River should produce 720 units of Aspen only. C) Forest River should produce 500 units of Aspen, 110 of Oak, and 110 of Pine. D) Forest River should produce 500 units of Aspen and 220 of Oak. E) None of the answers is correct.

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78) Forest River produces 3 products, Aspen, Oak, and Pine. The company has accumulated the following information about each of its products:

Sales price per unit Variable cost per unit Contribution margin per unit

Aspen

Oak

Pine

$ 12.00

$ 9.60

$ 8.00

8.00

6.40

5.60

$ 4.00

$ 3.20

$ 2.40

Aspen requires 4 machine hours, Oak requires 2.5 machine hours and Pine requires 1.5 machine hours. The company has 1,440 machine hours available each year. The demand for each product is 500 units. Which of the following statements is correct regarding Forest River’s production? A) Forest River should produce 500 units of Pine and 276 of Oak. B) Forest River should produce equal amounts of each product since they all have the same contribution margin per unit of scarce resource. C) Forest River should produce 360 units of Aspen only. D) Forest River should produce 500 units of Pine and 500 units of Oak. E) None of the answers is correct.

79) Forest River produces 3 products, Aspen, Oak, and Pine. The company has accumulated the following information about each of its products:

Sales price per unit Variable cost per unit Contribution margin per unit

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Aspen

Oak

Pine

$ 12.00

$ 9.60

$ 8.00

8.00

6.40

5.60

$ 4.00

$ 3.20

$ 2.40

Aspen requires 4 machine hours, Oak requires 2.5 machine hours and Pine requires 1.5 machine hours. The company has 1,440 machine hours available each year. The demand for each product is 500 units. If Forest River schedules its production to maximize its total contribution margin, what would be the company’s total contribution margin? A) $2,083.20. B) $3,043.20. C) $1,440.00. D) $2,800.00. E) None of the answers is correct.

80) Brady Industries is deciding whether or not to discontinue its Agave Division. The division’s contribution margin is $48,600 per year. The fixed costs charged to the division total $57,600 but $27,000 would be eliminated if the division is discontinued. If the division is eliminated, Brady’s overall operating income would: A) Decrease by $48,600. B) Decrease by $21,600. C) Increase by $9,000. D) Decrease by $18,000. E) None of the answers is correct.

81)

The first step in the decision-making process is to identify the alternatives. ⊚ true ⊚ false

82)

The last step in the decision-making process is to collect the data. ⊚ true ⊚ false

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83) While the managerial accountant is often involved in multiple steps in the decisionmaking process, the managerial accountant’s primary role in the pro-cess is to select data pertinent to the decision. ⊚ true ⊚ false

84) In the final analysis of a decision, quantitative measures are more important than qualitative measures. ⊚ true ⊚ false

85) The concept of a relevant cost can be defined as a past cost that differs among alternatives. ⊚ true ⊚ false

86) Cost predictions relevant to repetitive decisions typically can draw on a large amount of historical data. ⊚ true ⊚ false

87) The City of Columbus should not consider the purchase price of its old vehicle when making the decision to replace it with a more cost effective new vehicle. ⊚ true ⊚ false

88) The term "opportunity cost" is best defined as the benefit associated with a rejected alternative when making a choice. ⊚ true ⊚ false Version 1

89) Dubin Company has excess capacity and wants to add a new service to its expanding business. The new service should be added as long as service revenues exceed the sum of variable costs and fixed costs. ⊚ true ⊚ false

90)

Opportunity cost is not important in special order decisions. ⊚ true ⊚ false

91)

In most all decisions, joint costs are relevant costs. ⊚ true ⊚ false

92) A firm that decides to emphasize those goods with the highest contribution margin per unit may have made an incorrect decision when the company has capacity constraints in the form of limited resources. ⊚ true ⊚ false

93) Under activity-based costing, the concepts underlying relevant-costing analysis are not valid because they may derive conclusions that are different than those obtained with conventional cost analyses. ⊚ true ⊚ false

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94) The process of identifying relevant costs and benefits is largely the same whether the decision is viewed from a short-run or long-run perspective. ⊚ true ⊚ false

95) The axes and constraints form an area for the solution to a linear program called the relevant region. ⊚ true ⊚ false

96)

The objective function is an algebraic expression of a firm’s goal. ⊚ true ⊚ false

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Answer Key Test name: Chap 14_6e_Cornett 1) E 2) A 3) D 4) E 5) C 6) C 7) D 8) B 9) D 10) C 11) E 12) B 13) B 14) B 15) C 16) A 17) A 18) D 19) E 20) C 21) D 22) C 23) B 24) B 25) D 26) C Version 1

27) C 28) D 29) A 30) B 31) B 32) A 33) C 34) D 35) C 36) D 37) B 38) D 39) A 40) B 41) D 42) C 43) D 44) C 45) C 46) A 47) B 48) E 49) E 50) C 51) A 52) C 53) B 54) C 55) C 56) C Version 1

57) A 58) E 59) D 60) D 61) C 62) C 63) B 64) A 65) B 66) C 67) D 68) B 69) B 70) C 71) E 72) C 73) B 74) C 75) D 76) C 77) D 78) A 79) A 80) B 81) FALSE 82) FALSE 83) TRUE 84) FALSE 85) FALSE 86) TRUE Version 1

87) TRUE 88) TRUE 89) FALSE 90) FALSE 91) FALSE 92) TRUE 93) FALSE 94) TRUE 95) FALSE 96) TRUE

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Chapter 14 – 6e Cornet- Manually Graded 1)

The following costs relate to a variety of decision settings: Cost

Decision

Allocated corporate overhead

Closing a money-losing department

Cost of an old car

Vehicle replacement

Direct materials

Make or buy a product

Salary of marketing manager

Project discontinuance; manager to be transferred elsewhere in the firm

Home theater installation

Purchase of a new home

Unavoidable fixed overhead

Plant closure

Research expenditures incurred last year, related to new product

Product introduction to marketplace

$4 million advertising program

Whether to promote product A or B with the $4 million program

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Manufactured cost of existing inventory

Whether to discard the goods or sell them to a third-world country

Required: Consider each of the nine costs listed and determine whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.

2) Alton Van Lines is considering the acquisition of two new trucks. Because of improved mileage, these vehicles are expected to have a lower operating cost per mile than the trucks the company plans to replace. Management is studying whether the firm would be better off keeping the older vehicles or going ahead with the replacement, and has identified the following decision factors to evaluate: 1. Cost and book value of the old trucks 2. Moving revenues, which are not expected to change with the acquisition 3. Operating costs of the new and old vehicles 4. New truck purchase price and related depreciation charges 5. Proceeds from sale of the old vehicles 6. The 8% return on alternative investments that Alton will forego by tying up cash in the new trucks 7. Drivers' wages and fringe benefits Required: Classify the seven decision factors listed into the following categories (note: A factor may be included in more than one category, or the factor may not necessarily be included in any of the categories): A. Relevant information. B. Opportunity costs. C. Sunk costs. D. Factors to be considered in the decision.

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3) Maine Company recently discontinued the manufacture of product J15. The standard costs for this product were: Direct materials

$50

Direct labor

Variable overhead

Fixed overhead

Total

$119

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There are 800 units of this product in finished-goods inventory. The units are technologically obsolete, and the following alternatives are being considered: 1. Dispose of as scrap. The proceeds from the sale will equal the cost of transportation to the disposal site. 2. Sell to an exporter for sale in a developing country. The sales price to the exporter would be $12 per unit. 3. Remanufacture the products to convert them into model J16, a model that normally sells for $200. The additional cost to convert the J15 units would be $45; the standard cost to manufacture J16 is $125. Presently, there is sufficient capacity to manufacture product J16 directly or to do the necessary conversion work on J15. Required: A. Determine the current carrying value of the J15 inventory. B. Evaluate each alternative and determine the financial benefit to Maine if the alternative is pursued.

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4) Icon, Inc. produces a variety of products that carry the logos of teams in the Fortified Football League (FFL). The company recently paid the league $85,000 for the rights to market a popular player jersey and immediately began production. The following information is available: Number of jerseys manufactured: 25,000 Cost of jerseys manufactured: $625,000 Amount of manufacturing costs paid to-date: $410,000 Number of jerseys sold to-date: 0 Estimated future marketing costs: $330,000 Anticipated selling price per jersey: $42 The FFL is about to file a lawsuit to stop jersey sales and is demanding another $50,000 from Icon for the manufacturing rights. Conversations with Icon’s attorneys indicate that the league has a strong case and is likely to win the suit. If this situation arises, Icon will be unable to recover any amounts paid to the FFL. Required: Icon’s sales department anticipates very strong demand and a sellout of all jerseys manufactured. A. Determine the overall profitability of the jersey product line if Icon settles the disagreement with the FFL and the anticipated sellout occurs. B. Should the company pay the additional $50,000 demanded by the league or should the jersey program be dropped? Show computations to support your answer.

5) Drew Mellow builds custom homes in Miami. Mellow was approached not too long ago by a client about a potential project, and he submitted a bid of $590,000, derived as follows: Land

$90,000

Construction materials

120,000

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Subcontractor labor costs

150,000

$360,000

Construction overhead: 20% of direct costs

72,000

Allocated corporate overhead

40,000

Total cost

$472,000

Mellow adds a 25% profit margin to all jobs, computed on the basis of total cost. In this client's case the profit margin amounted to $118,000 ($472,000 × 25%), producing a bid price of $590,000. Assume that 60% of construction overhead is fixed. Required: A. Suppose that business is presently very slow, and the client countered with an offer on this home of $455,000. Should Mellow accept the client's offer? Why? B. If Mellow has more business than he can handle, how much should he be willing to accept for the home? Why?

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6) Pea Ridge Corporation manufactures faucets. Several weeks ago, the company received a special-order inquiry from Galena, Inc. Galena desires to market a faucet similar to Pea Ridge’s model no. 55 and has offered to purchase 3,000 units. The following data are available: · Cost data for Pea Ridge’s model no. 55 faucet: direct materials, $45; direct labor, $30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per hour). · The normal selling price of model no. 55 is $180; however, Galena has offered Pea Ridge only $115 because of the large quantity it is willing to purchase. · Galena requires a design modification that will allow a $4 reduction in direct-material cost. · Pea Ridge’s production supervisor notes that the company will incur $8,700 in additional setup costs and will have to purchase a $3,300 special device to manufacture these units. The device will be discarded once the special order is completed. · Total manufacturing overhead costs are applied to production at the rate of $35 per labor hour. This figure is based, in part, on budgeted yearly fixed overhead of $624,000 and planned production activity of 24,000 labor hours. · Pea Ridge will allocate $5,000 of existing fixed administrative costs to the order as "part of the cost of doing business." Required: A. One of Pea Ridge’s staff accountants wants to reject the special order because "financially, it's a loser." Do you agree with this conclusion if Pea Ridge currently has excess capacity? Show calculations to support your answer. B. If Pea Ridge currently has no excess capacity, should the order be rejected from a financial perspective? Briefly explain. C. Assume that Pea Ridge currently has no excess capacity. Would outsourcing be an option that Pea Ridge could consider if management truly wanted to do business with Galena? Briefly discuss, citing several key considerations for Pea Ridge in your answer.

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7) St. Luke’s Hospital has been hit with a number of complaints about its food service from patients, employees, and cafeteria customers. These complaints, coupled with a very tight local labor market, have prompted the organization to contact Nationwide Institutional Food Service (NIFS) about the possibility of an outsourcing arrangement. The hospital's business office has provided the following information for food service for the year just ended: food costs, $890,000; labor, $85,000; variable overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria net income, $80,000. Conversations with NIFS personnel revealed the following information: · NIFS will charge St. Luke’s Hospital $14 per day for each patient served. Note: This figure has been "marked up" by NIFS to reflect the firm's cost of operating the hospital cafeteria. · St. Luke’s 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%. · Labor is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labor costs will drop by 90%. NIFS plans to use St. Luke’s facilities for meal preparation. · Cafeteria net income is expected to increase by 15% because NIFS will offer an improved menu selection. Required: A. What is meant by the term "outsourcing"? B. Should St. Luke’s outsource its food-service operation to NIFS? C. What factors, other than dollars, should St. Luke’s consider before making the final decision?

8) Mama Louise’s Pizza store no. 16 has fallen on hard times and is about to be closed. The following figures are available for the period just ended: Sales

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$205,000

Cost of sales

67,900

Building occupancy costs:

Rent

36,500

Utilities

15,000

Supplies used

5,600

Wages

77,700

Miscellaneous

2,400

Allocated corporate overhead

16,800

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All employees except the store manager would be discharged. The manager, who earns $27,000 annually, would be transferred to store no. 19 in a neighboring suburb. Additionally, no. 16's furnishings and equipment are fully depreciated and would be removed and transported to Mama Louise’s warehouse at a cost of $2,800. Required: A. What is store no. 16's reported loss for the period just ended? B. Should the store be closed? Why? C. Would Mama Louise’s likely lose all $205,000 of sales revenue if store no. 16 were closed? Explain.

9) "It's close to a $40,000 loser and we ought to devote our efforts elsewhere," noted Cindy Mires, after reviewing financial reports of her company's attempt to offer a reduced-price daycare service to employees. The daycare's financial figures for the year just ended follow. Revenues

$120,000

Variable costs

45,000

Traceable fixed costs

89,000

Allocated corporate overhead

24,000

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If the daycare service/center is closed, 70% of the traceable fixed cost will be avoided. In addition, the company will incur one-time closure costs of $6,800. Required: A. Show calculations that support Mires’ belief that the daycare center lost almost $40,000. B. Should the center be closed? Show calculations to support your answer. C. What problem might the company experience if the center is closed?

10) Second Time Around sells clothing, shoes, and accessories at a suburban location near Dallas. Information for the just concluded calendar year follows. Clothing

Shoes

Accessories

Sales

$850,000

$320,000

$150,000

Less: Variable costs

$510,000

$270,000

$82,500

Fixed costs

290,000

70,000

42,000

Total costs

$800,000

$340,000

$124,500

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Operating income (loss)

$50,000

$(20,000)

$25,500

Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Second Time Around will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed. Required: Determine whether the shoe department should be closed.

11) Tyson Corner Manufacturing produces two bearings: C15 and C19. Data regarding these two bearings follow.

Machine hours required per unit

C15

C19

2.00

2.50

$2.50

$4.00

Standard cost per unit

Direct material

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Direct labor

5.00

4.00

Variable*

3.00

2.50

Fixed**

4.00

5.00

Total

$14.50

$15.50

Manufacturing overhead:

* Applied on the basis of direct labor hours

** Applied on the basis of machine hours

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The company requires 8,000 units of C15 and 11,000 units of C19. Recently, management decided to devote additional machine time to other product lines, resulting in only 31,000 machine hours per year that can be dedicated to production of the bearings. An outside company has offered to sell Tyson Corner the bearings at prices of $13.50 for C15 and $13.50 for C19. Required: A. Assume that Tyson Corner decided to produce all C15s and purchase C19s only as needed. Determine the number of C19s to be purchased. B. Compute the net benefit to the company of manufacturing (rather than purchasing) a unit of C15. Repeat the calculation for a unit of C19. (Note: in answering this question, do not take into consideration any machine hours constraint). C. Tyson Corner lacks sufficient machine time to produce all of the C15s and C19s needed. Which component (C15 or C19) should Tyson Corner manufacture first with the limited machine hours available? Why? Be sure to show all supporting computations.

12) Ooo-La-La Company has met all production requirements for the current month and has an opportunity to manufacture additional units with its excess capacity. Unit selling prices and unit costs for three product lines follow. Plain

Regular

Super

Selling price

$40

$55

$65

Direct material

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Direct labor (at $20 per hour)

Variable overhead

Fixed overhead

Variable overhead is applied on the basis of direct labor dollars, whereas fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional manufacture of all products. Required: A. If Ooo-La-La has excess machine capacity and can add more labor as needed (i.e., neither machine capacity nor labor is a constraint), which product is the most attractive to produce? B. If Ooo-La-La has excess machine capacity but a limited amount of labor time available, which product or products should be manufactured in the excess capacity?

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13) Townson Company manufactures G and H in a joint process. The joint costs amount to $80,000 per batch of finished goods. Each batch yields 20,000 liters, of which 40% are G and 60% are H. The selling price of G is $8.75 per liter, and the selling price of H is $15.00 per liter. Required: A. If the joint costs are allocated on the basis of the products' sales value at the split-off point, what amount of joint cost will be charged to each product? B. Townson has discovered a new process by which G can be refined into Product GG, which has a sales price of $12 per liter. This additional processing would increase costs by $2.10 per liter. Assuming there are no other changes in costs, should the company use the new process? Show calculations.

14) Dixie Highway Corporation manufactures products J, K, and L in a joint process. The company incurred $480,000 of joint processing costs during the period just ended and had the following data that related to production: Sales values and Additional cost if Processed Beyond Split-off

Product

Sales Value at Split-off

Sales Value

Additional cost

$400,000

$550,000

$130,000

350,000

540,000

240,000

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850,000

975,000

118,000

An analysis revealed that all costs incurred after the split-off point are variable and directly traceable to the individual product line. Required: A. If Dixie Highway allocates joint costs on the basis of the products' sales values at the split-off point, what amount of joint cost would be allocated to product J? B. If production of J totaled 50,000 gallons for the period, determine the relevant cost per gallon that should be used in decisions that explore whether to sell at the split-off point or process further. Briefly explain your answer. C. At the beginning of the current year, Dixie Highway decided to process all three products beyond the split-off point. If the company desired to maximize income, did it err in regards to its decision with product J? Product K? Product L? By how much?

15)

Information is said to be useful in decision making if it possesses three characteristics.

Required: A. List the three characteristics of useful information. B. Frequently, there is a conflict between two of the characteristics requested in part "A." Briefly explain what this conflict is. C. What distinguishes relevant from irrelevant information?

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16)

Sunk costs and opportunity costs are inherent in decision making.

Required: A. Define the terms "sunk cost" and "opportunity cost." B. How are sunk costs treated when making decisions? C. "Information about sunk costs can be found in the financial statements and accounting records; however, information about opportunity costs is omitted." Do you agree with this statement? Explain.

17) Capacity restrictions often change the way that managers make decisions. For example, consider a retailer that has limited square footage in its store. What guideline should be used in deciding which new products to carry? How would this differ, say, from a concert promoter that desires to bring a rock group to an arena-type facility?

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Answer Key Test name: Chap 14_6e_Cornett_Manually Graded

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Chapter 15 – 6e Cornett 1)

Which of the following can influence a company's pricing decisions? A) Manufacturing costs. B) Competitors. C) Customer demand. D) Pricing laws. E) All of the answers are correct.

2) Which of the following choices correctly denotes factors that can influence a company's pricing practices for goods and services? Market Conditions

Costs

Customer Demand

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

Which of the following is not a major influence on pricing decisions? A) Planning and control policies of the firm. B) Customer demand. C) Costs. D) Competitors. E) Political, legal, and image-related issues.

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4) Consider the following statements about pricing: 1.I. Prices are often determined by the market, subject to the constraint that costs must be covered in the long run. 2.II. Prices are often based on costs, subject to the constraint that customers and competitors will exert an influence. 3.III. A balance of market forces and cost is important when making pricing decisions. Which of the above statements is (are) true? A) I only. B) II only. C) I and III. D) II and III. E) I, II, and III.

5) the:

The curve that shows the relationship between the sales price and quantity sold is called

A) marginal revenue curve. B) average cost curve. C) profit curve. D) demand curve. E) total revenue curve.

6) The curve that shows the relationship between the total sales revenue and quantity sold is called the: A) marginal revenue curve. B) average cost curve. C) profit curve. D) demand curve. E) total revenue curve.

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7) On a graph where the horizontal axis represents quantity sold and the vertical axis represents selling price, the basic demand curve in a competitive market can be graphed: A) as a horizontal line. B) as a vertical line. C) as a downward sloping line to the right. D) as an upward sloping line to the right. E) in the same manner as the total revenue curve.

8) The curve that shows the change in total revenue that accompanies a change in quantity sold is called the: A) marginal revenue curve. B) average cost curve. C) profit curve. D) demand curve. E) revenue curve.

9) The curve that shows the change in total cost that accompanies a change in quantity produced and sold is called the: A) marginal revenue curve. B) marginal cost curve. C) profit curve. D) average revenue curve. E) revenue curve.

10)

From an economic perspective, a company's profit-maximizing quantity is found where:

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A) the total cost curve intersects with the marginal cost curve. B) the total revenue curve intersects with the average revenue curve. C) the marginal revenue curve intersects with the demand curve. D) the marginal revenue curve intersects with the marginal cost curve. E) the marginal cost curve intersects with the demand curve.

11)

If the volume sold reacts strongly to changes in price, demand: A) has no elasticity. B) has negative elasticity. C) is inelastic. D) is elastic. E) is unrealistic.

12)

Under which of the following condition(s) are prices said to be elastic? Price Change

Change in Sales Volume

Increase

Sizable increase

Increase

Sizable decrease

Decrease

Sizable increase

Decrease

Sizable decrease

Either sizable increase or decrease

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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13)

Which of the following statements regarding price elasticity is false? A) The concept of price elasticity is an extension of the economic pricing model. B) Demand is elastic if a price change has a large negative impact on sales volume. C) Demand is elastic if price changes have no impact on sales volume. D) Measuring price elasticity is an important objective of market research. E) Demand is relatively inelastic if price changes have little impact on sales quantity.

14)

Prices are said to be inelastic under which of the following conditions? Price Change

Change in Sales Volume

Increase

Sizable decrease

Increase

Little impact

Decrease

Sizable increase

Decrease

Little impact

Either increase or decrease

Little/no impact

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

15) Consider the following statements regarding the economic pricing model: 1.I. The economic model is limited in use because a firm's demand curve is difficult to determine. 2.II. The marginal revenue and marginal cost model is valid for all forms of market organization (perfect competition, oligopoly, and so forth). 3.III. Cost accounting systems are not designed to measure the marginal changes in cost incurred as production and sales increase. Which of the above statements is (are) true?

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A) I only. B) III only. C) I and III. D) II and III. E) I, II, and III.

16) In a typical business, the firm's overall demand would be influenced by interactions of pricing policies and: A) the company's reputation. B) the quality of goods and services offered. C) competing goods and services. D) advertising and promotional campaigns. E) All of these factors.

17) Consider the following statements about why prices are often based on product costs: 1.I. Companies sell many products and services, and cost-based approaches provide a simple and direct pricing method. 2.II. The cost of a product or service provides a lower limit or floor, below which price should not be set in the long run. 3.III. Determining a company's demand and marginal revenue curves is difficult, costly, and time consuming. Which of the above statements is (are) true? A) I only. B) III only. C) I and III. D) II and III. E) I, II, and III.

18)

Which of the following represents the cost-plus pricing formula?

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A) Price = cost + (markup percentage × cost). B) Price = cost + markup percentage. C) Price = markup percentage × cost. D) Price = cost ÷ markup percentage. E) Price = cost + (markup percentage + cost).

19)

If a company uses a cost-plus approach to pricing, it will find:

A) there are several different definitions of cost and the higher the cost, the higher the markup percentage. B) there are several different definitions of cost and the higher the cost, the lower the markup percentage. C) there is one definition of cost, and there is no relationship between cost and the markup percentage used. D) there is one definition of cost, and there is no markup percentage with the cost-plus approach. E) it is in violation of generally accepted accounting principles (GAAP).

20)

In a cost-plus approach to pricing:

A) there is an inverse relationship between the magnitude of the cost basis and the markup percentage. B) there is a direct relationship between the magnitude of the cost basis and the markup percentage. C) the cost basis used must include fixed manufacturing overhead. D) "plus" refers to the addition of allocated administrative overhead to the direct manufacturing costs. E) "plus" refers to the addition of allocated fixed manufacturing overhead to the variable manufacturing costs.

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21) Patterson and Clay Companies both use cost-plus pricing formulas and arrived at a selling price of $1,000 for the same product. Patterson uses absorption manufacturing cost as the basis for computing its dollar markup whereas Clay uses total cost. Which of the following choices correctly denotes the company that would have (1) the higher cost basis for deriving its dollar markup and (2) the higher markup percentage? Cost Basis

Markup Percentage

Patterson

Clay

Patterson

Clay

More information is needed to judge.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

22) Durango Industries employs cost-plus pricing formulas to derive selling prices for its various products. If the formulas are all used correctly, which of the following cost bases will result in the highest selling price? A) Variable manufacturing cost. B) Absorption manufacturing cost. C) Total variable cost. D) Total cost. E) None of these because if the formulas are applied correctly, all should result in the same selling price through the use of varying markups.

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23) Consider the following statements about absorption-cost pricing formulas: 1.I. Absorption-cost formulas consider a company's fixed manufacturing costs when establishing a selling price. 2.II. Absorption-cost formulas are often justified on the grounds that a company must cover all of its costs in the long run. 3.III. Absorption-cost data are the type that managers need when facing certain pricing decisions, such as whether or not to accept a special order. Which of the above statements is (are) true? A) II only. B) I and II. C) I and III. D) II and III. E) I, II, and III.

24) The difference between absorption manufacturing cost and total cost with respect to product pricing is caused by: A) variable manufacturing cost. B) applied fixed manufacturing cost. C) variable selling and administrative cost. D) allocated fixed selling and administrative cost. E) both variable selling and administrative cost and allocated fixed selling and administrative cost.

25) Collins Company uses cost-plus pricing and has calculated total variable manufacturing cost, total absorption manufacturing cost, and total cost for one of its products. Which of these costs would be the smallest? A) Total variable manufacturing cost. B) Total absorption manufacturing cost. C) Total cost. D) There is no difference between total absorption manufacturing cost and total cost. E) More information is needed to correctly answer the question.

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26)

Which of the following formulas represents the markup percentage on total cost? A) Target profit ÷ annual volume. B) Target profit ÷ (annual volume × total cost per unit). C) (Annual volume × total cost per unit) ÷ target profit. D) Target profit ÷ variable cost. E) (Target profit × total cost per unit) ÷ annual volume.

27) When determining the markup to be used in a cost-plus pricing formula, many companies base the markup on a target: A) return on investment. B) sales margin. C) capital turnover. D) earnings per share. E) debt-to-equity ratio.

28) The following costs relate to Tower Company: Variable manufacturing cost, $30; variable selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated fixed selling and administrative cost, $4. If Tower uses absorption manufacturing-cost pricing formulas, the company's markup percentage would be computed on the basis of: A) $30. B) $38. C) $45. D) $57. E) None of the answers is correct.

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29) The following costs relate to Tower Company: Variable manufacturing cost, $30; variable selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated fixed selling and administrative cost, $4. If Tower uses total-cost pricing formulas, the company's markup percentage would be computed on the basis of: A) $30. B) $38. C) $45. D) $57. E) None of the answers is correct.

30)

The following data pertain to Laramie Enterprises:

Variable manufacturing cost

$ 60

Variable selling and administrative cost

Applied fixed manufacturing cost

Allocated fixed selling and administrative cost

What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 60%? A) $63. B) $168. C) $175. D) $280. E) None of the answers is correct.

31)

The following data pertain to Ronaldo Enterprises:

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Variable manufacturing cost

$ 70

Variable selling and administrative cost

Applied fixed manufacturing cost

Allocated fixed selling and administrative cost

What price will the company charge if the firm uses cost-plus pricing based on absorption manufacturing cost and a markup percentage of 110%? A) $84. B) $147. C) $210. D) $231. E) None of the answers is correct.

32)

The following data pertain to Frontier Enterprises:

Variable manufacturing cost

$ 70

Variable selling and administrative cost

Applied fixed manufacturing cost

Allocated fixed selling and administrative cost

What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 110%?

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A) $84. B) $147. C) $210. D) $231. E) None of the answers is correct.

33) The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available:

Variable manufacturing cost

$ 180

Variable selling and administrative cost

Applied fixed manufacturing cost

Allocated fixed selling and administrative cost

What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 220%? A) $396.00 B) $495.00 C) $576.00 D) $643.50 E) None of the answers is correct.

34) The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available:

Version 1

Variable manufacturing cost

$ 180

Variable selling and administrative cost

Applied fixed manufacturing cost

Allocated fixed selling and administrative cost

What price will the company charge if the firm uses cost-plus pricing based on total manufacturing cost and a markup percentage of 160%? A) $150. B) $384. C) $390. D) $624. E) None of the answers is correct.

35) The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available:

Variable manufacturing cost

$ 180

Variable selling and administrative cost

Applied fixed manufacturing cost

Allocated fixed selling and administrative cost

What price will the company charge if the firm uses cost-plus pricing based on total variable cost and a markup percentage of 120%?

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A) $420. B) $459. C) $594. D) $672. E) None of the answers is correct.

36) The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available:

Variable manufacturing cost

$ 180

Variable selling and administrative cost

Applied fixed manufacturing cost

Allocated fixed selling and administrative cost

What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 40%? A) $462. B) $513. C) $567. D) $594. E) None of the answers is correct.

37) Musik Corporation uses a 140% markup on total cost and recently computed a selling price of $1,560 for a particular product. On the basis of this information, the product's total cost is:

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A) $650.00. B) $910.00. C) $1,114.29. D) $2,184.00. E) None of the answers is correct.

38) Fantasy Transport Company has average invested capital of $800,000 and a target return on investment of 15%. The total cost per unit is $20 based on a volume level of 25,000 units. Fantasy’s markup percentage on total cost is: A) 9.375%. B) 24.0%. C) 47.5%. D) 62.5%. E) None of the answers is correct.

39) If the target profit is $60,000 for a volume of 480 units, fixed costs are $168,000, and the variable cost per unit is $450, then the markup percentage on variable cost would be: A) 104.56%. B) 105.56%. C) 106.00%. D) 106.45%. E) None of the answers is correct.

40) Longwood, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows:

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Variable costs: Manufacturing Selling and Administrative

$ 450,000 100,000

Total variable costs

550,000

Fixed costs: Manufacturing Selling and Administrative Total fixed costs Total costs

$ 300,000 180,000 480,000 $ 1,030,000

The average amount of capital invested in the laptop product line is $900,000 and Longwood’s target return on investment is 18%. What price must Longwood charge if the company uses cost-plus pricing based on total cost? A) $868. B) $900. C) $1,000. D) $1,192. E) None of the answers is correct.

41) Longwood, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows:

Variable costs:

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Manufacturing Selling and Administrative

$ 450,000 100,000

Total variable costs

550,000

Fixed costs: Manufacturing Selling and Administrative

$ 300,000 180,000

Total fixed costs

480,000

Total costs

$ 1,030,000

The average amount of capital invested in the laptop product line is $900,000 and Longwood’s target return on investment is 18%. If Longwood uses cost-plus pricing based on absorption cost, the markup percentage the company must use would be: A) 15.72%. B) 21.64%. C) 29.56%. D) 58.93%. E) None of the answers is correct.

42) Longwood, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows:

Variable costs: Manufacturing

Version 1

$ 450,000

Selling and Administrative

100,000

Total variable costs

550,000

Fixed costs: Manufacturing Selling and Administrative Total fixed costs Total costs

$ 300,000 180,000 480,000 $ 1,030,000

The average amount of capital invested in the laptop product line is $900,000 and Longwood’s target return on investment is 18%. For Longwood, which of the following series of cost-plus pricing formulas will result in largest markup percentage necessary to achieve the company’s target return on investment? A) All variable costs. B) All costs. C) Absorption manufacturing costs. D) Variable manufacturing costs. E) None of the answers is correct.

43) Which of the following terms describes a pricing strategy in which a new product's initial price is set high and then eventually lowered to appeal to a broader range of customers? A) Penetration pricing. B) Price skimming. C) Customer pricing. D) Designed pricing. E) Market-share pricing.

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44)

What is price skimming? A) The initial price is set low and kept constant. B) The initial price is set low and then raised. C) The initial price is set high and later lowered. D) The initial price is set high and kept constant. E) The initial price is set high and then raised.

45) Which of the following terms describes a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share? A) Penetration pricing. B) Price skimming. C) Customer pricing. D) Designed pricing. E) Market-share pricing.

46) Company A uses a pricing approach where the initial price for a product is set high and then lowered, and Company B uses an approach where initial prices are set low in an effort to gain market share. What terms best describe these practices? Company A

Company B

Predatory

Skimming

Penetration

Predatory

Skimming

Penetration

Skimming

Predatory

Penetration

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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47) Charlene Company, which desires to enter the market with a new product, will perform the following tasks: 1—Design and engineer the product. 2—Determine the product's cost. 3—Determine the desired profit margin. 4—Determine the suggested selling price. If Charlene uses target costing, which task would the company perform first? A) 1. B) 2. C) 3. D) 4. E) None of the answers is correct.

48)

The four tasks that follow take place with the concept known as target costing:

1—Value engineering. 2—Establish a target selling price. 3—Establish a target cost. 4—Establish a target profit. Which of the following choices depicts the correct sequence of these tasks? A) 1, 3, 4, 2. B) 3, 1, 4, 2. C) 2, 4, 3, 1. D) 2, 3, 1, 4. E) None of these options.

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49) Charter Corporation manufactures a single product that has a cost of $350. The company uses a 70% markup on cost to arrive at a selling price of $595, which results in a price that virtually always exceeds that of the market leaders. If Charter changes to the approach known as target costing, the company will first: A) reduce its 70% markup rate. B) trim its $350 cost. C) attempt to re-engineer its product. D) undertake a thorough study of competitors' prices. E) change the markup so that it is based on sales rather than based on cost.

50)

Which of the following features is typically absent in target costing? A) An approach that begins with the determination of a product or service's target cost. B) An approach that begins with the determination of a product or service's target selling

price. C) A focus on the customer. D) A focus on product design. E) A focus on process design.

51)

Which of the following is (are) a key feature of target costing? A) The use of cross-functional teams. B) A focus on the customer. C) A focus on product design. D) A focus on process design. E) All of the answers are correct.

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52) Flagler Electronics currently sells a camera for $240. An aggressive competitor has announced plans for a similar product that will be sold for $205. Flagler’s marketing department believes that if the price is dropped to meet competition, unit sales will increase by 10%. The current cost to manufacture and distribute the camera is $175, and Flagler has a profit goal of 20% of sales. If Flagler meets competitive selling prices, what is the company's target cost? A) $41. B) $48. C) $164. D) $175. E) $192.

53) Miami Industries currently sells an industrial mixer for $900 that market leaders sell for $820. The current costs to manufacture and distribute the mixer total $645, and the company has a profit goal of 30% of sales. Miami uses target costing in its efforts to be a leader in the marketplace. On the basis of this information, (1) what should Miami consider to be the initial driver of the target-costing process and (2) what amount of cost reduction is needed for the company to achieve its goals? Initial Driver

Cost Reduction

Current price of $900

$15

Current price of $900

$71

Market leaders’ price of $820

$15

Market leaders’ price of $820

$71

Market leaders’ price of $820

Some other amount

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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54) Rudy Enterprises currently sells a piece of luggage for $200. An aggressive competitor has announced plans for a similar product that will be sold for $170. Rudy’s marketing department believes that if the price is dropped to meet competition, unit sales will increase by 10%. The current cost to manufacture and distribute the luggage is $130, and Rudy has a profit goal of 30% of sales. If Rudy meets competitive selling prices, what must happen to the company's manufacturing and distribution cost? A) Nothing, because the costs are within defined ranges and can actually increase by $10. B) Nothing, because the costs are within defined ranges and can actually increase by $23. C) Costs must decrease by $11. D) Costs must decrease by $39. E) None of the answers is correct.

55) Delmar Enterprises produces bicycles in a highly competitive market. During the past year, the company has added a 30% markup on the $250 manufacturing cost for one of its most popular models. A new competitor manufactures a similar model, has established a $300 selling price, and is seriously eroding Delmar’s market share. Management now desires to use a targetcosting approach to remain competitive and is willing to accept a 20% return on sales. If target costing is used, which of the following choices correctly denotes (1) the price that Delmar will charge and (2) company's target cost? Selling Price

Target Cost

$ 300

$ 240

$ 300

$ 250

$ 325

$ 240

$ 325

$ 250

Some other combination of selling price and target cost.

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A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

56) Consider the following statements about activity-based costing and its use in pricing: 1.I. A company that uses target costing generally would have little need for activity-based costing. 2.II. Companies that use cost-plus pricing methods would have little need for activity-based costing. 3.III. The use of activity-based costing will often lead to better pricing decisions by managers. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) I and III. E) I, II, and III.

57)

Which of the following management tools is a key component of target costing? A) Management simulation. B) Linear programming. C) Value engineering. D) Goal programming. E) Performance reporting systems.

58) Which of the following cost-reduction and process-improvement techniques is often used in conjunction with target costing?

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A) Linear programming. B) Deterministic simulations. C) Cost allocation. D) Budgetary padding. E) Value engineering.

59) Consider the following statements about time and material pricing:1.I. The time charge includes the direct cost of an employee's time. 2.II. The time charge includes an amount to cover various overhead costs. 3.III. The material charge includes a handling charge for material. Which of the above statements is (are) true? A) I only. B) I and II. C) I and III. D) II and III. E) I, II, and III.

60)

Under the time and material pricing method, a customer would be charged for: Material Costs

Labor Costs

Overhead Costs

Profit Margin

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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61) to:

With the time and material pricing method, the hourly time charge is typically set equal

A) the hourly labor cost. B) the hourly labor cost + annual overhead. C) the hourly labor cost + an hourly overhead charge + an hourly charge to cover the profit margin. D) annual overhead + an hourly charge to cover the profit margin. E) the hourly labor cost + an hourly charge to cover the profit margin.

62) Inse Corporation uses time and material pricing. The repair department expects 20,000 direct labor hours of activity and has the following selected data:

Labor and fringe benefit costs

$ 800,000

Overhead Costs (excludes material handling and storage)

480,000

Target profit

220,000

The company's time charge per hour is: A) $11. B) $24. C) $40. D) $64. E) $75.

63) Ralph’s Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data:

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Annual overhead costs: Material handling and storage

Other overhead costs

15,000 75,000

Annual cost of materials used

187,500

Labor rate per hour, including fringe benefits

Hourly charge to achieve profit margin

The time charge per hour is: A) $19.50. B) $27.00. C) $29.00. D) $36.50. E) None of the answers is correct.

64) Ralph’s Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data:

Annual overhead costs: Material handling and storage Other overhead costs Annual cost of materials used

15,000 75,000 187,500

Labor rate per hour, including fringe benefits

Hourly charge to achieve profit margin

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Assuming there is no profit markup on material cost, the amount to be added to each dollar of material cost to obtain the total material charge is: A) $0.06. B) $0.08. C) $0.10. D) $0.13. E) None of the answers is correct.

65) Ralph’s Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data:

Annual overhead costs: Material handling and storage Other overhead costs Annual cost of materials used

15,000 75,000 187,500

Labor rate per hour, including fringe benefits

Hourly charge to achieve profit margin

If a particular job takes 20 hours of labor and $800 of materials, the price charged for the job is:

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A) $1,380. B) $1,444. C) $1,530. D) $1,594. E) None of the answers is correct.

66) Consider the following statements about competitive bidding: 1.I. The higher the price that a company bids, the greater the profit if the firm gets the contract. 2.II. Bidding a higher price increases the probability of obtaining a contract. 3.III. A company that bids low to ensure acceptance of a contract may actually wind up bidding too low to make an acceptable profit. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) I and III. E) I, II, and III.

67)

If a company has excess capacity, which of the following is a sensible bidding strategy?

A) Set a price to cover all costs. B) Base the bid on the incremental costs incurred because the job will contribute toward the company's profit. C) Base the bid solely on direct labor hours. D) Downplay the potential impact of competitors. E) Allocate common fixed costs to individual jobs before preparing the bid.

68)

If a firm has no excess capacity, which of the following is a sensible bidding strategy?

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69) Harlen Company is involved in a competitive bidding situation. The following costs are anticipated for a project to be bid with the City of Crimson:

Direct material

$ 340,000

Direct labor

610,000

Allocated variable overhead

420,000

Allocated fixed cost

110,000

Which of the following cost figures should be used in setting a minimum bid price if Harlen has excess capacity? A) $530,000. B) $950,000. C) $1,370,000. D) $1,480,000. E) None of the answers is correct.

70) Gypsum Park Recreation is exploring a competitive bidding situation. The firm, which currently has no excess capacity, estimates the following costs for a project to be performed for the Talent School District:

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Direct material

$ 220,000

Direct labor

130,000

Allocated variable overhead

91,000

Allocated fixed cost

40,000

Which of the following cost figures would be used in determining a minimum price if Gypsum Park decides to bid on the Talent project? A) $131,000. B) $350,000. C) $441,000. D) $481,000. E) None of the answers is correct.

71) Polson Pool Company is involved in a number of competitive bidding situations. The following costs are anticipated for a project to be bid for Terrance Manufacturing:

Direct material Direct labor

680,000 2,450,000

Allocated variable overhead

570,000

Allocated fixed cost

230,000

Which of these costs would be treated differently if Polson had either excess capacity or no excess capacity?

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A) Direct materials used, $680,000. B) Direct labor, $2,450,000. C) Allocated variable overhead, $570,000. D) Allocated fixed cost, $230,000. E) None of these, as all four costs are considered in both situations.

72) Emporia Shipping Company is involved in a competitive bidding situation. Variable costs related to the project total $520,000, and allocated fixed cost is $95,000. Which of the following cost figures should be used in setting a minimum bid price if Emporia has (1) excess capacity and (2) no excess capacity? Excess Capacity 0

No Excess Capacity

$ 520,000

$ 615,000

$ 520,000

$ 615,000

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

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73) Consider the following statements about pricing and the law: 1.I. American antitrust laws restrict certain types of pricing behavior. 2.II. The term "price discrimination" involves charging different prices to different customers for the same goods and services. 3.III. Charging different prices to different customers for the same goods is permissible if price differences are based on cost differences of producing and/or selling the good. Which of the above statements is (are) true? A) I only. B) II only. C) I and II. D) II and III. E) I, II, and III.

74)

Which of the following pricing practices is illegal? A) Penetration pricing. B) Price skimming. C) Predatory pricing. D) Cost-based pricing. E) Time and material pricing.

75) Bluebird Company wants to introduce a new product with a unit selling price of $24. Bluebird expects sales of 40,000 units. The product will require an investment of $2,800,000 and the company desires a 20% return on this investment. What is the target cost per unit? A) $34. B) $14. C) $10. D) $4. E) None of the answers is correct.

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76)

Camelot Industries has the following information regarding one of its products:

Fixed costs

$ 90

Variable costs

210

Selling price

366

If Camelot uses absorption manufacturing cost when applying its markup, what is the markup percentage used on this product? A) 22%. B) 82%. C) 74%. D) 43%. E) None of the answers is correct.

77) Legend Industries charges $110 per hour and has a 55% material loading charge. Legend has recently accepted a job for Mission Co. that will require 25 hours and $1,200 of materials. What is the cost of the job? A) $5,462.50. B) $4,610.00. C) $18,012.50. D) $3,410.00. E) None of the answers is correct.

78) Softwind Manufacturing anticipates annual sales of 40,000 units and has the following information regarding one of its products:

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Annual unit sales Fixed manufacturing costs

40,000 $

Variable manufacturing costs

Variable selling and administrative costs

Fixed selling and administrative costs

Desired profit per unit

What is the markup percentage used by Softwind if it uses cost-plus pricing based on total variable costs? A) 38%. B) 67%. C) 125%. D) 80%. E) None of the answers is correct.

79) Softwind Manufacturing anticipates annual sales of 40,000 units and has the following information regarding one of its products:

Annual unit sales Fixed manufacturing costs

40,000 $

Variable manufacturing costs

Variable selling and administrative costs

Fixed selling and administrative costs

Desired profit per unit

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What is the markup percentage used by Softwind if it uses cost-plus pricing based on total costs? A) 83%. B) 17%. C) 20%. D) 500%. E) None of the answers is correct.

80) Softwind Manufacturing anticipates annual sales of 40,000 units and has the following information regarding one of its products:

Annual unit sales Fixed manufacturing costs

40,000 $

Variable manufacturing costs

Variable selling and administrative costs

Fixed selling and administrative costs

Desired profit per unit

If Softwind uses cost-plus pricing based on absorption manufacturing cost, what is the sales price Softwind will charge for this product? A) $90. B) $108. C) $84. D) $92. E) None of the answers is correct.

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81) Presido Company performed a service for Josselyn, Inc. The total amount billed to Josselyn was $1,080. The intern who prepared the bill forgot to save the document and Presido’s accountant is now trying to recreate the bill. The total cost of materials used was $216 and the total amount of labor charges was $702. The hourly rate paid for labor is $40.50. What was the charge for material handling and storage? A) 133%. B) 75%. C) 23%. D) 85%. E) None of the answers is correct.

82) Presido Company performed a service for Josselyn, Inc. The total amount billed to Josselyn was $1,080. The intern who prepared the bill forgot to save the document and Presido’s accountant is now trying to recreate the bill. The total cost of materials used was $216 and the total amount of labor charges was $702. The hourly rate paid for labor is $40.50. If 12 labor hours were used to complete the job, what was the hourly charge to cover profit margin? A) $13.50. B) $18.00. C) $22.50. D) $49.50. E) None of the answers is correct.

83) Horizon Company has expected annual sales of its Bermuda product of 600,000 units. Horizon’s desired profit per unit of Bermuda is $0.70 and the target cost of producing the 600,000 units is $252,000. What is the target selling price per unit?

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A) $0.99. B) $0.42. C) $1.12. D) $3.08. E) None of the answers is correct.

84)

Setting prices requires a balance between cost considerations and market forces. ⊚ true ⊚ false

85) Due to cost-based pricing, an organization or industry can price its products below their production costs indefinitely. ⊚ true ⊚ false

86)

The revenue curve shows the relationship between the sales price and quantity sold. ⊚ true ⊚ false

87) The marginal revenue curve shows the relationship between the change in total revenue that accompanies a change in quantity sold. ⊚ true ⊚ false

88) If a company uses a cost-plus approach to pricing, it will find that there are several different definitions of cost and the higher the cost, the higher the markup percentage. ⊚ true ⊚ false

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89)

A firm typically uses only one of the three cost-plus pricing formulas. ⊚ true ⊚ false

90) Penetration pricing is a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share. ⊚ true ⊚ false

91)

Skimming pricing is another name for penetration pricing. ⊚ true ⊚ false

92) Matton Corporation manufactures a single product that has a cost of $350. The company uses a 70% markup on cost to arrive at a selling price of $595, which results in a price that virtually always exceeds that of the market leaders. If Matton changes to the approach known as target costing, the company will first undertake a thorough study of competitors' prices. ⊚ true ⊚ false

93)

Target costing involves four key principles. ⊚ true ⊚ false

94) When a computer-integrated manufacturing (CIM) system is used, the process of target costing sometimes is computerized.

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⊚ ⊚

true false

95) When activity-based costing is integrated with target costing, a product’s projected costs always go up. ⊚ true ⊚ false

96) In many cases, traditional, volume based product costing may overcost low-volume and complex products, while undercosting high-volume and relatively simple products. ⊚ true ⊚ false

97)

Cost distortion can occur under the target-costing approach. ⊚ true ⊚ false

98)

Value engineering is an outgrowth of target costing. ⊚ true ⊚ false

99) Much of the historical development of the target-costing approach has taken place in German industry. ⊚ true ⊚ false

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100) Under the time and material pricing approach, the company determines one charge for the labor used on a job, another charge for the materials, and then averages the two to apply one charge for everything. ⊚ true ⊚ false

101)

Time and material pricing is used widely by construction companies. ⊚ true ⊚ false

102) In a competitive bidding situation where all of the companies submitting bids offer a roughly equivalent product or service, the amount of variable overhead becomes the sole criterion for selecting the contractor. ⊚ true ⊚ false

103) When a firm has excess capacity, a price that covers the incremental costs incurred because of the job will contribute toward covering the company’s fixed cost and profit. ⊚ true ⊚ false

104) The law prohibits price discrimination of quoting different prices to different customers for the same product or service, but it permits predatory pricing to establish initial markets. ⊚ true ⊚ false

105) One of the Congressional acts that restricts certain types of pricing behavior is the Robinson-Patman Act. ⊚ true ⊚ false Version 1

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Answer Key Test name: Chap 15_6e_Cornett 1) E 2) C 3) A 4) E 5) D 6) E 7) C 8) A 9) B 10) D 11) D 12) E 13) C 14) E 15) C 16) E 17) E 18) A 19) B 20) A 21) C 22) E 23) B 24) E 25) A 26) B Version 1

27) A 28) C 29) D 30) B 31) D 32) B 33) C 34) D 35) C 36) C 37) A 38) B 39) B 40) D 41) D 42) D 43) B 44) C 45) A 46) C 47) D 48) C 49) D 50) A 51) E 52) C 53) D 54) C 55) A 56) C Version 1

57) C 58) E 59) E 60) E 61) C 62) E 63) D 64) B 65) D 66) D 67) B 68) A 69) C 70) D 71) D 72) C 73) E 74) C 75) C 76) A 77) B 78) D 79) C 80) B 81) B 82) B 83) C 84) TRUE 85) FALSE 86) FALSE Version 1

87) TRUE 88) FALSE 89) FALSE 90) TRUE 91) FALSE 92) TRUE 93) FALSE 94) TRUE 95) FALSE 96) FALSE 97) TRUE 98) FALSE 99) FALSE 100) FALSE 101) TRUE 102) FALSE 103) TRUE 104) FALSE 105) TRUE

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Chapter 15 – 6e Cornet- Manually Graded 1)

The following data pertain to Arctic Company's commercial snow thrower: Variable manufacturing cost

$400

Applied fixed manufacturing cost

160

Variable selling and administrative cost

Allocated fixed selling and administrative cost

Required: For each of the following cost bases, determine the appropriate percentage markup that will result in a price of $980 for the snow thrower. (Round percentages to nearest one-hundredth of a percent.) A. Variable manufacturing cost. B. Absorption manufacturing cost. C. Total cost. D. Total variable cost.

The following data pertain to Tannebaum Corporation's residential humidifier: Variable manufacturing cost

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$240

Applied fixed manufacturing cost

Variable selling and administrative cost

Allocated fixed selling and administrative cost

To achieve a target price of $450 per humidifier, the markup percentage on total unit cost is 12%. Required: A. Calculate the fixed selling and administrative cost allocated to each humidifier. B. For each of the following bases, determine the appropriate percentage markup on cost that will result in a target price of $450 per humidifier: (1) variable manufacturing cost, (2) absorption manufacturing cost, and (3) total variable cost. (Round percentages to the nearest onehundredth of a percent.)

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3) Alpine, Inc. sells a single product. The following information relates to the year just ended: Number of units sold: 40,000 Variable cost per unit: $200 Total fixed cost: $2,400,000 Operating income: $3,800,000 Required: A. Compute the company's selling price. B. Compute the percentage markup on total cost. Round your answer to two decimal places. C. Assume that Alpine desired to change its practice of computing a markup on total cost to a markup on variable cost. If the company wants to hold selling price constant, would the markup percentage increase or decrease? By how much?

4) Astro, Inc. uses target costing and will soon enter a very competitive marketplace in which it will have limited influence over the prices that are charged. Management and consultants are working to fine-tune the company's sole service, which hopefully will generate a 12% return (profit) on the firm's $24,000,000 asset investment. The following information is available: Hours of service to be provided: 34,000 Anticipated variable cost per service hour: $30 Anticipated fixed cost: $2,560,000 per year Required: A. How much profit must Astro produce to achieve a 12% return? B. Calculate the revenue per hour that Astro must generate to achieve a 12% return. C. Assume that prior to entering the marketplace, management conducted a planning exercise to determine whether a 14% return could be attained in year no. 2. Can the company achieve this return if (a) competitive pressures dictate a maximum selling price of $195 per hour and (b) service hours, variable cost per service hour, and fixed costs are the same as the amounts anticipated in year no. 1? Show calculations. D. If your answer to part "C" is "no," suggest and briefly describe a procedure that Astro might use to achieve desired results.

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5) Rollins and Associates develops hotels in resort locations. The company is exploring the construction of a new facility that would have significant meeting and banquet space for conventions and conferences, and sleeping rooms that average 850 square feet. The accounting department estimates that land and building costs will amount to $60 and $120 per square foot of floor area, respectively. Other expenditures during construction for interest, real estate taxes, and general overhead are expected to total 35% of land and construction cost. Once basic construction is completed, Rollins anticipates per-room initial expenditures for: Sleeping room furnishings and accessories

$16,000

Supplies

1,900

Marketing

5,500

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The accounting department suggests that 10% be added to the total of all preceding costs to allow for estimation errors. Construction is anticipated to take two years. Rollins’ pricing policy is consistent with that of industry leaders, namely, to set a room rate equal to .1% (.001) of cost. Upon completion, comparable facilities are expected to charge $240 per day. Required: A. Compute the total cost of a sleeping room at the new facility. B. Is the company's room rate competitive? Briefly explain. C. Rollins desires to enter this market by adhering to the industry standard and charging a competitive room rate. If needed, the firm will look for ways to cut expenditures. Briefly explain the difference between cost-plus pricing and target costing. D. Other than operating costs and room revenues, what else should Rollins consider before a final decision is made about the facility?

6) Trailrider Corporation manufactures part no. 67, which is used in the production of mountain bikes. Per-unit information about part no. 67 follows. Prevailing market price

$33

Direct materials

Direct labor

Manufacturing overhead

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Selling and administrative expenses

Trailrider has traditionally used a 20% markup on total cost to arrive at a reasonable selling price. The company, though, has noticed a sizable drop in sales volume during the last few quarters, which it attributes to new entrants in the marketplace. Required: A. Compute the current selling price of part no. 67. B. If management desired to meet the prevailing market price and maintain the current rate of profit on sales, what must happen to the company's total manufacturing costs? By how much?

7) For many years, Oxmoor Corporation has used a straightforward cost-plus pricing system, marking its goods up approximately 20% of total cost. The company has been profitable; however, it has recently lost considerable business to foreign competitors that have become very aggressive in the marketplace. These firms appear to be using target costing. An example of Oxmoor’s woes is typified by item no. 710, which has the following unit-cost characteristics: direct materials, $50; direct labor, $90; manufacturing overhead, $40; and selling and administrative expenses, $20. The going market price for an identical product of identical quality is $210, which is below what Oxmoor is charging. Required: A. Contrast cost-plus pricing and target costing. B. What is Oxmoor’s current selling price for item no. 710? C. If Oxmoor used target costing for item no. 710, what must happen to costs if the company desired to meet market prices and maintain its current rate of profit on sales? By how much?

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8) Buffington, Inc. produces a number of components that are used in home theater systems. Mike Boston, head of the company's market research department, has identified the need for a new component that will most likely sell for $75. Projected volume levels are anticipated to reach 28,000 units in the first year, as several firmly entrenched competitors will be introducing a similar product in the not-too-distant future. Conversations with Buffington’s engineers and reviews of cost accounting data related to similar products that the company manufactures resulted in the following cost estimates for the new component: Direct materials

$18

Direct labor

Manufacturing overhead

Selling and administrative

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Buffington currently uses cost-plus pricing and adds a 20% markup on total production cost to arrive at what is normally a competitive selling price. Required: A. What is the anticipated selling price of the new component if Buffington uses its current pricing policy? What difficulties, if any, might the company face in the marketplace? B. Assume that Buffington decides to switch to target costing. What price would the company charge for the new component? C. With the switch to target costing, what would Buffington have to do to the component's manufacturing cost to achieve the normal profit margin on sales? Be specific and show calculations. D. Briefly describe how Buffington might achieve the cost reductions suggested in part “C”?

9) Allred Furniture manufactures easy-to-assemble wooden furniture for home and office. The firm is considering modification of a bookcase, and the company's marketing department surveyed potential buyers regarding five proposed changes (A-E). The buyers' responses, in order of preference, along with Allred’s related unit costs for the modifications, follow. Order of Preference

Change

Cost

$7.50

5.00

4.00

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1.50

5.50

The bookcase currently costs $81 to produce and distribute, and Allred’s selling price for this unit averages $108. An analysis of competitive products in the marketplace revealed a variety of features, with some models having all of the changes that Allred is considering and other models having only a few. The current manufacturers' selling prices on these bookcases average $120. Required: A. Why is there a need in target costing to (a) focus on the customer and (b) have a marketing team become involved with product design? B. Management desires to earn approximately the same rate of profit on sales that is being earned with the current design. 1. If Allred uses target costing and desires to meet the current competitive selling price, what is the maximum cost of the modified bookcase? 2. Which of the modifications should Allred consider? C. Assume that Allred wanted to add a modification or two that you excluded in your answer to requirement "B2." What process might management adopt to allow the company to make its target profit for the bookcase? Briefly explain.

10) The controller for Rich Photographic Supply has established the following cost pools and cost drivers: Activity Cost Pool

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Budgeted Overhead Cost

Cost Driver

Budgeted Level for Driver

Pool Rate

Machine setups

$200,000

Number of setups

100

$2,000 per setup

Material handling

100,000

Pounds of raw material

50,000

$2 per pound

Hazardous waste control

50,000

Pounds of hazardous chemicals

10,000

$5 per pound

Quality control

75,000

Number of inspections

1,000

$75 per inspection

Other overhead costs

200,000

Machine hours

20,000

$10 per machine hr.

Total

$625,000

An order for 1,200 boxes of film-development chemicals has the following production requirements: Machine setups

Pounds of raw materials

16,000

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Pounds of hazardous chemicals

None

Inspections

Machine hours

400

Direct materials and labor cost

$24,000

Rich established a target price by adding a 40% markup to total manufacturing cost. Required: A. Determine the order's target price by using the activity-cost pools. B. Assume that Rich used a single, combined overhead rate based on weight of raw materials. 1. Determine the predetermined overhead rate. 2. Determine the expected cost of the order. 3. Determine the target price. C. Which approach above ("A" or "B") seems to be a more reasonable method to establish target prices? Explain.

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11) Shocker Electrical, which installs sophisticated electronic-control systems in new homes, prices jobs by using the time-and-materials method. The following data apply to a job for ABC Builders: Labor hours: 180 Materials cost: $48,000 The following predictions, based on 30,000 direct labor hours, pertain to the company's operations for the year: Annual overhead costs:

Material handling and storage

$ 40,000

Other overhead costs

360,000

Annual cost of materials used

500,000

Labor rate per hour, including fringe benefits

Shocker Electrical adds a markup of $15 per hour on its time charges, but there is no profit markup on material costs. Required: Calculate the price for the ABC Builders' job.

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12) Exquisite Exteriors installs stucco on high-priced custom homes, using the time-andmaterials method to price jobs for individual builders. Exquisite anticipates using $250,000 of materials during the year and will incur $15,000 for material handling and storage. Other overhead costs, which are driven by the company's 18,000 direct labor hours, will total $360,000. Exquisite pays construction crews $17 per labor hour and adds a markup of $19 per hour on its time charges. There is no profit markup on material cost. During the first quarter of the year, Exquisite performed 24 jobs for Don Henderson Builders, using 3,100 labor hours and $72,000 of materials. Required: Calculate the amount that Exquisite would bill Don Henderson Builders for work performed.

13) Aerial Roofing performs roofing services for commercial clients. The company recently submitted a bid of $371,000 to the Ponca School System, computed as follows: Construction materials

$80,000

Labor costs

170,000

Total direct costs

$250,000

Construction overhead – 30% of labor

51,000

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Allocated administrative overhead

20,000

Total cost

$321,000

Aerial adds a 20% profit margin to all jobs, computed on the basis of total direct cost. In Ponca’s case the profit margin amounted to $50,000 ($250,000 × 20%), producing a bid price of $371,000. Assume that 60% of construction overhead is fixed. Required: A. If Aerial had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the district? How can Aerial justify this amount? B. If Aerial had no excess capacity, what would be the lowest price that the company should charge? C. What is the primary benefit and problem of approaching a competitive bid situation with a low-bid philosophy?

14) Frontage Corporation, which has a maximum labor capacity of 30,000 hours per month, has considerable flexibility with its customers when it comes to project completion dates. Management is considering the submission of a bid for a job to be performed for the city of Carthage. Costs for the job are as follows: Raw materials

$ 140,000

Labor costs

330,000

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Variable overhead (20% of labor)

66,000

Fixed overhead (45% of labor)

148,500

Allocated administrative cost

48,000

Total cost

$732,500

Frontage’s labor force is paid an average of $22 per hour and if the company wins the bid, it will have three months to complete the work. Management adds a 30% profit margin to all jobs, computed on the basis of total variable cost. Required: A. Compute the lowest total cost that the company would use when figuring its bid, assuming that Frontage has excess capacity. B. Compute Frontage’s bid if the company has no excess capacity. C. Assume that Frontage is currently working at 85% of capacity. Does the firm have sufficient time to complete the job? If not, what could the company do if it desires to do business with Carthage?

15) Riverview Manufacturing, which produces electrical components, is contemplating submitting a bid for 30,000 units of item no. 54. The bid's cost will be follows: Raw materials

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$ 75,000

Direct Labor

120,000

Manufacturing overhead

150,000

Additional set-up costs

3,000

Special device

5,000

Allocated administrative overhead

12,000

Total cost

$365,000

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The special device will be purchased for this job and once the job is completed, the device will be discarded. Riverview applies total manufacturing overhead of $5 to each unit (0.5 machine hours at $10 per hour). This figure is based, in part, on budgeted yearly fixed overhead of $1,440,000 and an anticipated volume of 480,000 machine hours (40,000 per month). Riverview is presently working at 85% of capacity, and the client needs the order in two months. Required: A. Is Riverview’s current operating environment one of excess capacity or no excess capacity? Briefly explain. B. If Riverview had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the order? C. Can Riverview produce this order in the required time frame of two months? Explain. D. Suppose that Riverview is in marginal financial health. Explain the benefits and problems of approaching the bidding procedure with (1) a low bid or (2) a high bid.

16) The following questions explore the relationships between total and marginal functions in the economic profit-maximizing (EPM) model: Required: A. The total revenue function rises over the range of operating activity portrayed in the text. Why does the marginal revenue function decrease? B. What is the behavior of the marginal cost curve? C. In the EPM model, where is the profit-maximizing volume level? Explain.

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17) When pricing products, many companies use target costing and/or cost-plus pricing methods. Required: A. Briefly explain how target costing is applied to new products. B. How does target costing differ from cost-plus pricing? C. Can an activity-based costing system be used with target costing? Explain.

18) When introducing new products, some companies use price skimming whereas others use penetration pricing. Required: A. Distinguish between price skimming and penetration pricing. B. Is price skimming a viable alternative for most new products? Explain.

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19) Austin Company, which experiences considerable seasonal variation in its activity and has a high level of fixed costs, is preparing a bid for a project. This particular project will be done during a slack period of the year. Required: A. How should the fixed costs be handled in the bidding approach to this project? B. Assume that the company wins the bid and performs the job on a profitable basis, consistent with the results as projected in the bid. Several months later, the customer contacts Austin and requests a bid to do another job. This project, however, must be done during a peak season. How should Austin’s management respond? How do you think the customer will respond?

20)

A number of antitrust laws have been enacted that affect product pricing.

Required: A. Define price discrimination and predatory pricing. B. Assume that a company has been charged with price discrimination. What role can cost information play in defending the firm's pricing practices?

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Answer Key Test name: Chap 15_6e_Cornett_Manually Graded

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Chapter 16 – 6e Cornett 1)

Capital-budgeting decisions primarily involve: A) emergency situations. B) long-term decisions. C) short-term planning situations. D) cash inflows and outflows in the current year. E) planning for the acquisition of capital.

Which of the following would not involve a capital-budgeting analysis?

A) The acquisition of new equipment. B) The addition of a new product line. C) The adoption of a new cost driver for overhead application. D) The construction of a new distribution facility. E) The decision of a pro football team to trade for and sign a star quarterback to a longterm contract.

3) The decision process that has managers select from among several acceptable investment proposals to make the best use of limited funds is known as: A) capital rationing. B) capital budgeting. C) acceptance-or-rejection analysis. D) cost analysis. E) project planning.

Capital budgeting tends to focus primarily on:

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A) revenues. B) costs. C) cost centers. D) programs and projects. E) allocation tools.

Discounted-cash-flow analysis focuses primarily on: A) the stability of cash flows. B) the timing of cash flows. C) the probability of cash flows. D) the sensitivity of cash flows. E) whether cash flows are increasing or decreasing.

In a net-present-value analysis, the discount rate is often called the: A) payback rate. B) hurdle rate. C) minimal value. D) net unit rate. E) objective rate of return.

The hurdle rate that is used in a net-present-value analysis is the same as the firm's: A) discount rate. B) internal rate of return. C) minimum desired rate of return. D) objective rate of return. E) discount rate and minimum desired rate of return.

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Which of the following is taken into account by the net-present-value method? A Project’s Immediate Cash Flows

Cash Flows During a Project’s Life

Time Value of Money

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

9) Consider the following factors related to an investment: 1.I. The net income from the investment. 2.II. The cash flows from the investment. 3.III. The timing of the cash flows from the investment. Which of the preceding factors would be important considerations in a net-present-value analysis? A) I only. B) II only. C) I and II. D) II and III. E) I, II, and III.

10)

The true economic yield produced by an asset is summarized by the asset's:

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A) non-discounted cash flows. B) net present value. C) future value. D) annuity discount factor. E) internal rate of return.

11)

The internal rate of return on an asset can be calculated:

A) if the return is greater than the hurdle rate. B) if the asset's cash flows are identical to the future value of a series of cash flows. C) if the future value of a series of cash flows can be arrived at by the annuity accumulation factor. D) by finding a discount rate that yields a zero net present value. E) by finding a discount rate that yields a positive net present value.

12)

The internal rate of return:

A) ignores the time value of money. B) equates a project's cash inflows with its cash outflows. C) equates a project's cash outflows with its expenses. D) equates the present value of a project's cash inflows with the present value of the cash outflows. E) equates the present value of a project's cash flows with the future value of the project's cash flows.

13) Grenada Company is contemplating the acquisition of a machine that costs $50,000 and promises to reduce annual cash operating costs by $11,000 over each of the next six years.

PV of $1 (i = 12%; n = 6): PV of a series of $1 cash flows (i = 12%, n = 6):

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0.507 4.111

Which of the following is a proper way to evaluate this investment if the company desires a 12% return on all investments? A) $50,000 versus − $11,000 × 6. B) $50,000 versus − $66,000 × 0.507. C) $50,000 versus − $66,000 × 4.111. D) $50,000 versus − $11,000 × 4.111. E) $50,000 × 0.893 versus − $11,000 × 4.111.

14) Barton Company can acquire a $900,000 machine now that will benefit the firm over the next 6 years. FV of 1 (i = 8%, n = 6):

1.587

FV of a series of $1 cash flows (i = 8%, n = 6):

7.336

PV of $1 (i = 8%; n = 6):

0.630

PV of a series of $1 cash flows (i = 8%, n = 6):

4.623

Annual savings in cash operating costs are expected to total $190,000. If the hurdle rate is 8%, the investment's net present value is: A) $(181,800). B) $(21,630). C) $44,970. D) $184,920. E) None of the answers is correct.

15) Carlin Company, which uses net present value to analyze investments, requires a 10% minimum rate of return. A staff assistant recently calculated a $500,000 machine's net present value to be $86,400, excluding the impact of straight-line depreciation. FV of 1 (i = 10%, n = 5):

1.611

FV of a series of $1 cash flows (i = 10%, n = 5):

6.105

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PV of $1 (i = 10%; n = 5):

0.621

PV of a series of $1 cash flows (i = 10%, n = 5):

3.791

If Carlin ignores income taxes and the machine is expected to have a five-year service life, the correct net present value of the machine would be: A) $(13,600). B) $86,400. C) $186,400. D) $292,700. E) $465,500.

16) A new asset is expected to provide service over the next four years. It will cost $500,000, generates annual cash inflows of $150,000, and requires cash operating expenses of $30,000 each year. In addition, a $10,000 overhaul will be needed in year 3. Period

FV of a series of $1 cash flows (i = 10%)

FV of 1 (i = 10%) 1.100

PV of a series of $1 cash flows (i = 10%)

1.000

PV of $1 (i = 10%) 0.909

1.210

2.100

0.826

1.736

1.331

3.310

0.751

2.487

1.464

4.641

0.683

3.170

0.909

If the company requires a 10% rate of return, the net present value of this machine would be: A) $(127,110), and the machine meets the company's rate-of-return requirement. B) $(127,110), and the machine does not meet the company's rate-of-return requirement. C) $(129,600), and the machine does not meet the company's rate-of-return requirement. D) $(151,700), and the machine meets the company's rate-of-return requirement. E) None of the answers is correct.

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17) Swiss imports can acquire a $700,000 machine now that will benefit the firm over the next 5 years. A newly hired staff assistant correctly computed the net present value to be $134,020 by using a 10% hurdle rate. FV of 1 (i = 10%, n = 5):

1.611

FV of a series of $1 cash flows (i = 10%, n = 5):

6.105

PV of $1 (i = 10%; n = 5):

0.621

PV of a series of $1 cash flows (i = 10%, n = 5):

3.791

On the basis of this information, the machine was expected to produce annual cash operating savings of approximately: A) $166,804. B) $220,000. C) $268,605. D) $834,020. E) None of the answers is correct.

18) A new machine that costs $172,100 is expected to save annual cash operating costs of $40,000 over each of the next nine years. Using the tables that follow, the machine's internal rate of return is: Future Value of $1 8% 10% 12% 14%

Periods

1.040

1.060

1.080

1.100

1.120

1.082

1.124

1.166

1.210

1.125

1.191

1.260

1.170

1.263

1.217

1.265

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16%

18%

20%

1.140

1.160

1.180

1.200

1.254

1.300

1.346

1.393

1.440

1.331

1.405

1.482

1.561

1.643

1.728

1.361

1.464

1.574

1.689

1.811

1.939

2.074

1.338

1.469

1.611

1.762

1.925

2.101

2.288

2.488

1.419

1.587

1.772

1.974

2.195

2.437

2.700

2.986

1.316

1.504

1.714

1.949

2.211

2.502

2.827

3.186

3.583

1.369

1.594

1.851

2.144

2.476

2.853

3.279

3.759

4.300

1.423

1.690

1.999

2.359

2.773

3.252

3.803

4.436

5.160

1.480

1.791

2.159

2.594

3.106

3.707

4.412

5.234

6.192

Future Value of a Series of $1 Cash Flows 4% 6% 8% 10% 12% 14% 16%

18%

20%

1.000

2.040

2.060

2.080

2.100

2.120

2.140

2.160

2.180

2.220

3.122

3.184

3.246

3.310

3.374

3.440

3.506

3.572

3.640

4.247

4.375

4.506

4.641

4.779

4.921

5.067

5.215

5.368

5.416

5.637

5.867

6.105

6.353

6.610

6.877

7.154

7.442

6.633

6.975

7.336

7.716

8.115

8.536

8.977

9.442

9.930

7.898

8.394

8.923

9.487 10.089 10.730 11.414 12.142 12.916

9.214

9.898 10.637 11.436 12.300 13.233 14.240 15.327 16.499

10.583 11.491 12.488 13.580 14.776 16.085 17.519 19.086 20.799

12.006 13.181 14.487 15.938 17.549 19.337 21.321 23.521 25.959

Periods

Present Value of $1 8% 10% 12% 14%

Periods

0.962

0.943

0.926

0.909

0.893

0.925

0.890

0.857

0.826

0.889

0.840

0.794

0.855

0.792

0.735

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16%

18%

20%

0.877

0.862

0.847

0.833

0.797

0.769

0.743

0.718

0.694

0.751

0.712

0.675

0.641

0.609

0.579

0.683

0.636

0.592

0.552

0.516

0.482

0.822

0.747

0.681

0.621

0.567

0.519

0.476

0.437

0.402

0.790

0.705

0.630

0.564

0.507

0.456

0.410

0.370

0.335

0.760

0.665

0.583

0.513

0.452

0.400

0.354

0.314

0.279

0.731

0.627

0.540

0.467

0.404

0.351

0.305

0.266

0.233

0.703

0.592

0.500

0.424

0.361

0.308

0.263

0.225

0.194

0.676

0.558

0.463

0.386

0.322

0.270

0.227

0.191

0.162

Present Value of a Series of $1 Cash Flows 4% 6% 8% 10% 12% 14% 16%

18%

20%

Periods 1

0.962

0.943

0.926

0.909

0.893

0.877

0.862

0.847

0.833

1.886

1.833

1.783

1.736

1.690

1.647

1.605

1.566

1.528

2.775

2.673

2.577

2.487

2.402

2.322

2.246

2.174

2.106

3.630

3.465

3.312

3.170

3.037

2.914

2.798

2.690

2.589

4.452

4.212

3.993

3.791

3.605

3.433

3.274

3.127

2.991

5.242

4.917

4.623

4.355

4.111

3.889

3.685

3.498

3.326

6.002

5.582

5.206

4.868

4.564

4.288

4.039

3.812

3.605

6.733

6.210

5.747

5.335

4.968

4.639

4.344

4.078

3.837

7.435

6.802

6.247

5.759

5.328

4.946

4.607

4.303

4.031

8.111

7.360

6.710

6.145

5.650

5.216

4.833

4.494

4.192

A) approximately 14%. B) approximately 16%. C) approximately 18%. D) approximately 20%. E) None of the answers is correct.

Version 1

19) Excaliber is considering the acquisition of a $217,750 machine that is expected to produce annual savings in cash operating costs of $50,000 over the next six years. If Excaliber uses the internal rate of return (IRR) to evaluate new investments and the company has a hurdle rate of 12%, which of the following statements is correct, using the tables that follow? Future Value of $1 8% 10% 12% 14%

Periods

16%

18%

20%

1.040

1.060

1.080

1.100

1.120

1.140

1.160

1.180

1.200

1.082

1.124

1.166

1.210

1.254

1.300

1.346

1.393

1.440

1.125

1.191

1.260

1.331

1.405

1.482

1.561

1.643

1.728

1.170

1.263

1.361

1.464

1.574

1.689

1.811

1.939

2.074

1.217

1.338

1.469

1.611

1.762

1.925

2.101

2.288

2.488

1.265

1.419

1.587

1.772

1.974

2.195

2.437

2.700

2.986

1.316

1.504

1.714

1.949

2.211

2.502

2.827

3.186

3.583

1.369

1.594

1.851

2.144

2.476

2.853

3.279

3.759

4.300

1.423

1.690

1.999

2.359

2.773

3.252

3.803

4.436

5.160

1.480

1.791

2.159

2.594

3.106

3.707

4.412

5.234

6.192

Periods

Future Value of a Series of $1 Cash Flows 6% 8% 10% 12% 14% 16%

18%

20%

1.000

2.040

2.060

2.080

2.100

2.120

2.140

2.160

2.180

2.220

3.122

3.184

3.246

3.310

3.374

3.440

3.506

3.572

3.640

4.247

4.375

4.506

4.641

4.779

4.921

5.067

5.215

5.368

5.416

5.637

5.867

6.105

6.353

6.610

6.877

7.154

7.442

Version 1

6.633

6.975

7.336

7.716

8.115

8.536

7.898

8.394

8.923

9.487 10.089 10.730 11.414 12.142 12.916

9.214

9.898 10.637 11.436 12.300 13.233 14.240 15.327 16.499

10.583 11.491 12.488 13.580 14.776 16.085 17.519 19.086 20.799

12.006 13.181 14.487 15.938 17.549 19.337 21.321 23.521 25.959

Present Value of $1 8% 10% 12% 14%

Periods

0.962

0.943

0.926

0.909

0.893

0.925

0.890

0.857

0.826

0.889

0.840

0.794

0.855

0.792

0.822

8.977

9.442

9.930

16%

18%

20%

0.877

0.862

0.847

0.833

0.797

0.769

0.743

0.718

0.694

0.751

0.712

0.675

0.641

0.609

0.579

0.735

0.683

0.636

0.592

0.552

0.516

0.482

0.747

0.681

0.621

0.567

0.519

0.476

0.437

0.402

0.790

0.705

0.630

0.564

0.507

0.456

0.410

0.370

0.335

0.760

0.665

0.583

0.513

0.452

0.400

0.354

0.314

0.279

0.731

0.627

0.540

0.467

0.404

0.351

0.305

0.266

0.233

0.703

0.592

0.500

0.424

0.361

0.308

0.263

0.225

0.194

0.676

0.558

0.463

0.386

0.322

0.270

0.227

0.191

0.162

Present Value of a Series of $1 Cash Flows 4% 6% 8% 10% 12% 14% 16%

18%

20%

Periods 1

0.962

0.943

0.926

0.909

0.893

0.877

0.862

0.847

0.833

1.886

1.833

1.783

1.736

1.690

1.647

1.605

1.566

1.528

2.775

2.673

2.577

2.487

2.402

2.322

2.246

2.174

2.106

Version 1

3.630

3.465

3.312

3.170

3.037

2.914

2.798

2.690

2.589

4.452

4.212

3.993

3.791

3.605

3.433

3.274

3.127

2.991

5.242

4.917

4.623

4.355

4.111

3.889

3.685

3.498

3.326

6.002

5.582

5.206

4.868

4.564

4.288

4.039

3.812

3.605

6.733

6.210

5.747

5.335

4.968

4.639

4.344

4.078

3.837

7.435

6.802

6.247

5.759

5.328

4.946

4.607

4.303

4.031

8.111

7.360

6.710

6.145

5.650

5.216

4.833

4.494

4.192

A) The machine's IRR is less than 4%, and the machine should not be acquired. B) The machine's IRR is approximately 10%, and the machine should not be acquired. C) The machine's IRR is approximately 10%, and the machine should be acquired. D) The machine's IRR is approximately 12%, and the machine should be acquired. E) All of the statements are false.

20) A machine costs $25,000; it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years. The required rate of return is 12%.

FV of 1 (i = 12%, n = 5): FV of a series of $1 cash flows (i = 12%, n = 5): PV of $1 (i = 12%; n = 5): PV of a series of $1 cash flows (i = 12%, n = 5):

1.762 6.353 0.567 3.605

The net present value of the machine is:

Version 1

A) $(3,840). B) $(3,370). C) $0. D) $21,630. E) $28,840.

21) A machine costs $25,000; it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years. The required rate of return is 12%. Using the tables that follow, which of the following statements about the machine's internal rate of return is true? Future Value of $1 8% 10% 12% 14%

Periods

16%

18%

20%

1.040

1.060

1.080

1.100

1.120

1.140

1.160

1.180

1.200

1.082

1.124

1.166

1.210

1.254

1.300

1.346

1.393

1.440

1.125

1.191

1.260

1.331

1.405

1.482

1.561

1.643

1.728

1.170

1.263

1.361

1.464

1.574

1.689

1.811

1.939

2.074

1.217

1.338

1.469

1.611

1.762

1.925

2.101

2.288

2.488

1.265

1.419

1.587

1.772

1.974

2.195

2.437

2.700

2.986

1.316

1.504

1.714

1.949

2.211

2.502

2.827

3.186

3.583

1.369

1.594

1.851

2.144

2.476

2.853

3.279

3.759

4.300

1.423

1.690

1.999

2.359

2.773

3.252

3.803

4.436

5.160

1.480

1.791

2.159

2.594

3.106

3.707

4.412

5.234

6.192

Future Value of a Series of $1 Cash Flows 4% 6% 8% 10% 12% 14% 16%

18%

20%

1.000

Periods 1

Version 1

1.000

2.040

2.060

2.080

2.100

2.120

2.140

2.160

2.180

2.220

3.122

3.184

3.246

3.310

3.374

3.440

3.506

3.572

3.640

4.247

4.375

4.506

4.641

4.779

4.921

5.067

5.215

5.368

5.416

5.637

5.867

6.105

6.353

6.610

6.877

7.154

7.442

6.633

6.975

7.336

7.716

8.115

8.536

8.977

9.442

9.930

7.898

8.394

8.923

9.487 10.089 10.730 11.414 12.142 12.916

9.214

9.898 10.637 11.436 12.300 13.233 14.240 15.327 16.499

10.583 11.491 12.488 13.580 14.776 16.085 17.519 19.086 20.799

12.006 13.181 14.487 15.938 17.549 19.337 21.321 23.521 25.959

Present Value of $1 8% 10% 12% 14%

Periods

16%

18%

20%

0.962

0.943

0.926

0.909

0.893

0.877

0.862

0.847

0.833

0.925

0.890

0.857

0.826

0.797

0.769

0.743

0.718

0.694

0.889

0.840

0.794

0.751

0.712

0.675

0.641

0.609

0.579

0.855

0.792

0.735

0.683

0.636

0.592

0.552

0.516

0.482

0.822

0.747

0.681

0.621

0.567

0.519

0.476

0.437

0.402

0.790

0.705

0.630

0.564

0.507

0.456

0.410

0.370

0.335

0.760

0.665

0.583

0.513

0.452

0.400

0.354

0.314

0.279

0.731

0.627

0.540

0.467

0.404

0.351

0.305

0.266

0.233

0.703

0.592

0.500

0.424

0.361

0.308

0.263

0.225

0.194

0.676

0.558

0.463

0.386

0.322

0.270

0.227

0.191

0.162

Present Value of a Series of $1 Cash Flows

Version 1

Periods

10%

12%

14%

16%

18%

20%

0.962

0.943

0.926

0.909

0.893

0.877

0.862

0.847

0.833

1.886

1.833

1.783

1.736

1.690

1.647

1.605

1.566

1.528

2.775

2.673

2.577

2.487

2.402

2.322

2.246

2.174

2.106

3.630

3.465

3.312

3.170

3.037

2.914

2.798

2.690

2.589

4.452

4.212

3.993

3.791

3.605

3.433

3.274

3.127

2.991

5.242

4.917

4.623

4.355

4.111

3.889

3.685

3.498

3.326

6.002

5.582

5.206

4.868

4.564

4.288

4.039

3.812

3.605

6.733

6.210

5.747

5.335

4.968

4.639

4.344

4.078

3.837

7.435

6.802

6.247

5.759

5.328

4.946

4.607

4.303

4.031

8.111

7.360

6.710

6.145

5.650

5.216

4.833

4.494

4.192

A) The internal rate of return is greater than 12%. B) The internal rate of return is between 10% and 12%. C) The internal rate of return is less than 10%. D) The internal rate of return must be greater than 15%. E) There is insufficient information to make any judgment about the internal rate of return.

22) The mayor of Trenton is considering the purchase of a new computer system for the city's tax department. The system costs $75,000 and has an expected life of five years. The mayor estimates the following savings will result if the system is purchased: Year or Period

Savings

PV of $1 at 10%

$ 20,000

0.909

Version 1

PV of an ordinary annuity at 10% 0.909

25,000

0.826

1.736

30,000

0.751

2.487

15,000

0.683

3.170

12,000

0.621

3.791

If Trenton uses a 10% discount rate for capital-budgeting decisions, the net present value of the computer system would be: A) $489. B) $4,057. C) $11,658. D) $63,342. E) $79,057.

23) The mayor of Trenton is considering the purchase of a new computer system for the city's tax department. The system costs $75,000 and has an expected life of five years. The mayor estimates the following savings will result if the system is purchased: Year

Savings

$ 20,000

25,000

30,000

15,000

12,000

What can be said about the computer system's internal rate of return if the net present value at 12% is positive? Trenton uses a 10% discount rate for capital-budgeting decisions.

Version 1

A) The internal rate of return is greater than 12%. B) The internal rate of return is between 10% and 12%. C) The internal rate of return is less than 10%. D) The internal rate of return must be less than 5%. E) There is insufficient information to make any judgment about the internal rate of return.

24) The mayor of Trenton is considering the purchase of a new computer system for the city's tax department. The system costs $75,000 and has an expected life of five years. The mayor estimates the following savings will result if the system is purchased: Year or Period

Savings

PV of $1 at 10%

$ 20,000

0.909

PV of an ordinary annuity at 10% 0.909

25,000

0.826

1.736

30,000

0.751

2.487

15,000

0.683

3.170

12,000

0.621

3.791

Trenton uses a 10% discount rate for capital-budgeting decisions. A salesperson from a different computer company claims that his machine, which costs $85,000 and has an estimated service life of four years, will generate annual savings for the city of $32,000. If the discount rate is 10%, the net present value of this system would be: A) $16,440. B) $23,175. C) $63,512. D) $101,440. E) None of the answers is correct.

Version 1

25) A company that is using the internal rate of return (IRR) to evaluate projects should accept a project if the IRR: A) is greater than the project's net present value. B) equates the present value of the project's cash inflows with the present value of the project's cash outflows. C) is greater than zero. D) is greater than the hurdle rate. E) is less than the firm's cost of investment capital.

26) Which of the following choices correctly states the rules for project acceptance under the net-present-value method and the internal-rate-of-return method? Net Present Value

Internal Rate of Return

Positive total

Greater than hurdle rate

Positive total

Less than hurdle rate

Negative total

Greater than hurdle rate

Negative total

Less than hurdle rate

Greater than hurdle rate

Positive number

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

27)

The rule for project acceptance under the net-present-value method is that:

Version 1

A) NPV should be greater than zero. B) NPV should be less than zero. C) NPV should equal zero. D) NPV should be less than the hurdle rate. E) NPV should equal the hurdle rate.

28)

The rule for project acceptance under the internal rate of return method is that: A) IRR should be greater than zero. B) IRR should be less than zero. C) IRR should be greater than the hurdle rate. D) IRR should be less than the hurdle rate. E) IRR should equal the hurdle rate.

29)

The net-present-value method assumes that project funds are reinvested at the: A) hurdle rate. B) rate of return earned on the project. C) cost of debt capital. D) internal rate of return. E) cost of equity capital.

30)

The internal-rate-of-return method assumes that project funds are reinvested at the: A) hurdle rate. B) rate of return earned on the project. C) cost of debt capital. D) cost of equity capital. E) rate of earnings growth (REG).

Version 1

31) Which of the following choices correctly states how funds are assumed to be reinvested under the net-present-value method and the internal-rate-of-return method? Net Present Value

Internal Rate of Return

At the hurdle rate

At the return earned on the project

At the cost of debt capital

At the cost of equity capital

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

32)

A company's hurdle rate is generally influenced by:

A) the cost of capital. B) the firm's depreciable assets. C) whether management uses the net-present-value method or the internal-rate-of-return method. D) project risk. E) both the cost of capital and project risk.

33) If income taxes are ignored, which of the following choices correctly notes how a project's depreciation is treated under the net-present-value method and the internal-rate-ofreturn method? Net Present Value

Version 1

Internal Rate of Return

A. Considered

Considered

B. Considered

Ignored

C. Ignored

Considered

D. Ignored

Ignored

E. The correct answer depends on the depreciation method (straight line or accelerated) that is used.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

34) Consider the following statements about the total-cost and the incremental-cost approaches of investment evaluation: 1.I. Both approaches will yield the same conclusions. 2.II. Choosing between these approaches is a matter of personal preference. 3.III. The incremental approach focuses on cost differences between alternatives. Which of the above statements is (are) true? A) I only. B) II only. C) III only. D) II and III. E) I, II, and III.

35) The systematic follow-up on a capital project to see how the project actually turns out is commonly known as:

Version 1

A) capital budgeting assessment (CBA). B) a postaudit. C) control of capital expenditures (CCE). D) overall cost performance. E) the cost evaluation phase.

36) Consider the following statements about capital budgeting postaudits: 1.I. Postaudits can be used to detect desirable projects that were rejected. 2.II. Postaudits can be used to detect undesirable projects that were accepted. 3.III. Postaudits may reveal shortcomings in cash-flow projections, providing insights that allow a company to improve future predictions. Which of the above statements is (are) correct? A) I only. B) II only. C) III only. D) II and III. E) I, II, and III.

37) Generally speaking, which of the following would not directly affect a company's income tax payments? A) Advertising expense. B) Gain on sale of machinery. C) Sales revenue. D) Land owned by the firm. E) Loss on sale of building.

38)

A company's cash flows for income taxes are normally affected by:

Version 1

A) revenues. B) operating expenses. C) gains on the sale of assets. D) losses on the sale of assets. E) All of the answers are correct.

39) Consider the following statements about taxes and after-tax cash flows: 1.I. Capital budgeting analyses should incorporate after-tax cash flows rather than before-tax cash flows. 2.II. Additional company revenues will result in lower taxes for a firm. 3.III. Operating expenses may actually provide a tax benefit for an organization. Which of the above statements is (are) correct? A) I only. B) II only. C) III only. D) I and II. E) I and III.

40) When income taxes are considered in capital budgeting, the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

A) adding the result of multiplying (advertising expense × (1 - tax rate)). B) adding the tax rate. C) adding the result of multiplying advertising expense × the tax rate. D) subtracting the result of multiplying (advertising expense × (1 - tax rate)). E) subtracting the result of multiplying advertising expense × the tax rate.

Version 1

41) Of the five expenses that follow, which one is most likely treated differently than the others when income taxes are considered in a discounted-cash-flow analysis? A) Salaries expense. B) Advertising expense. C) Depreciation expense. D) Utilities expense. E) Office expense.

42) Assume that a capital project is being analyzed by a discounted-cash-flow approach, and an employee first assumes no income taxes and then later assumes a 30% income tax rate. How would depreciation expense be incorporated in the analysis? No Income Taxes

30% Income Tax Rate

A. Considered

Considered

B. Considered

Ignored

C. Ignored

Considered

D. Ignored

Ignored

E. The correct answer depends on the depreciation method that is used.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

43) When a company is analyzing a capital project by a discounted-cash-flow approach and income taxes are being considered, depreciation:

Version 1

A) should be ignored. B) should be considered because it results in a tax savings. C) should be considered because it is a fixed cost. D) should be considered because it is a cash inflow. E) should be considered because, like other expenses, it is a cash outlay related to operations.

44) When income taxes are considered in capital budgeting, the cash flows related to a company's depreciation expense would be correctly figured by taking the cash paid for depreciation and: A) adding the result of multiplying (depreciation expense × tax rate). B) adding the result of multiplying [depreciation expense × (1 − tax rate)]. C) subtracting the result of multiplying (depreciation expense × tax rate). D) subtracting the result of multiplying [depreciation expense × (1 − tax rate)]. E) None of the answers, because there is no cash paid for depreciation.

45) Jenkins plans to generate $650,000 of sales revenue if a capital project is implemented. Assuming a 30% tax rate, the sales revenue should be reflected in the analysis by a: A) $195,000 inflow. B) $195,000 outflow. C) $455,000 inflow. D) $455,000 outflow. E) $650,000 inflow.

46) Higgins Company plans to incur $350,000 of salaries expense if a capital project is implemented. Assuming a 30% tax rate, the salaries should be reflected in the analysis by a:

Version 1

A) $105,000 inflow. B) $105,000 outflow. C) $245,000 inflow. D) $245,000 outflow. E) $350,000 outflow.

47) Bowers Company plans to incur $190,000 of salaries expense and produce $320,000 of additional sales revenue if a capital project is implemented. Assuming a 30% tax rate, these two items collectively should appear in a capital budgeting analysis as: A) a $39,000 inflow. B) a $39,000 outflow. C) a $91,000 inflow. D) a $91,000 outflow. E) None of the answers is correct.

48) Hampton Company plans to incur $230,000 of additional cash operating expenses and produce $410,000 of additional sales revenue if a capital project is implemented. Assuming a 30% tax rate, these two items collectively should appear in a capital budgeting analysis as: A) a $57,000 inflow. B) a $57,000 outflow. C) a $126,000 outflow. D) a $126,000 inflow. E) a $161,000 outflow.

49) Pizza Company has $70,000 of depreciation expense and is subject to a 30% income tax rate. On an after-tax basis, depreciation results in a:

Version 1

A) $21,000 inflow. B) $21,000 outflow. C) $49,000 inflow. D) $49,000 outflow. E) neither an inflow nor an outflow because depreciation is a noncash expense.

50) Coulter Company is studying a capital project that will produce $600,000 of added sales revenue, $400,000 of additional cash operating expenses, and $50,000 of depreciation. Assuming a 30% income tax rate, the company's after-tax cash inflow (outflow) is: A) $105,000. B) $125,000. C) $155,000. D) $175,000. E) None of the answers is correct.

51)

Which of the following is the proper calculation of a company's depreciation tax shield? A) Depreciation ÷ tax rate. B) Depreciation ÷ (1 − tax rate). C) Depreciation × tax rate. D) Depreciation × (1 − tax rate). E) Depreciation deduction + income taxes.

52)

A depreciation tax shield is a(n):

Version 1

A) after-tax cash outflow. B) increase in income tax. C) factor that has no effect on cash flows. D) reduction in income tax. E) sporadic fluctuation in income tax.

53) Consider the following statements about depreciation tax shields: 1.I. A depreciation tax shield provides distinct benefits to a business. 2.II. A depreciation tax shield should be ignored when doing a net-present-value analysis. 3.III. A depreciation tax shield can occur in more than one year. Which of the above statements is (are) correct? A) I only. B) II only. C) III only. D) I and II. E) I and III.

54)

A company that uses accelerated depreciation:

A) would write off a larger portion of an asset's cost sooner than under the straight-line method. B) would find that depreciation speeds up, with a small portion taken in early years and larger amounts taken in later years. C) would find that more tax benefits occur earlier than under the straight-line method. D) would find itself out of compliance with generally accepted accounting principles (GAAP). E) would both write off a larger portion of an asset's cost sooner than under the straightline method and find that more tax benefits occur earlier than under the straight-line method.

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55) Poston Company uses an accelerated depreciation method for tax purposes rather than straight-line depreciation for a new asset acquisition. Which of the following choices correctly shows when the majority of depreciation would be taken (early or late in the asset's life), when most of the tax savings occur (early or late in the asset's life), and which depreciation method would have the higher present value? When Majority of When Majority of Tax Depreciation Method with Depreciation is Taken Savings Occur Higher Present Value A. Early in life

Early in life

Accelerated

B. Early in life

Early in life

Straight-line

C. Early in life

Late in life

Straight-line

D. Late in life

Late in life

Straight-line

E. Late in life

Early in life

Accelerated

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

56) Julio Company purchased a $200,000 machine that has a four-year life and no salvage value. The company uses straight-line depreciation on all asset acquisitions and is subject to a 30% tax rate. The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be: (Click here to view PV table.) A) $(200,000). B) $(140,000). C) $(35,000). D) $15,000. E) $50,000.

57) If a company desires to be in compliance with current income tax law and write off the cost of its assets rapidly, the firm would use:

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A) straight-line depreciation. B) sum-of-the-years'-digits depreciation. C) accelerated depreciation. D) the Modified Accelerated Cost Recovery System (MACRS). E) annuity depreciation.

58) The Modified Accelerated Cost Recovery System (MACRS) assumes that, on average, assets will be placed in service: A) at the beginning of the tax year. B) three months into the tax year. C) halfway through the tax year. D) at the end of the tax year. E) in the next tax year.

59) A company used the net-present-value method to analyze an investment and found the investment to be very attractive. If the firm used straight-line depreciation in its analysis and changes to the Modified Accelerated Cost Recovery System (MACRS), the investment's net present value will: A) increase. B) remain the same. C) decrease. D) change, but the direction cannot be determined based on the data presented. E) fluctuate in an erratic manner.

60) A company used the net-present-value method to analyze an investment and found the investment to be very attractive. If the firm used Modified Accelerated Cost Recovery System (MACRS) for the analysis and changes to the straight-line depreciation, the investment's net present value will:

Version 1

A) increase. B) remain the same. C) decrease. D) change, but the direction cannot be determined based on the data presented. E) fluctuate in an erratic manner.

61) Young Company received $18,000 cash from the sale of a machine that had a $13,000 book value. If the company is subject to a 30% income tax rate, the net cash flow to use in a discounted-cash-flow analysis would be: A) $3,500. B) $6,500. C) $12,600. D) $16,500. E) $19,500.

62) Dapper Company received $7,000 cash from the sale of a machine that had an $11,000 book value. If the company is subject to a 30% income tax rate, the net cash flow to use in a discounted-cash-flow analysis would be: A) $2,100. B) $4,900. C) $5,800. D) $7,000. E) $8,200.

63) A machine was sold in December 20x3 for $9,000. It was purchased in January 20x1 for $15,000, and depreciation of $12,000 was recorded from the date of purchase through the date of disposal. Assuming a 40% income tax rate, the after-tax cash inflow at the time of sale is:

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A) $3,600. B) $7,800. C) $8,400. D) $9,000. E) $11,400.

64) Donata Company purchased equipment for $30,000 in December 20x1. The equipment is expected to generate $10,000 per year of additional revenue and incur $2,000 per year of additional cash expenses, beginning in 20x2. Under MACRS, depreciation in 20x2 will be $3,000. If the firm's income tax rate is 40%, the after-tax cash flow in 20x2 would be: A) $3,200. B) $3,600. C) $4,800. D) $6,000. E) None of the answers is correct.

65) Carmen Company has an asset that cost $5,000 and currently has accumulated depreciation of $2,000. Suppose the firm sold the asset for $2,500 and is subject to a 30% income tax rate. The loss on disposal would be: A) $350. B) $500. C) $650. D) $2,500. E) None, because the transaction produced a gain.

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66) Carmen Company has an asset that cost $5,000 and currently has accumulated depreciation of $2,000. Suppose the firm sold the asset for $2,500 and is subject to a 30% income tax rate. The net after-tax cash flow of the disposal is: A) $2,100. B) $2,350. C) $2,500. D) $2,650. E) None of the answers is correct.

67) Workman Company is considering a five-year project that requires a typical investment in working capital, in this case, $100,000. Consider the following statements about this situation: 1.I. Workman should include a $100,000 outflow that occurs at time 0 in a discounted-cash-flow analysis. 2.II. Workman should include separate $100,000 outflows in each year of the project's five-year life. 3.III. Workman should include a $100,000 recovery of its working-capital investment in year 5 of a discounted-cash-flow analysis. Which of the above statements is (are) correct? A) I only. B) II only. C) III only. D) I and II. E) I and III.

68) A machine is expected to produce annual savings in cash operating costs of $400,000 for the next six years. FV of 1 (i = 10%, n = 6):

1.772

FV of a series of $1 cash flows (i = 10%, n = 6):

7.716

PV of $1 (i = 10%; n = 6):

0.564

Version 1

PV of a series of $1 cash flows (i = 10%, n = 6):

4.355

If the company has a 10% after-tax hurdle rate and is subject to a 30% income tax rate, the correct discounted net cash flow would be: A) $522,600. B) $947,520. C) $1,219,400. D) $1,742,000. E) None of the answers is correct.

69) A machine is expected to produce increases in cash operating costs of $200,000 for the next six years. FV of 1 (i = 14%, n = 6):

2.195

FV of a series of $1 cash flows (i = 14%, n = 6):

8.536

PV of $1 (i = 14%; n = 6):

0.456

PV of a series of $1 cash flows (i = 14%, n = 6):

3.889

If the company has a 14% after-tax hurdle rate and is subject to a 30% income tax rate, the correct discounted net cash flow would be: A) $(233,340). B) $(544,460). C) $(777,800). D) $(1,011,140). E) None of the other answers is correct.

70)

A new machine is expected to produce a MACRS deduction in three years of $50,000.

Year 1

Version 1

FV of $1 at 12% 1.120

FV of an ordinary annuity at 12% 1.000

PV of $1 at 12% 0.893

PV of an ordinary annuity at 12% 0.893

1.254

2.120

0.797

1.690

1.405

3.374

0.712

2.402

1.574

4.779

0.636

3.037

1.762

6.353

0.567

3.605

1.974

8.115

0.507

4.111

If the company has a 12% after-tax hurdle rate and is subject to a 30% income tax rate, the correct discounted net cash flow to include in an acquisition analysis would be: A) $0. B) $10,680. C) $24,920. D) $46,280. E) None of the other answers is correct.

71) In 6 years, Hopkins Company plans to receive $9,000 cash from the sale of a machine that has a $5,000 book value. Year 1

FV of $1 at 8% 1.080

FV of an ordinary annuity at 8% 1.000

PV of $1 at 8% 0.926

PV of an ordinary annuity at 8% 0.926

1.166

2.080

0.857

1.783

1.260

3.246

0.794

2.577

1.361

4.506

0.735

3.312

1.469

5.867

0.681

3.993

1.587

7.336

0.630

4.623

Version 1

If the firm is subject to a 30% income tax rate and has an 8% after-tax hurdle rate, the correct discounted net cash flow would be: A) $10,200. B) $4,914. C) $6,425. D) $7,800. E) None of the other answers is correct.

72) In six years, Shu Company plans to receive $11,000 cash from the sale of a machine that has a $16,000 book value. Year 1

FV of $1 at 12% 1.120

FV of an ordinary annuity at 12% 1.000

PV of $1 at 12% 0.893

PV of an ordinary annuity at 12% 0.893

1.254

2.120

0.797

1.690

1.405

3.374

0.712

2.402

1.574

4.779

0.636

3.037

1.762

6.353

0.567

3.605

1.974

8.115

0.507

4.111

If the firm is subject to a 30% income tax rate and has a 12% after-tax hurdle rate, the correct discounted net cash flow would be: A) $3,042.00. B) $8,112.00. C) $4,816.50. D) $6,337.50. E) None of the answers is correct.

Version 1

73) Consider the following statements about the investment in working capital in a capital budgeting analysis: 1.Working capital often increases as the result of higher balances in accounts receivable or inventory necessary to support a project. 2.Working capital increases are sources of cash and should be included in a discounted-cashflow analysis. 3.The time 0 cash investment in working capital is included in a discounted-cash-flow analysis as a cash outflow. Which of the above statements is (are) correct? A) I only. B) II only. C) III only. D) I and II. E) I and III.

74)

Which of the following tools is sometimes used to rank investment proposals? A) Profitability index. B) Annuity index. C) Project assessment guide (PAG). D) Investment opportunity index. E) Capital ranking index.

75)

If a proposal's profitability index is greater than one:

Version 1

A) the net present value is negative. B) the net present value is positive. C) the net present value is zero. D) none of these, because the net present value cannot be gauged by the profitability index. E) the proposal should be rejected.

76) St. Michaels School ranks investments by using the profitability index (PI). The following data relate to Project X and Project Y:

Initial Investment Present value of inflows

Project X

Project Y

$ 400,000

$ 1,300,000

600,000

1,800,000

Which project would be more attractive as judged by its ranking, and why? A) Project X because the PI is 1.50. B) Project Y because the PI is 1.38. C) Project X because the PI is 0.67. D) Project Y because the PI is 0.72. E) Both projects would be equally attractive in terms of ranking, as indicated by a positive PI.

77) Upton evaluates future projects by using the profitability index. The company is currently reviewing five similar projects and must choose one of the following: Project 1

Version 1

Initial Investment Present Value of Cash Inflows $

100,000

97,000

50,000

80,000

75,000

110,000

60,000

100,000

150,000

200,000

Which project should Upton select if the decision is based entirely on the profitability index? A) Project 1. B) Project 2. C) Project 3. D) Project 4. E) Project 5.

78)

The payback period is best defined as:

A) initial investment ÷ annual after-tax cash inflow. B) annual after-tax cash inflow ÷ initial investment. C) initial investment ÷ useful life of investment. D) (present value of the cash flows, exclusive of the initial investment) ÷ initial investment. E) initial investment ÷ (present value of the cash flows, exclusive of the initial investment).

79) Consider the following statements about the payback period: 1.I. As shown in your text, the payback period considers the time value of money. 2.II. The payback period can only be used if net cash inflows are uniform throughout a project's life. 3.III. The payback period ignores cash inflows that occur after the payback period is reached. Which of the above statements is (are) correct?

Version 1

A) I only. B) II only. C) III only. D) I and II. E) I, II, and III.

80) A piece of equipment costs $30,000, and is expected to generate $8,500 of annual cash revenues and $1,500 of annual cash expenses. The disposal value at the end of the estimated 10year life is $3,000. Ignoring income taxes, the payback period is: A) 3.53 years. B) 3.86 years. C) 4.29 years. D) 6.98 years. E) None of these options is correct.

81) Sinclair is considering the acquisition of new machinery that will produce uniform benefits over the next eight years. The following information is available:

Annual savings in cash operating costs:

$ 350,000

Annual depreciation expense:

$ 250,000

If the company is subject to a 30% tax rate, what denominator should be used to compute the machinery's payback period?

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A) $70,000. B) $170,000. C) $245,000. D) $320,000. E) None of the answers is correct.

82) Krate Inc. is considering a $600,000 investment in new equipment that is anticipated to produce the following net cash inflows: Year 1

Net Cash Inflows $ 120,000

250,000

110,000

80,000

160,000

If cash flows occur evenly throughout a year, the equipment's payback period is: A) 4 years, 2 months. B) 4 years, 3 months. C) 4 years, 4 months. D) 5 years. E) None of these options is correct.

83) Ocean Wave Packaging is considering a $600,000 investment in new equipment that is anticipated to produce the following data over a five-year life: Year

Version 1

Cash Inflows

Cash Outflows

Depreciation

$ 350,000

$ 130,000

$ 120,000

450,000

190,000

120,000

450,000

170,000

120,000

340,000

150,000

120,000

300,000

130,000

120,000

Ignoring income taxes and assuming that cash flows occur evenly throughout a year, the equipment's approximate payback period is: A) 1 year, 7 months. B) 2 years, 1 month. C) 2 years, 5 months. D) over 5 years. E) None of these options is correct.

84) Which of the following project evaluation methods focuses on accounting income rather than cash flows? A) Net present value. B) Accounting rate of return. C) Internal rate of return. D) Payback period. E) None of the answers is correct.

85)

The accounting rate of return focuses on the:

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A) total accounting income over a project's life. B) average accounting income over a project's life. C) average cash flows over a project's life. D) cash inflows from a project. E) tax savings from a project.

86) Which of the following choices correctly depicts whether discounted cash flows are used by the method noted when evaluating long-term investments? Net Present Value

Internal Rate of Return

Accounting Rate of Return

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

87) Consider the following statements about the accounting rate of return: 1.I. The accounting rate of return focuses on a project's income rather than its cash flows. 2.II. Companies can figure the accounting rate of return on either the initial investment figure or an average investment figure. 3.III. The accounting rate of return considers the time value of money. Which of the above statements is (are) correct?

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A) I only. B) II only. C) III only. D) I and II. E) II and III.

88) Barrel Corporation, which is subject to a 30% income tax rate, is considering a $420,000 asset that will result in the following over its six-year life:

Average revenue:

$ 920,000

Average operating expenses (excluding depreciation):

$ 770,000

Average depreciation:

70,000

The after-tax accounting rate of return on the initial investment is: A) 13.33%. B) 19.05%. C) 25.00%. D) 35.71%. E) None of the answers is correct.

89) San Marco has a $4,000,000 asset investment and is subject to a 30% income tax rate. Cash inflows related to the investment are expected to average $600,000 before tax over the next few years; in contrast, average income before tax is anticipated to be $500,000. The company's after-tax accounting rate of return is:

Version 1

A) 8.75%. B) 10.50%. C) 12.50%. D) 15.00%. E) None of the answers is correct.

90) Which of the following situations will most likely create a bias against accepting a worthwhile project? 1.I. Converting after-tax cash flows to real dollars and using a nominal discount rate. 2.II. Using nominal dollar cash flows and a nominal interest rate to determine the nominal discount rate. 3.III. Using cash flows measured in real dollars to determine the real discount rate. A) I only. B) II only. C) III only. D) I and III. E) II and III.

91) As a general rule, which of the following relationships is valid? 1.I. Accounting rate of return using average investment < Internal rate of return < Accounting rate of return using initial investment. 2.II. Accounting rate of return using initial investment < Internal rate of return < Accounting rate of return using average investment. 3.III. Internal rate of return < Accounting rate of return using average investment < Accounting rate of return using initial investment. A) I only. B) II only. C) III only. D) I and III. E) II and III.

Version 1

92)

A cash flow measured in nominal dollars is: A) the actual cash flow that we experience. B) the adjustment for a change in the dollar's purchasing power. C) the discounted cash flow. D) the realistic cash flow after taxes. E) None of the answers is correct.

93)

A cash flow measured in real dollars: A) is the actual cash flow that we experience. B) is the actual cash flow adjusted for a change in the dollar's purchasing power. C) reflects the time value of money. D) equals the cash flow measured in nominal dollars. E) coincides with the amount of contemplated new investment.

94) Consider the following statements about the accounting for inflation in a capital budgeting analysis: 1.An analyst can use nominal dollars in conjunction with a nominal interest rate. 2.An analyst can use real dollars in conjunction with a real interest rate. 3.An analyst can use nominal dollars in conjunction with a real interest rate. Which of the above statements is (are) correct? A) I only. B) II only. C) III only. D) I and II. E) II and III.

Version 1

95) Tuna Company recently invested in a project with a 3-year life. The project’s net present value was $27,000 and annual cash inflows were $63,000 for year 1, $72,000 for year 2, and $81,000 for year 3. Year or Period 1

PV of $1 at 10% 0.909

PV of an ordinary annuity at 10% 0.909

0.826

1.736

0.751

2.487

0.683

3.170

0.621

3.791

If Tuna’s hurdle rate is 10%, the initial investment for the project was: A) $356,706. B) $150,570. C) $204,570. D) $410,706. E) None of the answers is correct.

96) Yorkshire Industries recently invested in a project with a 4-year life. The project’s net present value was ($4,000) and annual cash inflows were $21,000 for year 1, $24,000 for year 2, $27,000 for year 3, and $31,000 for year 4. Year or Period 1

PV of $1 at 10% 0.909

PV of an ordinary annuity at 10% 0.909

0.826

1.736

0.751

2.487

0.683

3.170

Version 1

0.621

3.791

If Yorkshire’s hurdle rate is 10%, the initial investment for the project was: A) $76,363. B) $102,270. C) $84,363. D) $94,270. E) None of the answers is correct.

97) Silverton Company used the internal rate of return method and computed a factor of 5.2 when the equal annual cash flows were $23,400 and the company’s hurdle rate is 12%. Silverton’s initial investment in the project was: A) $195,000. B) $70,200. C) $121,680. D) $45,000. E) There is insufficient information to determine the amount of the initial investment.

98) Jaclyn Co. has a 2-year capital project with an internal rate of return factor of 1.690. The company’s initial investment in the project was $202,800. If Jaclyn’s hurdle rate is 10%, what were the annual cash flows associated with this capital project? A) $145,200. B) $24,336. C) $171,366. D) $120,000. E) There is insufficient information to determine the annual cash flows.

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99) Sunshine Company is considering a 3-year capital project that costs $759,300. The company has a hurdle rate of 8%. The investment is expected to generate $315,000 annual cash inflows. The internal rate of return for this project is closest to: Future Value of $1 8% 10% 12% 14%

Periods

16%

18%

20%

1.040

1.060

1.080

1.100

1.120

1.140

1.160

1.180

1.200

1.082

1.124

1.166

1.210

1.254

1.300

1.346

1.393

1.440

1.125

1.191

1.260

1.331

1.405

1.482

1.561

1.643

1.728

1.170

1.263

1.361

1.464

1.574

1.689

1.811

1.939

2.074

1.217

1.338

1.469

1.611

1.762

1.925

2.101

2.288

2.488

1.265

1.419

1.587

1.772

1.974

2.195

2.437

2.700

2.986

1.316

1.504

1.714

1.949

2.211

2.502

2.827

3.186

3.583

1.369

1.594

1.851

2.144

2.476

2.853

3.279

3.759

4.300

1.423

1.690

1.999

2.359

2.773

3.252

3.803

4.436

5.160

1.480

1.791

2.159

2.594

3.106

3.707

4.412

5.234

6.192

Future Value of a Series of $1 Cash Flows 4% 6% 8% 10% 12% 14% 16%

18%

20%

1.000

2.040

2.060

2.080

2.100

2.120

2.140

2.160

2.180

2.220

3.122

3.184

3.246

3.310

3.374

3.440

3.506

3.572

3.640

4.247

4.375

4.506

4.641

4.779

4.921

5.067

5.215

5.368

5.416

5.637

5.867

6.105

6.353

6.610

6.877

7.154

7.442

6.633

6.975

7.336

7.716

8.115

8.536

8.977

9.442

9.930

7.898

8.394

8.923

9.487 10.089 10.730 11.414 12.142 12.916

Periods

Version 1

9.214

9.898 10.637 11.436 12.300 13.233 14.240 15.327 16.499

10.583 11.491 12.488 13.580 14.776 16.085 17.519 19.086 20.799

12.006 13.181 14.487 15.938 17.549 19.337 21.321 23.521 25.959

Present Value of $1 8% 10% 12% 14%

Periods

16%

18%

20%

0.962

0.943

0.926

0.909

0.893

0.877

0.862

0.847

0.833

0.925

0.890

0.857

0.826

0.797

0.769

0.743

0.718

0.694

0.889

0.840

0.794

0.751

0.712

0.675

0.641

0.609

0.579

0.855

0.792

0.735

0.683

0.636

0.592

0.552

0.516

0.482

0.822

0.747

0.681

0.621

0.567

0.519

0.476

0.437

0.402

0.790

0.705

0.630

0.564

0.507

0.456

0.410

0.370

0.335

0.760

0.665

0.583

0.513

0.452

0.400

0.354

0.314

0.279

0.731

0.627

0.540

0.467

0.404

0.351

0.305

0.266

0.233

0.703

0.592

0.500

0.424

0.361

0.308

0.263

0.225

0.194

0.676

0.558

0.463

0.386

0.322

0.270

0.227

0.191

0.162

Present Value of a Series of $1 Cash Flows 4% 6% 8% 10% 12% 14% 16%

18%

20%

Periods 1

0.962

0.943

0.926

0.909

0.893

0.877

0.862

0.847

0.833

1.886

1.833

1.783

1.736

1.690

1.647

1.605

1.566

1.528

2.775

2.673

2.577

2.487

2.402

2.322

2.246

2.174

2.106

3.630

3.465

3.312

3.170

3.037

2.914

2.798

2.690

2.589

4.452

4.212

3.993

3.791

3.605

3.433

3.274

3.127

2.991

Version 1

5.242

4.917

4.623

4.355

4.111

3.889

3.685

3.498

3.326

6.002

5.582

5.206

4.868

4.564

4.288

4.039

3.812

3.605

6.733

6.210

5.747

5.335

4.968

4.639

4.344

4.078

3.837

7.435

6.802

6.247

5.759

5.328

4.946

4.607

4.303

4.031

8.111

7.360

6.710

6.145

5.650

5.216

4.833

4.494

4.192

A) 14%. B) 9%. C) 10%. D) 8%. E) 12%.

100) Pepita Company is evaluating a capital project. The project will generate $520,000 of sales revenue annually for 5 years and will require an initial investment of $2,000,000. Pepita’s hurdle rate is 12% and its tax rate is 40% tax rate. These amounts would be reflected in the analysis by a: A) $800,000 outflow and a $208,000 inflow. B) $1,200,000 outflow and a $312,000 inflow. C) $2,000,000 outflow and a $312,000 inflow. D) $2,000,000 outflow and a $208,000 inflow. E) $800,000 outflow and a $312,000 inflow.

101) Campbell Co. is evaluating a capital project. If the project is implemented, Campbell will incur $135,000 of additional salaries expense for 5 years. If the project is implemented, Campbell will be required to make an immediate investment of $1,400,000. Campbell’s hurdle rate is 10% and its tax rate is 30% tax rate. These amounts would be reflected in the analysis by a:

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A) $140,000 outflow and a $40,500 inflow. B) $1,400,000 outflow and a $94,500 outflow. C) $280,000 outflow and a $40,500 outflow. D) $1,400,000 outflow and a $94,500 inflow. E) $980,000 outflow and a $94,500 outflow.

102) Austin Industries plans to incur $342,000 of advertising expense and produce $576,000 of additional sales revenue if a capital project is implemented. Assuming a 30% tax rate, these two items collectively should appear in a capital budgeting analysis as: A) a $70,200 inflow. B) a $70,200 outflow. C) a $163,800 inflow. D) a $163,800 outflow. E) None of the answers is correct.

103) Amanda Corporation has a 30% income tax rate. Amanda is considering a capital project that will produce average revenue of $460,000, average operating expenses (excluding depreciation) of $385,000 and average depreciation of $35,000 for 6 years. If the after-tax accounting rate of return is 13.33%, Amanda’s investment in the capital project is: A) $210,053. B) $562,640. C) $315,079. D) $168,792. E) Cannot be determined from the information provided.

104) Superstition Industries has a $2,000,000 asset investment and is subject to a 30% income tax rate. Cash inflows from the project are expected to average $400,000 before tax over the next few years; in contrast, average income before tax is anticipated to be $350,000. The company's after-tax accounting rate of return on this investment is:

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A) 12.25%. B) 14.00%. C) 17.50%. D) 20.00%. E) None of the answers is correct.

105) The internal rate of return equates the present value of a project's cash inflows with the present value of the cash outflows. ⊚ true ⊚ false

106) Two widely used methods of discounted-cash-flow analysis are the net-present-value method and the return on assets method. ⊚ true ⊚ false

107) A company's hurdle rate is generally influenced by whether management uses the netpresent-value method or the internal-rate-of-return method. ⊚ true ⊚ false

108)

An advantage of the NPV method is that the analyst can adjust for risk considerations. ⊚ true ⊚ false

109) The last step in any investment analysis is to determine the cash flows that are relevant to the analysis. ⊚ true ⊚ false Version 1

110) The incremental-cost approach looks at the difference in the NPVs of the cost of each relevant item under two alternatives in an analysis. ⊚ true ⊚ false

111)

All expenses represent cash outflows. ⊚ true ⊚ false

112) When income taxes are considered in capital budgeting, the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and subtracting the result of 1 minus the tax rate [advertising expense × (1 − tax rate)]. ⊚ true ⊚ false

113) Under MACRS, an asset’s estimated salvage value is not subtracted in computing the asset’s depreciation basis. ⊚ true ⊚ false

114) MACRS depreciation is based on straight-line depreciation and is typically used for published financial statements. ⊚ true ⊚ false

115) When preparing an NPV analysis on the disposal of an asset, like equipment, capital gains and losses are taxed at the same rate as ordinary income in the analysis. Version 1

⊚ ⊚

116)

true false

Some investment proposals require additional outlays for working capital. ⊚ true ⊚ false

117) Valid methods exist for ranking independent investment projects with positive net present values. ⊚ true ⊚ false

118)

If a proposal's profitability index is greater than one then the net present value is positive. ⊚ true ⊚ false

119) The payback period can only be used if net cash inflows are uniform throughout a project's life. ⊚ true ⊚ false

120)

There is no adjustment in the payback method for the time value of money. ⊚ true ⊚ false

121) Because the real interest rate includes compensation for the risk of the investment, in most cases the real interest rate will be higher than the nominal interest rate.

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⊚ ⊚

true false

122) A cash flow measured in real dollars is the actual cash flow observed whereas a cash flow measured in nominal dollars has been adjusted for the dollar’s purchasing power. ⊚ true ⊚ false

123) Inflation is defined as a decline in the general purchasing power of a monetary unit, such as a dollar, across time. ⊚ true ⊚ false

124)

Nominal dollars is another name for real dollars. ⊚ true ⊚ false

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Answer Key Test name: Chap 16_6e_Cornett 1) B 2) C 3) A 4) D 5) B 6) B 7) E 8) C 9) D 10) E 11) D 12) D 13) D 14) B 15) B 16) B 17) B 18) C 19) B 20) B 21) C 22) B 23) A 24) A 25) D 26) A Version 1

27) A 28) C 29) A 30) B 31) B 32) E 33) D 34) E 35) B 36) D 37) D 38) E 39) E 40) E 41) C 42) C 43) B 44) E 45) C 46) D 47) C 48) D 49) A 50) C 51) C 52) D 53) E 54) E 55) A 56) A Version 1

57) D 58) C 59) A 60) C 61) D 62) E 63) B 64) D 65) B 66) D 67) E 68) C 69) B 70) B 71) B 72) D 73) E 74) A 75) B 76) A 77) D 78) A 79) C 80) C 81) D 82) B 83) C 84) B 85) B 86) D Version 1

87) D 88) A 89) A 90) A 91) B 92) A 93) B 94) D 95) B 96) C 97) C 98) D 99) E 100) C 101) B 102) C 103) A 104) A 105) TRUE 106) FALSE 107) FALSE 108) TRUE 109) FALSE 110) TRUE 111) FALSE 112) FALSE 113) TRUE 114) FALSE 115) FALSE 116) TRUE Version 1

117) FALSE 118) TRUE 119) FALSE 120) TRUE 121) FALSE 122) FALSE 123) TRUE 124) FALSE

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Chapter 16 – 6e Cornet- Manually Graded 1) Randi Corp. is considering the replacement of some machinery that has zero book value and a current market value of $2,800. One possible alternative is to invest in new machinery that costs $30,000. The new equipment has a four-year service life and an estimated salvage value of $3,500, will produce annual cash operating savings of $9,400, and will require a $2,200 overhaul in year 3. The company uses straight-line depreciation. Year

FV of $1 at 8%

FV of an ordinary annuity at 8%

PV of $1 at 8%

PV of an ordinary annuity at 8%

1.080

1.000

0.926

1.166

2.080

0.857

1.783

1.260

3.246

0.794

2.577

1.361

4.506

0.735

3.312

1.469

5.867

0.681

3.993

1.587

7.336

0.630

4.623

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Required: Prepare a net-present-value analysis of Randi’s replacement decision, assuming an 8% hurdle rate and no income taxes. Should the machinery be acquired? Note: Round calculations to the nearest dollar.

2) On January 2, 20x1, Jennifer Grey purchased 800 shares of Sounder Telecommunications common stock at $35 per share. The company paid a $1.50 dividend per share on December 28 of that year, and raised the amount by $0.50 per share for a distribution on December 28, 20x2. Jennifer sold her entire investment on December 30, 20x2, generating a $5,000 gain on the sale of stock.

Year

FV of $1 at 10%

FV of an ordinary annuity at 10%

PV of $1 at 10%

PV of an ordinary annuity at 10%

1.100

1.000

0.909

1.210

2.100

0.826

1.736

1.331

3.310

0.751

2.487

1.464

4.641

0.683

3.170

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1.611

6.105

0.621

3.791

1.772

7.716

0.564

4.355

Required: A. Prepare a dated listing of the cash inflows and outflows related to Jennifer’s stock investment. Ignore income taxes. B. Assume that Jennifer has a 10% hurdle rate for all investments. Rounding to the nearest dollar, compute the net present value of her investment in Sounder and determine whether she achieved her 10% goal.

3) Racer Industries is currently purchasing Part No. 76 from an outside supplier for $80 per unit. Because of supplier reliability problems, the company is considering producing the part internally in an idle manufacturing plant. Annual volume over the next six years is expected to total 300,000 units at variable manufacturing costs of $75 per unit. Racer must acquire $80,000 of new equipment if it reopens the plant. The equipment has a sixyear service life, a $14,000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $5,200 per year in years 4-6, and the equipment will be sold at the end of its life. Year

FV of $1 at 12%

FV of an ordinary annuity at 12%

PV of $1 at 12%

PV of an ordinary annuity at 12%

1.120

1.000

0.893

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1.254

2.120

0.797

1.690

1.405

3.374

0.712

2.402

1.574

4.779

0.636

3.037

1.762

6.353

0.567

3.605

1.974

8.115

0.507

4.111

Required: Rounding to the nearest dollar, use the net-present-value method (total-cost approach) and a 12% hurdle rate to determine whether Mark should make or buy Part No. 76. Ignore income taxes.

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4) Clear Skies Airline Company is planning a project that is expected to last for six years and generate annual net cash inflows of $75,000. The project will require the purchase of a $280,000 machine, which is expected to have a salvage value of $10,000 at the end of the sixyear period. The machine will require a $50,000 overhaul at the end of the fourth year. The company presently has a 12% minimum desired rate of return. Based on this information, an accountant prepared the following analysis: Annual net cash inflow

$75,000

Annual depreciation

$45,000

Annual average cost of overhaul

8,333

Average annual income

Return on investment

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(53,333)

$21,667

$21,667 ÷ $280,000 = 7.74%

The accountant recommends that the project be rejected because it does not meet the company's minimum desired rate of return. Ignore income taxes. Required: A. What criticism(s) would you make of the accountant's evaluation? B. Use the net-present-value method and determine whether the project should be accepted. C. Based on your answer in requirement "B," is the internal rate of return greater or less than 12%? Explain. Year

FV of $1 at 12%

FV of an ordinary annuity at 12%

PV of $1 at 12%

PV of an ordinary annuity at 12%

1.120

1.000

0.893

1.254

2.120

0.797

1.690

1.405

3.374

0.712

2.402

1.574

4.779

0.636

3.037

1.762

6.353

0.567

3.605

1.974

8.115

0.507

4.111

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5) Fulton Township is studying a 700-acre site for a new landfill. The new site will save $70,000 in annual operating costs for 10 years, as Fulton currently uses the landfill of a neighboring municipality. Other data are: Purchase price per acre: $550 Site preparation costs: $110,000 Hurdle rate: 6% Ignore income taxes. Year

FV of $1 at 6%

FV of an ordinary annuity at 6%

PV of $1 at 6%

PV of an ordinary annuity at 6%

1.060

1.000

0.943

1.124

2.060

0.890

1.833

1.191

3.184

0.840

2.673

1.263

4.375

0.792

3.465

1.338

5.637

0.747

4.212

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1.419

6.975

0.705

4.917

1.504

8.394

0.665

5.582

1.594

9.898

0.627

6.210

1.690

11.491

0.592

6.802

1.791

13.181

0.558

7.360

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{MISSING IMAGE} Required: A. Use the net-present-value method and determine whether the landfill should be acquired. B. Determine the landfill's approximate internal rate of return, using the tables above.

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6) Canton Corporation is considering the acquisition of a new machine that costs $149,040. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $45,000. Canton evaluates investments by using the internal rate of return and ignores income taxes. Required: A. Briefly define the internal rate of return. B. What relationship holds true at the internal rate of return with respect to discounted cash inflows and discounted cash outflows? With respect to net present value? C. Compute the machine's internal rate of return, using the tables that follow.

{MISSING IMAGE}

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7) Both net present value (NPV) and the internal rate of return (IRR) have a reinvestment assumption. Required: A. State the assumption for each method. B. One of the advantages of the NPV method is that users can adjust for risk considerations. Explain how this is done.

8) Consider the five items that follow, which are related to independent investment opportunities. Purchase price of a new machine: $850,000 Annual straight-line depreciation: $75,000 Annual savings in cash operating costs: $120,000 Advertising expenses related to a new marketing campaign in year 2: $35,000 Sale of an asset in year 6: Loss on sale, $60,000; proceeds received by seller, $23,000 Required: Complete the following table, inserting the (pre-discounted) cash flow amounts that would be used in a net-present-value analysis. Column A should be completed based on the assumption of no income taxes; in contrast, Column B should be completed assuming the relevant company is subject to a 30% income tax rate. Be sure to note cash outflows in parentheses. Column A:

Column B: 30% Tax Rate

No Income Taxes

Purchase price of new machine

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Annual straight-line depreciation

Annual savings in cash operating costs

Advertising expenses

Sale of Asset

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9) Spear Company is considering a $5.4 million asset investment that has a four-year service life and a $400,000 salvage value. The investment is expected to produce annual savings in cash operating costs of $860,000 and will require a $250,000 overhaul in year 3. This amount will be recorded as repair and maintenance expense and is fully deductible for tax purposes. Spear uses the net-present-value method to analyze investments. Asset investments are depreciated by the straight-line method, ignoring salvage values in related computations. Required: A. Ignoring income taxes, determine the (pre-discounted) cash-flow amounts that would be used in a net-present-value analysis for (1) the asset acquisition, (2) annual savings in cash operating costs, (3) annual straight-line depreciation, (4) the overhaul in year 3, and (5) disposal of the asset in year 4. Note cash outflows in parentheses. B. Repeat requirement "A," assuming the company is subject to a 30% income tax rate. Assume the company depreciates the asset using the optional straight-line method. Additionally, it depreciates it over the asset's service life (not its MACRS life).

10)

Postaudits are an important part of capital budgeting.

Required: A. What is a postaudit of a capital investment project? B. What are the benefits of a postaudit? C. A manager prepared an unsuccessful proposal for a capital project, as her firm decided not to fund and pursue the project. The manager observed, "The company's postaudit process will show that this project should have been funded." Comment on the manager's understanding of the postaudit process.

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11)

Depreciation is often described as a "tax shield."

Required: A. Explain how depreciation provides such a shield. B. MACRS is an accelerated depreciation system. Explain how an accelerated system can provide a more beneficial tax shield than, say, a straight-line depreciation system.

12) Tatum Corporation recently purchased a $1,200,000 asset that has a three-year service life and no salvage value. The company is subject to a 30% income tax rate and employs a 12% after-tax hurdle rate in capital investment decisions. Management is studying whether to depreciate the asset by using the straight-line method or the Modified Accelerated Cost Recovery System (MACRS). Assume that the following MACRS factors are in effect: year 1, 33%; year 2, 45%; year 3, 15%; and year 4, 7% Year

FV of $1 at 12%

FV of an ordinary annuity at 12%

PV of $1 at 12%

PV of an ordinary annuity at 12%

1.120

1.000

0.893

1.254

2.120

0.797

1.690

1.405

3.374

0.712

2.402

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1.574

4.779

0.636

3.037

1.762

6.353

0.567

3.605

1.974

8.115

0.507

4.111

Required: A. Calculate the total depreciation expense that Tatum will record under each method. B. Calculate the total tax savings that will occur with each method (include present value calculation). C. On the basis of your calculations in part "B," which of the two methods will management likely prefer? Explain your answer.

13) Marker Sail Company plans to purchase $4.5 million of equipment in the not-too-distant future. The equipment will be depreciated by the optional straight-line method over the MACRS life of 5 years. Marker is subject to a 30% income tax rate. The company's accountant is about to perform a net-present-value analysis, assuming a 10% after-tax hurdle rate. Year

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FV of $1 at 10%

FV of an ordinary annuity at 10%

PV of $1 at 10%

PV of an ordinary annuity at 10%

1.100

1.000

0.909

1.210

2.100

0.826

1.736

1.331

3.310

0.751

2.487

1.464

4.641

0.683

3.170

1.611

6.105

0.621

3.791

1.772

7.716

0.564

4.355

Required: A. Determine the discounted cash flows that would be reflected in the analysis in year 0 and year 1. B. Determine the discounted cash flow that would be reflected in the analysis in year 6, assuming that Marker sells the equipment for $450,000.

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14) You are reviewing some material that deals with investment analysis, preparing for your first day on the job at Enrique Enterprises. Consider the cash flows that follow. 1. The immediate payment required to purchase a $600,000 milling machine. 2. Straight-line depreciation of $20,000 in year 2 of a long-term investment. 3. Annual savings in cash operating costs of $50,000 over the next six years. 4. Sale of a machine for $35,000 at the end of its six-year service life. The machine has a book value of $25,000. 5. A $6,000 equipment overhaul in year 5 that is fully deductible for income tax purposes. Year

FV of $1 at 10%

FV of an ordinary annuity at 10%

PV of $1 at 10%

PV of an ordinary annuity at 10%

1.100

1.000

0.909

1.210

2.100

0.826

1.736

1.331

3.310

0.751

2.487

1.464

4.641

0.683

3.170

1.611

6.105

0.621

3.791

1.772

7.716

0.564

4.355

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Required: Calculate the discounted cash flow that is appropriate for each of the preceding items. Assume a 10% after-tax hurdle rate and a 30% income tax rate, and round to the nearest dollar.

15) The Excon Machine Tool Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is $600,000, and the lathe is expected to have a useful life of five years and no salvage value. The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm's annual cash inflows (before considering depreciation) of $180,000. The machine will be depreciated using MACRS for tax purposes. The 5-year MACRS depreciation percentages as computed by the IRS are: Year 1 = 20.00%; Year 2 = 32.00%; Year 3 = 19.20%; Year 4 = 11.52%; Year 5 = 11.52%; Year 6 = 5.76%. Warren is currently in the 40% income tax bracket. A 10% after-tax rate of return is desired. Year

FV of $1 at 10%

FV of an ordinary annuity at 10%

PV of $1 at 10%

PV of an ordinary annuity at 10%

1.100

1.000

0.909

1.210

2.100

0.826

1.736

1.331

3.310

0.751

2.487

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1.464

4.641

0.683

3.170

1.611

6.105

0.621

3.791

1.772

7.716

0.564

4.355

Required: A. What is the net present value of the investment? Round to the nearest dollar. B. Should the machine be acquired by the firm? C. Assume that the equipment will be sold at the end of its useful life for $100,000. If the depreciation amounts are not revised, calculate the dollar impact of this change on the total net present value.

16) Warner Corporation is considering the acquisition of a new machine that costs $350,000. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $100,000. Warner uses the optional straight-line method of depreciation and depreciates the asset over its four-year service life. The company is subject to a 30% income tax rate, has an after-tax hurdle rate of 12%, and rounds calculations to the nearest dollar. Year

FV of $1 at 12%

FV of an ordinary annuity at 12%

PV of $1 at 12%

PV of an ordinary annuity at 12%

1.120

1.000

0.893

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1.254

2.120

0.797

1.690

1.405

3.374

0.712

2.402

1.574

4.779

0.636

3.037

1.762

6.353

0.567

3.605

1.974

8.115

0.507

4.111

Required: A. Determine the annual after-tax cash flows that result from acquisition of the machine. B. Calculate the machine's net present value. Is the machine an attractive investment? Why?

17) Kansas Corporation is reviewing an investment proposal that has an initial cost of $52,500. An estimate of the investment's end-of-year book value, the yearly after-tax net cash inflows, and the yearly net income are presented in the schedule below. Yearly after-tax net cash inflows include savings from the depreciation tax shield. The investment's salvage value at the end of each year is equal to book value, and there will be no salvage value at the end of the investment's life.

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Year

Initial Cost and Book Value

Yearly After-Tax Net cash Inflows

Yearly

Net

Income

$35,000

$20,000

$2,500

21,000

17,500

3,500

10,500

15,000

4,500

3,500

12,500

5,500

---

10,000

6,500

$75,000

$22,500

Kansas uses a 14% after-tax target rate of return for new investment proposals. Year

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FV of $1 at 14%

FV of an ordinary annuity

PV of $1 at 14%

PV of an ordinary annuity

at 14%

1.140

1.000

0.877

1.300

2.140

0.769

1.647

1.482

3.440

0.675

2.322

1.689

4.921

0.592

2.914

1.925

6.610

0.519

3.433

2.195

8.536

0.456

3.889

Required: A. Calculate the project's payback period. B. Calculate the accounting rate of return on the initial investment. C. Calculate the proposal's net present value. Round to the nearest dollar.

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18) Tanner Corporation is considering the acquisition of a new machine that is expected to produce annual savings in cash operating costs of $30,000 before income taxes. The machine costs $100,000, has a useful life of five years, and no salvage value. Tanner uses straight-line depreciation on all assets, is subject to a 30% income tax rate, and has an after-tax hurdle rate of 8%. Year

FV of $1 at 8%

FV of an ordinary annuity at 8%

PV of $1 at 8%

PV of an ordinary annuity at 8%

1.080

1.000

0.926

1.166

2.080

0.857

1.783

1.260

3.246

0.794

2.577

1.361

4.506

0.735

3.312

1.469

5.867

0.681

3.993

1.587

7.336

0.630

4.623

Required: A. Compute the machine's accounting rate of return on the initial investment. B. Compute the machine's net present value.

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19)

A profitability index can be used to rank investment proposals.

Required: A. Define the profitability index. B. Two projects are under consideration. Project I has a net present value of $20,000 whereas project II has a net present value of $200,000. Which project is better? Explain. What weakness in a net-present-value analysis does the profitability index address?

20) Marcus & Tyler sells frozen custard and sandwiches. It is considering a new site that will require a $2 million investment for land acquisition and construction costs. The following operating results are expected: Sales Revenue

$980,000

Less operating expenses:

Food & Supplies

$320,000

Wages & Salaries

180,000

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Insurance

40,000

Utilities

10,000

Depreciation

70,000

Operating income

620,000

$360,000

Disregard income taxes. Required: A. If management requires a payback period of four years or less, should the new site be opened? Why? B. Compute the accounting rate of return on the initial investment. C. What significant limitation of payback and the accounting rate of return is overcome by the net-present-value method?

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21)

The payback method is a popular way to analyze investment proposals.

Required: A. Explain how the payback period is determined. Generally speaking, from a payback perspective, which projects are viewed to be the most attractive? B. Can the payback method take income taxes into consideration? Explain. C. What are the deficiencies of the payback method?

22)

Most countries experience inflation to some degree.

Required: A. Define inflation. B. Is it important to consider inflation in capital-budgeting decision? Why or why not? C. Describe two ways to incorporate inflation into a capital-budgeting decision. Include in your explanation a definition of nominal dollars, real dollars, nominal interest rate, and real interest rate.

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Answer Key Test name: Chap 16_6e_Cornett_Manually Graded

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Chapter 17 – 6e Cornett 1)

Which of the following would be considered a service department for an airline? A) Maintenance. B) Information Systems. C) Purchasing. D) Flight Catering. E) All of the answers are correct.

Which of the following would not be considered a service department in a hospital? A) Security. B) Cardiac Care. C) Patient Records. D) Accounting. E) Human Resources.

3) Consider the following statements about service department costs: 1.The costs of the Human Resources Department in a manufacturing organization must be allocated to production departments in order to achieve a correct costing of inventory. 2.The allocation of service department costs requires that an organization select both an allocation base and an allocation method. 3.Service department cost allocations are more relevant for firms involved in service industries (e.g., repair, health care) than for those involved with manufacturing. Which of the above statements is (are) correct? A) I only. B) II only. C) I and II. D) II and III. E) I, II, and III.

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4) Which of the following methods ignores the fact that some service departments provide service to other service departments? A) Direct method. B) Indirect method. C) Step-down method. D) Reciprocal-services method. E) Dual-cost allocation method.

5) Which of the following methods fully recognizes the fact that some service departments provide service to other service departments? A) Direct method. B) Indirect method. C) Step-down method. D) Reciprocal-services method. E) Dual-cost allocation method.

6) Which of the following methods recognizes the fact that fixed and variable service department costs should be allocated separately? A) Direct method. B) Indirect method. C) Step-down method. D) Reciprocal-services method. E) Dual-cost allocation method.

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7) Consider the following statements about the direct method of service department cost allocation: 1.Under the direct method, all service department costs are eventually allocated to production departments. 2.The order in which service department costs are allocated to production departments is important. 3.Once a service department's costs have been allocated, no costs are re-circulated back to that department. Which of the above statements is (are) correct? A) I only. B) II only. C) I and II. D) I and III. E) I, II, and III.

8) The Buckaneer Clinic has two service departments (Human Resources and Information Resources) and two "production" departments (In-patient Treatment and Out-patient Treatment). The service departments service the "production" departments as well as each other, and studies have shown that Information Resources provides the greater amount of service. Which of the following allocations would occur if Buckaneer uses the direct method of cost allocation? A) Information Resources cost would be allocated to In-patient Treatment. B) Information Resources cost would be allocated to Human Resources. C) Human Resources cost would be allocated to Information Resources. D) In-patient Treatment cost would be allocated to Out-patient Treatment. E) Out-patient Treatment cost would be allocated to Information Resources.

9) Tennison Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing). Maintenance is the larger service department and Assembly is the largest production department. The two service departments service each other as well as the three producing departments. On the basis of this information, which of the following cost allocations would not occur under the direct method?

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A) Machining cost would be allocated to Assembly. B) Maintenance cost would be allocated to Finishing. C) Maintenance cost would be allocated to Human Resources. D) Human Resources cost would be allocated to Finishing. E) Both machining cost would be allocated to Assembly and maintenance cost would be allocated to Human Resources.

10) Which of the following methods recognizes some (but not all) of the services that occur between service departments? A) Direct method. B) Step-down method. C) Indirect method. D) Reciprocal-services method. E) Dual-cost allocation method.

11) When the step-down method is used, the service department whose costs are allocated first is often the department that: A) obtains the highest yield. B) has the lowest cost. C) is the newest. D) serves the greatest number of other service departments. E) serves the fewest other service departments.

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12) Consider the following statements about the step-down method of service department cost allocation: 1.Under the step-down method, all service department costs are eventually allocated to production departments. 2.The order in which service department costs are allocated is important. 3.After a service department's costs have been allocated to other departments, no costs are recirculated back to that service department. Which of the above statements is (are) correct? A) I only. B) II only. C) I and II. D) I and III. E) I, II, and III.

13) Oxmoor Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing). The two service departments service the production departments as well as each other, and studies have shown that Maintenance provides the greater amount of service. On the basis of this information, which of the following cost allocations would likely occur under the step-down method? A) Machining cost would be allocated to Assembly. B) Maintenance cost would be allocated to Finishing. C) Maintenance cost would be allocated to Human Resources. D) Human Resources cost would be allocated to Maintenance. E) Both maintenance cost would be allocated to Finishing and maintenance cost would be allocated to Human Resources.

14) The Covington Clinic has two service departments (Human Resources and Information Systems) and two "production" departments (In-patient Treatment and Out-patient Treatment). The service departments service the "production" departments as well as each other, and studies have shown that Information Systems provides the greater amount of service. Which of the following allocations would not occur if Covington uses the step-down method of cost allocation?

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A) Information Systems cost would be allocated to Human Resources. B) Human Resources cost would be allocated to Information Systems. C) Human Resources cost would be allocated to In-patient Treatment. D) In-patient Treatment cost would be allocated to Out-patient Treatment. E) Both Human Resources cost would be allocated to Information Systems and In-patient Treatment cost would be allocated to Out-patient Treatment.

15) The Blue Sky Clinic has two service departments (S1 and S2) and two "production" departments (P1 and P2). The service departments service the "production" departments as well as each other, and studies have shown that S2 provides the greater amount of service. Which of the following choices correctly denotes an allocation that would not occur under (1) the direct method and (2) the step-down method of cost allocation? Direct Method

Step-Down Method

A. S1’s cost would be allocated to P1.

S1’s cost would be allocated to P1.

B. P1’s cost would be allocated to P2.

S1’s cost would be allocated to P2.

C. S2’s cost would be allocated to S1.

S2’s cost would be allocated to S1.

D. P1’s cost would be allocated to S1.

S2’s cost would be allocated to S1.

E. None of the answers is correct.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

16) Which of the following methods accounts for 100% of the services that occur between service departments?

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A) Direct method. B) Indirect method. C) Reciprocal-services method. D) Step-down method. E) Dual-cost allocation method.

17) Naples Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing). The two service departments service each other as well as the production departments, and studies have shown that Maintenance provides the greater amount of service. Given the various cost allocation methods, which of the following choices correctly denotes whether Maintenance cost would be allocated to Human Resources? Direct

Step-Down

Reciprocal

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

18) Which of the following methods would be of little use when allocating service department costs to production departments?

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A) The direct method. B) The reciprocal-services method. C) The step-down method. D) The net-realizable-value method. E) The dual-cost allocation method.

19) Aldo Industries, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources. The square footage occupied by each department follows. Human Resources

6,000

Building Maintenance

13,000

Machining

18,000

Assembly

26,000

Assuming use of the direct method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)? A) 19,000. B) 44,000. C) 50,000. D) 63,000. E) More information is needed to judge.

20) Aldo Industries, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources. The square footage occupied by each department follows. Human Resources

6,000

Building Maintenance

13,000

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Machining

18,000

Assembly

26,000

Assuming use of the step-down method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)? A) 19,000. B) 44,000. C) 50,000. D) 63,000. E) More information is needed to judge.

21) Rave Reviews Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly). The number of employees in each department follows. Cafeteria

Human Resources

Machining

200

Assembly

300

Rave Reviews uses the direct method of cost allocation and allocates cost on the basis of employees. If Human Resources cost amounts to $1,800,000, how much of the department's cost would be allocated to Machining? A) $600,000. B) $720,000. C) $900,000. D) $1,200,000. E) None of the answers is correct.

22) Rave Reviews Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly). The number of employees in each department follows.

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Cafeteria

Human Resources

Machining

200

Assembly

300

Rave Reviews uses the direct method of cost allocation and allocates cost on the basis of employees. If Human Resources cost amounts to $1,800,000, how much of the department's cost would be allocated to Assembly? A) $900,000. B) $720,000. C) $1,080,000. D) $1,200,000. E) None of the answers is correct.

23) Trek, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources. The square footage occupied by each department follows. Human Resources

7,000

Building Maintenance

11,000

Machining

20,000

Assembly

28,000

Assuming use of the step-down method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)? A) 18,000. B) 48,000. C) 55,000. D) 66,000. E) More information is needed to judge.

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24) Trek, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources. The square footage occupied by each department follows. Human Resources

7,000

Building Maintenance

11,000

Machining

20,000

Assembly

28,000

Assuming use of the direct method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)? A) 18,000. B) 48,000. C) 55,000. D) 66,000. E) More information is needed to judge.

25) Sparkle Metallurgy, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and Human Resources cost on the basis of employees. It believes that Building Maintenance provides more service than Human Resources. The square footage and employees in each department follow. Square Footage

Employees

Human Resources

4,000

Building Maintenance

10,000

Machining

15,000

Assembly

21,000

Assuming use of the step-down method, which of the following choices correctly denotes the number of square feet and employees over which the Building Maintenance cost and Human Resources cost would be allocated (i.e., spread)?

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Building Maintenance

Human Resources

36,000

100

40,000

100

46,000

110

50,000

110

None of the answers is correct

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

26) Visions, Inc. has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly). The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources. The square footage occupied by each department follows. Human Resources

3,500

Building Maintenance

8,700

Machining

9,900

Assembly

15,000

Over how many square feet would the Building Maintenance cost be allocated (i.e., spread) with the direct method and the step-down method? Direct Method

Step-Down Method

24,900

28,400

24,900

37,100

28,400

24,900

37,100

24,900

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Some other combination of figures not listed above.

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

27) Marshall Welding Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly). The number of employees in each department follows. Cafeteria

Human Resources

Machining

100

Assembly

150

Marshall Welding uses the step-down method of cost allocation and allocates cost on the basis of employees. Human Resources cost amounts to $1,200,000, and the department provides more service to the firm than Cafeteria. How much Human Resources cost would be allocated to Machining? A) $0. B) $428,572. C) $444,444. D) $480,000. E) None of the answers is correct.

28) Marshall Welding Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly). The number of employees in each department follows. Cafeteria

Human Resources

Machining

100

Assembly

150

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Marshall Welding uses the step-down method of cost allocation and allocates cost on the basis of employees. Human Resources cost amounts to $1,200,000, and the department provides more service to the firm than Cafeteria. How much Human Resources cost would be allocated to Assembly? A) $0. B) $480,572. C) $444,444. D) $666,666. E) None of the answers is correct.

29) Marshall Welding Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly). The number of employees in each department follows. Cafeteria

Human Resources

Machining

100

Assembly

150

Marshall Welding uses the step-down method of cost allocation and allocates cost on the basis of employees. Human Resources cost amounts to $1,200,000, and the department provides more service to the firm than Cafeteria. How much Human Resources cost would be allocated to Cafeteria? A) $88,888. B) $28,572. C) $44,444. D) $0. E) None of the answers is correct.

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30) Stormy Corporation has two service departments (S1 and S2) and two production departments (P1 and P2), and uses the step-down method of cost allocation. Management has determined that S1 provides more service to the firm than S2, and has decided that the number of employees is the best allocation base to use for S1. The following data are available: Department

Number of Employees

Which of the following statements is (are) true if S1 and S2 have respective operating costs of $280,000 and $350,000? A) S2 should allocate a portion of its $350,000 cost to S1. B) S1's cost should be allocated (i.e., spread) over 140 employees. C) S1's cost should be allocated (i.e., spread) over 150 employees. D) S2 should allocate a total of $390,000 to P1 and P2. E) Both S1's cost should be allocated (i.e., spread) over 140 employees and S2 should allocate a total of $390,000 to P1 and P2.

31) The Xtra Store has a Human Resources Department and a Janitorial Department that provide service to three sales departments. The Human Resources Department cost is allocated on the basis of employees, and the Janitorial Department cost is allocated on the basis of space. The following information is available:

Budgeted cost Space in Square Feet Number of employees

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Human Resources $ 45,000

Janitorial Sales #1 Sales #2 Sales #3 $ 30,000

4,000

1,000

20,000

30,000

50,000

Using the direct method, the amount of Janitorial Department cost allocated to Sales Department no. 2 is: A) $8,571. B) $8,654. C) $9,000. D) $10,350. E) $14,210.

32) The Xtra Store has a Human Resources Department and a Janitorial Department that provide service to three sales departments. The Human Resources Department cost is allocated on the basis of employees, and the Janitorial Department cost is allocated on the basis of space. The following information is available:

Budgeted cost Space in Square Feet Number of employees

Human Resources $ 45,000

Janitorial Sales #1 Sales #2 Sales #3 $ 30,000

4,000

1,000

20,000

30,000

50,000

Using the step-down method and assuming that the Human Resources Department is allocated first, the amount of Human Resources cost allocated to Sales Department no. 2 is: A) $13,500. B) $21,316. C) $20,250. D) $19,286. E) $22,500.

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33) The Xtra Store has a Human Resources Department and a Janitorial Department that provide service to three sales departments. The Human Resources Department cost is allocated on the basis of employees, and the Janitorial Department cost is allocated on the basis of space. The following information is available:

Budgeted cost Space in Square Feet Number of employees

Human Resources $ 45,000

Janitorial Sales #1 Sales #2 Sales #3 $ 30,000

4,000

1,000

20,000

30,000

50,000

Using the step-down method and assuming the Human Resources Department is allocated first, the amount of Janitorial cost allocated to Sales Department no. 2 is: A) $8,571. B) $9,000. C) $9,857. D) $10,247. E) $10,350.

34) The Dahle Manufacturing Company has two production departments (Assembly and Finishing) and two service departments (Human Resources and Janitorial). The projected usage of the two service departments is as follows: Use of Human Resources Use of Janitorial Human resource

---

Janitorial

10 %

---

Assembly

60 %

40 %

Finishing

30 %

55 %

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The budgeted costs in the service departments are: Human Resources, $90,000 and Janitorial, $50,000. Using the direct method, the amount of Janitorial Department cost allocated to the Finishing Department is: A) $21,053. B) $24,843. C) $25,000. D) $28,947. E) $34,157.

35) The Dahle Manufacturing Company has two production departments (Assembly and Finishing) and two service departments (Human Resources and Janitorial). The projected usage of the two service departments is as follows: Use of Human Resources Use of Janitorial Human resource

---

Janitorial

10 %

---

Assembly

60 %

40 %

Finishing

30 %

55 %

The budgeted costs in the service departments are: Human Resources, $90,000 and Janitorial, $50,000. Using the step-down method and assuming the Human Resources Department is allocated first, the amount of Human Resources cost allocated to the Assembly Department is:

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A) $21,053. B) $28,947. C) $54,000. D) $60,000. E) $78,842.

36)

The process of allocating fixed and variable costs separately is called: A) the separate allocation procedure (SAP). B) diverse allocation. C) reciprocal-cost allocation. D) common-cost allocation. E) dual-cost allocation.

37)

Under dual-cost allocation, fixed costs are allocated on the basis of a user department's: A) long-run usage of a service department's output. B) short-run usage of a service department's output. C) long-run usage and short-run usage of a service department's output. D) neither long-run usage nor short-run usage of a service department's output. E) either long-run usage or short-run usage of a service department's output.

38) Consider the following statements about dual-cost allocation: 1.Dual-cost allocation prevents a change in the short-run activity of one department from affecting the cost allocated to another department. 2.Dual-cost allocations create an incentive for user department managers to understate their expected long-run service needs. 3.Dual-cost allocations are generally preferred over lump-sum allocations, or those that combine variable and fixed costs together. Which of the above statements is (are) true?

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A) I only. B) III only. C) I and II. D) II and III. E) I, II, and III.

39)

When allocating service department costs, companies should use: A) actual costs rather than budgeted costs, and separate rates for variable and fixed costs. B) budgeted costs rather than actual costs, and separate rates for variable and fixed costs. C) budgeted costs rather than actual costs, and a rate that combines variable and fixed

costs. D) actual costs rather than budgeted costs, and a rate that combines variable and fixed costs. E) a rate that is based on matrix theory.

40) Grassley Corporation allocates administrative costs on the basis of staff hours. Short-run monthly usage and anticipated long-run monthly usage of staff hours for Operating Departments 1 and 2 follow. Department 1

Department 2

Total

Short-run usage (hours)

40,000

60,000

100,000

Long-run usage (hours)

45,000

55,000

100,000

If Grassley uses dual-cost accounting procedures and variable administrative costs total $200,000, the amount of variable administrative cost to allocate to Department 1 would be: A) $80,000. B) $85,000. C) $90,000. D) $100,000. E) None of the answers is correct.

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41) Soprano Corporation allocates administrative costs on the basis of staff hours. Short-run monthly usage and anticipated long-run monthly usage of staff hours for Operating Departments 1 and 2 follow. Department 1

Department 2

Total

Short-run usage (hours)

80,000

120,000

200,000

Long-run usage (hours)

90,000

110,000

200,000

If Soprano uses dual-cost accounting procedures and fixed administrative costs total $1,000,000, the amount of fixed administrative costs to allocate to Department 1 would be: A) $400,000. B) $450,000. C) $500,000. D) $850,000. E) None of the answers is correct.

42) Nichols Corporation allocates administrative costs on the basis of staff hours. Short-run monthly usage and anticipated long-run monthly usage of staff hours for Operating Departments 1 and 2 follow. Department 1

Department 2

Total

Short-run usage (hours)

45,000

55,000

100,000

Long-run usage (hours)

48,000

52,000

100,000

Variable and fixed administrative costs total $180,000 and $400,000, respectively. If Nichols uses dual-cost accounting procedures, the total amount of administrative cost to allocate to Department 2 would be:

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A) $301,600. B) $307,000. C) $313,600. D) $319,000. E) None of the answers is correct.

43)

A company that uses activity-based costing would likely allocate costs from: A) service departments to production departments. B) service departments to products and services. C) service departments to production departments and then to products and services. D) activity-cost pools to production departments. E) activity-cost pools to products and services.

44) The point in a joint production process where each individual product becomes separately identifiable is commonly called the: A) decision point. B) separation point. C) individual product point. D) split-off point. E) joint product point.

45) The joint-cost allocation method that recognizes the revenues at split-off but does not consider any further processing costs is the: A) relative-sales-value method. B) net-realizable-value method. C) physical-units method. D) reciprocal-accounting method. E) gross margin at split-off method.

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46) Which of the following choices correctly denotes the data needed to allocate joint costs under the relative-sales-value method? Sales Value of Product at Split-Off

Separable Cost

Sales Value of Product After Processing Beyond Split-Off

Yes

A) Choice A B) Choice B C) Choice C D) Choice D E) Choice E

47) Which of the following methods should be selected if a company terminates all processing at the split-off point and desires to use a cost-allocation approach that considers the "revenue-producing ability" of each product? A) Gross margin at split-off method. B) Reciprocal-accounting method. C) Relative-sales-value method. D) Physical-units method. E) Net-realizable-value method.

48) When allocating joint costs, Feinberg calculates the final sales value of the various products manufactured and subtracts appropriate separable costs. The company is using the:

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A) gross margin at split-off method. B) reciprocal-accounting method. C) relative-sales-value method. D) physical-units method. E) net-realizable-value method.

49) Hancock Machining manufactures A, B, and C, all of which are joint products, and D, which is classified as a by-product. If joint manufacturing costs amount to $450,000 and the company is using a popular accounting method, the firm will: A) allocate $450,000 among A, B, and C. B) allocate $450,000 among A, B, C, and D. C) increase $450,000 by the net realizable value of D and then allocate the total among A, B, and C. D) decrease $450,000 by the net realizable value of D and then allocate the total among A, B, and C. E) decrease $450,000 by the net realizable value of D and then allocate the total among A, B, C, and D.

50) Hsu Company manufactures two products (A and B) from a joint process that cost $200,000 for the year just ended. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. Further information follows. If Processed Further Product

Pounds Produced

A B

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Sales Value

Separable Cost

20,000

Per-Pound Sales Price $ 12

$ 350,000

$ 90,000

30,000

300,000

60,000

If the joint costs are allocated based on the physical-units method, the amount of joint cost assigned to product A would be: A) $80,000. B) $100,000. C) $104,000. D) $120,000. E) None of the answers is correct.

51) Ramos Corporation uses the physical-units method to allocate costs among its three joint products: X, Y, and Z. The following data are available for the period just ended: Joint processing cost: $800,000 Total production: 150,000 pounds Share of joint cost allocated to X: $160,000 Share of joint cost allocated to Y: $400,000 Which of the following statements is true? A) The company would have relied on the sales value of each product when allocating joint costs to X, Y, and Z. B) Ramos produced 30,000 pounds of Z during the period. C) Ramos produced 45,000 pounds of Z during the period. D) Ramos produced 105,000 pounds of Z during the period. E) Based on the data presented, it is not possible to determine Ramos’ production of Z during the period.

52) Kingston Specialty Corporation manufactures joint products P and Q. During a recent period, joint costs amounted to $80,000 in the production of 20,000 gallons of P and 60,000 gallons of Q. Kingston can sell P and Q at split-off for $2.20 per gallon and $2.60 per gallon, respectively. Alternatively, both products can be processed beyond the split-off point, as follows:

Separable processing costs

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$ 15,000

$ 35,000

Sales price (per gallon) if processed beyond split-off

The joint cost allocated to Q under the relative-sales-value method would be: A) $40,000. B) $62,400. C) $64,000. D) $65,600. E) None of the answers is correct.

53) Kingston Specialty Corporation manufactures joint products P and Q. During a recent period, joint costs amounted to $80,000 in the production of 20,000 gallons of P and 60,000 gallons of Q. Kingston can sell P and Q at split-off for $2.20 per gallon and $2.60 per gallon, respectively. Alternatively, both products can be processed beyond the split-off point, as follows: P

Separable processing costs

$ 15,000

$ 35,000

Sales price (per gallon) if processed beyond split-off

The joint cost allocated to P under the relative-sales-value method would be: A) $17,600. B) $16,400. C) $24,000. D) $25,600. E) None of the answers is correct.

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54) Corey Corporation manufactures joint products W and X. During a recent period, joint costs amounted to $300,000 in the production of 20,000 gallons of W and 60,000 gallons of X. Both products will be processed beyond the split-off point, giving rise to the following data: W

Separable processing costs

$ 40,000

$ 160,000

Sales price (per gallon) if processed beyond split-off

The joint cost allocated to W under the net-realizable-value method would be: A) $75,000. B) $80,000. C) $84,000. D) $90,000. E) None of the answers is correct.

55) Corey Corporation manufactures joint products W and X. During a recent period, joint costs amounted to $300,000 in the production of 20,000 gallons of W and 60,000 gallons of X. Both products will be processed beyond the split-off point, giving rise to the following data: W

Separable processing costs

$ 40,000

$ 160,000

Sales price (per gallon) if processed beyond split-off

The joint cost allocated to X under the net-realizable-value method would be: A) $210,000. B) $180,000. C) $184,000. D) $190,000. E) None of the answers is correct.

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56) Stoney Brook Company produces two products (X and Y) from a joint process. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. Joint manufacturing costs for the year were $60,000. Sales values and costs were as follows: If Processed Further Product X

Units Made 9,000

Sales Price at Split-Off $ 40,000

6,000

80,000

Sales Value Separable Cost $ 78,000

$ 10,500

90,000

7,500

If the joint production costs are allocated based on the physical-units method, the amount of joint cost assigned to product X would be: A) $20,000. B) $24,000. C) $30,000. D) $36,000. E) $40,000.

57) Stoney Brook Company produces two products (X and Y) from a joint process. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. Joint manufacturing costs for the year were $60,000. Sales values and costs were as follows: If Processed Further Product X

Version 1

Units Made 9,000

Sales Price at Split-Off $ 40,000

Sales Value Separable Cost $ 78,000

$ 10,500

6,000

80,000

90,000

7,500

If the joint production costs are allocated based on the relative-sales-value method, the amount of joint cost assigned to product X would be: A) $20,000. B) $27,000. C) $33,000. D) $40,000. E) None of the answers is correct.

58) Stoney Brook Company produces two products (X and Y) from a joint process. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. Joint manufacturing costs for the year were $60,000. Sales values and costs were as follows: If Processed Further Product X

Units Made 9,000

Sales Price at Split-Off $ 40,000

6,000

80,000

Sales Value Separable Cost $ 78,000

$ 10,500

90,000

7,500

If the joint production costs are allocated based on the net-realizable-value method, the amount of joint cost assigned to product Y would be: A) $20,000. B) $27,000. C) $33,000. D) $40,000. E) None of the answers is correct.

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59)

Which of the following statements about joint-cost allocation is false?

A) Joint-cost allocation is useful in deciding whether to further process a product after split-off. B) Joint-cost allocation is useful in making a profit determination about individual joint products. C) Joint-cost allocation is helpful in inventory valuation. D) Joint-cost allocation can be based on the number of units produced. E) Joint-cost allocation can be accomplished by using several different methods that focus on sales value and product "worth."

60) Consider the following statements about joint product cost allocation: 1.Joint product cost is allocated because it is necessary for inventory valuation. 2.Joint product cost is allocated because it is necessary for making economic decisions about individual products (e.g., sell at split-off or process further). 3.Joint cost may be allocated to products by using several different methods. Which of the above statements is (are) correct? A) I only. B) III only. C) I and II. D) I and III. E) I, II, and III.

61) Downtown Hospital has two service departments (Patient Records and Accounting) and two "production" departments (Internal Medicine and Surgery). Which of the following allocations would likely take place under the reciprocal-services method of cost allocation?

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A) Allocation of Accounting cost to Patient Records. B) Allocation of Patient Records cost to Internal Medicine. C) Allocation of Surgery cost to Accounting. D) Allocation of Internal Medicine cost to Surgery. E) Both allocation of Accounting cost to Patient Records and Allocation of Patient Records cost to Internal Medicine.

62) State Hospital has two service departments (Patient Records and Accounting) and two "production" departments (Internal Medicine and Surgery). Which of the following allocations would not take place under the reciprocal-services method of cost allocation? A) Allocation of Accounting cost to Patient Records. B) Allocation of Patient Records cost to Internal Medicine. C) Allocation of Surgery cost to Accounting. D) Allocation of Internal Medicine cost to Surgery. E) Both allocation of Surgery cost to Accounting and Allocation of Internal Medicine cost to Surgery.

63) Hsu Company manufactures two products (A and B) from a joint process that cost $200,000 for the year just ended. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. Further information follows. If Processed Further Product

Pounds Produced

A B

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Sales Value

Separable Cost

20,000

Per-Pound Sales Price $ 12

$ 350,000

$ 90,000

30,000

300,000

60,000

If the joint costs are allocated based on the relative-sales-value method, the amount of joint cost assigned to product A would be: A) $100,000. B) $104,000. C) $107,692. D) $120,000. E) None of the answers is correct.

64) Hsu Company manufactures two products (A and B) from a joint process that cost $200,000 for the year just ended. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. Further information follows. If Processed Further Product

Pounds Produced

Sales Value

Separable Cost

20,000

Per-Pound Sales Price $ 12

$ 350,000

$ 90,000

30,000

300,000

60,000

If the joint costs are allocated based on the net-realizable-value method, the amount of joint cost assigned to product A would be: A) $100,000. B) $104,000. C) $107,692. D) $120,000. E) None of the answers is correct.

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65) Hemlock Industries uses the physical-units method to allocate costs among its three joint products: AA, BB, and CC. Hemlock’s joint processing cost was $640,000 and its total production was 120,000 gallons. If Hemlock allocated $128,000 to BB and $320,000 to CC, how many gallons of AA were produced? A) 192,000 gallons of AA. B) 24,000 gallons of AA. C) 36,000 gallons of AA. D) 84,000 gallons of AA. E) Based on the data presented, it is not possible to determine how many gallons of AA were produced.

66) Kingston Specialty Corporation manufactures joint products P and Q. During a recent period, joint costs amounted to $80,000 in the production of 20,000 gallons of P and 60,000 gallons of Q. Kingston can sell P and Q at split-off for $2.20 per gallon and $2.60 per gallon, respectively. Alternatively, both products can be processed beyond the split-off point, as follows: P

Separable processing costs

$ 15,000

$ 35,000

Sales price (per gallon) if processed beyond split-off

The joint cost allocated to Q under the net-realizable-value method would be: A) $40,000. B) $64,000. C) $65,600. D) $62,400. E) None of the answers is correct.

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67) Kingston Specialty Corporation manufactures joint products P and Q. During a recent period, joint costs amounted to $80,000 in the production of 20,000 gallons of P and 60,000 gallons of Q. Kingston can sell P and Q at split-off for $2.20 per gallon and $2.60 per gallon, respectively. Alternatively, both products can be processed beyond the split-off point, as follows: P

Separable processing costs

$ 15,000

$ 35,000

Sales price (per gallon) if processed beyond split-off

The joint cost allocated to P under the net-realizable-value method would be: A) $14,400. B) $16,400. C) $17,600. D) $25,600. E) None of the answers is correct.

68) Bulldog Canyon Manufacturing produces three products from a joint process. The following information is available for the period just ended:

Units produced Joint cost allocation Sales value at split-off

BDC-4

BDC-5

BDC-6

Total

10,800

25,200

54,000

90,000

$ 33,120

$ 144,000

$ 187,200

$ 468,000

Assume that Bulldog Canyon allocates joint costs using the relative-sales-value method. What is the amount of joint cost allocation to BDC-4?

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A) $17,280. B) $53,280. C) $57,600. D) $48,000. E) Not enough information is provided to determine how to allocate the joint cost.

69) Bulldog Canyon Manufacturing produces three products from a joint process. The following information is available for the period just ended:

Units produced

BDC-4

BDC-5

BDC-6

Total

10,800

25,200

54,000

90,000

$ 33,120

$ 144,000

$ 187,200

$ 468,000

Joint cost allocation Sales value at split-off

Assume that Bulldog Canyon allocates joint costs using the relative-sales-value method. What is the amount of sales value at the split-off point for BDC-5? A) $57,600. B) $53,280. C) $173,160. D) $107,640. E) Not enough information is provided to determine sales value at the split-off point.

70) Bulldog Canyon Manufacturing produces three products from a joint process. The following information is available for the period just ended:

Units produced

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BDC-4

BDC-5

BDC-6

Total

10,800

25,200

54,000

90,000

Joint cost allocation Sales value at split-off

$ 33,120

$ 144,000

$ 187,200

$ 468,000

Assume that Bulldog Canyon allocates joint costs using the relative-sales-value method. What is the amount of joint cost allocation to BDC-6? A) $53,280. B) $17,280. C) $57,600. D) $48,000. E) Not enough information is provided to determine how to allocate the joint cost.

71) The direct method ignores the fact that some service departments provide service to other service departments. ⊚ true ⊚ false

72) The step-down method of service department cost allocation completely ignores the provision of services by one service department to another service department. ⊚ true ⊚ false

73) City Hospital has two service departments (Patient Records and Accounting) and two "production" departments (Internal Medicine and Surgery). It uses the reciprocal-services method of cost allocation and should allocate Internal Medicine cost to Surgery. ⊚ true ⊚ false

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74) When allocating service department costs, companies should use actual costs rather than budgeted costs, and separate rates for variable and fixed costs. ⊚ true ⊚ false

75) Dual cost allocation works with either the direct method or the step-down method of allocation. ⊚ true ⊚ false

76) A company that uses activity-based costing would likely allocate costs from activity-cost pools to products and services. ⊚ true ⊚ false

77) The breakdown of costs by departments is much finer than a breakdown by activities in an ABC system. ⊚ true ⊚ false

78) If a company uses the physical-units method to allocate joint product costs, the weight of the joint products at the split-off point may be the basis for allocating joint costs. ⊚ true ⊚ false

79) In the net-realizable-value method, the joint cost is allocated to the joint products in proportion to the joint products’ net realizable values. ⊚ true ⊚ false

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80) The net-realizable-value method is the least preferred cost allocation method since it does not consider the economic characteristics of the joint products. ⊚ true ⊚ false

81) A joint product with minimal value relative to the other joint products is known as a byproduct. ⊚ true ⊚ false

82)

The reciprocal-services method is less accurate than the direct and step-down methods. ⊚ true ⊚ false

83)

The reciprocal-services method cannot be combined with the dual-allocation approach. ⊚ true ⊚ false

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Answer Key Test name: Chap 17_6e_Cornett 1) E 2) B 3) C 4) A 5) D 6) E 7) D 8) A 9) E 10) B 11) D 12) E 13) E 14) E 15) E 16) C 17) E 18) D 19) B 20) C 21) B 22) C 23) C 24) B 25) B 26) A Version 1

27) C 28) D 29) A 30) E 31) C 32) C 33) E 34) D 35) C 36) E 37) A 38) E 39) B 40) A 41) B 42) B 43) E 44) D 45) A 46) C 47) C 48) E 49) D 50) A 51) C 52) B 53) A 54) D 55) A 56) D Version 1

57) A 58) C 59) A 60) D 61) E 62) E 63) A 64) B 65) C 66) C 67) A 68) C 69) D 70) A 71) TRUE 72) FALSE 73) FALSE 74) FALSE 75) TRUE 76) TRUE 77) FALSE 78) TRUE 79) TRUE 80) FALSE 81) TRUE 82) FALSE 83) FALSE

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Chapter 17 – 6e Cornet- Manually Graded 1) Tempest Industries has two service departments (General Factory and Human Resources) and two production departments (Machining and Assembly). The company uses the direct method of service-department cost allocation, allocating General Factory cost on the basis of square feet and Human Resources cost on the basis of employees. Budgeted allocation-base and operating data for the four departments follow. General Factory

Human Resources

Machining

Assembly

Square feet

7,000

3,000

90,000

30,000

Employees

120

180

Machine hours

200

---

80,000

20,000

Labor hours

45,000

25,000

100,000

150,000

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Additional information: · Budgeted costs of General Factory and Human Resources respectively amount to $1,560,000 and $950,000. · The anticipated overhead costs incurred directly in the Machining and Assembly Departments respectively total $3,650,000 and $2,340,000. · The manufacturing overhead application bases used by Tempest’s production departments are: Machining, machine hours; Assembly, labor hours. · Company policy holds that a department's overhead application rate is based on a department's own overhead plus an allocated share of service-department cost. Required: A. Allocate the company's service-department costs to the producing departments. B. Compute the overhead application rates for Machining and Assembly.

2) Midwest Alabama State College has two service departments, the Library and Computing Services that assist the School of Business and the School of Health. Budgeted costs of the Library and Computing Services are $800,000 and $1,800,000, respectively. Usage of the service departments' output during the year is anticipated to be: Provider of Service

User of Services

Library

Computing Services

Library

---

10%

Computing Services

---

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School of Business

20%

60%

School of Health

80%

30%

Required: A. Use the direct method to allocate the costs of the Library and Computing Services to the School of Business and the School of Health. B. Repeat requirement "A" using the step-down method. Midwest allocates the cost of Computing Services first.

3) Claremore Electronics, Inc. manufactures gauges for automobile dashboards. The company has two production departments, Molding and Assembly. There are three service departments: Human Resources, Maintenance, and Engineering. Usage of services by the various departments follows. Human Resources

Human Resources

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---

Maintenance

Engineering

---

Maintenance

---

Engineering

10%

---

Molding

40%

75%

Assembly

50%

25%

The budgeted costs in Claremore’s service departments are: Human Resources, $180,000; Maintenance, $270,000; and Engineering, $200,000. The company rounds all calculations to the nearest dollar. Required: A. Use the direct method to allocate Claremore’s service department costs to the production departments. B. Determine the proper departmental sequence to use in allocating the company's service costs by the step-down method. C. Ignoring your answer in part "B," assume that Human Resources costs are allocated first, Maintenance costs second, and Engineering costs third. Use the step-down method to allocate Claremore’s service department costs.

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4) Dodge City Corporation is developing departmental overhead rates based on direct labor hours for its two production departments, Molding and Assembly. The Molding Department worked 20,000 hours during the period just ended, and the Assembly Department worked 40,000 hours. The overhead costs incurred by Molding and Assembly were $151,250 and $440,750, respectively. Two service departments, Repair and Power, directly support the two production departments. These service departments have costs of $90,000 and $250,000, respectively. The following schedule reflects the use of Repair and Power's output by the various departments: Repair

Repair (repair hours)

Power (kilowatt hours)

120,000

Power

Molding

Assembly

500

4,000

420,000

60,000

Required: A. Allocate the company's service department costs to production departments by using the direct method. B. Calculate the overhead application rates of the production departments. Hint: Consider both directly traceable and allocated overhead when deriving your answer. C. Allocate the company's service department costs to production departments by using the stepdown method. Begin with the Power Department, and round calculations to the nearest dollar.

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5) Allegiance Corporation has two service departments (S1 and S2) and two production departments (P1 and P2). S1 and S2 both use the number of employees as an allocation base. The following data are available: Number of Employees

Budgeted Cost

$172,000

250,000

300

660,000

500

840,000

Required: A. Assuming use of the direct method: 1. Over how many employees would S1's budgeted cost be allocated? 2. How much of S2's cost would be allocated to P1? 3. How much of P1's cost would be allocated to S1? B. Assuming use of the step-down method: 1. How much of S1's cost would be allocated to S2? Allegiance allocates S1's costs prior to allocating those of S2. 2. How much of S2's total cost would be allocated to P2? 3. How much of S2's total cost would be allocated to S1?

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6) Consider the following independent cases that relate to service department cost allocations: Case A: Aaron Company has two service departments [Human Resources (H/R) and Information Systems] and two production departments (Machining and Assembly). Human Resource cost is allocated by using the direct method based on the number of personnel in each department. For the period just ended, there were 189 employees in Machining, and Machining received $90,000 of H/R's overhead of $200,000. How many employees are in the Assembly Department? Case B: Drew Montana, controller of Butte Enterprises, wants service department managers to be aware that their use of other service departments costs the firm a substantial amount of money. Would Drew prefer the direct method or the step-down method of cost allocation? Why? Case C: Laramie Company has four service departments (S1, S2, S3, and S4) and two production departments (P1 and P2). The costs of S1 are allocated first, followed in order by the costs of S2, S3, and S4. Laramie uses the step-down method, and the costs of S2 are allocated based on the number of computer hours used. Computer hours logged during the period were as follows: S1, 4,600; S2, 7,100; S3, 10,400; S4, 17,600; P1, 37,000; and P2, 48,600. Over how many hours would S2's cost be allocated? Case D: A recently hired staff accountant noted that given the nature of the allocations, the total cost allocated to production departments is typically less under the step-down method than under the direct method. Do you agree with the accountant? Why? Required: Answer the questions that are raised in Cases A, B, C, and D.

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7) Carlson, Inc. has centralized much of its specialized data processing operation, with the Computer Department performing services for Departments A and B. Service hours consumed during Quarter No. 1 and Quarter No. 2 follow. A

Quarter No. 1

Quarter No. 2

Computer Department operating costs were: Variable (Per Hour)

Fixed

Quarter No. 1

$50

$40,000

Quarter No. 2

38,000

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Company policy currently requires that total variable and fixed costs be combined and allocated as a lump sum to users based on service hours. Carlson has been financially healthy for a number of years but began to experience problems toward the end of Quarter No. 1. In response to these problems, management issued a directive to closely monitor costs and computer usage, effective with the start of Quarter No. 2. Required: A. Compute Quarter No. 1's total computer cost and determine the allocation to Department A and Department B. B. How much cost would be allocated to Departments A and B during Quarter No. 2, and how would the heads of these departments likely react to the allocations in light of management's directive? C. Assume that at the beginning of quarter no. 2, the company switched to dual-cost allocations, with variable costs allocated based on current usage and fixed costs allocated based on long-run average utilization. An analysis of projected usage found that work for Department A was expected to consume 55% of the Computer Department's time over the forthcoming year. How much cost would be allocated to A and B in Quarter No. 2? D. Given the use of dual allocations, how, if at all, would a short-term increase or decrease in A's current usage affect the quarterly cost allocation that is charged to Department B?

Many companies use the dual-rate method of cost allocation.

Required: A. How does the dual-rate method work? B. Is there any advantage of the dual-rate method over a method that uses a combined, lumpsum single rate? Briefly explain.

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9) Bowden Outfitters manufactures a complete line of running shoes. The firm has three manufacturing departments: Molding, Component, and Assembly. There are also two service departments: Power and Maintenance. The soles of the shoes are manufactured in the Molding Department. The tops of the shoes are manufactured in the Component Department. The shoes are then completed in the Assembly Department. Varying amounts of materials, time, and effort are required for each of the shoe models. The Power Department and Maintenance Department provide services to the three manufacturing departments. Bowden has always used a plantwide overhead rate. Direct-labor hours are used to assign overhead to products. The predetermined overhead rate is calculated by dividing the company’s total estimated overhead by the total estimated direct-labor hours to be worked in the three manufacturing departments. Christine Macguire, director of cost management, has recommended that Bowden use departmental overhead rates. The planned operating costs and expected levels of activity for the coming year have been developed by Macguire and are presented by department in the following schedules. (All numbers are in thousands.) Service Departments

Power

Maintenance

Maximum capacity

1,000 kilowatt-hours

Adjustable

Estimated usage for the coming year

800 kilowatt-hours

125 hours

Departmental activity measures:

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Departmental costs:

Materials and supplies

$ 6,000

$2,500

Variable labor

1,400

2,250

Fixed overhead

13,000

1,250

Total service department costs

$20,400

$6,000

Manufacturing Departments

Molding

Component

Assembly

Department activity measures:

Direct-labor hours

1,500

3,000

2,500

Machine hours

1,875

1,125

–0–

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Departmental costs:

Direct material

$12,400

$30,000

$ 1,250

Direct labor

3,500

20,000

12,000

Variable overhead

4,500

11,000

20,500

Fixed overhead

18,500

7,200

7,100

Total departmental costs

$38,900

$68,200

$40,850

Use of service departments:

Maintenance:

Estimated usage in labor hours for the coming year

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Power (in kilowatt-hours):

Estimated usage for the coming year

360

320

120

Maximum allotted capacity

500

350

150

Required: 1. Calculate the plantwide overhead rate for Bowden Company for the coming year using the same method as used in the past. 2. Christine Macguire has been asked to develop departmental overhead rates for comparison with the plantwide rate. The following steps are to be followed in developing the departmental rates. a. The Maintenance Department costs should be allocated to the three manufacturing depart¬ments using the direct method. b. The Power Department costs should be allocated to the three manufacturing departments using the dual method combined with the direct method. Fixed costs are to be allocated according to maximum allotted capacity, and variable costs are to be allocated according to planned usage for the coming year. c. Calculate departmental overhead rates for the three manufacturing departments using a machine-hour cost driver for the Molding Department and a direct-labor-hour cost driver for the Component and Assembly departments.

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10) Suppose that one hog yields 250 pounds of ham, 200 pounds of chops, and 50 pounds of miscellaneous items. The sales value of ham is $1.80 per pound; chops, $2.50 per pound; and miscellaneous items, $1.00 per pound. The hog costs $670, and processing costs are $30. Required: A. Determine the proper allocation of joint costs to the three products by using the physicalunits method. B. Repeat part "B" by using the relative-sales-value method.

11) Quatro Corporation manufactures two chemicals (Flextra and Hydro) in a joint process. Data from a recent month follow. Direct materials used: $360,000 Direct labor: $150,000 Manufacturing overhead: $690,000 Manufacturing output: Flextra: 40,000 gallons Hydro: 120,000 gallons Flextra sells for $15 per gallon and Hydro sells for $20 per gallon. Required: A. Compute the total joint costs to be allocated to Flextra and Hydro. B. Compute the joint costs that would be allocated to Flextra by using the physical-units method. C. Compute the joint costs that would be allocated to Hydro by using the relative-sales-value method. D. Assume that Hydro can be converted into a more refined product, Hydro-R, in a totally separable process at an additional cost of $4 per gallon. If the refined product can be sold in the marketplace for $26 per gallon, compute the net realizable value of Hydro-R.

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12) Lowrey Chemical manufactures two industrial chemicals in a joint process. In October, $200,000 of direct materials were processed at a cost of $300,000, resulting in 16,000 pounds of Pentex and 4,000 pounds of Glaxco. Pentex sells for $35 per pound and Glaxco sells for $60 per pound. Management generally processes each of these chemicals further in separable processes to manufacture more refined products. Pentex is processed separately at a cost of $7.50 per pound, with the resulting product, Pentex-R, selling for $45 per pound. Glaxco is processed separately at a cost of $10 per pound, and the resulting product, Glaxco-R, sells for $100 per pound. Required: A. Compute the company's total joint production costs. B. Assuming that total joint production costs amounted to $500,000, allocate these costs by using: (1) The physical-units method; (2) The relative-sales-value method; (3) The netrealizable-value method.

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13) Clarion Company, a new firm, manufactures two products, J and K, in a common process. The joint costs amount to $80,000 per batch of finished goods. Each batch results in 20,000 liters of output, of which 80% are J and 20% are K. The two products are processed beyond the split-off point, with Clarion incurring the following separable costs: J, $2 per liter; K, $5 per liter. After the additional processing, the selling price of J is $12 per liter, and the selling price of K is $15 per liter. Required: A. Determine the proper allocation of joint costs if the company uses the net-realizable-value method. B. Assume that Clarion sold all of its production of K during the current accounting period. Compute K's sales revenue, cost of goods sold, and gross margin. C. Is the firm's cost-of-goods-sold figure influenced by the choice of a joint-cost allocation method? Briefly explain.

14) Palen Chemical Company manufactures X-111, X-112, and X-113 from a joint process. The following information is available for the period just ended: X-111

X-112

X-113

Total

Units produced

6,000

14,000

30,000

50,000

Joint cost allocation

$18,400

$80,000

Sales value at splitoff

$104,000

$260,000

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Required: A. Does Palen allocate joint costs by using the physical-units method? Explain. B. Assume that Palen does not use the physical-units method but instead allocates joint costs by using the relative-sales-value method. Find the four unknowns in the preceding table.

15) Clandestine Corporation allocates joint costs by using the net-realizable-value method. In the company's Texas plant, products D and E emerge from a joint process that costs $250,000. E is then processed at a cost of $220,000 into products F and G. Data pertaining to D, F, and G follow. D

Costs beyond split-off

$50,000

$27,000

$25,000

Selling price

Pounds produced

10,000

4,000

2,000

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Required: A. Allocate the $220,000 processing cost between products F and G. B. From a profitability perspective, should product E be processed into products F and G? Show your calculations. C. Assume that the net realizable value associated with E is zero. How would you allocate the joint cost of $250,000?

16) Companies are free to use the direct, step-down, and reciprocal allocation methods when dealing with service-department costs. Required: A. How does the direct method work? What is its chief limitation? B. Is the step-down method an improvement over the direct method? Explain. C. Which of the three methods is the most correct from a conceptual viewpoint? Why?

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17) Crystal Magic Company is developing departmental overhead rates based on direct-labor hours for its two production departments in the production of light-catcher art pieces, Etching and Assembly. The Etching Department employs 12 people and the Assembly Department employs 48 people. Each person in these two departments works 2,000 hours per year. The production-related overhead costs for the Etching Department are budgeted at $400,000, and the Assembly Department costs are budgeted at $640,000. Two service departments, Maintenance and Computing, directly support the two production departments. These service departments have budgeted costs of $96,000 and $500,000, respectively. The production departments’ overhead rates cannot be determined until the service departments’ costs are allo-cated. The following schedule reflects the use of the Maintenance Department’s and Computing Department’s output by the various departments. Using Department

Service Department

Maintenance

Computing

Etching

Assembly

Maintenance (maintenance hours)

1,000

8,000

Computing (minutes)

240,000

840,000

120,000

Required: (Use M for Maintenance and C for Computing in your equations.) 1. What is the equation for the total cost of the maintenance department when using the reciprocal services method? 2. What is the equation for the total cost of the computing department when using the reciprocal services method? 3. Solve each equation. 4. Using the reciprocal-services method to allocate service department costs, calculate the overhead rates per direct-labor hour for the Etching Department and the Assembly Department.

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Answer Key Test name: Chap 17_6e_Cornett_Manually Graded

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Appendix I-16e 1)

The Sarbanes-Oxley Act:

A) arose because of several accounting scandals that rocked the public's confidence in published financial statements. B) was enacted, in part, to bring about reform in companies' financial reporting processes. C) has distinct guidelines for reporting on an organization's internal control practices. D) contains provisions whereby the chief executive officer (CEO) and chief financial officer (CFO) can be held criminally responsible if their firm's financial statements are found to be fraudulent in nature. E) All of the answers are correct.

Internal controls focus on all of the following except: A) effectiveness of operations. B) reliability of financial reporting. C) compliance with applicable laws and regulations. D) maximization of profit and cash flows. E) efficiency of operations.

Which of the following is a typical internal control? A) The use of password-protected computers and software. B) The requirement that separate individuals authorize cash disbursements and sign

checks. C) The use of physical controls over inventories to prevent loss from theft. D) A physical count of inventory at year-end to verify amounts shown on the company's accounting records. E) All of the answers are correct.

The Sarbanes-Oxley Act established the:

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A) Securities and Exchange Commission (SEC). B) Public Company Accounting Oversight Board (PCAOB). C) Financial Accounting Standards Board (FASB). D) Institute of Management Accountants (IMA). E) American Accounting Association (AAA).

5) Which of the following bodies oversees audits and auditors, and sanctions firms and individuals for violations of laws and regulations? A) American Institute of Certified Public Accountants (AICPA). B) American Accounting Association (AAA). C) Public Company Accounting Oversight Board (PCAOB). D) Financial Accounting Standards Board (FASB). E) Accounting Principles Board (APB).

6) Act?

Which of the following is not a provision of (nor an outgrowth of) the Sarbanes-Oxley

A) A public company's annual report must contain a separate disclosure that assesses the company's internal controls. B) Management is responsible for establishing and maintaining internal controls. C) A company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO) can be held criminally responsible if their firm's financial statements are fraudulent. D) A company must prepare a balance sheet, an income statement, a statement of stockholders' equity, and a statement of cash flows. E) A new body, the Public Company Accounting Oversight Board, oversees and investigates the audits and auditors of public companies.

Which of the following statements regarding the Sarbanes-Oxley Act is (are) true?

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A) Management must establish and maintain a system of internal controls over financial reporting. B) Management must periodically assess a company's system of internal controls over financial reporting. C) Management must include in the company's annual report a separate report that assesses internal controls. D) A company's auditors are required to report on management's assessment of internal controls. E) All of the answers are correct.

8) The provisions of sections 302 and 404 of the Sarbanes-Oxley Act (as originally enacted) have proved especially troublesome for: A) small businesses. B) private universities. C) cities and municipalities. D) healthcare providers. E) individual taxpayers.

9) The provisions of section 302 of the Sarbanes-Oxley Act (as originally enacted) require the signing officers of a company to do all of the following except: A) audit the internal controls over financial reporting. B) establish the internal controls over financial reporting. C) maintain the internal controls over financial reporting. D) evaluate the internal controls over financial reporting. E) disclose material weaknesses in the internal controls over financial reporting.

10) Section 404 of the Sarbanes-Oxley Act, Management Assessment of Internal Controls, includes all of the following except:

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A) a statement of management's responsibility for establishing the internal control structure. B) a waiver of auditor responsibility for assessing management's report on internal controls. C) an assessment of the effectiveness of internal controls by management. D) an assessment of the effectiveness of procedures for financial reporting by management. E) a requirement that management include in its annual report an internal control report.

11) To achieve the objectives of sections 302 and 404 of the Sarbanes-Oxley Act, management and independent auditors should: A) disclose the minutia of the internal control structure. B) conduct a cost-benefit analysis prior to deciding whether or not to adopt these sections. C) emphasize those areas where the greatest risk of fraud or material misstatement is likely to occur. D) analyze all financial transactions that are included in the reported financial statements. E) work together to design the most effective internal control system.

12)

Most of the Sarbanes-Oxley Act relates primarily to: A) Corporate governance. B) Financial accounting. C) Auditing. D) Court-invoked penalties for violating the law. E) All of the answers are correct.

13)

Which of the following statements is false concerning computerized accounting systems?

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A) Safeguards exist to make sure that controls are working properly. B) There is no need for controls over human operators of computerized systems. C) Computerized accounting systems are not 100% reliable. D) Limits should be placed on who can access a computerized system. E) Many internal control procedures are automated.

14)

Under section 404 of the Sarbanes-Oxley Act, auditors are required to: A) attest to and report on the effectiveness of the client's internal controls. B) establish and maintain internal controls for audited companies. C) advise management on its preparation of the Report on Internal Controls. D) evaluate the company's internal control system periodically throughout the year. E) All of the answers are correct.

15) Even in large companies, few internal controls exist in order to establish greater control of security among limited individuals. ⊚ true ⊚ false

16) Since many internal control procedures are automated, internal software controls are not needed. ⊚ true ⊚ false

17) The Public Company Accounting Oversight Board (PCAOB) is a 7-member board operating under the auspices of the American Institute of Certified Public Accountants (AICPA). ⊚ true ⊚ false

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18)

The first decade of the SOX legislation was characterized by controversy. ⊚ true ⊚ false

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Answer Key Test name: Appendix I 1) E 2) D 3) E 4) B 5) C 6) D 7) E 8) A 9) A 10) B 11) C 12) E 13) B 14) A 15) FALSE 16) FALSE 17) FALSE 18) TRUE

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Appendix I-16e- Manually Graded 1) Smart Start Company is a hardware supplier to building contractors. At the end of each month, the employee who maintains all of the inventory records takes a physical inventory of the firm’s stock. When discrepancies occur between the recorded inventory and the physical count, the employee changes the physical count to agree with the records. Required: A. What problems could arise as a result of Smart Start Company’s inventory procedures? B. How could the internal control system be strengthened to eliminate the potential problems? C. What are the implications of SOX sections 302 and 404 for the company’s internal control issues?

2) What does it mean to say that the concept of risk exposure may be the key to making SOX sections 302 and 404 more effective?

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Answer Key Test name: Appendix I_Manually Graded

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Appendix II-16e 1)

The main idea behind the time value of money is that:

A) cash flows received in the distant future are less valuable than cash flows received in the near-term future. B) cash received in year 3, say, $80,000, has the same value as $40,000 received in year 3 plus $40,000 received in year 4. C) cash flows received in different years are treated as equal in value. D) cash payments made in the future have the same value as payments made today. E) timing considerations of cash flows have little value in decision making.

The procedure used to compute the future value of a series of cash flows is known as: A) compounding. B) the annuity method. C) discounting. D) the future-cost approach. E) indexing.

3) Norton Company has a 12% compound annual interest rate. If the firm invests $60,000 today, how much will have accumulated by the end of eight years? Use appendix Table 1, Table 2, Table 3 and Table 4. A) $117,600. B) $148,560. C) $298,080. D) $738,000. E) None of the answers is correct.

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4) Lawson Company invests $60,000 today and has $148,560 by the end of eight years. What is the firm's compound annual interest rate? Use appendix Table 1, Table 2, Table 3 and Table 4. A) 10.00%. B) 12.00%. C) 18.45%. D) 40.39%. E) None of the answers is correct.

The procedure used to compute the present value of a series of cash flows is known as: A) compounding. B) the annuity method. C) discounting. D) the present-cost approach. E) indexing.

6) All other things being equal, which of the following would be the most attractive to an investor? A) A cash inflow of $10,000 in five years. B) A cash inflow of $2,000 each year for the next five years. C) A cash inflow of $5,000 in year 1 and $5,000 in year 5. D) A cash inflow of $10,000 today. E) All of these would be equally attractive to an investor.

7) All other things being equal, which of the following would be most attractive to an investor?

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A) A cash outflow of $60,000 in six years. B) A cash outflow of $10,000 each year for the next six years. C) A cash outflow of $30,000 in year 1 and $30,000 in year 6. D) A cash outflow of $60,000 today. E) All of these would be equally attractive to an investor.

A series of equal cash flows is called a (n): A) ongoing cash flow. B) payback. C) accrual. D) cash accumulation. E) annuity.

The factor applicable to individual cash flows in a series of equal cash flows is called the: A) single-sum, present-value factor. B) total discount factor. C) accumulation factor. D) compound discount factor. E) internal rate discount factor.

10) Consider the following items of information: 1.I. The target recovery period. 2.II. The discount rate. 3.III. The timing (i.e., year) of a cash flow. Which of the above items would be needed to calculate the present value of a cash flow?

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A) I only. B) II only. C) I and II. D) II and III. E) I, II, and III.

11) You desire to invest $3,000 at the end of each year for the next five years to accumulate the funds needed for a down payment on a home. Which table factor(s) should be used to most efficiently determine the amount accumulated by the end of the five-year period? A) Future value of $1. B) Future value of a $1 annuity. C) Present value of $1. D) Present value of a $1 annuity. E) Both Future value of $1 and Future value of a $1 annuity.

12) Uncle Roscoe, a wealthy relative, has given you a choice of receiving $10,000 today or $3,000 at the end of each year for the next four years. Which table factor(s) should be used to most efficiently determine the "value" of the $3,000 cash-flow stream? A) Future value of $1. B) Future value of a $1 annuity. C) Present value of $1. D) Present value of a $1 annuity. E) Both Present value of $1 and Present value of a $1 annuity.

13) You are a sports agent who is representing Jack Lofton, a star football player, in contract negotiations with the New York Landmarks. The Landmarks have offered Lofton a four-year contract, with annual raises and performance bonuses that will result in a growing cash-flow stream for Lofton each year. Which table factor(s) should you use to most efficiently determine the "value" of the contract?

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A) Future value of $1. B) Future value of a $1 annuity. C) Present value of $1. D) Present value of a $1 annuity. E) Both Present value of $1 and Present value of a $1 annuity.

14) Which of the following choices is closest to the amount of money that must be invested today in order to have $25,000 at the end of four years if the rate of return is 12% compounded annually? Use appendix Table 1, Table 2, Table 3 and Table 4. A) $15,900. B) $17,100. C) $19,900. D) $22,300. E) None of the answers is correct.

15) You estimate that it will take five years to complete your college education. Your parents want to invest enough money today at an interest rate of 8% compounded annually to allow you to withdraw $10,000 at the end of each year for the next five years, with nothing left at the end. The amount of money to invest today is: Use appendix Table 1, Table 2, Table 3 and Table 4. A) $14,690. B) $34,050. C) $39,930. D) $50,000. E) None of the answers is correct.

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16) You received a $5,000 loan at the end of each of your four years of college. Aunt Rose agreed to pay off your loans at the end of your fourth year of school. How much will she have to pay? Assume a 4% interest rate compounded annually on student loans. Use appendix Table 1, Table 2, Table 3 and Table 4. A) $20,000. B) $21,235. C) $39,930. D) $50,000. E) None of the answers is correct.

17) You received a $5,000 loan at the end of each of your four years of college. Your grandparents agreed to pay off your loans at the end of your fourth year of school. Assume a 4% annual compound interest rate on student loans. Which of the following answers is the closest to the amount they will have to deposit when you start school so that they will have enough money to pay off your loans after four years? Their interest rate is 6% compounded annually. Use appendix Table 1, Table 2, Table 3 and Table 4. A) $20,000. B) $21,235. C) $16,813. D) $15,000. E) None of the answers is correct.

18) You want to buy a new car in five years. You want to have saved $25,000 by then. You can invest $4,000 at the end of each of the next five years at an interest rate of 6% compounded annually. Will you have enough money at the end of the fifth year? Use appendix Table 1, Table 2, Table 3 and Table 4.

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A) No. You are short $2,452. B) Yes. You have $1,532 more than you need. C) No. You are short $1,532. D) Yes. You have $2,452 more than you need. E) None of the answers is correct.

19) Green Company owes White Company money for the purchase of equipment. White has given Green the following payment options: 1.I. Immediate payment in full of $38,000. 2.II. Annual payments of $15,000 made at the end of each of the next three years. 3.III. A single payment of $48,000 made at the end of three years. Green uses a 10% annual compound interest rate and will choose the option with the lowest present value. Which option should Green choose, and what is the present value of that option? Use appendix Table 1, Table 2, Table 3 and Table 4. A) Option I, $34,542. B) Option I, $38,000. C) Option II, $37,305. D) Option III, $34,164. E) Option III, $36,048.

20) Nelson Company owes money to Nash Company for the purchase of equipment. Nash Company has given Nelson the following payment options: 1.I. Immediate payment in full of $38,000. 2.II. Annual payments of $15,000 made at the end of each of the next three years. 3.III. A single payment of $48,000 made at the end of three years. Assume that both Nelson and Nash use a 10% interest rate compounded annually. What option would Nash prefer, and what is the present value of that option?

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A) Option I, $34,542. B) Option I, $38,000. C) Option II, $37,305. D) Option III, $34,164. E) Option III, $36,048.

21) Lucas Sugar wants to accumulate funds to open his own restaurant after he graduates from culinary school and gains experience working in local restaurants. Lucas deposited $20,000 into a fund on January 2 of the current year. Lucas will be able to deposit $10,000 at the end of each of the next 5 years. If the fund pays 4% interest compounded annually, how much will Lucas have in his restaurant fund at the end of the 5th year? Use appendix Table 1, Table 2, Table 3 and Table 4. A) $64,160. B) $78,500. C) $29,830. D) $70,000. E) $85,170.

22) Olive Loom wants to accumulate $3,880 for a down payment toward the purchase of a car. Olive plans to make this purchase 3 years from today. If Olive can earn 8%, approximately how much does she need to deposit into the fund today in order to accumulate the desired down payment? Use appendix Table 1, Table 2, Table 3 and Table 4. A) $3,080. B) $4,890. C) $925. D) $3,258. E) $2,915.

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23) Elk Creek Industries (ECI) purchased equipment to expand its production facilities. The purchase agreement calls for annual payments of $60,000 at the end of each year for the next 6 years. If ECI’s discount rate is 12%, at what amount should ECI record the equipment? Use appendix Table 1, Table 2, Table 3 and Table 4. A) $360,000. B) $231,300. C) $331,540. D) $246,660. E) None of the answers is correct.

24) Larch West invested $71,030 in exchange for a series of $10,000 annual payments beginning one year from today. If the investment pays 10% interest, how many payments will Larch receive? Use appendix Table 1, Table 2, Table 3 and Table 4. A) 7. B) 13. C) 10. D) 12. E) None of the answers is correct.

25) Jax Coolidge invested $58,830 today and will earn 8% on his investment. At the end of the investment’s life, Jax will receive $160,000. How many years will Jax wait to receive $160,000? Use appendix Table 1, Table 2, Table 3 and Table 4.

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A) 3. B) 13. C) 4. D) 12. E) None of the answers is correct.

26)

The fundamental concept in a capital-budgeting decision analysis is inflation. ⊚ true ⊚ false

27)

Compound interest is interest earned on the interest earned in previous periods. ⊚ true ⊚ false

28)

A series of equivalent cash flows is called the accumulation factor. ⊚ true ⊚ false

29) The interest rate used when we discount a future cash flow to compute its present value is called the discount rate. ⊚ true ⊚ false

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Answer Key Test name: Appendix II 1) A 2) A 3) B 4) B 5) C 6) D 7) A 8) E 9) C 10) D 11) B 12) D 13) C 14) A 15) C 16) B 17) C 18) A 19) E 20) B 21) B 22) A 23) D 24) B 25) B 26) FALSE Version 1

27) TRUE 28) FALSE 29) TRUE

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Appendix II-16e- Manually Graded 1)

Future value and present value are two key business tools.

Required: Ignoring income taxes, answer the following independent questions: A. Your best friend won the state lottery and has offered to give you $19,000 at the end of eight years (after he has made his first million). You figure that if you had the money now, you could invest it at a rate of 20% compound annually. What is the value today of your friend's future gift? B. Suppose that you invest $15,000 today in an account that bears interest at the rate of 4% compounded annually. What will your investment grow to at the end of seven years? C. Suppose that your best friend won the state lottery and promised to give you $13,000 per year for six years. The first payment will be made at the end of 20x1. Using a 20% annual compound discount rate, what is the value of these payments at the beginning of 20x1? D. Suppose that you invest $6,000 at the end of each year for seven years in an investment that provides a return of 4% compounded annually. What will be the value of your investment at the end of seven years? Use appendix Table 1, Table 2, Table 3 and Table 4.

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Answer Key Test name: Appendix II_Manually Graded

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Appendix III-16e 1)

Inventory holding costs typically include:

A) clerical costs of purchase-order preparation. B) costs of deterioration, theft, or spoilage. C) costs associated with lost sales to customers. D) forgone interest on money tied up in inventory. E) both costs of deterioration, theft, or spoilage and forgone interest on money tied up in inventory.

Inventory holding costs would typically include all of the following except: A) insurance. B) theft. C) transportation. D) obsolescence. E) warehouse rent.

Which of the following is classified as an inventory shortage cost? A) Purchase order preparation. B) Production disruption. C) Lost sales and lost customers. D) Spoilage. E) Both production disruption and lost sales and lost customers.

At the economic order quantity:

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A) total annual inventory costs, holding costs, and ordering costs are all minimized. B) total annual inventory costs and holding costs are minimized. C) total annual inventory costs are minimized, and holding costs equal ordering costs. D) total annual inventory costs are minimized, and holding costs exceed ordering costs. E) total annual inventory costs are minimized, and ordering costs exceed holding costs.

5) Lagoon Enterprises uses an economic order quantity model and has determined an optimal order size of 500 units. Annual demand is 10,000 units, ordering costs are $50 per order, and holding costs are $4 per unit. The company's annual holding costs total: A) $2,000. B) $3,000. C) $21,000. D) $41,000. E) None of the answers is correct.

6) Dazzle Graphics uses a special purpose paper on 80% of its jobs. The paper is purchased in 100-sheet packages at a cost of $100 per package. Management estimates that the cost of placing and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50. Dazzle uses 2,600 packages each year. Production is constant, and the lead time to receive an order is one week. The economic order quantity is approximately: A) 203 packages. B) 225 packages. C) 228 packages. D) 565 packages. E) 631 packages.

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7) Dazzle Graphics uses a special purpose paper on 80% of its jobs. The paper is purchased in 100-sheet packages at a cost of $100 per package. Management estimates that the cost of placing and receiving a typical order is $15, and the annual cost of carrying a package in inventory is $1.50. Dazzle uses 2,600 packages each year. Production is constant, and the lead time to receive an order is one week. (Assume 52 weeks in a year.) The reorder point is: A) 25 packages. B) 50 packages. C) 100 packages. D) 203 packages. E) 225 packages.

8) When comparing EOQ and JIT inventory systems, which of the following statements is false? A) The EOQ approach takes the viewpoint that some inventory is necessary. B) The EOQ system assumes a constant order quantity. C) JIT argues that inventory investments should be minimized. D) The EOQ system focuses on acquisition and holding costs. E) JIT argues that safety stocks are necessary to reduce the probability of a stock shortage.

Which of the following does not minimize ordering costs when using JIT purchasing? A) Reducing the number of vendors. B) Negotiating long-term supply agreements. C) Making less frequent payments. D) Maintaining a safety stock. E) Eliminating inspections.

10)

When graphing the EOQ, which of the following statements is false?

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A) Holding costs are a downward sloping line to the right. B) The EOQ is represented by the minimum total cost. C) Ordering costs are a downward sloping line to the right. D) Average inventory on hand results in higher holding costs. E) As order size increases, so does average inventory on hand.

11) When considering safety stock and its effect on EOQ, which of the following statements is false? A) Safety stock is equal to the potential excess usage of an input. B) The reorder point is affected by the existence of safety stock. C) Safety stock decreases inventory holding costs. D) Safety stock decreases the potential costs caused by inventory shortages. E) Fluctuations in monthly usage of a material indicate the desirability of a safety stock.

12) Pika Pumps uses a special component in manufacturing its pool pumps. Pika produces 26,000 pool pumps per year, each of which requires one of these special components. The annual cost of holding one component is $4 and Pika’s management estimates that the cost of placing and receiving a typical order is $125. Production is constant, and the lead time to receive an order is one week. Assume 52 weeks in a year. Pika’s economic order quantity is approximately: A) 456. B) 41. C) 1,275. D) 901. E) 1,803.

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13) Pika Pumps uses a special component in manufacturing its pool pumps. Pika produces 26,000 pool pumps per year, each of which requires one of these special components. The annual cost of holding one component is $4 and Pika’s management estimates that the cost of placing and receiving a typical order is $125. Production is constant, and the lead time to receive an order is one week. Assume 52 weeks in a year. The reorder point is: A) 1,000 components. B) 500 components. C) 100 components. D) 225 components. E) Not enough information is provided to determine the reorder point.

14) Safari Industries requires part XC-4 to manufacture one of its most popular products. Safari produces 32,000 units of this popular product each year, it costs Safari $12 per unit in holding costs, and order costs are $240. In order to minimize inventory costs, Safari wants to determine the economic order quantity and its total inventory costs if it implements EOQ. Safari’s economic order quantity is approximately: A) 1,131. B) 800. C) 2,771. D) 3,919. E) 2,667.

15) Safari Industries requires part XC-4 to manufacture one of its most popular products. Safari produces 32,000 units of this popular product each year, it costs Safari $12 per unit in holding costs, and order costs are $240. In order to minimize inventory costs, Safari wants to determine the economic order quantity and its total inventory costs if it implements EOQ. Safari’s total annual inventory cost is approximately: (Round your intermediate calculations to whole dollars.)

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A) $1,600. B) $6,960. C) $20,532. D) $13,512. E) Not enough information is provided to determine the total annual inventory cost.

16) The EOQ model is a mathematical tool for determining the order quantity that maximizes the costs of ordering and holding inventory. ⊚ true ⊚ false

17) Inventory decisions involve a delicate balance between three classes of costs: ordering costs, advertising costs, and shipping costs. ⊚ true ⊚ false

18)

The key to the JIT system is the “pull” approach to controlling manufacturing. ⊚ true ⊚ false

19) The EOQ approach takes the view that no inventory is necessary and can be acquired as needed. ⊚ true ⊚ false

20) Some of the ways that JIT efficiencies are achieved are through reducing the number of vendors, negotiating long-term supply agreements, making less frequent payments, and eliminating inspections.

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⊚ ⊚

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true false

Answer Key Test name: Appendix III 1) E 2) C 3) E 4) C 5) A 6) C 7) B 8) E 9) D 10) A 11) C 12) C 13) B 14) A 15) D 16) FALSE 17) FALSE 18) TRUE 19) FALSE 20) TRUE

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Appendix III-16e- Manually Graded 1) Economic Order Quantity, timing of orders and safety stock are three important considerations in inventory management. Required: A. Explain each of these considerations. B. How is EOQ affected by the timing of orders and safety stock?

2) Broadbent Industries carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit. The company is considering the implementation of an economic order quantity model in an effort to better manage its inventories. Required: A. Compute the economic order quantity. B. Compute total annual inventory costs if Broadbent follows the EOQ policy.

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3) Broadbent Industries carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit. The company, which currently places four orders per year with its suppliers, is considering the implementation of an economic order quantity (EOQ) model to better manage its inventories. Preliminary EOQ calculations revealed an optimal order quantity of 400 units and total annual inventory costs of $600. Required: A. In comparison with its current policy, how much will Broadbent save by adopting the EOQ model? B. Briefly explain the philosophical difference between the EOQ model and the just-in-time model. Which of the two models will likely result in lower holding costs for the firm? Why?

4) What is the disadvantage of using the tabular method to identify the economic order quantity?

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Answer Key Test name: Appendix III_Manually Graded

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