TEST BANK for Managerial Accounting 6th Edition by James Jiambalvo

CHAPTER 1 Managerial Accounting in the Information Age Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

Item LO BT Item True-False Statements K 21. 2 K 31. K 22. 2 K 32. K 23. 2 K 33. K 24. 2 K 34. K 25. 2 K 35. K 26. 3 K 36. K 27. 3 K 37. K 28. 3 K 38. K 29. 3 C 39. K 30. 3 K 40. Multiple Choice Questions C 87. 2 AP 106. K 88. 2 AP 107. K 89. 2 AP 108. K 90. 2 AP 109. K 91. 2 K 110. K 92. 2 AP 111. K 93. 2 AP 112. C 94. 2 AP 113. C 95. 2 AP 114. K 96. 2 AP 115. K 97. 2 Ap 116. C 98. 2 AP 117. C 99. 3 AP 118. K 100. 3 AP 119. AP 101. 3 AP 120. AP 102. 3 K 121. AP 103. 3 K 122. AP 104. 3 K 123. AP 105. 3 K 124. Matching

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1 1 1 1 1 1 1 1 1 1

K K K K K K C K K K

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

1 1 1 1 1 1 1 2 2 2

49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2

K K K C C K K K K K K K K K K K AP C C

68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

143. 1,2,3,4 K 7,7 144. 1 K 145. 2 K 146. 2 AP

147. 148. 149.

2 2 2

AP K K

159.

2,3

160.

2,3

161. 162.

1 1

K K

163. 164.

1 2

C C

Item

4 4 4 4 4 4 4 4 4 4

K K K K K K K K K K

41. 42. 43. 44. 45. 46. 47. 48.

5 5 5 5 5 5 5 5

C K K K K K K K

3 3 3 3 3 3 3 3 3 3 4 4 4 5 5 5 5 5 5

K C C AP AP AP AP AP AP K K K K K K K K K K

125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142.

5 5 5 2 2 2 2 2 2 2 3 3 2 2 2 2 2 2

K K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

Exercises 150. 2 AP 153. 151. 2,3 AP 154. 152. 2 AP 155. Challenge Exercises

2,3 2,3 1,2

AP AP AP

156. 157. 158.

2,3 2,3 2,3

AP AN AN

Short-Answer Essays 165. 3 C 167. 166. 3 C

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

TRUE-FALSE STATEMENTS 1.

Financial accounting stresses accounting concepts and procedures that are relevant to preparing reports for internal users of accounting information.

The goal of managerial accounting is to provide information for planning, controlling, and reporting information to shareholders.

A thorough understanding of managerial accounting is essential to be an effective manager.

A production cost budget provides details of planned production amounts and the cost of resources needed for production.

Budgets can be used to communicate a company’s goals to employees.

Only amounts that can be expressed in dollars and cents can be used in preparing budgets.

A favorable evaluation of an operation indicates that the manager of that operation is performing adequately.

Performance reports are used for control purposes.

Performance reports, like other managerial accounting reports, must follow GAAP.

10.

Budgets show comparisons of current period performance to the planned performance.

11.

Management by exception requires managers to investigate every difference between actual and budgeted costs that causes profit to be less than budgeted.

12.

Decisions to reward or punish managers are part of the planning and control process.

13.

Managerial accounting is directed at internal users of accounting information.

14.

Financial accounting must follow generally accepted accounting principles, whereas managerial accounting stresses information that is useful to managers.

Managerial accounting may present more detailed information than financial accounting.

16.

Managerial accounting stresses that the information provided should be useful to decision makers such as creditors and shareholders.

17.

Financial accounting is concerned with presenting results of past transactions, while managerial accounting places considerable emphasis on the future.

18.

Variable costs in total increase or decrease in proportion with changes in the level of business activity.

19.

Equipment depreciation is generally a controllable cost for a factory department supervisor.

20.

Fixed cost per unit remains the same even though there is a change in the number of units produced.

21.

Variable cost per unit remains constant when the number of units produced changes.

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22.

Sunk costs are never a consideration in incremental analysis.

23.

Opportunity costs are the value of benefits forgone when one alternative is selected over another.

24.

Indirect costs are directly traceable to a product, activity, or department.

25.

Since a manager can influence noncontrollable costs, they should be considered when evaluating a manager’s performance.

26.

Incremental analysis involves calculating the difference in revenue and difference in costs between alternatives.

27.

The actions of a manager are influenced by the performance measures that are used to evaluate the manager.

28.

Incremental analysis is the appropriate way to approach the solution to all business problems.

29.

A good single measure of performance for a sales force would be the ratio of sales to new customers to total sales.

30.

Costs that increase due to a special order are not considered as incremental.

31.

Managerial accounting is a key provider of information that impacts the information age.

32.

Firm value is created when the value to the customer of receiving products and services exceeds the cost of these activities,

33.

One aspect of the value chain involves information flows between a company and its customers.

34.

Businesses sometimes share sales databases with suppliers so suppliers can respond more quickly.

35.

Enterprise resource planning systems focus on managing a variety of customer interactions.

36.

Enterprise resource planning systems (ERP) often support accounting, human resources, and e-commerce, in addition to production.

37.

Supply chain management systems (SCM) allow suppliers some access to a company’s databases so goods can more profitably be delivered to a company’s customers.

38.

Customer Relationship Management Systems (CRM) involve activities between companies and its suppliers in an effort to enhance production and delivery of goods to customers.

39.

A Customer Relationship Management System (CRM) might allow a customer to track his/her package as it is being shipped across the country.

40.

Walmart and Procter & Gamble are two companies that collaborate in the use of Supply Chain Management (SCM).

41.

Managers that are able to recognize all ethical dilemmas have the most profitable businesses.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

42.

A good code of ethics eliminates potential unethical behavior.

43.

The U.S. government has charged the Institute of Management Accountants with primary responsibility for developing ethics laws that businesses must follow.

44.

The Sarbanes-Oxley Act requires that companies provide relevant managerial accounting information to decision-makers.

45.

In most organizations, the controller is the top managerial accountant.

46.

The treasurer usually reports to the controller.

47.

The controller is responsible for preparing reports for planning and evaluating company activities.

48.

The treasurer has custody of cash and funds invested in marketable securities.

Answers to True-False 1 F 9 F 2 F 10 F 3 T 11 F 4 T 12 T 5 T 13 T 6 F 14 T 7 F 15 T 8 T 16 F

17 18 19 20 21 22 23 24

T T F F T T T F

25 26 27 28 29 30 31 32

F T T T T F T T

33 34 35 36 37 38 39 40

T T F T T F T T

41 42 43 44 45 46 47 48

F F F F T F T T

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MULTIPLE CHOICE 49.

Managerial accounting stresses accounting concepts and procedures that are relevant to preparing reports for A. investors and banks. B. internal users of accounting information. C. shareholders and creditors. D. the Securities and Exchange Commission (SEC).

50.

The goal of managerial accounting is to provide information that managers need for A. planning, control, and financial reporting. B. control, evaluation, and financial reporting. C. planning, control, and decision making. D. preparing reports for external users.

51.

The financial plans prepared by managerial accountants are referred to as A. budgets. B. financial statements. C. treasurer’s reports. D. controller’s opinions.

52.

Which of the following is not a reason that current period performance results may differ from the company’s budget for that period? A. The plan may not have been followed properly. B. The plan may not have been well thought-out. C. Changing circumstances may have made the plan out of date. D. All of the above are reasons that actual results may differ from the company’s plan.

53.

Which one of the following is true as it relates to the management function of control? A. It is achieved by evaluating the performance of managers. B. It is achieved by evaluating the operations for which a manager is responsible. C. It is necessary only when performance is less than expected. D. It is achieved by evaluating the performance of managers and the operations for which they are responsible.

54.

Which one of the following is the last step in the planning and control process? A. Implement a plan. B. Construct a plan. C. Make decisions based on the evaluation of the results. D. Compare actual results to the planned results.

55.

Performance reports often compare current performance with A. a competing company’s performance. B. shareholders’ expected level of performance. C. industry standards. D. performance in a prior period or budgeted performance.

56.

When using management by exception, a difference between actual costs and budgeted costs A. should be investigated if the amount is large. B. indicates that the planned cost was poorly estimated. C. indicates that the manager is doing a poor job. D. should be ignored if it increases profit.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

57.

Wilson Company’s managers investigate departures from the budget that appear to be significant. What principle is being followed? A. Small amounts do not matter B. Management by exception C. Incremental analysis D. You get what you measure

58.

Below is a performance report that compares budgeted and actual profit of Atlanta Enterprises for the month of June: Budget Actual Difference Sales $182,000 $180,000 ($2,000) Less: Cost of ingredients 145,000 141,000 4,000 Salaries 24,000 23,000 1,000 Controllable profit $ 13,000 $ 16,000 $ 3,000 In evaluating the department in terms of its changes in sales and expenses, what will be most important to investigate? A. Sales B. Cost of ingredients C. Salaries D. Debtors

59.

Managerial accounting A. is primarily directed at external users of accounting information. B. is required by taxing authorities such as the IRS. C. must follow GAAP. D. focuses on future performance.

60.

The fundamental difference between managerial and financial accounting is that A. all financial accounting information is audited by Certified Public Accountants whereas managerial accounting information is audited by the IMA. B. managerial accounting is concerned principally with budgets, whereas financial accounting is concerned with a wider range of the organization’s activities. C. managerial accounting provides information for decision-makers within the organization, whereas financial accounting provides information for individuals and institutions external to the organization. D. financial accounting information follows U.S. Generally Accepted Accounting Principles, whereas managerial accounting information generally follows rules set forth by the Institute of Management Accountants.

61.

Which of the following is a difference between financial accounting and managerial accounting? A. Managerial accounting is primarily concerned with reporting the past, while financial accounting is more concerned with future decisions that external users may need to make. B. Managerial accounting uses monetary and nonmonetary information, whereas financial accounting reports monetary information. C. Managerial accounting is primarily concerned with providing information for external users while financial accounting is concerned with internal users. D. Financial accounting is rather detailed, while managerial accounting is more summarized.

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62.

Which one of the following is most likely to make use of Ralston Enterprises’ managerial accounting information? A. The IRS B. An individual contemplating an investment in Ralston Enterprises C. A company that is one of Ralston’s main suppliers D. The production manager of Ralston’s plant in Georgia

63.

Which of the following costs will change when the level of business activity changes? A. Total fixed costs B. Variable cost per unit C. A company’s total costs D. Sunk cost

64.

Variable cost per unit A. increases when the number of units produced increases. B. does not change when the number of units produced increases. C. decreases when the number of units produced increases. D. decreases when the number of units produced decreases.

65.

Kilwin’s Candies produced and sold 600 boxes of chocolate covered popcorn last month and had total variable costs of $2,100 that reflected the costs of chocolate and popcorn (ingredients). Each box of popcorn sells for $12.00. If production and sales are expected to increase by 10% next month, which of the following statements is true? A. Total variable costs are expected to be $1,785 B. Variable cost per unit is expected to be $3.50 C. The incremental cost per unit is expected to be $0.35 D. Unit variable costs are expected to be $2.10

66.

A company has a cost that is $3.00 per unit at a volume of 9,000 units and $3.00 per unit at a volume of 11,000 units. What type of cost is this? A. Fixed B. Variable C. Sunk D. Noncontrollable

67.

Which of the following is most likely to be a fixed cost? A. Cost of wheels for a lawn mower manufacturer B. Rent on a factory building C. Cost of labor for cashiers at a retail store D. Supplies used by the housekeeping staff that cleans hotel rooms

68.

Bagel Time produced and sold 2,500 bagels last month and incurred fixed costs totaling $8,000. If production and sales are expected to decrease by 10% next month, which of the following statements is true? A. Total fixed costs will increase. B. Total fixed costs will decrease. C. Fixed cost per unit will increase. D. Fixed cost per unit will decrease.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

69.

Which of the following statements regarding fixed costs is true? A. When production increases, fixed cost per unit increases. B. When production decreases, total fixed costs decrease. C. When production increases, fixed cost per unit decreases. D. When production decreases, total fixed costs increase.

70.

Costs incurred in the past that are not incremental to present decisions are A. fixed costs. B. sunk costs. C. opportunity costs. D. variable costs.

71.

A sunk cost is a cost A. expected to be incurred in the future which is not relevant to present decisions. B. incurred in the current period which changes with changes in production activity. C. incurred in the current period which remains constant even though activity changes. D. incurred in the past that is not relevant for future decisions.

72.

Sunk costs A. can be incremental or not incremental, depending on the decision to be made. B. include all incremental costs to management decisions. C. are costs that cannot be directly traded to a product, activity, or department. D. None of these answer choices are correct.

73.

Opportunity costs are A. considered to be fixed costs in the short-term. B. another term for sunk costs. C. costs that are controlled by most effective managers. D. the value of benefits forgone when one decision alternative is selected over another.

74.

Which of the following is a benefit given up when one decision alternative is selected over another? A. Sunk cost B. Controllable cost C. Opportunity cost D. Incremental cost

75.

You own a car and are trying to decide whether to trade it in and buy a new car. Which of the following costs is an opportunity cost in this situation? A. The trip to Europe that you will not be able to take if you buy the car B. The cost of the car you are trading in C. The cost of toothpaste and soap that you need for the next few months D. The cost of your meals for the last week

76.

A retailer purchased some trendy clothes that have gone out of style and must be marked down to 60% of the original selling price in order to be sold. Which of the following is a sunk cost in this situation? A. The current selling price B. The original selling price C. The original purchase price D. The anticipated profit

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77.

A cost which is directly traceable to a product, activity, or department is a(n) A. fixed cost. B. managerial cost. C. opportunity cost. D. direct cost.

78.

Which of the following statements regarding direct and indirect costs is true? A. Direct costs are always variable and indirect costs are always fixed. B. Sunk costs are always direct, and opportunity costs are always fixed. C. The distinction between a direct and indirect cost depends on the product, activity, or department to which the cost pertains. D. If a cost is indirect to a department within a plant, it will also be indirect for the plant as a whole.

79.

Which of the following is a direct cost in relation to the cost of teaching the managerial accounting course in a college? A. The cost of the paper that is given as handouts in the class B. The cost of the electricity to light the classroom C. The cost of the registration system D. The cost of the financial aid department of the college

80.

Which of the following is likely to be a noncontrollable cost of a department supervisor? A. Labor in the department B. Materials used in the department C. Insurance on the plant D. Overtime premium pay earned by those working in the department

81.

On which of the following costs should a manager not be evaluated? A. Noncontrollable costs B. Opportunity costs C. Fixed costs D. Variable costs

82.

Hurricane Wings has budgeted the following costs for a month in which 24,000 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 $0.80 each. How much is the budgeted variable cost per unit? A. $0.35 B. $0.45 C. $0.80 D. None of these answer choices are correct.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

83.

Hurricane Wings has budgeted the following costs for a month in which 24,000 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 $0.80 each. What is the budgeted total variable cost? A. $8,400 B. $9,500 C. $10,400 D. $10,800

84.

Hurricane Wings has budgeted the following costs for a month in which 24,000 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 $0.80 each. What is the budgeted total fixed cost? A. $7,300 B. $2,400 C. $8,400 D. $10,800

85.

Hurricane Wings has budgeted the following costs for a month in which 24,000 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 $0.80 each. What is the budgeted fixed cost per unit? A. $0.35 B. $0.80 C. $0.10 D. $0.17

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86.

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Hurricane Wings has budgeted the following costs for a month in which 24,000 wings will be cooked and sold. Wings, breading, and sauce Direct labor (Variable) Rent Depreciation Other fixed costs

$4,900 3,500 1,100 900 400

Each wing sells for $0.80 each. What is Hurricane Wings’ budgeted profit? A. $8,400 B. $19,200 C. $10,800 D. $13,200 87.

Hurricane Wings has budgeted the following costs for a month in which 24,000 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 $0.80 each. How much will Hurricane Wing’s profit increase if 100 more wings were sold? A. $80.00 B. $35.00 C. $45.00 D. None of these answer choices are correct.

88.

Dent Lab Car Repair projects variable labor costs of $21,500 in July when 8,600 units are produced. If production is expected to drop to 8,000 units in August, what is the expected labor cost in August? A. $21,500 B. $20,000 C. $23,113 D. $20,900

89.

Sweet Time Candies projects its factory rent to be $8,000 in August 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 September, what is the expected cost of rent in September? A. $12,000 B. $8,000 C. $7,000 D. Not enough information is provided to determine the answer.

90.

Rincon Gifts had the following costs in May when 400 ceramic pots 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 Rincon? 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

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

91.

Rincon Gifts had the following costs in May when 400 ceramic pots were produced: materials, $4,200; labor cost, $1,600; depreciation, $800; rent, $700; and other fixed costs, $500. If production changes to 500 units, 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

92.

Rincon Gifts had the following costs in May when 400 ceramic pots 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? A. $9,750 B. $7,800 C. $9,250 D. $1,950

93.

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. If production is actually 5,100 units, what is the expected total cost of the units produced? A. $52,000 B. $60,800 C. $66,300 D. $40,800

94.

In a period when 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

95.

In a period when anticipated production is 20,000 units, budgeted variable costs are $85,000 and budgeted fixed costs are $45,000. If 15,000 units are actually produced, what is the expected total cost? A. $130,000 B. $97,500 C. $108,750 D. $118,750

96.

Rom 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

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97.

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Rom 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 Labor cost Rent Depreciation Other fixed costs Total

$ 5,200 2,600 1,200 1,700 4,600 $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 98.

$ 5,200 2,600 1,200 1,700 4,600 $15,300

Materials and labor are the only variable costs. The company has estimated that it can increase sales to 70 generators in August if it changes the selling price of generators to $450 instead of the current $480 per unit. What is expected to occur to the cost per unit given the expected changes? A. B. C. D.

It will decline because fixed costs do not increase with increases in volume. It will decline because selling price per unit declines. It will increase because more units will be produced. It will increase because fixed costs do not increase with increases in volume.

99.

Barney & Robles plans to produce 50,000 books next year at a total cost of $1,900,000. The fixed costs total $120,000. Selling price per book is $65.00. Management is considering lowering the price to $62.00 per unit, and feels that this action will cause sales to climb to 54,000 books. What is the incremental revenue generated if 54,000 units are sold? A. $44,400 B. $98,000 C. $3,348,000 D. $3,250,000

100.

Hanover Binding plans to produce 40,000 books next year at a total cost of $1,640,000 with a selling price per book of $66.00. The fixed costs total $280,000. Management is considering lowering the price to $60.00 per book, and feels that this action will cause sales to climb to 50,000 books. What will be the incremental costs incurred if 50,000 books are sold? A. $340,000 B. $20,000 C. $1,700,000 D. $1,300,000

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

101.

Hanover Binding plans to produce 40,000 books next year at a total cost of $1,640,000 with a selling price per book of $66.00. The fixed costs total $280,000. Management is considering lowering the price to $60.00 per book, and feels that this action will cause sales to climb to 50,000 books. What is the amount of incremental profit if 50,000 books are sold? A. $340,000 profit B. $20,000 profit C. $1,700,000 profit D. $1,300,000 profit

102.

Which of the following terms involves calculating the difference in revenue and the difference in cost between decision alternatives? A. Budgeting production B. Incremental analysis C. Profit planning D. Systems development

103.

Which of the following statements regarding incremental analysis is true? Assume that there are no opportunity costs and that the capacity exists to complete any of the alternatives. A. The preferred alternative will have revenues that are greater than the revenues of the other alternatives. B. The preferred alternative will have expenses that are greater than the expenses of the other alternatives. C. The preferred alternative will have fixed expenses that are less than the fixed expenses of the other alternatives. D. The preferred alternative will have profits that are greater than the profits of the other alternatives.

104.

Which one of the following will most likely influence the actions of managers? A. Sunk costs B. Performance measures C. Noncontrollable costs D. GAAP

105.

Which of the following is not a reasonable measure of a plant manager’s performance? A. Net income B. Cost of insurance for the plant C. Number of orders delivered on time D. Change in market share

106.

“You get what you measure!” refers to the relationship between A. managerial accounting and financial accounting. B. ethical and unethical behavior. C. duties of the CEO and duties of the controller. D. performance measures and actions of managers.

107.

If management informs employees that bonuses will depend solely on improving the gross profit ratio (gross profit/sales), which of the following behaviors would most likely be observed? A. Sales people would quit trying to sell high volume, low margin core products B. Overall sales would fall C. Overall gross profit would fall D. All of these answer choices are correct

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108.

Which of the following statements regarding performance measures is true? A. GAAP requires performance measures for all employees. B. Companies must select from performance measures published by its own industry when deciding how they want to assess performance. C. Employees tend to direct their attention to what is measured and may neglect what is not measured. D. Companies need to place emphasis on a single performance measure so employees know what to expect.

109.

ProLight plans to sell 1,600 white lights that enhance indoor plant growth next year with total budgeted sales of $48,000 and estimated profit of $8,000. Variable costs are projected to be $17.50 per unit. Customer A offers to pay $10,000 to buy 400 lights from ProLight. Total fixed costs are $12,000 per year. This offer does not affect ProLight’s other planned operations. How much is the incremental revenue associated with the offer from Customer A? A. $58,000 B. $10,000 C. $48,000 D. $3,000

110.

ProLight plans to sell 1,600 white lights that enhance indoor plant growth next year with total budgeted sales of $48,000 and estimated profit of $8,000. Variable costs are projected to be $17.50 per unit. Customer A offers to pay $10,000 to buy 400 lights from ProLight. Total fixed costs are $12,000 per year. This offer does not affect ProLight’s other planned operations. What is the incremental cost associated with the offer from Customer A? A. $58,000 B. $10,000 C. $48,000 D. $7,000

111.

ProLight plans to sell 1,600 white lights that enhance indoor plant growth next year with total budgeted sales of $48,000 and estimated profit of $8,000. Variable costs are projected to be $17.50 per unit. Customer A offers to pay $10,000 to buy 400 lights from ProLight. Total fixed costs are $12,000 per year. This offer does not affect ProLight’s other planned operations. How much is incremental profit associated with the offer from Customer A? A. $3,000 B. $10,000 C. $48,000 D. $7,000

112.

Goody Buy Electronics has received an offer from a customer for $21,600 to purchase 12,000 external hard drives. Good Buy has budgeted sales of 200,000 hard drives totaling $500,000, with fixed costs of $260,000 and total costs of $420,000. Assuming that Good Buy has the capacity to produce the additional units and that accepting this order will not affect any other orders, what effect will accepting the order have on Good Buy’s profit? A. Incremental profit will increase by $21,600 B. Incremental profit will decrease by $9,600 C. Incremental profit will increase by $12,000 D. Incremental profit will decrease by $3,600

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

113.

Classic Loungers is in the process of preparing a production cost budget for August. Actual costs in July for 200 chaise lounge chairs were: Materials cost $ 6,000 Labor cost 8,000 Rent 2,000 Depreciation 4,000 Other fixed costs 5,000 Total $25,000 Each chair was sold for $140 in July. Management estimates that sales will increase to 230 chairs during August if the company lowers the selling price to $130 per chair. Materials and labor are the only variable costs. How much is the incremental cost of producing an extra 30 chairs? A. $1,900 B. $2,100 C. $3,750 D. $(200)

114.

Classic Loungers is in the process of preparing a production cost budget for August. Actual costs in July for 200 chaise lounge chairs were: Materials cost $ 6,000 Labor cost 8,000 Rent 2,000 Depreciation 4,000 Other fixed costs 5,000 Total $25,000 Each chair was sold for $140 in July. Management estimates that sales will increase to 230 chairs during August if the company lowers the selling price to $130 per chair. Materials and labor are the only variable costs. How much is the incremental revenue associated with the price reduction? A. $200 B. $2,100 C. $3,750 D. $1,900

115.

Classic Loungers is in the process of preparing a production cost budget for August. Actual costs in July for 200 chaise lounge chairs were: Materials cost $ 6,000 Labor cost 8,000 Rent 2,000 Depreciation 4,000 Other fixed costs 5,000 Total $25,000 Each chair was sold for $140 in July. Management estimates that sales will increase to 230 chairs during August if the company lowers the selling price to $130 per chair. Materials and labor are the only variable costs. Under what situation should the company lower the price of its chaise lounge chairs? A. If total revenue exceeds totals costs under the new pricing B. If incremental revenue exceeds the old revenue C. If incremental profit is a positive number D. If incremental costs decrease

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116.

Which of the following is true concerning Enterprise Resource Planning (ERP) systems? A. They grew out of the material requirements planning systems that preceded them. B. They will allow customers to track their orders. C. They are considered sunk costs. D. All of these answer choices are correct.

117.

Which of the following would most likely be a Customer Relationship Management System component? A. A system allowing customers to do online banking. B. A system that prepares a master production schedule. C. A system that links the company’s suppliers electronically to its databases. D. A system that manages human resources.

118.

Supply Chain Management (SCM) systems A. computerize inventory control and production planning. B. organize activities between a company and its suppliers. C. automate customer service and support. D. allow customers to track their purchase as it is being produced.

119.

Which of the following should be considered when making ethical decisions? A. What is right? B. What is standard practice? C. Is the company’s control system able to detect an irregularity? D. All of these answer choices are correct.

120.

Which of the following is one of the questions you should ask when faced with an ethical dilemma? A. Will I get caught? B. What decisions alternatives are available? C. Are the actions illegal? D. How big is the effect on the company’s profit?

121.

The Institute of Management Accountants (IMA) A. is the professional organization of managerial accountants. B. administers the comprehensive examination which must be passed before a person can become a CMA. C. has developed a set of standards of ethical conduct and maintains an ethics hotline. D. All of these answer choices are correct.

122.

The organization which administers the Certificate in Management Accounting program is the A. GAAP. B. SCM. C. CRM. D. IMA.

123.

In most companies, the top management accountant is called the A. financial analyst. B. taxation specialist. C. treasurer. D. controller.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

124.

Which of the following is not usually a responsibility of the controller? A. Preparing budgets and performance reports B. Filing tax returns C. Managing cash and marketable securities D. Providing information for management decisions

125.

Which of the following skills are needed by those who desire a high-level career in management accounting? A. Written and oral communication skills B. Interpersonal skills C. Knowledge of the industry in which their firm competes D. All of these answer choices are correct.

126.

For which one of the following is a company’s treasurer typically held responsible? A. Reporting information to the IRS B. Maintaining relationships with investors and creditors C. Preparing audited financial statements D. Preparing and analyzing budgets

127.

Many companies have a chief financial officer (CFO). Which of these positions is most likely to report directly to the CFO? A. Controller B. Chief executive officer C. Janitor D. Production supervisor

128.

Sleep Time produces mattresses. During February, each mattress had has a variable cost of $260, fixed costs of $56,000 per month, and a unit selling price of $500. If the company produces and sells 400 mattresses in March February, how much profit will the company expect for March assuming that the number of mattresses sold and the selling price per mattress remains the same as that of February? A. $96,000 B. $160,000 C. $40,000 D. $200,000

129.

Sleep Time produces mattresses. Each mattress has a variable cost of $260, fixed costs of $56,000 per month, and a unit selling price of $500. If the company produces and sells 400 mattresses in February, how much is the unit cost per mattress? A. $260 B. $400 C. $240 D. $100

130.

Triatt Resort has 200 rooms. Each room rents at $130 per night and variable costs total $42 per room per night of occupancy. The fixed costs total $18,700 per month. If 70% of the rooms are occupied each of the 30 nights in June, how much will total variable costs be for June? A. $546,000 B. $369,600 C. $176,400 D. $252,000

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131.

Triatt Resort has 200 rooms. Each room rents at $130 per night and variable costs total $42 per room per night of occupancy. The fixed costs total $18,700 per month. If Triatt is able to increase occupancy from 70% to 80%, by how much will total costs increase per day during June? A. $840 B. $2,710 C. $1,870 D. $1,760

132.

Triatt Resort has 200 rooms. Each room rents at $130 per night and variable costs total $42 per room per night of occupancy. The fixed costs total $18,700 per month. If Triatt spends an additional $30,000 in June on advertising, it estimates it can expect an occupancy rate of 85%. What will be the monthly financial impact of spending this additional money on advertising over an occupancy level of 70% during June? A. Profit will increase by $49,200 B. Profit will increase by $7,800 C. Total fixed costs will decrease. D. Total costs will increase by $1,260

133.

A company purchases machinery costing $60,000 in October of 2017. Five years later, management discovers better, more efficient machine that could be purchased for $80,000 to replace the existing machine. Management has determined that they are able to sell the original machine for $15,000. In making the decision about buying the new machine, how much are total sunk costs? A. $60,000 B. $80,000 C. $15,000 D. $20,000

134.

Leah Berry is entering her senior year as an accounting major and has a number of options for her summer break. Her options for the 3-month break follow: (1) Work full time at a local accounting firm making $3,200 per month. (2) Take a summer class which will cost $600 and work half time making $1,600 per month. (3) Take two classes at a cost of $1,200 and not work at all during the summer. Leah’s opportunity cost of taking two classes if she chooses option 3 over option 1 would be A. $3,200 per month. B. $2,000 per month. C. $1,200 per month. D. $1,600 per month.

135.

Leah Berry is entering her senior year as an accounting major and has a number of options for her summer break. Her options for the 3-month break follow: (1) Work full time at a local accounting firm making $3,200 per month. (2) Take a summer class which will cost $600 and work half time making $1,600 per month. (3) Take two classes at a cost of $1,200 and not work at all during the summer. Leah’s incremental revenue if she chooses option 1 over option 2 would be A. $1,000 per month. B. $2,200 per month. C. $1,600 per month. D. $3,200 per month.

1-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

136.

Leah Berry is entering her senior year as an accounting major and has a number of options for her summer break. Her options for the 3-month break follow: (1) Work full time at a local accounting firm making $3,200 per month. (2) Take a summer class which will cost $600 and work half time making $1,600 per month. (3) Take two classes at a cost of $1,200 and not work at all during the summer. Leah’s incremental profit (or loss) if she chooses option 2 over option 1 would be A. ($2,200) per month. B. ($1,600) per month. C. ($1,000) per month. D. $1,000 per month.

137.

Flash Eyes sells mascara. In June, it produced and sold 10,000 tubes of mascara. For the month, total variable costs were $21,000 and fixed costs totaled $24,000. In July, the company produced and sold 11,000 tubes of mascara. Which of the following statements is correct for July? A. Total variable costs will be $21,000 B. Variable costs per unit will be $2.10 C. Variable costs per unit will be $4.50 D. Total fixed costs will be $26,400

138.

Flash Eyes sells mascara. In June, it produced and sold 10,000 tubes of mascara. Total variable costs were $21,000 and fixed costs totaled $24,000. Which of the following statements is correct if Flash Eyes produced and sold 9,000 units in July? A. Fixed cost per unit will be $2.67 B. Total fixed costs will be $21,600 C. Variable costs in total will be $40,500 D. Variable costs per unit will be $2.33

139.

Vita Boost Pets produces a line of cat food. In August, it produced and sold 1,000 bags of food. Total fixed costs were $19,000. In September, it produced 2,000 bags of food. Which of the following statements is true for September? A. Total fixed costs will be $38,000. B. Total fixed costs will be $9,500 C. Fixed cost per unit will be $19.00. D. Fixed costs per unit will be $9.50.

140.

Harrison Carpets incurred the following costs for March when 3,000 square feet of carpet were produced and sold: • $18,500 for nylon thread used on carpet • $5,000 for scotch guard for carpet • $7,200 for jute backing to reinforce the carpet • $6,800 for glue to be used in the manufacturing process • $13,000 for insurance (half for administrative activities, half for production activities) • $9,000 for production employees’ wages • $6,500 for rent and utilities in the factory How much are total fixed costs for April if 3,500 square feet of carpet are produced and sold? A. $19,500 B. $32,500 C. $77,000 D. $22,750

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141.

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Harrison Carpets incurred the following costs for March when 3,000 square feet of carpet were produced and sold: • $18,500 for nylon thread used on carpet • $5,000 for scotch guard for carpet • $7,200 for jute backing to reinforce the carpet • $6,800 for glue to be used in the manufacturing process • $13,000 for insurance (half for administrative activities, half for production activities) • $9,000 for production employees’ wages • $6,500 for rent and utilities in the factory How much are total variable costs if 3,500 square feet of carpet are produced and sold in April? A. $77,000 B. $46,500 C. $54,250 D. $43,750

142.

Harrison Carpets incurred the following costs for March when 3,000 square feet of carpet were produced and sold: • $18,500 for nylon thread used on carpet • $5,000 for scotch guard for carpet • $7,200 for jute backing to reinforce the carpet • $6,800 for glue to be used in the manufacturing process • $13,000 for insurance (half for administrative activities, half for production activities) • $9,000 for production employees’ wages • $6,500 for rent and utilities in the factory How much are variable costs per unit if 3,500 square feet of carpet are produced and sold in April? A. $22.00 B. $15.50 C. $12.50 D. $18.86

1-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answers to Multiple Choice 49 B 65 B 50 C 66 B 51 A 67 B 52 D 68 C 53 D 69 C 54 C 70 B 55 D 71 D 56 A 72 D 57 B 73 D 58 B 74 C 59 D 75 A 60 C 76 C 61 B 77 D 62 D 78 C 63 C 79 A 64 B 80 C

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96

A A A B C A C B B B A C B C C B

97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112

C A B A B B D B B D A C B D A C

MATCHING

113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128

B D C A A B A B D D D C D B A C

129 130 131 132 133 134 135 136 137 138 139 140 141 142

B C A A A A C A B A D A C B

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143.

1-23

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once. 1.

Noncontrollable costs

Opportunity costs

Supply Chain Management systems

Sunk costs

Customer Relationship Management systems

Variable costs

Budgets

Controllable costs

Direct costs

10. Fixed costs 11. Incremental costs 12. Indirect costs 13. Enterprise Resource Planning system A. B. C. D. E. F. G. H. I. J. K. L. M.

Costs that increase or decrease in total in response to increases or decreases in the level of business activity Costs that are directly traceable to a product, activity, or department Costs that a manager can influence The difference in costs between decision alternatives Costs incurred in the past that are not relevant to present decisions Costs that cannot be influenced by a manager Financial plans prepared by management accountants Value of the benefits forgone when one decision alternative is selected over another Costs that cannot be directly traced to a product, activity, or department, or are not worth tracing Costs that do not change in total with changes in the level of business activity Systems that prepare a master production schedule and provide support across various other departments of the company Allows companies and suppliers to share information to improve efficiency in getting inputs Allows customer data analysis and support, often in online format for customers

Answers to Matching 1. F 2. H 3. L 4. E 5. M 6. A 7. G

8. 9. 10. 11. 12. 13.

C B J D I K

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

EXERCISES 144.

Below is a performance report that compares budgeted and actual profit in the shoe department of Clara Boutique for the month of June:

Sales Less: Cost of merchandise Salaries of sales staff Controllable profit

Budget $680,000

Actual $672,000

Difference ($8,000)

330,000 120,000 $230,000

325,000 123,000 $224,000

5,000 (3,000) ($6,000)

Evaluate the department in terms of its increases or decreases in sales and expenses. Do you believe it would be useful to investigate either or both of the increases in expenses? Explain. Answer The actual sales is less than budgeted sales by 1.2% ($8,000 ÷ $680,000), while the cost of merchandise was 1.5% less than the budgeted amount. Salaries exceeded budget by 2.5%. The investigation should focus first on salaries, and possibly on the cost of merchandise, since both changes are disproportionate to the decrease in sales.

145.

The distinction between fixed costs and variable costs is an extremely important concept in managerial accounting. For each of the following phrases, indicate if the phrase is more closely related to fixed costs (FIX) or to variable costs (VAR) in reference to the number of units produced. _____

Hourly wages for assembly workers in an food manufacturing firm

_____

Changes on a per unit basis when the level of production changes

_____

Depreciation calculated by the straight line method for factory machines

_____ _____

d. e.

Monthly rent cost Changes in total when the level of production changes

_____

Wheels used on toy truck by a toy manufacturer

_____

Janitor’s salary at a factory

_____ _____

h. i.

Does not change in total when the level of production changes Flour used to produce brownies by a snack manufacturer

_____

Does not change on a per unit basis when the level of production changes

d. e. f.

FIX VAR VAR

Answer a. VAR b. FIX c. FIX

g. h. i.

FIX FIX VAR

VAR

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In a month when Walt Enterprises plans to make and sell 200,000 recycle bins, its total fixed costs are expected to be $420,000 and its total variable costs are expected to be $350,000. If the production level changes to 180,000 units, what is the expected total cost?

Answer $420,000 + [180,000 × ($350,000 ÷ 200,000)] = $735,000

147.

In a period when North Edge Shirt Company plans to make and sell 55,000 shirts, its total fixed costs are expected to be $108,000, and its total variable costs are expected to be $178,750. If the production level changes to 60,000 units, what is the expected cost per shirt?

Answer ($178,750 ÷ 55,000 units) + ($108,000 ÷ 60,000 units) = $5.05

148.

Identify each of the following statements as fixed costs or variable costs. ______ a.

A cost that changes in total with changes in the activity level

______ b.

A cost that decreases on a per-unit basis when activity levels increase

______ c.

A cost that varies on a per-unit basis with changes in the activity level

______ d.

A cost that remains constant per unit with changes in the level of business activity

______ e.

A cost that remains the same in total with changes in the activity level

Answer a. b. c. d. e.

149.

Variable Fixed Fixed Variable Fixed

Indicate whether each of the following costs is most likely a fixed cost or a variable cost for a car wash company. ______ a.

Depreciation on the car wash building

______ b.

Car blow dryer depreciation

______ c.

Salary of the car wash manager

______ d.

Wages of employees who dry the cars

______ e.

The cost of water used in car washes

Answer a. b. c.

Fixed Fixed Fixed

d. e.

Variable Variable

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

150.

Hanover Gears plans to produce 6,000 rotor gears in July. The production budget for this level of activity is: Labor (variable) $35,000 Rent 6,000 Depreciation 4,000 Materials costs 7,000 Packaging 3,000 Other fixed costs 8,000 Calculate the total cost and the cost per unit if the production level is changed to 5,000 units.

Answer Variable cost per unit = ($35,000 + $7,000 + $3,000) ÷ 6,000 = $7.50 per unit Total costs = ($7.50 × 5,000) + $18,000 = $55,500 Unit cost = $55,500 ÷ 5,000 = $11.10

151.

Parvez Painting provides painting services for residential and commercial customers five days per week (Monday through Friday). Due to customer requests, the company owner, Juan Parvez, is considering staying open on Saturday. If the company stays open on Saturday, it can generate $1,600 of daily revenue and will operate for 52 extra days per year. The incremental daily costs will be $700 for labor, $200 for paint, brushes, and supplies, $40 for transportation, and $80 for office staff. These costs do not include a share of monthly rent totaling $220, or a share of depreciation related to office equipment totaling $170. Prepare an estimate of the incremental profit for the year.

Answer Incremental revenue per day Less incremental costs: Labor Paint, brushes, and supplies Transportation Office staff Net increase in profit

$1,600 $700 200 40 80

Incremental profit = $580 per day  52 days = $30,160

1,020 $ 580

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152.

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Vickshay Bolts has fixed costs of $40,000 and variable costs of $100,000 during a period when 10,000 units were produced. a.

Complete the following table based on the information for Vickshay Bolts: Cost per unit This type of cost in total Fixed costs Variable costs Total cost

Now assume that production changes to 12,500 units and complete this table: Cost per unit This type of cost in total Fixed costs Variable costs Total cost

What conclusions can you draw about the behavior of each of the following if the level of production decreases? 1. Fixed cost per unit 2. Variable cost per unit 3. Fixed costs in total 4. Variable costs in total

Answer a. Fixed costs Variable costs Total cost

Cost per unit $4.00 $10.00 $14.00

This type of cost in total $40,000 $100,000 $140,000

Fixed costs Variable costs Total cost

Cost per unit $3.20 $10.00 $13.20

This type of cost in total $40,000 $125,000 $165,000

When the level of production decreases, fixed cost per unit will increase because the fixed costs will be spread among fewer units. 2. Variable cost per unit will remain the same when the level of production changes. 3. When the level of production decreases, total fixed costs will remain the same. 4. When the level of production decreases, total variable costs will also decrease.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

153.

Reef Paradise is a five-star resort on the island of St. Thomas. Late on Friday, it had 10 of its 400 rooms available when the desk clerk received a call from the Hyatt Hotel that had made a booking error leaving six couples with no rooms even though their reservations were confirmed. Hyatt wants to send their customers to the Reef Paradise at the same rate the guests would have been charged at the Hyatt, $190 per room, rather than Reef’s normal rate of $240 per room. a. b.

Answer a. b.

154.

If Reef Paradise accepts the guests, how much will the incremental revenue be? List four examples of incremental costs that Reef Paradise will incur if it accepts the guests. $190  6 = $1,140 Cost of soap and shampoo Cost of cleaning the room (maid labor costs, electricity for vacuum cleaner, cleaning products) Cost of cleaning towels and bedding Cost of electricity

Sanchez Sweets is in the process of preparing a production cost budget for May. Actual costs in April for production of 7,000 batches of cookies were: Ingredients cost Rent Labor cost Depreciation Other fixed costs Total

$ 7,200 1,100 3,300 900 700 $13.200

The company is currently producing and selling 80,000 batches of cookies annually with each batch sold for $8.00. The company is considering lowering the price to $7.50 per batch for which management estimates this will increase sales to 90,000 batches. Ingredients and labor are the only variable costs. a. b. c. Answer a.

What is the incremental cost associated with producing an extra 10,000 batches of cookies? What is the incremental revenue associated with the price reduction? Should Sanchez Sweets lower the price of its cookies?

Variable cost per unit = ($7,200 + $3,300) ÷ 7,000 = $1.50 per batch Additional cost: $1.50 × 10,000 = $15,000

Original revenue (80,000 × $8.00) $640,000 Revenue with price change (90,000 × $7.50) 675,000 Incremental revenue associated with price change $ 35,000

Yes. Total costs increase by $15,000, while the revenue increases by $35,000, creating additional profit of $20,000.

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155.

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Sanchez Sweets is in the process of preparing a production cost budget for May. Actual costs in April for production of 5,000 batches of cookies were: Ingredients cost $ 7,200 Rent 1,100 Labor cost 3,300 Depreciation 900 Other fixed costs 700 Total $13.200 Ingredients and labor are the only variable costs. a.

Using this information, prepare a budget for May. Assume that production will increase to 8,000 batches of cookies, reflecting an anticipated sales increase related to a change in selling price. Calculate the actual cost per unit in April and the budgeted cost per unit in May. Explain why the cost per unit is expected to decrease.

Answer a. Ingredients cost per unit = $7,200 ÷ 5,000 = $1.44 Labor cost per unit = $3,300 ÷ 5,000 = $0.66 Ingredient cost ($1.44 × 8,000) Labor cost ($0.66 × 8,000) Rent Depreciation Other fixed costs Total b.

156.

$11,520 5,280 1,100 900 700 $19,500

April: $13,200 ÷ 5,000 units = $2.64 May: $19,500 ÷ 8,000 units = $2.44 The unit cost declines because some costs are fixed, which do not increase with increases in volume. The fixed cost per unit is smaller when there are more units.

The manager of quality control at Zenic Products, a medical products company, purchased a new lab machine for $44,000 two years ago during 2017. This year, a new machine, which is faster and more precise than the current model, is available in the market. In deciding whether or not to purchase the new machine, indicate if the manager should consider each of the following costs and why. a. The original cost of the old machine b. The value at which the old machine can be sold in the used equipment market

Answer a. b.

No. The original cost is a sunk cost. Yes. This is an incremental cash inflow equal to the market value of the old machine that will result if the manager buys a new lab machine.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

157.

Jones Cola sells bottled beverages. During the past year, 40,000 bottles were produced and sold at a price of $1.20 per bottle. Variable cost per unit was $0.45 and total fixed costs were $150,000. Jones Cola would like to raise the price per bottle to $1.50, but feels that this will reduce sales to 36,000 bottles per year. Perform the appropriate incremental analysis of this situation. Clearly label the incremental revenues, incremental costs, and incremental profits. Should Jones Cola raise its price?

Answer Incremental revenue ($1.20 × 40,000) – ($1.50 × 36,000) $6,000 Incremental variable cost savings ($0.45 × 4,000) 1,800 Incremental profit $7,800 Jones Cola should raise its selling price since its profit is estimated to increase by $7,800.

158.

ZBar Supplies is currently producing 20,000 tape dispensers per month, but has the capacity to produce 25,000 tape dispensers without incurring any additional fixed costs. The selling price is $5.00 per dispenser and variable cost per unit is $2.00. Total fixed costs are $35,000. Marathon Corporation approaches ZBar with a proposal to buy 4,000 dispensers at a price of $4.25 per unit. Prepare the incremental analysis that ZBar should use to evaluate this situation. Assuming that other customers are not affected, should ZBar accept Marathon’s offer?

Answer Incremental revenue ($4.25 × 4,000) Incremental variable cost ($2.00 × 4,000) Incremental profit

$17,000 (8,000) $ 9,000

The offer should be accepted based on the estimated increase in profit of $9,000.

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CHALLENGE EXERCISES 159.

Fiesta Shirts produces two types of t-shirts—crew neck and v-neck. The variable cost of producing each crew neck shirt is $4.25, and $4.50 per shirt for each v-neck. Fixed costs per shirt are $1.50 per shirt when the production level is 12,000 of both types of shirts. The fixed cost is for factory costs including rent, depreciation, and insurance. Crew necks are currently sold for $7.00 each, while v-necks are sold for $8.00 each. During the past year, the company has sold 12,000 of each type of shirt. The company estimates it can sell 14,000 crew neck shirts during the upcoming year if it reduces the selling price to $6.50 per shirt. a. b. c. d.

Prepare the incremental analysis to evaluate this situation for the coming year. Should Fiesta Shirts reduce the selling price? Why or why not? Why is the fixed cost of each shirt not used in the incremental analysis? Why does the analysis in part “a” exclude amounts related to the v-neck shirts?

Answer a. Incremental revenue (14,000 × $6.50) – (12,000 × $7.00) Incremental cost ($4.25 × 2,000) Incremental decline in profit

$ 7,000 (8,500) ($1,500)

Fiesta Shirts should not reduce the price of the crew neck shirts as total profit will decline by $1,500.

Fixed costs are generally not avoidable when a change in units produced occurs. The company will incur the same amount of total fixed costs regardless of the number of shirts produced.

Fiesta Shirts plans no changes to the v-neck shirts so the amounts are not incremental to the decision to sell additional crew neck shirts.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

160.

Junk Food Palace has two product lines: candy and chips. Information for the month of June is presented below: Candy Chips Units sold 5,000 8,000 Revenue $7,500 $16,000 Variable costs 4,000 8,800 Fixed costs 2,000 2,000 Net income (loss) $1,500 $ 5,200 a.

Answer a.

A potential new customer has asked to buy 1,000 candy products and 1,500 chips products at 80% of the price paid by other customers. Prepare an incremental analysis that will help Junk Food Palace’s managers decide whether to accept the order from the customer. Suppose Junk Food Palace decided to accept the order. Identify three other considerations that management should consider before accepting the order.

Selling price per unit of candy: $7,500 ÷ 5,000 = $1.50 × 80% = $1.20 Selling price per unit of chips: $16,000 ÷ 8,000 = $2.00 × 80% = $1.60 Variable cost per unit of candy: $4,000 ÷ 5,000 = $0.80 Variable cost per unit of chips: $8,800 ÷ 8,000 = $1.10 Incremental revenue (1,000 × $1.20) + (1,500 × $1.60) Incremental cost ($0.80 × 1,000) + ($1.10 × 1,500) Incremental profit

$3,600 (2,450) $1,150

Management must consider what other customers might think if they find out that Junk Food Palace is selling to other customers at a cheaper price. They will also want to know if employees are able to work extra hours to produce the additional product and if suppliers will have the ability to deliver the materials needed to produce the extra snacks.

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SHORT-ANSWER ESSAYS 161.

What information is typically included in a performance report? How does an effective manager use this information?

Answer The reports used to evaluate the performance of managers and the operations they control are referred to as performance reports. Although there is no generally accepted method of preparing performance reports, these reports frequently involve a comparison of the currentperiod performance with performance in a prior period or with planned (budgeted) performance. Managers use performance reports to flag areas that need closer attention and to avoid areas that are under control. Effective managers use the principle of management by exception to investigate differences that appear to be significant and do not devote a great deal of attention to those areas where the departures from the prior period or budgeted amounts are minor. 162.

Explain the principle of “management by exception.”

Answer Management by exception is a principle that helps managers investigate departures from the plan that appear to be exceptional; they do not investigate minor departures from the planned performance. Resources are used to investigate the major exceptions to the plan.

163.

List and briefly describe four of the five differences between managerial accounting and financial accounting.

Answer 1. 2.

3. 4. 5.

164.

Financial accounting is aimed primarily at external users of accounting information, while managerial accounting is aimed primarily at internal users. Financial accounting is prepared in accordance with GAAP (generally accepted accounting principles), while conformance with GAAP is not required for managerial accounting reports. Financial accounting information is highly summarized, while managerial accounting reports may contain information in much more detail. Managerial accounting reports may contain a substantial amount of nonmonetary information. Financial accounting records represent what has happened in the past, while managerial accounting places considerable emphasis on the future.

A store manager is being evaluated. Explain the difference between controllable costs and noncontrollable costs as they should be used in this evaluation. Provide examples of costs that are controllable and those that are noncontrollable.

Answer Controllable costs are those costs that the manager can influence, while noncontrollable costs are those that cannot be influenced by the manager. The manager can control labor costs, and perhaps advertising costs for the store, but is probably not able to control the insurance costs or property taxes for the building.

1-34

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

165.

Performance measures influence the actions of managers. List two performance measures and the actions that are likely to result if these measures are implemented.

Answer An example of a performance measure is the number of new customers for a business. If a manager is evaluated on this performance measure, the manager may ignore existing customers while trying to cultivate new customers. Another example of a performance measure is the percentage of on-time deliveries. If a manager is evaluated on this measure, the quality of the output may suffer, as all efforts are concentrated on making the delivery on time.

166.

What is incremental analysis? When is it appropriate to use this technique?

Answer Incremental analysis involves calculating the difference in revenues, difference in costs, and difference in profits between decision alternatives. It is appropriate to use this technique in approaching all business problems where there are different alternatives and based on the outcome of the alternatives, a decision needs to be arrived at and best alternative is to be chosen. If an alternative yields an incremental profit (the difference between incremental revenue and incremental cost), it is the preferred alternative.

167.

Explain what an Enterprise Resource Planning System is and how has it reduced costs for businesses?

Answer An Enterprise Resource Planning System is a software system which processes information and improves the operation of the value chain. It is an improvement over material requirements planning (MRP) systems which computerized inventory control and production planning. ERP systems update MRP systems with better integration, relational databases, and graphical user interfaces. ERP components also include accounting and finance, human resources, and various e-commerce applications including SCM and CRM. An ERP system reduces costs by integrating all facets of the business through maintaining databases that support production and procurement, as well as finance and accounting, customers, and human resources. Costs are reduced in all areas and transactions only need to be recorded once, ordering and paying becomes automated, and customer service improves.

CHAPTER 2 Job-Order Costing for Manufacturing and Service Companies Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

K K K K K K

7. 8. 9. 10. 11. 12.

2 2 2,5 2 2 3

30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.

1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2,5 2,3 2,3 2,3 2,3 2,3 2,3 2,3

K K C C C C C K C C K K K C K AP AP AP AP AP AP AP AP AP AP

55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79.

2,3 2,3 2,3 2,3 2,3 2,3 2,3 2,3 2,3 2,3 3 3 3 2 4 2 2 2 4 2,4,6 5 2 4 4 4

151.

1-7

152. 153. 154.

1,2 1,2 3

AP AP K

155. 156. 157.

4 4 4

167.

1,2

168.

1,5

170. 171.

1 1

C K

172. 173.

1 3

Item LO BT Item True-False Statements K 13. 3 C 19. K 14. 3 C 20. K 15. 2 K 21. K 16. 2,3 K 22. K 17. 4 K 23. K 18. 4 K 24. Multiple Choice Questions AP 80. 4 AP 105. AP 81. 5,6 AP 106. AP 82. 4,6 AP 107. AP 83. 5 AP 108. AP 84. 4 K 109. AP 85. 2,4 K 110. AP 86. 4 K 111. AP 87. 4 C 112. AP 88. 4,5 K 113. AP 89. 4,5 K 114. C 90. 2,4 K 115. C 91. 4 K 116. K 92. 5 K 117. K 93. 4,5 AP 118. K 94. 5 K 119. AP 95. 5 K 120. AP 96. 4,5 K 121. AP 97. 4,5 K 122. AP 98. 4,5 K 123. AP 99. 4,5 AP 124. AP 100. 4,5 AP 125. AP 101. 5 AP 126. AP 102. 5 AP 127. AP 103. 4,5 AP 128. AP 104. 4,5 AP 129. Matching Exercises 158. 4,5 AP 161. 159. 5 AP 162. 160. 4,5,6 AP 163. Challenge Exercises AP 169. 4,5,6 AP Short-Answer Essays K 174. 5 C 176. K 175. 4 C 177. AP AP AP

Item

4 4 4 5 5 5

K K K K C C

25. 26. 27. 28. 29.

5 6 6 7 7

C K K K K

4,5 4,5 4,5 4 4,5 4 5 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5

AP AP AP AP AP AP AP AP AP AP C C AP AP K C C C AP AP AP AP AP AP AP

130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

5 5 5 5 5 5 5 5 5 5 5 5 5 6 7 7 7 7 7 7 7

AP AP AP AP AP AP AP AP AP AP AP AP AP K K C K K K K C

4,5 4,5 5

AP AP AP

164. 165. 166.

5 5 5,6

AP AP AP

7 7

C C

178.

2-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

TRUE-FALSE STATEMENTS 1.

All costs other than direct materials, direct labor, indirect materials, and indirect labor are classified as period costs.

The wages of a factory machine maintenance worker are classified as direct labor.

Insurance on factory equipment is a part of manufacturing overhead.

Sales commissions are considered a product cost.

Period costs are identified with accounting periods rather than with goods produced.

Rent of the office building for the sales staff is a period cost.

Raw Materials Inventory, Work in Process Inventory, and Cost of Goods Sold will appear on a company’s balance sheet.

Cost of Goods Manufactured appears on the balance sheet.

Overhead is related ideally to production using an allocation base.

10.

Indirect labor is added directly to the Work in Process account in a job-order costing system.

11.

Direct labor costs are traced to each job.

12.

Process costing systems are generally used by companies that produce large quantities of identical items.

13.

A company that builds custom homes would likely use a process costing system.

14.

A company that designs advertising campaigns for other companies would likely use job-order costing.

15.

In a job-order costing system, the Finished Goods account includes the cost of all jobs completed and sold during an accounting period.

16.

In a job-order costing system, the Cost of Goods Sold account consists of costs transferred out of the Finished Goods account.

17.

A job cost sheet is a form used to accumulate costs of a particular job in a job-order costing system.

18.

When overhead is applied to jobs, Manufacturing Overhead is debited and Work in Process is credited.

19.

In a job-order costing system, the Cost of Goods Manufactured account is increased and the Finished Goods account is decreased when a job is completed.

20.

In a job-order costing system, Work in Process is debited and Finished Goods is credited when a job is sold.

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

2-3

21.

Increases in overhead costs should be driven by increases in the overhead allocation base.

22.

Underapplied overhead occurs when actual overhead is greater than the amount of overhead applied to jobs.

23.

If the amount of over- or under-applied overhead is material, the amount should be closed to Work in Process.

24.

If the amount of overapplied overhead is not material, the amount should be closed to Cost of Goods Sold.

25.

If overhead is underapplied, closing it to Cost of Goods Sold will increase income.

26.

Job-order costing is often used by service companies, such as lawyers who need to determine the cost of lawsuit or consultants who need to determine the cost of an engagement.

27.

Because H&R Block provides no materials when it completes a tax return for a client, it does not assign overhead costs to each tax return client.

28.

The use of computer-controlled manufacturing systems has had a significant effect on the composition of product costs.

29.

One goal of just-in-time systems is to minimize inventory levels.

Answers to True-False 1 2 3 4 5 6

F F T F T T

7 8 9 10 11 12

F F T F T T

13 14 15 16 17 18

F T F T T F

19 20 21 22 23 24

F F T T F T

25 26 27 28 29

F T F T T

2-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MULTIPLE CHOICE 30.

Which of the following is not a reason for companies to know the cost of their products? A. The company must set appropriate prices for the products. B. The salary of the company president is based on the cost of the product. C. The cost of the product is used in the calculation of profit when the product is sold. D. The management of the company needs to assess the reasonableness of the costs incurred in purchasing or manufacturing the products.

31.

Which of the following is a manufacturing cost? A. Cost of supplies used by sales personnel B. Indirect factory labor C. Product advertising costs D. Administrative expenses

32.

Which of the following is an example of a manufacturing overhead cost? A. Wages paid to security personnel at the corporate office building B. The cost of electricity used to run the oven in which Domino’s bakes it pizzas C. Cost of shipping product to customers D. The salary of the president of the company

33.

Which of the following is a manufacturing cost? A. Indirect materials B. Advertising expense C. Depreciation of the office equipment used by the sales staff D. Salary of clerical workers

34.

Westerhouse manufactures refrigerators. Which of the following items is most likely considered an indirect material cost for Westerhouse? A. Supplies used by the factory janitor B. Gasoline costs for trucks used to deliver products to customers C. Glass shelves for the refrigerators D. Refrigerator motors

35.

Which of the following costs is not part of manufacturing overhead? A. Electricity for the factory B. Depreciation of factory equipment C. Salaries for the production supervisors D. Health insurance for sales staff

36.

Which of the following costs is part of manufacturing overhead? A. Indirect labor B. Direct labor C. Salaries for the accounting personnel D. Wages for the janitorial staff for the sales offices

37.

Product costs A. are also called period costs. B. are considered an asset until the finished goods are sold. C. become an expense in the period the costs are incurred. D. All of these answer choices are correct.

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

2-5

38.

Which of the following is a period cost? A. Rent on a factory machine B. Maintenance on production equipment C. Indirect labor D. Janitorial costs for the corporate office

39.

Which of the following is not a period cost? A. Advertising costs B. Accounting staff salaries C. Direct materials D. Depreciation of accounting office equipment

40.

Which of the following accounts does not appear on the balance sheet? A. Raw Materials Inventory B. Finished Goods Inventory C. Work in Process Inventory D. Cost of Goods Manufactured

41.

Work in Process Inventory includes the cost of A. goods which are only partially completed. B. all goods sold during the period. C. all materials purchased during the last period. D. all goods which are completed and ready to sell.

42.

Which of the following is not a cost that is included in the ending balances of the Work in Process Inventory account in a job-order cost system? A. Cost of Goods Sold B. Costs of tires attached to wagons by a toy manufacturer C. Factory-related costs D. Cost of wages earned by assembly workers

43.

Which of the following lists presents the accounts in the order in which product costs flow? A. Cost of Goods Sold, Work in Process Inventory, Raw Materials Inventory, Finished Goods Inventory B. Work in Process Inventory, Finished Goods Inventory, Cost of Goods Sold, Raw Materials Inventory C. Raw Materials Inventory, Finished Goods Inventory, Work in Process Inventory, Cost of Goods Sold D. Raw Materials Inventory, Work in Process Inventory, Finished Goods Inventory, Cost of Goods Sold

44.

Cost of goods manufactured A. is the amount transferred from Work in Process Inventory to Finished Goods Inventory during the period. B. is equal to the beginning Work in Process Inventory plus the current period’s manufacturing costs plus the ending Work in Process Inventory. C. is always equal to cost of goods sold. D. is transferred to Raw Material Inventory account.

2-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

45.

DistaBricks manufactures custom brick and applies job-order costing. The following information relates to the fiscal year ending December 31, 2017. Beginning balance in Raw Materials Inventory Purchases of raw material Ending balance in Raw Materials Inventory Beginning balance in Work in Process Ending balance in Work in Process Direct labor cost Manufacturing overhead applied Actual manufacturing overhead Beginning balance in Finished Goods Ending balance in Finished Goods Sales Selling expenses General and administrative expenses

$ 13,600 211,000 15,100 18,700 16,500 78,600 47,900 44,800 26,200 24,500 421,000 115,400 75,900

How much is the cost of direct materials transferred into production? A. $224,600 B. $212,500 C. $209,500 D. $211,000 46.

$ 13,600 211,000 15,100 18,700 16,500 78,600 47,900 44,800 26,200 24,500 421,000 115,400 75,900

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

47.

2-7

$ 13,600 211,000 15,100 18,700 16,500 78,600 47,900 44,800 26,200 24,500 421,000 115,400 75,900

How much is cost of goods sold prior to closing under or overapplied overhead?

A. B. C. D. 48.

$339,900 $338,200 $336,000 None of these answer choices are correct

The manufacturing operations of Saltic Enterprises had the following balances for the month of March: March 1, 2017 March 31, 2017 Raw Materials $11,000 $14,000 Work in Process 8,000 10,000 Finished Goods 25,000 28,000 If Saltic calculated cost of goods to be $249,000 in March, how much did it transfer out of Work in Process as completed goods? A. $277,000 B. $246,000 C. $251,000 D. $252,000

49.

Blue Dynamics manufactures custom water fountains and employs job-order costing system. Beginning raw materials on October 1 totaled $15,600. During October, Blue Dynamic’s transactions and accounts included the following: Raw materials acquired for cash $ 7,500 Raw materials received on account 88,900 Direct materials requisitioned and transferred to production 91,200 Cost of goods manufactured 187,900 How much is the balance of Raw Materials on October 31? A. $20,800 B. $96,400 C. $5,200 D. $9,800

2-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

50.

Hard Walks Inc. designs and builds custom sidewalks and employs a job-order costing system. During June, the company’s transactions and accounts included the following: Raw materials purchased $282,000 Direct materials used in production 290,000 Raw materials inventory, beginning 11,400 Corporate administrative costs 22,500 Selling expenses 16,500 Sales 389,000 Total manufacturing overhead applied 45,300 Total manufacturing overhead incurred 49,100 Finished goods, beginning 21,400 Work in process inventory, beginning 31,800 Work in process inventory, ending 28,700 Direct labor cost incurred 42,300 Finished goods, ending 23,500 How much is cost of goods manufactured for June? A. $348,900 B. $377,600 C. $380,700 D. $384,500

51.

Tranham, Inc. uses a job-order costing system. It reported the following amounts for March: Work in process, March 1 $38,000 Work in process, March 31 35,000 Cost of goods manufactured 169,000 Direct labor used 64,000 Selling costs incurred 32,000

Finished goods, March 1 $14,000 Finished goods, March 31 17,500 Raw materials, March 1 12,300 Raw materials, March 31 12,000 Direct materials used 63,000

How much of the above amounts will Tranham report on its balance sheet at the end of March? A. $64,500 B. $233,500 C. $192,500 D. $169,000 52.

Finished goods, March 1 $14,000 Finished goods, March 31 17,500 Raw materials, March 1 12,300 Raw materials, March 31 12,000 Direct materials used 63,000

How much will Tranham report as cost of goods sold for the month of March? A. $169,000 B. $172,000 C. $183,000 D. $165,500

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

2-9

53.

On December 31, 2017, Barnett Tools has a balance in the Work in Process Inventory account of $62,000. On January 1, 2017, the balance in Work in Process Inventory was $55,000. Current manufacturing costs for the year are $292,000, and cost of goods sold is $284,000. How much is cost of goods manufactured? A. $292,000 B. $299,000 C. $277,000 D. $285,000

54.

Palm Works Inc. has a beginning balance in the Work in Process Inventory account of $20,000. Current manufacturing costs for the period are $325,000. The ending balance in the Work in Process Inventory account is $23,000. How much is cost of goods manufactured? A. $322,000 B. $328,000 C. $348,000 D. Not enough information is provided

55.

If the balance in the Finished Goods Inventory account is increased by $34,000 during the period and the cost of goods manufactured was $321,000, how much is cost of goods sold? A. $287,000 B. $321,000 C. $355,000 D. Not enough information is provided

56.

The balance in the Finished Goods Inventory account on July 31, 2017, was $41,000 and the June 30, 2017, balance in the Finished Goods Inventory account was $34,000. Cost of goods sold is $200,000 and direct materials used in production total $86,000. How much is cost of goods manufactured? A. $286,000 B. $193,000 C. $207,000 D. Not enough information is provided.

57.

Ink Technology’s Work in Process Inventory account has a beginning balance of $50,000 and an ending balance of $40,000. Direct materials used are $70,000 and direct labor incurred totals $35,000. Cost of goods sold totals $135,000. Manufacturing overhead applied is $20,000. How much is cost of goods manufactured? A. $145,000 B. $115,000 C. $125,000 D. $135,000

2-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

58.

DynaSpa manufactures solar spa heaters and employs a job-order costing system. Beginning raw materials totaled $4,200 and beginning work in process totaled $6,700. Ending work in process totaled $7,700. During October, DynaSpa’s transactions and accounts included the following: Raw materials acquired Manufacturing overhead applied Direct materials requisitioned and transferred to production

Cost of goods manufactured

$91,000 34,000 65,400 331,000

How much is the amount of the current manufacturing costs? A. $332,000 B. $99,400 C. $430,400 D. Not enough information is provided 59.

Sanitize Systems had current production costs of $211,000 for March. Inventories were as follows: Beginning Ending Raw material $13,000 $9,000 Work in Process $14,000 $15,000 Finished Goods $18,000 $16,000

How much is the cost of goods manufactured? A. $213,000 B. $212,000 C. $210,000 D. Not enough information is provided 60.

Watson Specialties bought $100,000 of raw materials during June, incurred $90,000 in direct labor cost, and applied $130,000 in manufacturing overhead. Inventories for June were as follows: Beginning Ending Raw material $22,000 $24,000 Work in Process $23,000 $19,000 Finished Goods $32,000 $31,000 How much is cost of goods sold for June? A. $323,000 B. $322,000 C. $324,000 D. $325,000

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

61.

2-11

The following information has been collected from Harper Tools’ accounting records for the month of April: Direct materials added to Work in Process Inventory $ 160,000 Indirect materials added to Manufacturing Overhead 40,000 Direct labor added to Work in Process Inventory 150,000 Indirect labor added to Manufacturing Overhead 65,000 Manufacturing overhead added to Work in Process Inventory100,000 Depreciation Expense added to Manufacturing Overhead 50,000 Cost of Goods Sold 340,000 Cost of Goods Manufactured 380,000 What is the amount of the current manufacturing costs? A. $410,000 B. $565,000 C. $500,000 D. $550,000

62.

Reason Apparel applied overhead totaling $140,000 during March. Inventories were as follows: Beginning Ending Raw material $15,000 $21,000 Work in Process $24,000 $26,000 Finished Goods $11,000 $15,000 How much is cost of goods manufactured? A. $138,000 B. $136,000 C. $140,000 D. Not enough information provided

63.

During the month of August, Ross MotorCo applied overhead to jobs using an overhead rate of $0.80 per dollar of direct labor. Direct labor incurred in August was $138,000. Estimated overhead in August was $112,800. Actual overhead was composed of the following items: Indirect materials Indirect labor Utilities Depreciation Repair expense Total

$ 16,400 24,900 24,500 38,700 13,500 $118,000

How much will be recorded as a debit to Work in Process for overhead during the year for Ross MotorCo? A. $112,800 B. $118,000 C. $110,400 D. More information is needed to answer

2-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

64.

During the month of August, Ross MotorCo applied overhead to jobs using an overhead rate of $0.80 per dollar of direct labor. Direct labor in August was $138,000. Estimated overhead in August was $112,800. Actual overhead was composed of the following items: Indirect materials Indirect labor Utilities Depreciation Repair expense Total

$ 16,400 24,900 24,500 38,700 13,500 $118,000

How much will Ross MotorCo record as a debit to Manufacturing Overhead during the year? A. $112,800 B. $118,000 C. $110,400 D. More information is needed to answer 65.

A job-order costing system is most likely to be used by a A. soft-drink bottler. B. breakfast cereal manufacturer. C. paint manufacturer. D. caterer.

66.

Which of the following companies will most likely use a process costing system? A. A company that produces recycle bins B. A company that designs and bakes wedding cakes C. An ambulance service D. An attorney that handles divorce cases

67.

Companies that use process costing systems A. generally produce large quantities of identical items. B. trace costs to specific items produced. C. accumulate costs by completed products rather than by departments. D. All of these answer choices are correct.

68.

When work is completed on a job, costs for the completed job are found in which of the following accounts? A. Cost of Goods Manufactured B. Work in Process Inventory C. Finished Goods Inventory D. Cost of Goods Sold

69.

Which of the following statements about job-order costing is not true? A. Materials are traced to jobs using materials requisition forms. B. Indirect labor is traced to jobs using time tickets. C. Manufacturing overhead cannot be traced directly to jobs, so it is assigned using an overhead allocation rate. D. Manufacturing overhead costs are applied to jobs by crediting the Manufacturing Overhead account and debiting it to Work in Process Inventory.

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

70.

2-13

Load King Manufacturing transferred $265,000 of costs from the Work in Process Inventory account to the Finished Goods Inventory account during the month. The company’s inventory balances follow: Beginning Ending Work in Process $22,000 $25,400 Finished Goods $31,500 $29,200 How much is cost of goods sold for the month? A. $262,700 B. $261,600 C. $267,300 D. Not enough information is provided

71.

In April, Walston Enterprises had the following results: Beginning Finished Goods Inventory Ending Finished Goods Inventory Sales Gross Margin

$17,400 $25,400 $965,000 $450,000

How much is Cost of Goods sold for April? A. $458,000 B. $515,000 C. $507,000 D. $423,000 72.

Title Audio manufactures industrial sound systems and employs a job-order costing system. During June, Title Audio’s transactions and accounts included the following: Raw materials purchased Direct labor cost incurred Total manufacturing overhead applied Raw Materials Inventory, beginning Raw Materials Inventory, ending Finished Goods Inventory, beginning Work in Process Inventory, beginning Work in Process Inventory, ending Total manufacturing overhead incurred

$126,000 34,000 42,100 12,500 11,600 10,400 13,000 14,100 44,300

How much is the cost of direct materials issued to production during June? A. $126,900 B. $126,000 C. $125,100 D. None of these answer choices are correct

2-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

73.

Winslow Windows manufactures custom windows for high rise buildings and employs a joborder costing system. During June, Winslow’s transactions and accounts included the following: Raw materials purchased Direct labor cost incurred Total manufacturing overhead applied Raw Materials Inventory, beginning Raw Materials Inventory, ending Finished Goods Inventory, beginning Work in Process Inventory, beginning Work in Process Inventory, ending Total manufacturing overhead incurred

$106,000 42,000 35,800 13,100 11,600 9,000 13,000 14,100 34,200

How much is the cost of goods manufactured for June? A. $185,300 B. $184,200 C. $182,600 D. $182,700 74.

Dax Productions produces commercials for companies wishing to advertise on television. It uses job-order costing. Dax utilized annual estimates of overhead and machine hours in determining its overhead rate of $1.50 per machine hour. Data from the month of June is as follows: Factory rent Direct labor Factory depreciation Administrative salaries Indirect materials used in production Direct materials used in production Actual machine hours Estimated machine hours

$20,400 $56,000 $15,000 $42,000 $16,000 $11,500 33,000 31,800

How much are total manufacturing costs added to Work in Process during the period? A. $118,900 B. $114,000 C. $117,000 D. None of these answer choices are correct. 75.

Olive Productions utilizes job-order costing for textbook production. It allocates overhead at a rate of 130% of direct labor costs. The following is data regarding three jobs:

Job #64 Job #65 Job #66

Work in Process balance On February 1 $600 $700 $500

Costs added in February Direct Labor Direct Materials $500 $200 $300 $300 $100 $250

How much are total manufacturing overhead costs applied for February? A. $3,510 B. $900 C. $1,440 D. $1,170

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

76.

2-15

Olive Productions utilizes job-order costing for textbook production. It allocates overhead at a rate of 130% of direct labor costs. The following is data regarding three jobs:

Job #64 Job #65 Job #66

Work In Process balance On February 1 $600 $700 $500

Costs added in February Direct Labor Direct Materials $500 $200 $300 $300 $100 $250

Jobs #64 and #66 were completed and sold in February. How much is the balance in the Work in Process account at the end of February? A. $990 B. $1,690 C. $1,650 D. $1,300 77.

Cost of goods manufactured equals $44,000 for 2017. Finished goods inventory is $2,500 at the beginning of the year and $5,500 at the end of the year. Total manufacturing overhead applied is $4,500. Beginning and ending work in process for 2017 are $6,000 and $5,000 respectively. How much is cost of goods sold for the year? A. $41,000 B. $47,000 C. $43,000 D. More information is needed.

78.

Occi-Predictions manufactures weather forecasting circuits for meteorologists and uses a joborder costing system. During June, Occi-Predictions accounts included the following balances and transactions:

$ 700 Raw Materials Inventory, ending 4,850 Manufacturing overhead cost applied 9,500 Marketing expenses 11,000 Sales 98,000 Raw Materials Inventory, beginning

Direct materials purchased $45,000 Direct labor cost incurred 16,400 Administrative expenses 13,000 Work in Process Inventory, beginning 7,800 Work in Process Inventory, ending 6,600

How much is the cost of direct materials issued to production during June? A. $45,000 B. $45,700 C. $49,150 D. $40,850 79.

Value Wood utilizes job-order costing. The company began the month of July with $35,000 in raw materials. During the month $300,000 of additional raw materials were purchased and $295,000 of direct materials were requisitioned from the storeroom. How much will be reported on Value Wood’s balance sheet for Raw Materials at the end of July? A. $40,000 B. $5,000 C. $30,000 D. $335,000

2-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

80.

Occi-Predictions manufactures weather forecasting circuits for meteorologists machines and uses a job-order costing system. During June, Occi-Predictions accounts included the following balances and transactions:

$ 700 4,850 Manufacturing overhead cost applied 9,500 Marketing expenses 11,000 Sales 98,000 Raw Materials Inventory, beginning

Raw Materials Inventory, ending

Direct materials purchased $45,000 Direct labor cost incurred 16,400 Administrative expenses 13,000 Work in Process Inventory, beginning 7,800 Work in Process Inventory, ending 6,600

How much is cost of goods manufactured? A. $67,950 B. $58,540 C. $72,100 D. $66,750 81.

DynaMore applies overhead to each window cleaning job it provides to customers based on direct labor hours. Information concerning manufacturing overhead and labor for July follows: Estimated direct labor 5,000 hours @ $14.20 = $71,000 Direct labor incurred 5,100 hours @ $14.50 = $73,950 Estimated manufacturing overhead $269,800 Actual manufacturing overhead $281,400 How much is the predetermined overhead rate? A. $3.80 B. $3.65 C. $53.96 D. $52.90

82.

RedEx Shipping determined the rate to apply overhead based on direct labor hours would be $5.40, and based on machine hours would be $4.20. Job 664 used $26.00 of direct materials, 2.5 machine hours, and 4 hours of direct labor at a cost of $14 per hour. How much is the manufacturing cost of job 664 if RedEx Shipping applies overhead based on machine hours? A. $92.50 B. $10.50 C. $21.60 D. $103.60

83.

National Production Company applies manufacturing overhead based on direct labor cost. Information concerning manufacturing overhead and labor for August follows: Overhead cost Direct labor hours Direct labor cost

Estimated $174,000 5,800 $87,000

How much is the predetermined overhead rate? A. $2.00 B. $1.90 C. $30.00 D. $1.93

Actual $171,100 5,900 $89,975

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

2-17

84.

A form used to accumulate the cost of producing products is called a(n) A. job cost sheet. B. material requisition. C. time sheet. D. purchase order.

85.

Which of the following is true in a job-order costing system? A. Cost of goods sold will include the costs of all jobs that have been completed during the accounting period. B. Work in Process Inventory will include the cost of all jobs that are currently completed and ready to deliver to customers. C. Finished Goods Inventory will include the cost of all jobs that are completed but not yet shipped and sold. D. Raw Materials Inventory will include the cost of jobs that have been started but are not yet completed.

86.

An allocation base is A. a common activity that jobs share, which is used to spread the overhead costs among the various jobs. B. the total amount of overhead assigned to a job. C. used to estimate how many labor hours are needed to complete a job. D. used to determine the total cost of a job completed during the period.

87.

Direct labor hours are a good basis for applying overhead when A. most direct laborers are doing the same type of work and use about the same amount of low-level technology. B. the process is very capital intensive. C. labor is a very small part of total cost. D. some labor is manual and other labor uses very expensive equipment.

88.

Which of the following accounts is debited, when overhead is applied to jobs? A. Manufacturing Overhead B. Finished Goods Inventory C. Indirect Labor D. Work in Process Inventory

89.

When manufacturing overhead is applied to jobs, which of the following accounts is credited? A. Manufacturing Overhead B. Work in Process Inventory C. Accounts Payable D. Raw Materials Inventory

90.

When a job is sold, it is recorded with a A. debit to Work in Process Inventory and a credit to Finished Goods Inventory. B. debit to Finished Goods Inventory and a credit to Work in Process Inventory. C. debit to Cost of Goods Sold and a credit to Finished Goods Inventory. D. debit to Work in Process Inventory and a credit to Cost of Goods Sold.

2-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

91.

When a job is completed, the transaction is recorded with a A. debit to Work in Process Inventory and a credit to Cost of Goods Sold. B. debit to Finished Goods Inventory and a credit to Work in Process Inventory. C. debit to Cost of Goods Sold and a credit to Finished Goods Inventory. D. debit to Work in Process Inventory and a credit to Finished Goods Inventory.

92.

Which of the following is not a commonly used measure of activity for allocating overhead? A. Direct labor cost B. Machine hours C. Sales commissions D. Direct labor hours

93.

During the month of August, Ranson Productions applied overhead to jobs using an overhead rate of $0.60 per dollar of direct labor. Actual direct labor in August was 12,000 hours at $15.00 per hour, for a total of $180,000. Estimated overhead in August was $111,600. Actual overhead was composed of the following items: Indirect materials Indirect labor Utilities Depreciation Repair expense Total

$ 16,400 22,000 24,500 38,700 13,500 $115,100

How much overhead was applied during the year by Ranson Productions? A. $108,000 B. $115,100 C. $111,600 D. More information is needed to answer 94.

Which of the following is the most reasonable allocation base for a highly mechanized process? A. Direct labor hours B. Machine hours C. Direct materials cost D. The number of different materials used to produce the product

95.

To what should the allocation base used to apply overhead be most strongly associated? A. The cost of direct materials B. The cost of direct labor C. The estimated overhead cost D. The total product cost

96.

Predetermined overhead rates are calculated using A. actual overhead costs and actual levels of the allocation base. B. estimated overhead costs and estimated levels of the allocation base. C. actual overhead costs and estimated levels of the allocation base. D. estimated overhead costs and actual levels of the allocation base.

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97.

The calculation for the predetermined overhead rate is A. estimated overhead cost times the estimated level of the allocation base. B. estimated overhead cost divided by the estimated level of the allocation base. C. estimated level of the allocation base divided by the estimated overhead cost. D. estimated overhead cost minus the actual overhead cost.

98.

For which period of time, the predetermined overhead rate is generally set in advance? A. A day, because costs can change on a daily basis B. A week, because labor costs differ from week to week C. A month, because job-order cost sheets are generated each month D. A year, because of the need for the overhead rate to stay the same from month to month

99.

Wilson Company applies overhead using machine hours as the allocation base, at a rate of $15 per machine hour. Job 44 requires $320 worth of material, 11 hours of labor at $16 per hour and 9 machine hours. What is the cost of job 44? A. $496 B. $135 C. $661 D. $631

100.

Savannah Factory applies manufacturing overhead based on direct labor cost. Information concerning manufacturing overhead and labor for August follows:

Overhead cost Direct labor hours Direct labor cost

Estimated $174,000 5,800 $87,000

Actual $171,100 5,900 $89,975

How much overhead should be applied in total during August? A. $179,950 B. $174,000 C. $177,000 D. $171,100 101.

Walsam Tools applies manufacturing overhead based on direct labor hours. Information concerning manufacturing overhead and labor for August follows:

Overhead cost Direct labor hours Direct labor cost

Estimated $160,000 8,000 $120,000

Actual $161,000 8,200 $115,800

How much is the predetermined overhead rate? A. $1.33 B. $20.00 C. $1.03 D. $19.63

2-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

102.

If Duffy Company budgets total overhead costs for the next year of $40,000 and anticipates using machine hours as the overhead allocation base, which of the following statements is true? A. If Duffy Company expects to use 60,000 machine hours, the predetermined overhead rate is $1.50 per machine hour. B. If Duffy Company expects to use 160,000 machine hours, the predetermined overhead rate is $4.00 per machine hour. C. If Duffy Company expects to use 80,000 machine hours, the predetermined overhead rate is $0.50 per machine hour. D. None of these answer choices are true

103.

Builder Giant estimates the following overhead costs for 2017: Equipment depreciation Equipment maintenance Factory management salaries Factory rent Total manufacturing overhead

$ 30,000 64,000 150,000 50,000 $294,000

Builder Giant incurred the following costs for 2017 for job A56: Direct material $40,000 Direct labor $12,800 Other jobs incurred $183,200 of direct labor. Builder Giant also budgeted $210,000 in direct labor costs and 20,000 machine hours for 2017. Actual manufacturing overhead for 2017 was $336,000. How much is the predetermined overhead rate using direct labor cost as the allocation base? A. $14.70 B. $1.60 C. $1.50 D. $1.40 104.

Wunder Builders estimates the following overhead costs for 2017: Equipment depreciation $ 30,000 Equipment maintenance 64,000 Factory management salaries 150,000 Factory rent 50,000 Total manufacturing overhead $294,000 Wunder Builders incurred the following costs for 2017 for job 23: Direct material $80,000 Direct labor $60,000 Wunder applies manufacturing overhead based on direct labor cost. Other jobs incurred $320,000 of direct labor. Wunder Builders budgeted $350,000 in direct labor costs and 20,000 machine hours for 2017. Actual manufacturing overhead for 2017 was $300,000. How much overhead will Wunder Builders apply to job 23? A. $168,800 B. $294,000 C. $58,800 D. $50,400

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

105.

2-21

Sharp Tables produces go carts designed to a customer’s specification with the customer’s logo. Job 65 consists of producing 40 carts for Race Around for a new store opening. Overhead is applied on the basis of direct labor hours using a predetermined overhead rate of $18 per hour. Job 65 incurred the following amounts: Direct materials Direct labor

$2,200 28 hours at $15 per hour

How much is the cost of Job 65? A. $2,620 B. $3,124 C. $2,704 D. $604 106.

Mudd Shoe Company has expected overhead costs of $864,000. The majority of the overhead costs are incurred providing production support to the direct labor force. Direct labor rates vary from $12 to $21 per hour, and more complex tasks are assigned to more skilled workers who have higher pay rates. Management projects direct labor costs to be $540,000 with 39,273 direct labor hours. More complex tasks require proportionally more support than do the less complex tasks. Each model/size of shoe is produced in a separate production batch and constitutes a job. Mudd allocates overhead based on direct labor hours. During the year, the company produced 6,600 pairs of the size 8 Beachcomber shoes. A total of 4,200 direct labor hours, costing $54,600, were assigned to the job. How much overhead will be assigned to the size 8 Beachcomber shoes? A. $92,400 B. $87,360 C. $10,560 D. $57,750

107.

Mudd Shoe Company has expected overhead costs of $864,000. The majority of the overhead costs are incurred providing production support to the direct labor force. Direct labor rates vary from $12 to $21 per hour, and more complex tasks are assigned to more skilled workers who have higher pay rates. Management projects direct labor costs to be $540,000 with 39,273 direct labor hours. More complex tasks require proportionally more support than do the less complex tasks. Each model/size of shoe is produced in a separate production batch and constitutes a job. Mudd allocates overhead based on direct labor cost. During the year, the company produced 6,600 pairs of the size 8 Beachcomber shoes. A total of 4,200 direct labor hours, costing $54,600, were assigned to the job. How much overhead will be assigned to the size 8 Beachcomber shoes? A. $92,400 B. $90,560 C. $87,360 D. $57,750

2-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

108.

Haskell Construction began the month of July with jobs 60 and 63 completed and waiting to be shipped to customers. At the end of June, jobs 61, 64, and 65 were in production. During July, jobs 66, 67, 68, 69 and 70 were begun. The company completed Jobs 61, 65, 66, 68, and 69 during July. Jobs 60, 61, 63, 66, and 68 were shipped to customers during July. Which jobs are in Work in Process on July 31? A. 61, 65, 66, 68, and 69 B. 64, 67, and 70 C. 67 and 70 D. 65 and 69

109.

Reef Shoe Company has expected overhead costs of $864,000. The majority of the overhead costs are incurred providing production support to the direct labor force. Direct labor rates vary from $12 to $21 per hour, and more complex tasks are assigned to more skilled workers who have higher pay rates. Management projects direct labor costs to be $540,000 with 39,273 direct labor hours. More complex tasks require proportionally more support than do the less complex tasks. Each model/size of shoe is produced in a separate production batch and constitutes a job. During the year, the company produced 6,600 pairs of the size 8 Beachcomber flip flop. A total of 4,200 direct labor hours, costing $54,600, were assigned to the job. Which method of assigning overhead should management prefer? A. Direct labor cost is the preferred allocation base because workers paid a higher rate work on more complex jobs, and more complex jobs lead to more overhead cost. B. Direct labor hours is the preferred allocation base because workers paid a higher rate work on more complex jobs, and more complex jobs lead to more overhead cost. C. Direct labor cost is the preferred allocation base because it is not possible to track hours during which workers spend on each type of shoe produced. D. Direct labor hours is the preferred allocation base because the number of hours incurred for each model of shoe is the same for each worker, regardless of the rate of pay each worker earns.

110.

Haskell Construction began the month of July with jobs 60 and 63 completed and waiting to be shipped to customers. At the end of June, jobs 61, 64, and 65 were in production. During July, jobs 66, 67, 68, 69 and 70 were begun. The company completed Jobs 61, 65, 66, 68, and 69 during July. Jobs 60, 61, 63, 66, and 68 were shipped to customers during July. Which jobs are in Finished Goods Inventory on July 31? A. 64, 67, and 70 B. 60, 65, and 69 C. 65 and 69 D. 60, 63, 65, and 69

111.

During 2017, Anhover Wedding Planners applied overhead using a job-order costing system at a rate of $3.25 per direct labor hour. Estimated direct labor hours totaled 220,000 and estimated overhead was $715,000 for the year. Actual direct labor hours for 2017 totaled 215,000 and actual overhead was $702,000. What is the amount of under or overapplied overhead as of the end of 2017? A. $13,000 overapplied B. $13,000 underapplied C. $16,250 underapplied D. $3,250 underapplied

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

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112.

Lansing Productions estimated it would use $360 of materials and take 20 hours at $14.50 per hour to complete job 456. It calculated a predetermined overhead rate of $9.00 per direct labor hour. Job 456 required $380 of material and took employees a total of 19.25 hours at a cost of $15.20 per hour to complete the job. Actual manufacturing overhead costs totaled $223,000 for the year for the company. How much is the cost of Job 456? A. $173.25 B. $553.25 C. $845.85 D. $823.25

113.

Osprey Production uses job-order costing for batches of customer printed t-shirts. For job R45, the company incurred the following costs: Direct materials used Direct labor Applied overhead

$4,235 $1,300 $450

Actual overhead for Osprey for the month totaled $24,840, based on a total of 2,300 shirts for the month. If Job R45 consisted of 570 shirts, how much is the cost per shirt for this job? A. $10.80 B. $14.95 C. $10.50 D. $15.25 114.

Alex Constructors uses job-order costing for production of custom playground sets. The company incurred the following costs during March: Direct materials used Direct labor Applied overhead Actual overhead

$22,000 $14,000 $18,000 $20,000

If Alex Constructors closes out any under or overapplied overhead directly to cost of goods sold, which entry will the company make to eliminate the over or underapplied amount in March? A. Cost of Goods Sold 2,000 Work in Process Inventory 2,000 B.

Manufacturing Overhead Work in Process Inventory

2,000

Manufacturing Overhead Cost of Goods Sold

2,000

Cost of Goods Sold Manufacturing Overhead

2,000

2-24

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

115.

Assume that managers are rewarded for reducing product costs as calculated by the accounting system. In keeping with the theme that "you get what you measure,” if a company switches its overhead application basis from direct labor hours to machine hours, what would you expect to happen? A. Machine hours will increase B. Machine hours will decrease C. Total costs will increase D. Output will reduce

116.

Why is overhead applied using a predetermined overhead rate? A. The actual amount of overhead is not determined until yearend and the company desires timely cost information. B. Actual manufacturing overhead costs are often larger than expected. C. It allows a company to overcost and undercost specific jobs as desired. D. It helps to reduce the overhead cost for the company.

117.

Brothers Construction uses a predetermined overhead rate of $6.00 per direct labor hour. Budgeted overhead was $720,000 and actual overhead incurred was $700,000. Actual direct labor hours worked were 125,000 hours. How many labor hours did Brothers plan to work during the year? A. 120,000 hours B. 116,667 hours C. 20,833 hours D. Cannot be determined from the information given

118.

Ansley Products applies overhead using a predetermined overhead rate. Overhead is applied based on direct labor hours. At the beginning of the year, it is estimated that $500,000 in overhead will be incurred and 25,000 hours will be worked. At year-end, the company had used 24,000 hours of labor, and actual overhead costs were $470,000. What can be concluded from this? A. Cost control was good. B. Overhead is overapplied by $10,000. C. Overhead is underapplied by $10,000. D. Overhead is applied at a rate of $19.58 per hour

119.

If the amount of underapplied overhead or overapplied overhead is small in amount, the Manufacturing Overhead account is closed to A. Raw Materials Inventory. B. Work in Process Inventory. C. Finished Goods Inventory. D. Cost of Goods Sold.

120.

Stalk Products has $27,000 of underapplied overhead at the end of the year. Management has asked you what the impact on income will be if you prorate the underapplied overhead to the appropriate accounts. What will you tell them? A. Income will be higher if the underapplied overhead is prorated than if it is closed to Cost of Goods Sold. B. Income will be lower if the underapplied overhead is prorated than if it is closed to Cost of Goods Sold. C. Income will be the same regardless of which method is used. D. The answer depends on the reason that the underapplied exists.

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121.

If the amount of underapplied overhead is large in amount, it is A. closed to Finished Goods. B. apportioned between Raw Materials, Finished Goods, and Work in Process Inventory. C. apportioned among Work in Process, Finished Goods, and Cost of Goods Sold. D. closed to Cost of Goods Sold.

122.

What is the impact of disposing any overapplied overhead between the appropriate accounts, if the amount is material? A. It will increase cost of goods sold, decrease income, and reduce inventory. B. It will reduce cost of goods sold, increase income, and increase inventory. C. It will reduce cost of goods sold, increase income, and reduce inventory. D. It will increase cost of goods sold, decrease income and increase inventory.

123.

Factory Containers allocates overhead based on machine hours. Estimated overhead costs for the year total $68,000 and the company estimates that it will use 16,000 machine hours during the year. Actual overhead for the year was $62,250 and the company used 15,000 machine hours. If Job J33 requires 420 machine hours, how much overhead will be allocated to Job J33? A. $1,743 B. $1,904 C. $1,634 D. $1,785

124.

King Manufacturing estimated manufacturing overhead costs to be $248,000 for the year, incurred manufacturing overhead costs of $251,000, and applied overhead to jobs in the amount of $253,000. How much is the amount of overapplied or underapplied overhead? A. $2,000 overapplied B. $5,000 overapplied C. $3,000 underapplied D. $2,000 underapplied

125.

Juarez, Inc. designs and manufactures custom cabinets. The company uses a job-order costing system, and the allocates overhead at $18 per direct labor hour. Over or underapplied overhead is not material. During May, Juarez’s transactions included the following: Direct labor cost incurred at $15 an hour Manufacturing overhead cost incurred Direct materials purchased Raw materials inventory, beginning Raw materials inventory, ending Sales Selling expenses Work in process inventory, beginning Work in process inventory, ending

$5,400 6,800 11,500 160 280 23,000 2,100 220 250

How much is over or underapplied overhead for May? A. $320 underapplied B. $1,400 overapplied C. $6,800 underapplied D. More information is needed

2-26

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

126.

Sandross, Inc. applies overhead based on direct labor cost using a job-order costing system. The company estimated the following annual amounts: Estimated manufacturing overhead $42,000 Estimated direct labor 1,600 hours at $15 per hour Actual amounts for the year were: Actual manufacturing overhead $44,000 Actual direct labor 1,550 hours at $16 per hour How much is over or underapplied overhead? A. $600 underapplied B. $2,000 underapplied C. $3,313 underapplied D. $1,419 underapplied

127.

Elm Street Company incurred $440,000 direct labor costs this year. Manufacturing overhead was applied at a predetermined rate of $5.50 per direct labor hour. The average hourly wage rate was $16 per hour. If actual overhead incurred was $160,000, what was the amount of overapplied or underapplied overhead? A. $151,250 underapplied B. $8,750 underapplied C. $27,500 overapplied D. $151,250 overapplied

128.

Rivertown Products applied overhead to jobs at a rate of $10.00 per direct labor hour. If the budgeted manufacturing overhead was $660,000 and the actual manufacturing overhead incurred was $630,000, how much under or over applied overhead did Rivertown have? A. $30,000 underapplied B. $30,000 overapplied C. $60,000 overapplied D. Information provided is not sufficient to derive the answer

129.

Harvard Binding had budgeted direct labor costs of $870,000 and budgeted manufacturing overhead of $304,500. It allocates manufacturing overhead based on direct labor costs. If actual direct labor costs were $840,000 and actual manufacturing overhead costs were $286,000, identify the true statement. A. The company applied more overhead than it incurred. B. The company estimated less overhead than it applied. C. The company incurred more overhead than it estimated. D. The company estimated less overhead than it incurred.

130.

Why is factory overhead ‘applied’ to products and jobs by manufacturing companies? A. Actual overhead costs can never be accurately determined for jobs. B. Managers prefer job costs to be exact in amount for budgeting purposes. C. It allows managers more timely determination of product costs during the manufacturing process. D. It provides a more accurate cost of the job or products being processed.

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131.

At the end of the period, the Manufacturing Overhead account had a $4,200 debit balance. The balances in the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold were $10,000, $20,000, and $70,000, respectively. Assuming that the balance in Manufacturing Overhead is considered material, which of the following is part of the journal entry to close the Manufacturing Overhead account at the end of the period? A. A $4,200 debit to Finished Goods Inventory. B. A $4,200 debit to Cost of Goods Sold. C. Debits to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold for $420, $840, and $2,940, respectively. D. Debits to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold for $1,400 each

132.

At the end of the period, the Manufacturing Overhead account had a $21,000 debit balance. The balances in the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold were $10,000, $20,000, and $70,000, respectively. Assuming that the balance in Manufacturing Overhead is considered immaterial, which of the following is a part of the journal entry to close the Manufacturing Overhead account at the end of the period? A. A $21,000 debit to Cost of Goods Sold. B. A $21,000 debit to Finished Goods Inventory. C. Debits to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold for $7,000 each. D. Debits to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold for $2,100, $4,200, and $14,700, respectively.

133.

At the end of the period, Massive Designs had the following debit balances in its accounts. Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturing Overhead

$ 20,000 40,000 60,000 400,000 8,000

Assuming the amount in Manufacturing Overhead is considered material, the entry to allocate Manufacturing Overhead will include a A. debit to Cost of Goods Sold for $6,400. B. debit to Cost of Goods Sold for $8,000. C. debit to Cost of Goods sold for $6,154. D. credit to Work in Process Inventory for $6,400. 134.

At the end of 2017, Harbin Toys had the following balances in its accounts Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturing Overhead (credit)

$ 12,000 30,000 48,000 360,000 3,200

Assuming the amount in Manufacturing Overhead is considered immaterial, which of the following accounts will be credited for $3,200 in eliminating the balance in the Manufacturing Overhead account? A. Raw Materials Inventory B. Work in Process Inventory C. Manufacturing Overhead D. Cost of Goods Sold

2-28

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

135.

Actual manufacturing overhead incurred during the year was $332,000 and manufacturing overhead applied to jobs was $336,000. Assuming the balance in the Manufacturing Overhead account is considered immaterial, the journal entry to close the Manufacturing Overhead account will include a $4,000 debit to A. Cost of Goods Sold. B. Work in Process Inventory. C. Manufacturing Overhead. D. Finished Goods.

136.

Overhead applied to jobs during the period was $180,000. Actual overhead costs incurred were $181,000. Budgeted overhead used to calculate the predetermined overhead rate was $184,000. Which of the following is a correct entry to close the Manufacturing Overhead account assuming the under or overapplied overhead is immaterial? A. Manufacturing Overhead 1,000 Cost of Goods Sold 1,000 B.

137.

Cost of Goods Sold Manufacturing Overhead

1,000

Manufacturing Overhead Cost of Goods Sold

3,000

Cost of Goods Sold Manufacturing Overhead

4,000

1,000

3,000

4,000

Hanover Fence produces custom wrought iron fencing. At the end of 2017, the account balances indicated the following: Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturing Overhead (credit balance)

$ 18,000 74,000 42,000 384,000 8,000

Hanover considers the balance of manufacturing overhead to be immaterial. How much will Hanover Fence report as Cost of Goods Sold on its income statement for the year ending December 31, 2017? A. $376,000 B. $392,000 C. $384,000 D. $382,000

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

138.

2-29

Walston’s Designs produces custom portable spas. At the end of its accounting period, the account balances indicated the following: Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturing Overhead (credit balance)

$ 22,000 38,000 62,000 300,000 9,000

Walston’s Designs considers the balance of manufacturing overhead to be material in amount. How much is the adjusted balance of Cost of Goods Sold to be reported by Walston on its income statement? A. $300,000 B. $293,250 C. $306,750 D. $294,313 139.

Raindrop Gear utilizes job-order costing for production of customized umbrellas. Each division establishes its own estimates regarding overhead, which are as follows:

Total estimated overhead Total estimated machine hours Total estimated direct labor costs

Division A $78,750 26,250 $262,500

Division B $240,000 15,000 $120,000

If Division A allocates overhead on the basis of direct labor costs, and Division B allocates overhead based on machine hours, what will be the predetermined overhead rate for each division?

A. B. C. D.

Division A $3.00 per direct labor dollar $3.00 per machine direct labor dollar $0.30 per machine direct labor dollar $0.30 per machine direct labor dollar

Division B $16.00 per machine hour $0.625 per machine hour $16.00 per machine hour $2.00 per machine hour

140.

Kamins Company uses a predetermined overhead rate of $6.00 per machine hour. Overhead was underapplied by $40,000 for the year, and actual machine hours totaled 70,000. How much was the actual overhead cost? A. $460,000 B. $380,000 C. $420,000 D. $360,000

141.

Templeton Widgets applies manufacturing overhead based on direct labor hours. It budgeted 123,000 direct labor hours at $11.50 per labor hour and incurred 125,000 direct labor hours at an actual total labor cost of $1,500,000. It incurred $720,000 of manufacturing overhead and estimated the manufacturing overhead cost to be $707,250 for the period. What was the predetermined overhead rate? A. $0.50 B. $5.75 C. $0.48 D. $5.76

2-30

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

142.

The balances in Dellco Company’s accounts at the end of the period were: Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturing Overhead (credit balance)

$ 40,000 60,000 300,000 12,000

If the balance in the Manufacturing Overhead account is considered immaterial, which of the following represents the amounts that should be adjusted to the Work in Process Inventory account? A. $0 B. Debit of $12,000 C. Credit of $12,000 D. Credit of $9,000 143.

Which of these service-type companies typically do not assign overhead costs to jobs when using a job-order costing system? A. Consulting firms B. Hospitals C. Repair shops D. Law firms

144.

In which country were just-in-time (JIT) systems first used? A. England B. United States C. Japan D. Germany

145.

If a company has zero beginning inventory and zero ending inventory which of the following is true? A. Cost of goods sold will equal cost of goods manufactured. B. Cost of goods sold will be zero. C. Cost of goods manufactured will be zero. D. Inventory levels will fluctuate each period.

146.

To which of the following is the goal of minimizing raw materials and work in process inventories considered to be a key objective? A. ABC B. JIT C. TQM D. Computer-controlled manufacturing systems

147.

Which of the following is true concerning computer-controlled manufacturing systems? A. They require a company to use a just-in-time inventory system. B. They result in a decrease in direct labor costs. C. They increase the variable costs and decrease fixed costs. D. They require overhead to be allocated based on machine hours.

148.

Which of the following is another name for the total quality management program? A. Just-in-time B. Activity-based allocation C. Lean manufacturing D. Continuous quality improvement

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149.

Which of the following is not a component of a total quality management (TQM) program? A. Making products right the first time, which reduces rework and scrap costs B. Listening to the customers’ needs C. Encouraging workers to continuously improve the production process D. Reducing inventories to very small, or non-existent levels

150.

What occurs when state of the art equipment is installed as part of incorporating a computercontrolled manufacturing system? A. Labor costs generally decrease. B. Direct labor becomes a good allocation base. C. Fixed costs will generally decrease. D. All of these choices are correct

Answers to Multiple Choice 30 B 55 A 31 B 56 C 32 B 57 D 33 A 58 A 34 A 59 C 35 D 60 A 36 A 61 A 37 B 62 D 38 D 63 C 39 C 64 B 40 D 65 D 41 A 66 A 42 A 67 A 43 D 68 C 44 A 69 B 45 C 70 C 46 B 71 B 47 A 72 A 48 D 73 B 49 A 74 C 50 C 75 D 51 A 76 B 52 D 77 A 53 D 78 D 54 A 79 A

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104

A C A A A C A A D A C B C A B C B B D D A B C D D

105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129

B A C B A C D C C D B A A B D A C C D A A A B D A

130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150

C C A A D C B A B C A B A C C A B B D D A

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MATCHING 151.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once.

______ 1. activity-based costing

______ 9.

overapplied overhead

______ 2. cost of goods available for sale ______ 10.

period costs

______ 3. cost of goods manufactured

______ 11.

process costing system

______ 4. direct materials

______ 12.

product costs

______ 5. job-order costing system

______ 13.

total quality management

______ 6. just-in-time system

______ 14.

underapplied overhead

______ 7. indirect materials

______ 15.

work in process

______ 8. manufacturing overhead

A. B. C. D. E. F. G. H. I. J. K. L. M. N. O. P.

16.

predetermined overhead rate

Method of assigning overhead costs that uses multiple allocation bases System that uses a job cost sheet to collect costs for each individual job Cost of all materials that are directly traced to the items produced Beginning balance in the Finished Goods Inventory plus cost of goods manufactured Overhead applied to products is greater than the actual overhead costs incurred Used by companies that produce large quantities of identical items Cost of all manufacturing activities other than direct material and direct labor Inventory account that contains the cost of goods that are only partially completed Program that encourages workers to constantly improve their production processes Amount determined at the beginning of the period to be used to apply overhead to production Costs assigned to the goods produced; also known as manufacturing costs Materials costs that are not traced directly to products produced System that seeks to minimize Raw Materials Inventory and Work in Process Inventory Cost of items that are completed and transferred from Work in Process Inventory to Finished Goods Inventory Costs that are identified with accounting periods rather than with goods produced Actual overhead is greater than overhead that has been applied to products

Answers to Matching 1. A 5. 2. D 6. 3. N 7. 4. C 8.

B M L G

9. 10. 11. 12.

E O F K

13. 14. 15. 16.

I P H J

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

2-33

EXERCISES 152.

The following information is available for Lansing Closets for the fiscal year ending December 31, 2017. Beginning balance in Finished Goods $ 12,000 Ending balance in Finished Goods 10,200 Beginning balance in Work in Process 15,500 Ending balance in Work in Process 17,200 Selling expenses 102,000 General and administrative expenses 67,000 Direct material cost incurred 54,000 Direct labor cost 71,000 Manufacturing overhead applied 36,300 Sales 367,000 Prepare a schedule of cost of goods manufactured for 2017.

Answer Lansing Closets Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2017 Beginning balance in work in process Add current manufacturing costs: Direct material Direct labor Manufacturing overhead Total Less ending balance in work in process Cost of goods manufactured

153.

$ 15,500 $54,000 71,000 36,300

161,300 176,800 17,200 $159,600

2-34

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answer Lansing Closets Income Statement For the Year Ended December 31, 2017 Sales Less cost of goods sold: Beginning finished goods Add cost of goods manufactured* Cost of goods available for sale Less ending finished goods Gross profit Less nonmanufacturing expenses: Selling expenses General & admin. expenses Net income

$367,000 $ 12,000 159,600 171,600 10,200

102,000 67,000

161,400 205,600

169,000 $ 36,600

*$15,500 + $54,000 + $71,000 + $36,300 ‒ $17,200 = $159,600

154.

For the list of product manufacturers below, indicate whether a job-cost system (J) or a process cost system (P) would be most appropriate. ______ a. ______ b. ______ c. ______ d. ______ e. ______ f.

Answer a. b. c.

P P J

d. e. f.

Jelly bean producer Cereal producer Custom kitchen cabinet builder Oil refinery Paint manufacturer Accounting firm

P P J

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

155.

IT Consulting had the following labor time tickets for the month of March: Ticket # Employee #Hourly Pay Rate Hours Worked Job # 456 16 $10.00 32 201 457 19 21.00 30 202 458 8 14.00 21 202 459 11 20.00 28 204 a. b.

Answer a.

Calculate the amount of direct labor cost assigned to job 202. Prepare a journal entry to record direct labor for March for IT Consulting. 30 hrs.  $21/hour 21 hrs.  $14/hour Total

$630 294 $924

b. Ticket # 456 457 458 459

Employee # Hourly Pay Rate Hours Worked Total Labor Cost 16 $10.00 32 $ 320 19 21.00 30 630 8 14.00 21 294 11 20.00 28 560 Total cost $1,804

Work in Process Wages Payable 156.

1,804 1,804

Crystal Catering had three jobs in process as of January 1, 2017: Job 47 $2,500 Job 49 1,600 Job 50 3,600 In addition, Job 48 was completed and awaiting shipment on January 1, 2017. Its cost was $5,600. During 2017, the company incurred the following costs: Direct material $ 135,000 Direct labor 120,000 Manufacturing overhead 110,000 At the end of 2017, two jobs were in process with costs incurred as of December 31, 2017: Job 56 $5,200 Job 58 1,500 In addition, two jobs were completed and awaiting shipment at the end of 2017 with costs incurred as of December 31, 2017: Job 55 $1,300 Job 59 3,300 Calculate the following amounts: 1. Beginning Work in Process 2. Ending Work in Process 3. Beginning Finished Goods 4. Ending Finished Goods 5. Cost of Goods Sold

2-35

2-36

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answer 1. 2. 3. 4. 5.

$2,500 + $1,600 + $3,600 = $7,700 $5,200 + $1,500 = $6,700 $5,600 $1,300 + $3,300 = $4,600 $367,000 computed as: Beginning balance in work in process Add current manufacturing costs: Direct material Direct labor Manufacturing overhead Total Less ending balance in work in process Cost of goods manufactured

$ 7,700 $ 135,000 120,000 110,000

Beginning finished goods Add cost of goods manufactured Cost of goods available for sale Less ending finished goods Cost of goods sold 157.

365,000 372,700 6,700 $366,000

5,600 366,000 371,600 4,600 $367,000

Special Installations allocates overhead based on a predetermined overhead rate of $5.00 per direct labor hour. Job 25 required 5 tons of direct material at a cost of $400.00 per ton and took employees who earn $12.00 per hour a total of 65 hours to complete. What is the total cost of Job 25?

Answer Direct materials Direct labor Manufacturing overhead Total cost of job 25 158.

5 tons @ $400 65 hours @ $12 65 hours @ $5

$ 2,000 780 325 $ 3,105

Frinut Company estimates the following overhead costs for the coming year: Equipment depreciation Equipment maintenance Supervisory salaries Factory rent Total

$250,000 50,000 20,000 100,000 $420,000

Frinut budgeted $600,000 in direct labor costs and 14,000 machine hours for the coming year. a. Calculate the predetermined overhead rate using direct labor costs as the allocation base. b. Calculate the predetermined overhead rate using machine hours as the allocation base. c. Which of the allocation bases is preferred and why? Answer a. b. c.

$420,000 / $600,000 = $ 0.70 per direct labor dollar $420,000 / 14,000 machine hours = $30.00 per machine hour Since most of the overhead costs are related to equipment as can be seen from the large amount of depreciation expense, machine hours is the preferred allocation base.

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

159.

Barnett Brass allocates overhead based on machine hours. Estimated overhead costs for the year total $420,000 and the company estimates that it will use 42,000 machine hours during the year. Barnett Brass used 41,600 machine hours during the year and incurred $424,320 of overhead. a. b. c. d.

Answer a. b. c. d.

160.

What is the overhead application rate for the year? What is the amount of applied overhead for the year? What is the amount of under or overapplied overhead for the year? Label as over or underapplied. Why does the result you obtained in part c above differ from the actual overhead cost?

$420,000 ÷ 42,000 = $10.00 per machine hour $10.00 × 41,600 = $416,000 $424,320 ‒ $416,000 = $8,320 underapplied Actual overhead was more than expected, but not proportionately so, since part of the overhead is probably fixed.

Ponder Plumbing uses job-order costing for each of its installations and repairs. Overhead is allocated based on the cost of plumber wages. At the start of the year, annual plumber wages were estimated to be $275,000 based on 17,600 labor hours, and company overhead was estimated to be $440,000. a. Briefly state why the use of a predetermined overhead rate would be preferred to assigning actual overhead to repair jobs. b. Suppose a job required parts costing $180 and plumber time costing $1,800. How much will be the total cost of the job?

Answer a.

161.

2-37

If a company used actual overhead costs, the amount of incurred job costs would not be available until the end of the accounting period. If the company charges customers based on actual job cost, it would be unacceptable to wait until the end of the accounting period to bill customers. Overhead rate: $440,000 ÷ $275,000 = $1.60 per dollar of plumber wages Total job cost = $180 + $1,800 + ($1,800  1.6) = $4,860

Rooftop Solar estimated the following annual costs: Expected annual direct labor hours Expected annual direct labor cost Expected machine hours Expected material cost for the year Expected manufacturing overhead

12,000 $198,000 10,400 $65,000 $218,400

Job 612 used $350 of direct materials, 26 direct labor hours, and 14 machine hours. Actual labor cost is $17 per hour. a. b.

If Rooftop Solar allocates overhead based upon machine hours, how much is the overhead rate? Determine the cost of job 612.

2-38

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answer

a. b.

162.

$218,400 ÷ 10,400 MH = $21 per machine hour Direct materials $ 350 Direct labor ($17 × 26) 442 Manufacturing overhead ($21 × 14) 294 Total $1,086

During the month of August, Pamator Products applied overhead to jobs using an overhead rate of $0.60 per dollar of direct labor. Direct labor in August was $108,000. Actual overhead in August was $65,200, and consisted of the following items: Indirect materials Indirect labor Utilities Depreciation Repair expense Total a. b.

Answer a.

163.

$28,400 7,900 2,400 13,500 13,000 $65,200

Prepare a journal entry to record overhead applied to jobs. Prepare a journal entry to record actual overhead. Overhead applied = $0.60  $108,000 of direct labor = $64,800 Work in Process Manufacturing Overhead

64,800

Manufacturing Overhead Raw Materials Wages Payable Utilities Payable Accumulated Depreciation Repair Expense (or Cash)

65,200

64,800

28,400 7,900 2,400 13,500 13,000

During the month of August, Winslow Chemicals applied overhead to jobs using an overhead rate of $0.80 per dollar of direct labor. Direct labor in August was $65,000. Actual overhead in August was $51,200. Actual overhead was composed of the following items: Indirect materials $ 21,200 Indirect labor 6,800 Utilities 1,400 Depreciation 12,500 Repair expense 9,300 Total $51,200 a. b. c.

Determine the balance in the Manufacturing Overhead account and prepare a journal entry to close the balance to cost of goods sold. Why is it important to close the balance in the Manufacturing Overhead account? What is the justification for assigning the balance in manufacturing overhead to Cost of Goods Sold rather than apportioning it to three accounts?

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

Answer a.

Overhead applied = $0.80 × $65,000 = $52,000 Overapplied = $52,000 ‒ $51,200 = $800 Manufacturing Overhead Cost of Goods Sold

b. c.

164.

2-39

800 800

Closing the balance in Manufacturing Overhead leads to product costs that are consistent with actual overhead costs rather than estimated overhead costs. If the amount of underapplied or overapplied overhead is small, income will not be significantly distorted even if the entire balance is assigned to Cost of Goods Sold.

At the end of the period, Harris Renovators had the following balances in selected accounts: Raw Materials Inventory Work in Process Inventory Finished Goods Cost of Goods Sold Manufacturing Overhead (debit balance) a. b.

Prepare the journal entry to close the Manufacturing Overhead account if the balance in the account is considered material. Prepare the journal entry assuming the balance is considered to be immaterial.

Answer a. Accounts Balance Work in Process $ 88,000 Finished Goods 64,000 Cost of Goods Sold 848,000 Total $1,000,000 Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturing Overhead b.

$ 42,000 88,000 64,000 848,000 21,000

Cost of Goods Sold Manufacturing Overhead

% 8.8% 6.4% 84.8%

Overapplied $21,000 21,000 21,000

Adjustment $ 1,848 1,344 17,808 $21,000

1,848 1,344 17,808 21,000 21,000 21,000

2-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

165.

Window Tinters uses a job-order costing system. The balances at the end of the period for the selected accounts are as follows: Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Manufacturing Overhead (debit)

$ 82,000 156,000 144,000 1,200,000 12,000

Prepare a journal entry to close the Manufacturing Overhead account assuming that the over or underapplied overhead is material. Answer Accounts Work in Process Finished Goods Cost of Goods Sold Total

Balance $ 156,000 144,000 1,200,000 $1,500,000

Work in Process Finished Goods Cost of Goods Sold Manufacturing Overhead

166.

% 10.4% 9.6% 80.0%

Underapplied $12,000 12,000 12,000

Adjustment $ 1,248 1,152 9,600 $12,000

1,248 1,152 9,600 12,000

Cisco Pool Service cleans and maintains residential pools and spas. At the beginning of the year, the company estimated that it would incur $480,000 of direct labor cost and $288,000 of manufacturing overhead. Overhead is allocated to production on the basis of direct labor cost. Actual supplies (direct materials) used during the year were $58,000, actual direct labor cost was $465,000, and actual overhead was $281,000. a. b. c. d. e.

Answer a. b. c. d.

Calculate the overhead rate for the current year. Prepare the journal entry to record use of direct materials. Prepare the journal entry to record direct labor. Prepare the journal entry to record manufacturing overhead applied to production. Prepare the journal entry to close the balance in manufacturing overhead to cost of goods sold assuming over or underapplied overhead is considered to be material in amount.

$288,000 ÷ $480,000 = $0.60 per direct labor dollar Work in Process Raw Materials Inventory

58,000

Work in Process Wages Payable

465,000

Work in Process Manufacturing Overhead ($0.60 × $465,000)

279,000

Cost of Goods Sold Manufacturing Overhead ($281,000 ‒ $279,000)

2,000

58,000 465,000 279,000

2,000

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

2-41

CHALLENGE EXERCISES 167.

Norris Decorators manufactures special order window coverings. During May, Norris’s transactions included the following:

Work in process inventory, May 1 Factory equipment depreciation exp. Work in process inventory, May 31 Raw materials purchased Raw materials inventory, May 1 Raw materials inventory, May 31 Finished goods inventory, May 1 a. b. Answer a. b.

168.

$ 160 2,800 240 11,500 160 280 700

Sales Selling expenses Factory supervision wages expense Indirect labor cost incurred Factory utilities expense Direct labor cost incurred Finished goods inventory, May 31

$23,000 2,100 2,300 400 900 5,400 950

How much is the cost of direct materials issued to production during May? Show the product cost amounts that would be reported on Norris’ balance sheet as of May 31, and describe the nature of each amount. $160 + $11,500 ‒ $280 = $11,380 Raw materials $ 280 Work in process 240 Finished goods 950 Total product costs $1,470 Raw Materials Inventory includes the cost of materials on hand that are used to produce a company’s products. No work has been initiated on these items. Work in Process represents the cost of goods that are partially complete and includes direct material, direct labor, and manufacturing overhead. The Finished Goods Inventory represents the cost of all items that are complete and ready to sell.

Howard Manufacturing applies manufacturing overhead to production at a rate of $3 per direct labor hour. The following information is provided for the month of March in 2017: Direct materials used in production Direct labor Product delivery costs (shipping to customers) Factory janitor salary Manufacturing overhead applied Direct materials purchased Indirect labor Depreciation on factory building Factory rental expense Indirect materials Sales commissions Administrative expenses a. b. c.

$86,000 57,000 13,000 31,000 94,100 89,400 10,000 32,000 21,000 2,600 20,000 54,000

List the account names of all period costs. How does the identification of product costs differ from period costs? How much is the actual manufacturing overhead for March? Why is it necessary to allocate manufacturing overhead costs to products when it is not necessary to allocate other product costs?

2-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answer a.

169.

The period costs are: product delivery costs, sales commissions, and administrative expenses. Product costs are those costs assigned to goods produced and include direct material, direct labor, and manufacturing overhead, i.e., all costs necessary to get the inventory ready to sell. Period costs include all costs that are not product costs and are identified with accounting periods rather than goods produced.

$31,000 + $10,000 + $32,000 + $21,000 + $2,600 = $96,600

Manufacturing overhead costs are not directly associated with specific goods produced. Managers need to know the amount of product costs are during the production process so they can make more timely decisions. Failure to allocate costs during the production process may cause managers to set selling prices at less than the total product cost, thereby producing operating losses.

Ryder Electric applies overhead based upon machine hours. Budgeted factory overhead was $266,700 and budgeted machine hours were 19,050 for 2017. Actual machine hours totaled 18,700. The company treats under or overapplied overhead as immaterial in amount. Actual manufacturing overhead was $265,400 for the year. Before disposition of the under- or overapplied overhead, Cost of Goods sold was $415,000. Other account balances are: Raw materials $40,000 Work in process 35,000 Finished goods 50,000 a.

b. c.

Answer a.

Determine the amount of any over or underapplied overhead at the end of 2017 by posting the respective amounts to the T-account in which these amounts will be accumulated. Calculate the account balance and label as over- or underapplied. How much Cost of Goods sold will be reported on Ryder’s income statement for 2017? Explain the nature of underapplied overhead and overapplied overhead as it relates to both actual and estimated overhead.

Overhead rate = $266,700 ÷ 19,050 = $14.00 per machine hour Overhead applied = $14.00 × 18,700 machine hours = $261,800 Manufacturing Overhead 265,400 261,800 Underapplied 3,600

b. c.

Adjusted CGS balance = $415,000 + $3,600 = $418,600 Underapplied overhead means that more manufacturing overhead costs were incurred than the amount of overhead that was allocated to production during the period. Overapplied overhead means that less manufacturing overhead costs were incurred than the amount of overhead that was allocated to production during the year. Estimated overhead is a budgeted amount and is not recorded in the accounting records. It is a budgeted amount used to determine the overhead rate. Actual overhead is the cost incurred for overhead costs related to production.

Chapter 2 Job-Order Costing for Manufacturing and Service Companies

2-43

SHORT-ANSWER ESSAYS 170.

Manufacturing costs are added to the Work in Process Inventory account as goods are manufactured. List and briefly describe the three categories of manufacturing costs.

Answer The three categories of manufacturing costs are as follows: • Direct materials: those materials and parts that are directly traced to the items produced • Direct labor: the labor costs for those workers who are directly involved in the manufacturing process • Manufacturing overhead: the cost of all manufacturing activities other than direct material and direct labor. This includes indirect materials, indirect labor, depreciation of factory equipment, utilities, and insurance on the manufacturing facility, among other items.

171.

Costs can be classified as product costs or period costs. Define the term “product cost” and give at least two examples of costs that are considered product costs.

Answer Product costs are also known as manufacturing costs and are those costs assigned to goods produced. These costs are an asset until the finished goods are sold, at which time these costs are expensed. Direct material, direct labor, and all the costs that are part of manufacturing overhead are product costs.

172.

Define the term “period cost” and give at least two examples of costs that are considered period costs. Identify the timing of when period costs are recognized as expenses.

Answer Period costs are identified with accounting periods rather than goods produced. Selling expenses and general and administrative expenses such as the CEO’s salary are period costs. They are recognized as expenses in the periods they are incurred.

173.

What is a job-order costing system? What type of company would be most likely to use a joborder costing system?

Answer A job-order costing system collects direct material, direct labor, and manufacturing overhead costs for specific, individual jobs. Job-order costing is used by construction companies, shipbuilding companies, services companies, and any company that manufactures unique goods or provides services to a customer’s specifications.

174.

Why is a predetermined overhead rate preferred to an actual rate?

Answer The predetermined overhead rate allows a company to cost products and jobs before the end of the period, thereby allowing for more timely decision making. It also allows a company to use the overhead rate for bidding on additional contracts or jobs.

2-44

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

175.

Discuss the use of job-order costing by service companies. Give at least two examples of service companies that use job-order costing. How does the amount of each type of ‘product’ cost differ for service companies compared to typical manufacturing companies?

Answer A service company that collects costs for each “job” uses job-order costing. Each patient in a hospital or health-care facility or a client of an accounting, legal, or consulting firm is considered a ‘job’ for which the costs of each job are accumulated. Service companies typically have little or no material costs, and significantly more overhead costs than companies that manufacture products.

176.

Many companies are going to computer-controlled manufacturing systems. Identify what effect this has on a company’s total fixed and total variable costs and on product costs as a whole.

Answer Acquiring manufacturing equipment increases fixed costs because additional depreciation costs must be recognized on new machinery. Typically, the new machinery reduces labor costs because the machines are able to do the work that humans had performed in the past. This reduces a company’s total variable costs. As a result of more efficient production, a company’s overall product costs tend to decline.

177.

Briefly explain the concepts of JIT and TQM. Are these ideas mutually exclusive or a company can use both?

Answer A just-in-time system seeks to minimize the raw materials and work in process inventories by careful scheduling and the development of a smooth, flexible production system. A total quality management system encourages workers to reduce defects and continuously improve the production process. The two systems are not mutually exclusive, and companies may use some of the just-in-time tools in a TQM program.

178.

A company may choose from several possible bases when allocating overhead costs. How does the company decide which allocation basis it will use?

Answer A company should choose an allocation base that is strongly associated with the type of costs that make up manufacturing overhead. If most of the manufacturing overhead costs are related to equipment and facilities, machine hours is a reasonable allocation base. If the overhead costs are primarily labor-related, direct labor hours or direct labor costs are good choices for the allocation base.

CHAPTER 3 Process Costing Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

Item LO BT Item True-False Statements K 11. 1 C 16. K 12. 2 K 17. C 13. 2 C 18. K 14. 2 K 19. C 15. 2 C 20. Multiple Choice Questions K 70. 2 AP 92. AP 71. 2 AP 93. C 72. 2 AP 94. K 73. 2 AP 95. AP 74. 2 AP 96. K 75. 2 AP 97. AP 76. 2 AP 98. AP 77. 2 C 99. AP 78. 2 C 100. K 79. 2 C 101. C 80. 2 AP 102. K 81. 2 AP 103. K 82. 2 K 104. C 83. 2 C 105. AP 84. 2 C 106. AP 85. 2 AP 107. AP 86. 3 AP 108. AP 87. 3 K 109. AP 88. 3 K 110. AP 89. 3 K 111. AP 90. 3 C 112. AP 91. 3 C 113. Matching

1. 2. 3. 4. 5.

1 1 1 1 1

K K C C K

6. 7. 8. 9. 10.

1 1 1 1 1

26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2

K C C K K K K K K K K C K K K K C K K AP AP K

48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

133.

1,2,3

134. 135. 136. 137.

2 1 2 2

AP AP AP AP

138. 139. 140. 141.

2 2 2 2

AP AP AP AP

153.

2,3

154.

2,3

155. 156.

1 1

K K

157. 158.

1,2 3

C K

Item

2 2 2 2 2

K C C C C

21. 22. 23. 24. 25.

2 2 3 2 1

C AP K K K

3 3 3 2 3 3 2 1,2 3 3 2 2 2 2 2,3 2,3 2,3 2,3 2 2 2 2

K K AP AP K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132.

2 2 2 2 2 2 3 2 2 2,3 2 2 2 2,3 2 2,3 2 2 2

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

Exercises 142. 2,3 AP 146. 143 2,3 AP 147. 144. 2 AP 148. 145. 2 AP 149. Challenge Exercises

2 2 2 2

AP AP AP AP

150. 151. 152.

2,3 2,3 3

AP AP AP

Short-Answer Essays 159. 1 K 161. 160. 3 C

3-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

TRUE-FALSE STATEMENTS 1.

Process costing systems are commonly used by companies that produce homogeneous items using a continuous production process.

A company such as Proctor & Gamble that produces large quantities of identical items, such as shampoo and toothpaste, is likely to use a process costing system.

In a process costing system, costs are transferred from the Work in Process inventory account directly to the Cost of Goods Sold account.

In the manufacturing operations of a company using process costing, a product must typically pass through two or more departments.

Material is generally added evenly throughout the production process.

Materials and labor are often grouped together and called conversion costs.

Transferred-in costs are the costs of the direct materials that are transferred into the company when materials are purchased from a supplier.

In process costing, a transferred-in cost is handled in the same manner as a material cost added at the beginning of the process.

In a process costing system, each department has a separate Work in Process account.

10.

A significant disadvantage of a process costing system is that it requires the use of actual overhead costs rather than predetermined overhead rates.

11.

Recording transferred-in costs requires a debit to the Finished Goods inventory account and a credit to a Work in Process account.

12.

An essential calculation in a process costing system is to calculate the average unit cost, also known as the cost per equivalent unit.

13.

The number of equivalent units for materials is the same as the equivalent units for conversion costs in each department, but will often differ from equivalent units of other departments.

14.

The number of fully complete units of product that could have been produced with the materials used and processing costs in a particular accounting period is referred to as equivalent units.

15.

The number of equivalent units for conversion costs is always equal to or less than the number of equivalent units for materials.

16.

Materials are always added at the beginning of every process.

17.

In order to calculate the cost per equivalent unit, one must know the number of equivalent units in beginning inventory, ending inventory, units completed during the period, along with the total product costs incurred during the period.

18.

The cost per equivalent unit is determined by dividing the cost incurred in the current period by the total equivalent units produced.

Chapter 3 Process Costing

3-3

19.

The denominator in the formula for determining the cost per equivalent unit is determined by adding the number of units completed to the equivalent units in the ending Work in Process inventory.

20.

The cost transferred out is the cost of the inventory that was started and completed during the period.

21.

When computing the cost of the ending Work in Process Inventory, the number of equivalent units in Work in Process inventory is multiplied by the cost per equivalent unit separately for material, and separately for conversion costs.

22.

If beginning inventory consisted of 400 units, ending inventory was 600 units, and 7,700 units were started during the period, the number of units completed during the period was 8,700.

23.

Total cost accounted for is the sum of the cost of the units transferred out of the department plus the cost of the ending Work in Process inventory.

24.

The cost of the items completed and transferred out of a department is the total cost per equivalent unit times the number of units completed.

25.

The cost per equivalent unit used in process costing is the average of fixed and variable costs.

Answers to True-False 1 2 3 4 5

T T F T F

6 7 8 9 10

F F T T F

11 12 13 14 15

F T F T F

16 17 18 19 20

F F F T F

21 22 23 24 25

T F T T F

3-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MULTIPLE CHOICE 26.

Which one of the following is a costing system commonly used by companies that produce a large number of homogeneous units in a continuous production process? A. Unit costing system B. Job-order system C. Incremental analysis cost system D. Process costing system

27.

Which of the following companies will most likely use a process costing system? A. A law office B. A custom home builder C. A car repair business D. A food manufacturer

28.

In which of the following industries are companies least likely to use a process costing system? A. Canned vegetables B. Wooden pencils C. Shampoo D. Office cleaning services

29.

Which of the following describes the differences between job-order and process costing? A. Job-order costing is used in financial accounting, while process costing is used in managerial accounting. B. Job-order costing can only be used by manufacturers; only service enterprises use process costing. C. Job-order costing is voluntary, while process costing is required by GAAP. D. Job-order costing traces costs to jobs, while process costing traces costs to departments and averages the costs among the units worked on during the period.

30.

In a process costing system with three departments, when items are sold, the cost of the items is moved from A. Work in Process to Finished Goods. B. Work in Process to Cost of Goods Sold. C. Cost of Goods Sold to Finished Goods. D. Finished Goods to Cost of Goods Sold.

31.

In a process costing system, when raw materials are put into process, the cost of the materials is moved from A. Work in Process to Finished Goods. B. Finished Goods to Cost of Goods Sold. C. Raw Materials to Work in Process. D. Finished Goods to Work in Process.

32.

Which of the following costs is not a cost added to the Work in Process account in a process costing system? A. Manufacturing overhead B. Direct materials C. Direct labor D. Cost of goods sold

Chapter 3 Process Costing

3-5

33.

Which of the following sequences describes the typical flow of costs in a company that is using process costing? A. Raw Materials Inventory, Work in Process, Finished Goods, Cost of Goods Sold B. Work in Process, Finished Goods, Raw Materials Inventory, Cost of Goods Sold C. Raw Materials Inventory, Cost of Goods Sold, Work in Process, Finished Goods D. Finished Goods, Raw Materials Inventory, Work in Process, Cost of Goods Sold

34.

Which one of the following is true of the manufacturing operations of a company using process costing? A. A product typically must pass through two or more finished goods departments. B. Manufacturing overhead and direct labor costs are referred to as conversion costs. C. Transferred-in costs occur only in departments that have no direct labor costs. D. Costs transferred in must equal total costs transferred out of each work in process department.

35.

Conversion costs A. are often assumed to be added at the beginning of the production process in each department. B. are the sum of the direct materials and direct labor costs. C. are rarely a part of the cost transferred out of a process department. D. are often assumed to be added evenly throughout the process within a department.

36.

Labor and overhead are often grouped together and referred to as A. prime costs. B. conversion costs. C. total manufacturing costs. D. equivalent unit costs.

37.

Which of the following statements about process costing is true? A. Total transferred-in cost is equal to the total transferred-out cost during a period. B. The costs of inventory completed in its final department in the manufacturing process will be transferred to Finished Goods inventory. C. If a department has transferred-in costs, it means that the inventory accounts were not closed correctly at the end of the last period. D. None of the answer choices are correct.

38.

A cost incurred by the Baking Department that is transferred to the Packaging Department is called a A. conversion cost by the Baking Department. B. transferred-out cost by the Packaging Department. C. equivalent unit cost by the Baking Department. D. transferred-in cost by the Packaging Department.

39.

When direct labor costs are incurred in the Mixing Department, the journal entry to record the transaction includes a A. debit to Wages Payable. B. credit to Manufacturing Overhead. C. credit to Work in Process, Mixing Department. D. debit to Work in Process, Mixing Department.

3-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

40.

In a process costing system, manufacturing overhead is added to Work in Process A. using a predetermined overhead rate or based on actual overhead. B. only in the final production department. C. at the same rate as the direct materials are added. D. only when Work in Process is transferred to Finished Goods.

41.

Transferred-in costs are recorded with a journal entry that includes a credit to A. Raw Materials. B. Manufacturing Overhead. C. Work in Process. D. Finished Goods.

42.

Which of the following will never be a component of the cost of Work in Process in a company’s initial production department? A. Direct material B. Direct labor C. Transferred-in costs D. Manufacturing overhead

43.

How are equivalent units calculated in a process costing system? A. By adding the units started to the equivalent units in beginning and ending inventory B. By adding the units completed to the equivalent units in ending Work in Process C. By subtracting the equivalent units in beginning inventory from the total units to account for D. By adding the units started to the equivalent units in ending inventory

44.

In the calculation of the cost per equivalent unit, the denominator A. is the total work done during the period plus the equivalent units in ending inventory. B. includes both the number of units completed and the number of equivalent units in ending Work in Process. C. equals the work done during the period less the work remaining to finish ending inventory. D. is the work done for the current and preceding departments.

45.

The Baking Department began the period with 16,000 units which were 45% complete. During the period, the department received another 78,000 units from the previous department, and at the end of the period, 9,000 units remained which were 40% complete. Conversion costs are added evenly throughout the process and materials are added at the beginning of the process. How much are equivalent units for conversion costs in the Baking Department’s Work in Process inventory at the end of the period? A. 5,400 units B. 3,600 units C. 3,000 units D. 9,000 units

46.

The Shaping Department began June with 5,000 units which were 50% complete. During June, the department received another 60,000 units from the prior department and completed 62,000 units. The remaining units were 75% complete as to conversion costs. Materials are added at the beginning of the process. How much are equivalent units for conversion costs in the Shaping Department’s Work in Process inventory at the end of June? A. 3,000 units B. 5,250 units C. 2,250 units D. 1,250 units

Chapter 3 Process Costing

3-7

47.

When partially completed units are converted to a comparable number of completed units, they are referred to as A. conversion units. B. transferred-out units. C. equivalent units. D. units to be accounted for.

48.

Equivalent units A. are used in calculating actual physical units completed in a process costing system. B. are partially completed units that have been converted to a comparable number of completed units. C. represent the cost of producing one unit of product. D. All of these answer choices are correct.

49.

The Molding Department’s Work in Process inventory on May 1 consists of 1,400 units and its Work in Process inventory on May 31 consists of 1,100 units. If 22,000 units were completed during the period, how many units were started in the Molding Department during the month of May? A. 21,700 units B. 23,100 units C. 24,800 units D. 21,400 units

50.

Why may the number of equivalent units in Work in Process inventory differ for material and for conversion costs? A. A mistake was made in counting or recording the inventory amounts. B. Material and conversion costs enter the production process at different times and at different rates. C. Conversion costs are calculated at the end of the accounting period. D. Some units may have been transferred in from previous departments.

51.

The number of equivalent units for an input cannot exceed the A. units started. B. units completed. C. units to account for. D. total cost to account for.

52.

HTC Calculators uses process costing. At the beginning June, there were 1,100 units in process, 70% complete with respect to material and 60% complete with respect to conversion costs. During June, 24,000 units were started and 23,600 units were completed. The units in ending Work in Process inventory were 90% complete with respect to material and 30% complete with respect to conversion costs. How many equivalent units will be used in calculating the cost per unit for materials during June? A. 24,950 units B. 24,050 units C. 25,720 units D. 22,950 units

3-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

53.

The cost per equivalent unit calculation is A. the cost carried forward from beginning inventory plus the current production costs divided by equivalent units. B. based on the costs incurred in this period divided by the equivalent units. C. current period costs plus costs of beginning inventory multiplied by the equivalent units. D. the total of all transferred-in costs plus beginning inventory costs minus ending inventory costs, all divided by equivalent units.

54.

Hanover Glassware produces crystal serve ware and uses process costing. At the start of May, 2,300 units were in process. During May, 11,000 units were completed and 2,000 units were in process at the end of May. The units in process at the end of May were 80% complete with respect to material and 30% complete with respect to conversion costs. Other information is as follows: Work in process, May 1: Direct material Conversion costs Costs incurred during May: Direct material Conversion costs

$28,800 48,000 $198,000 242,000

How much is the cost per equivalent unit for direct materials during May? A. $18.00 B. $25.00 C. $15.71 D. $39.75 55.

Mash Company uses process costing. During March, its Varnishing Department incurred costs of $63,250 for conversion. The beginning inventory was 1,500 units and 9,700 units were transferred to the Varnishing Department from the Sanding Department during March. The Varnishing Department’s conversion costs in beginning inventory totaled $5,550. The ending inventory consisted of 1,200 units that were 25% complete with respect to conversion costs. Materials are added at the beginning of the process. What is the cost per equivalent unit for conversion costs during March? A. $6.14 B. $6.88 C. $5.42 D. $6.38

Chapter 3 Process Costing

56.

3-9

Hanover Glassware produces crystal serve ware and uses process costing. At the start of May, 2,300 units were in process. During May, 11,000 units were completed and 2,000 units were in process at the end of May. These units in process were 80% complete with respect to material and 30% complete with respect to conversion costs. Other information is as follows: Work in process, May 1: Direct material $28,800 Conversion costs 48,000 Costs incurred during May: Direct material $198,000 Conversion costs 242,000 Calculate the cost per equivalent unit for conversion costs during May. A. $43.00 B. $25.00 C. $39.75 D. $17.45

57.

Which of the following is not needed in order to calculate the cost per equivalent unit in process costing? A. Equivalent units in beginning Work in Process Inventory B. Cost added during the period C. Units completed and transferred out of the department D. Equivalent units in ending inventory

58.

Cost per equivalent unit in the Blending Department in July is used to determine the cost of the A. July 1 Work in Process inventory for the Blending Department. B. Materials added to production in the Blending Department in July. C. July 31 Work in Process inventory in the Blending Department. D. Total costs added in the Blending Department during July.

59.

Cost per equivalent unit amounts are usually calculated for A. direct materials, direct labor, and administrative costs. B. current period costs incurred only. C. direct material, direct labor, manufacturing overhead, and transferred-in costs. D. units transferred in by the suppliers and units transferred out as sales returns.

60.

The amount used to determine the ‘cost’ in the cost per equivalent unit amount is the sum of the A. cost of beginning Work in Process inventory and the cost of ending Work in Process inventory. B. cost of beginning Work in Process inventory and the costs incurred in the current period. C. costs incurred in the current period and the cost of ending Work in Process inventory. D. cost of beginning Work in Process inventory, the cost of ending Work in Process inventory, and the costs incurred in the current period.

61.

If materials are entered into a production process at the beginning of the process, the number of units accounted for is A. determined by dividing the total units transferred out into the total cost of the units. B. equal to units to account for. C. equal to the number of units completed and transferred out during the period. D. equal to the number of equivalent units in beginning Work in Process.

3-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

62.

Parnelli Tires uses a process costing system and has 1,600 tires remaining in its Belting Department’s Work in Process inventory at month end. These tires are 90% and 40% complete with regard to materials and conversion costs, respectively. There were 6,500 tires completed and transferred out during the period. Conversion costs during the beginning of the month were $69,300 and added during the period were $116,340. How much is the conversion cost of the ending Work in Process? A. $7,140 B. $16,640 C. $36,700 D. $24,960

63.

America Productions uses a process costing system. Its Belting Department’s Work in Process inventory account at March 31 consists of 7,000 units that are 100% complete with respect to materials and 70% complete with respect to conversion costs. If the total conversion cost in the Work in Process inventory account is $552,000 at March 31 and the cost per equivalent unit for conversion costs is $6.00, how many units were completed and transferred out during March? A. 92,000 units B. 85,000 units C. 87,100 units D. 99,000 units

64.

Department Alpha had no beginning inventory. The department added direct materials costing $55,040 and conversion costs of $88,660 during the month of July. Materials are added at the beginning of the process and conversion costs are added evenly throughout the process in this department. During the month, 40,000 units were completed. At the end of July, 3,000 units remained which were 10% complete with respect to conversion costs. Which one of the following is the correct cost per equivalent unit for materials for July? A. $1.28 B. $3.48 C. $6.98 D. $2.20

65.

The ending Work in Process inventory in the Mixing Department contains 500 units that are 25% complete with respect to conversion costs. The beginning inventory of units totaled 350 units that were 40% complete with respect to conversion costs. During the period, 7,000 units were started. How many equivalent units for conversion costs are present in the ending inventory? A. 6,850 units B. 125 units C. 6,975 units D. 500 units

Chapter 3 Process Costing

66.

3-11

Weed Wackers uses process costing and has provided data for its Processing Department for June as follows: Units Cost of Materials Beginning Work in Process inventory 2,000 $21,020 Units started in June 77,000 48,500 Units completed 75,600 Ending Work in Process inventory 3,400 All materials are added at the beginning of the manufacturing process. How much is the cost per equivalent unit for materials during June? A. $0.88 B. $1.03 C. $0.61 D. Some other answer

67.

In the Assembly Department, all the direct materials are added at the beginning of processing. Beginning Work in Process Inventory consists of 2,000 units with a direct materials cost of $31,860. During the period, 15,000 units are started and direct materials costing $250,000 are charged to the department. If there are 1,000 units in ending inventory, what is the cost per equivalent unit for materials during the period, assuming the company uses a process costing system? A. $15.93 B. $15.63 C. $14.83 D. $16.58

68.

Mickler Productions uses process costing. Its Mixing Department incurred conversion costs of $650,820 during January, and had a beginning Work in Process inventory of $30,430 for conversion costs. 54,000 units were transferred out of the department, and the ending inventory consisted of 2,500 units that are 20% complete with respect to conversion costs. What is the conversion cost per equivalent unit during January? A. $12.50 B. $12.05 C. $12.17 D. $12.62

69.

ColorWorks’ Painting Department uses a process costing system. It had a beginning Work in Process Inventory of 160 units, which had direct material costs of $17,215. During June, 8,600 units were started and costs of $213,600 were incurred for direct materials. Ending inventory consists of 250 units, which are 80% complete with respect to direct materials. What is the cost per equivalent unit for direct materials during June? A. $26.09 B. $26.23 C. $26.35 D. $26.50

70.

A company that uses process costing has 1,000 units in ending Work in Process Inventory that are 100% complete with respect to materials and 80% complete with respect to conversion costs. The cost per unit for inventory is $2.15 for materials and $1.65 for conversion costs. What is the cost assigned to the ending Work in Process inventory? A. $3,470 B. $3,800 C. $3,040 D. $2,150

3-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

71.

Zanzibar Metals utilizes a process costing system with three processing departments— melting, molding, and packaging. Its Melting Department had 500 units in Work in Process inventory at June 1. Ending Work in Process inventory on June 30 consisted of 400 units. Materials are added at the beginning of the process. The beginning cost of materials totaled $900. The cost of materials added during June was $3,960. If the material cost per unit for June was $1.35, how many units would have been completed and transferred out during the period? A. 3,600 units B. 3,200 units C. 2,933 units D. 3,100 units

72.

Jeffery Ltd uses a process costing system. Its Spackling Department had no beginning Work in Process inventory. The department added direct materials of $200,000 and conversion costs of $321,300 during the period. Materials are added at the beginning of the process and conversion costs are added evenly throughout the process. During the period 75,000 units were completed, and at the end of the period, 5,000 units remained which were 30% complete. How much is transferred to the Finished Goods inventory account during the period? A. $521,300 B. $488,719 C. $502,500 D. $556,053

73.

Wilson Inc. uses process costing. Its Sanitizing Department had no beginning Work in Process inventory, though it added materials of $120,000 and conversion costs totaling $160,000 during May. Materials are added at the beginning of the process and conversion costs are added evenly throughout the process. During May, 75,000 units were completed. The May 31 Work in Process inventory balance consisted of 25,000 units that were 20% complete. What is the cost of the ending Work in Process inventory for May? A. $240,000 B. $56,000 C. $280,000 D. $40,000

74.

Z-Bar Sweets uses a process costing system. During August, the Mixing Department transferred out 65,000 units. On August 31, the Mixing Department held 22,000 equivalent units of material and 20,150 equivalent units of labor and overhead. The cost per equivalent unit was $5.50 for materials and $5.00 for labor and overhead. How much was the total balance in the Work in Process inventory account on August 31? A. $271,250 B. $463,750 C. $221,750 D. $192,500

Chapter 3 Process Costing

3-13

75.

For the month of June, Starlight Chocolates had a cost per equivalent unit of $2.50 for materials and $0.40 for conversion costs in its Mixing Department. The company began June with 12,000 pounds of chocolate in production. By the end of the month, the company had completed 180,000 pounds of chocolate, and 9,000 pounds were in process. The in-process units were 100 percent complete with respect to material and 40 percent complete with respect to labor and overhead. How much is the cost of the ending Work in Process Inventory in the Mixing Department? A. $23,940 B. $26,100 C. $22,500 D. $10,440

76.

For the month of June, Starlight Chocolates had cost per equivalent unit of $2.50 for materials in its Mixing Department and $0.40 for conversion costs. The company began June with 12,000 pounds of chocolate in production. By the end of June, the company had completed 180,000 pounds, and 9,000 pounds were in process. The in-process units were 100 percent complete with respect to material and 40 percent complete with respect to labor and overhead. How much is the cost of the pounds completed and transferred out of the Mixing Department during June? A. $522,000 B. $548,100 C. $219,240 D. $545,940

77.

In any department, the cost of beginning Work in Process inventory plus the costs incurred during the current period must be A. less than the costs transferred to the next department. B. less than the costs in ending Work in Process inventory in the department. C. equal to the costs transferred to the next department and the costs in ending Work in Process inventory D. less than the costs incurred in the next department.

78.

At the end of July, a journal entry is prepared to record the transfer of goods from the Mixing Department to the Baking Department. Which one of the following indicates the amount of this journal entry? A. Total costs incurred by Mixing Department during July B. Sum of the costs of the direct materials and nonmanufacturing overhead incurred in the Mixing Department during July C. Number of units transferred from the Mixing Department to the Baking Department times the cost per unit D. Number of equivalent units in the Mixing Department’s July 31 inventory times the cost per equivalent unit

79.

Which of the following is true as it pertains to the ending Work in Process Inventory? A. It is determined by adding the cost in the beginning Work in Process Inventory and the costs incurred in the current period and subtracting the cost of goods transferred out of the department. B. It is the actual costs incurred plus the costs added during the period. C. It is always greater than the costs transferred into the department. D. It is greater than the ending inventory in the previous process department.

3-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

80.

Cheese Heads Cheddar utilizes a process costing system. The beginning Work in Process Inventory in the Cutting Department consisted of 16,000 units which were 100% complete with respect to materials and 20% complete with respect to conversion costs. The ending Work in Process Inventory consisted of 12,000 units which were 100% complete with respect to materials and 50% complete with respect to conversion costs. The total cost in beginning inventory was $65,000 with an additional $270,400 added during the period. During the month, 62,000 units were transferred out to the next department. The equivalent cost per unit was $1.50 for materials and $3.30 for conversion costs. How much is the total cost of the inventory transferred out during the period? A. $389,000 B. $224,400 C. $297,600 D. $93,000

81.

Shiner Rock Car Wax uses a process costing system. The company has three processing departments—mixing, melting, and packaging. Ending Work in Process Inventory of the Mixing Department consists of 3,000 cans of wax in process carrying a total cost of $14,400. These units are 80% complete with respect to materials. The equivalent cost per unit for materials and conversion costs is $2.00 and $8.00, respectively. With regard to conversion costs, what percentage of completion is the ending inventory? A. 100% B. 40% C. 80% D. 60%

82.

After the cost per equivalent unit is calculated, costs can be assigned to A. ending Work in Process inventory and the units completed and transferred out of the department. B. beginning Work in Process inventory and ending Work in Process inventory. C. beginning Work in Process inventory and the units started this period. D. units started this period and units completed and transferred out this period.

83.

Which of the following statements regarding transferred-in costs is true? A. The number of equivalent units for transferred-in costs in ending Work in Process inventory is the same as the number of physical units transferred-in present in the ending Work in Process inventory. B. When considering only transferred-in costs, the cost of beginning inventory must equal the cost of the ending inventory. C. Transferred-in units are assumed to be 0 percent complete when the cost per equivalent unit calculation is performed. D. All of these answer choices are correct.

84.

Which one of the following components of Work in Process is always 100% complete at the beginning of the processing in a department? A. Direct labor B. Manufacturing overhead C. Transferred-in costs D. Direct material

Chapter 3 Process Costing

3-15

85.

Calhoun Productions uses process costing. At the beginning of the month, there were 1,100 units in process in the Welding Department, 40% complete with respect to conversion costs. Materials are added at the beginning of the process. A total of 15,000 units were started during the month and there were 1,400 units in the ending Work in Process inventory that were 100% complete with respect to material and 30% complete with respect to conversion costs. How many units were completed during the month? A. 14,700 units B. 16,100 units C. 11,900 units D. 15,300 units

86.

Selwyn Fabrics sold 60,000 yards of upholstery fabric for $22 per yard. The company’s unit product cost using process costing is $5 per yard and the company has fixed costs of $86,000 per month. The company predicts that a $2 decrease in the selling price will generate a 12% increase in sales during the next period. If the company lowers the price, which of the following will occur in the next period? A. Profit will increase by $24,000. B. Profit will decrease by $12,000. C. Total fixed costs will increase by $10,320. D. The variable costs per unit will decline by $0.60 per yard.

87.

The end of the month report for a process costing system which facilitates the determination of the ending Work in Process inventory to be reported on the balance sheet is called a(n) A. inventory control report. B. production cost report. C. equivalent unit report. D. cost summary report.

88.

Which of the following will not appear on the production cost report? A. Number of units in beginning Work in Process inventory B. Cost of beginning Raw Materials inventory C. Cost of ending Work in Process inventory D. Cost of goods sold

89.

A production cost report A. is the same as a job-order cost sheet. B. summarizes the costs in all of the Work in Process accounts for a company. C. provides a reconciliation of units and a reconciliation of costs, as well as the details of the cost per equivalent unit calculation. D. must be completed before a department starts production for the month.

90.

The number of units to account for is calculated as: A. the number of units in beginning inventory plus the number of units started this period. B. the number of units in beginning inventory plus the number of units in ending inventory. C. the number of units started during the period. D. the number of equivalent units produced during the period.

91.

Assuming no units are lost, the number of “units accounted for” should be the same as A. the number of units “to account for”. B. the sum of the number of units in ending Work in Process inventory and the number of units completed and transferred out of the department. C. the sum of the number of units in beginning inventory and the number of units started this period. D. All of these answer choices are correct.

3-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

92.

For each period, the total cost that must be accounted for is the sum of A. the costs in the beginning and ending Work in Process Inventory accounts. B. all costs that were incurred during this period. C. costs in the beginning Work in Process Inventory and costs incurred during the period. D. costs transferred out of the department and costs in the beginning Work in Process Inventory.

93.

The first step in preparing the production cost report is to A. account for the number of physical units. B. calculate the cost per equivalent unit. C. assign costs to the items completed. D. determine the cost per equivalent unit.

94.

DynaVenture Enterprises uses a process costing system. During May, the Processing Department transferred out 43,000 units. The Work in Process Inventory at May 31 in the Processing Department consisted of 3,200 equivalent units of material and 960 equivalent units of labor and overhead. The cost per equivalent unit was $1.50 for materials and $3.20 for labor and overhead. Which of the following amounts will you find reported as “Total Cost to Account for” in the production cost report for May? A. $209,972 B. $202,100 C. $217,140 D. $206,612

95.

WallerCo’s Assembly Department began the period with 12,000 units partially complete. An additional 275,000 units were transferred into this department during the period to be assembled (the final step in the manufacturing process). At the end of the period, 15,000 units remained in the Assembly Department. The company utilizes a process costing system. How many units were transferred to Finished Goods Inventory during the period? A. 287,000 units B. 290,000 units C. 272,000 units D. 278,000 units

96.

When performing incremental analysis, A. process costing unit costs should always be considered as they are incremental costs. B. process costing unit costs should be considered as they are period costs. C. process costing unit costs should not be considered as they comprise of both product costs and period costs. D. all process costing unit costs should not be considered as they are sunk costs.

97.

The production cost report contains the four steps listed below: 1. Assign costs to items completed and to the items remaining in Work in Process 2. Account for the amount of product cost 3. Calculate the cost per equivalent unit 4. Account for the number of physical units Which is the correct order of these steps? A. 1, 2, 3, 4 B. 4, 2, 1, 3 C. 4, 2, 3, 1 D. 4, 3, 1, 2

Chapter 3 Process Costing

3-17

98.

If beginning Work in Process inventory in the Assembly Department consists of 2,200 units, ending inventory is 1,400 units, and 17,000 units were started during the period, how many units were completed and transferred out of the Assembly Department? A. 20,600 units B. 16,200 units C. 19,200 units D. 17,800 units

99.

During 2017, Cost Savers Production used a predetermined overhead rate of $1.50 per machine hour in the Cutting Department. Actual overhead for the year was $65,000. If 1,700 machine hours were used during the year, what is the correct journal entry to record the application of overhead? A. Manufacturing Overhead—Cutting Dept.. 2,550 Work in Process—Cutting Dept. 2,550 B. C. D.

Work in Process—Cutting Dept. Manufacturing Overhead

2,550

Cutting Dept. Expenses Manufacturing Overhead—Cutting Dept.

2,550

Finished Goods Work in Process—Cutting Dept.

2,550

2,550 2,550 2,550

100.

Wall Creations uses process costing. On June 1, its Soldering Department had 580 units in process. The department transferred 6,500 units to the next department during June and there were 670 units in process on June 30. How many units were received and started by the Soldering Department during June? A. 7,170 units B. 6,500 units C. 6,590 units D. 6,680 units

101.

Creative Creations uses process costing. Its Molding Department started 21,300 units in August and transferred 23,100 units to the Cutting Department. If the ending Work in Process inventory was 880 units in the Molding Department, how many units were in process on August 1? A. 2,680 units B. 23,980 units C. 22,180 units D. 21,300 units

102.

Mack, Inc. uses process costing. The Baking Department’s Work in Process Inventory account decreased from 1,832 units to 1,275 units during the month. If 8,653 units were started during the month, how many units were transferred out of the Baking Department? A. 8,096 units B. 3,107 units C. 5,546 units D. 9,210 units

3-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

103.

Macklin Products uses process costing. Ending Work in Process inventory consists of 2,600 units that are 100% complete with respect to materials and 30% complete with respect to conversion costs. What are the equivalent units for materials and for conversion costs, respectively, in the ending Work in Process inventory of the Mixing Department? A. 2,600 and 780 units B. 780 and 2,600 units C. 780 and 780 units D. 2,600 and 2,600 units

104.

Rally Gifts uses process costing. In its Forming Department, all the materials are added at the beginning of processing. At the end of the year, 6,000 units remain in Work in Process inventory in the department. During the year, 54,000 units were completed and transferred out and 55,000 units were started. How many equivalent units will be used in the cost per equivalent unit calculation for material costs in the Forming Department? A. 61,000 units B. 54,000 units C. 60,000 units D. 48,000 units

105.

Wingfield, Inc. uses process costing. Ending Work in Process inventory in the Assembly Department consists of 700 units that are 50% complete with respect to conversion costs. The beginning inventory consisted of 2,000 units. During the month, 6,000 units were started. How many equivalent units will be used in the cost per equivalent unit calculation for conversion costs in the Assembly Department? A. 7,650 units B. 7,300 units C. 8,000 units D. 6,700 units

106.

Sanchez, Inc. uses process costing. Equivalent units for its Molding Department totaled 18,600 during January for conversion costs. 15,000 units were transferred out of the Molding Department to the Finishing Department during the month. If the items remaining in ending Work in Process Inventory in the Molding Department are 40% complete as to conversion costs and 80% complete as to materials, how many physical units are there in ending Work in Process inventory in the Molding Department? A. 24,000 units B. 15,000 units C. 4,500 units D. 9,000 units

107.

Wilson Carver Knives uses process costing. In its Cutting Department, all the materials are added at the beginning of the process and conversion costs are added evenly during the processing. During the first month of operations, the Cutting Department transferred 78,000 units to the Packing Department. The Cutting Department’s ending Work in Process inventory consisted of 3,800 units that were 40% complete. What are the equivalent units for materials and for conversion costs in the Cutting Department, respectively? A. 81,800 and 81,800 units B. 81,800 and 79,520 units C. 79,520 and 79,520 units D. 78,000 and 81,800 units

Chapter 3 Process Costing

3-19

108.

The Packaging Department is the final processing department in Hector Manufacturing, which uses process costing. During March, 5,100 units were transferred into the Packaging Department from the Finishing Department and 4,700 units were transferred out to Finished Goods. There were 900 units in ending inventory in the Packaging Department. How many equivalent units are used to calculate the cost per equivalent unit for transferred-in costs in the Packaging Department? A. 4,700 units B. 5,600 units C. 5,200 units D. 5,100 units

109.

The Cooking Department uses process costing and is the third department at Winslow Rice Production. During February, there were 8,000 units of beginning inventory in the Cooking Department, and 50,000 units were transferred in from the prior process. There were 4,000 units in ending inventory. The transferred-in cost in the beginning inventory was $80,000, with $900,200 of additional cost for units transferred in during the month. What is the cost per equivalent unit for transferred-in costs? A. $15.52 B. $16.90 C. $18.15 D. There is not enough information to answer the question

110.

The Mixing Department is the first processing department in Sweet N’ Plenty. The beginning Work in Process inventory had a value of $17,700 for conversion costs and additional conversion costs of $214,000 were incurred by the department during the month. There were 2,000 units in ending Work in Process inventory that were 10% complete and 66,000 units were transferred out of the department during the month. The company uses process costing. What is the cost per equivalent unit for conversion costs? A. $3.50 B. $34.07 C. $3.41 D. There is not enough information to answer the question

111.

Riley Company uses process costing. Its Forming Department had 10,000 equivalent units of production for direct materials and 7,500 equivalent units of production for conversion costs in May. There were 2,000 units in beginning inventory. Costs were incurred in May as follows: Direct Material Beginning Work in Process $ 3,000 Incurred during May 12,800 Total $15,800

Conversion $ 1,500 15,500 $17,000

What is the total cost per equivalent unit during May? A. $3.85 B. $3.28 C. $4.37 D. $1.87

Total $ 4,500 28,300 $32,800

3-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

112.

Sullivan Company uses process costing. Its Sewing Department had an equivalent cost per unit for direct materials of $0.75 and for conversion costs of $0.50 during May. There were 20,000 units completed and transferred to Finished Goods, and 8,000 units in ending Work in Process inventory that were 100% complete with respect to direct material and 75% complete with respect to conversion costs. What was the amount transferred to Finished Goods during May? A. $25,000 B. $34,000 C. $9,000 D. $6,000

113.

Fox Lane Gifts uses process costing and determined an equivalent cost per unit of $0.90 for direct materials and $0.70 for conversion costs during May. There were 9,000 units completed and transferred to Finished Goods, and 1,200 units in ending Work in Process Inventory that were 100% complete with respect to direct materials and 40% complete with respect to conversion costs. What was the ending Work in Process inventory during May? A. $6,636 B. $768 C. $1,416 D. $15,816

114.

Realm Company uses process costing and had an equivalent cost of $2.30 per unit for direct materials and $1.80 per unit for conversion costs during May in its Rolling Department. There were 11,600 units completed and transferred to Finished Goods, and 1,000 units in ending Work in Process inventory that were 80% complete with respect to direct material and 60% complete with respect to conversion costs. How much is the cost of completed goods transferred to Finished Goods from the Rolling Department during May? A. $2,920 B. $47,560 C. $50,480 D. $53,360

115.

Realm Company uses process costing and had an equivalent cost of $2.30 per unit for direct materials and $1.80 per unit for conversion costs during May in its Rolling Department. There were 11,600 units completed and transferred to finished goods, and 1,000 units in ending Work in Process inventory for the Rolling Department that were 80% complete with respect to direct material and 60% complete with respect to conversion costs. How much is ending Work in Process in the Rolling Department at the end of May? A. $47,560 B. $50,480 C. $2,920 D. $3,220

Chapter 3 Process Costing

116.

3-21

Pilot Protectors manufactures pocket knives in three processes and uses process costing. In the Forming Department, all materials are added at the start of production. The following unit information is available for March production for the Forming Department: Beginning Work in Process (20% complete) 2,000 Plus: Units started 34,000 Units to account for 36,000 Less: Ending Work in Process (70% complete) 4,000 Units completed 32,000 The following costs are available for March for the Forming Department: Material Conversion Cost Total Cost Beginning Work in Process $ 11,800 $ 22,500 $ 34,300 Current cost 65,600 64,500 130,100 Total cost $77,400 $87,000 $164,400 What is the total amount to be debited to the Forming Department’s Work in Process inventory account during March? A. $130,100 B. $164,400 C. $13,228 D. $15,600

117.

Pilot Protectors manufactures pocket knives in three processes and uses process costing. All materials are added at the start of the Forming Department process. The following information is available for March production for the Forming Department: Beginning Work in Process (20% complete) 2,000 Plus: Units started 34,000 Units to account for 36,000 Less: Ending Work in Process (70% complete) 4,000 Units completed 32,000 The following costs are available for March: Material Beginning Work in Process $ 11,800 Current cost 65,600 Total cost $77,400

Conversion Cost $ 22,500 64,500 $87,000

Total Cost $ 34,300 130,100 $164,400

What are the equivalent units for conversion costs in the Forming Department during March? A. 32,000 units B. 36,000 units C. 34,800 units D. 2,800 units

3-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

118.

Conversion Cost $ 22,500 64,500 $87,000

Total Cost $ 34,300 130,100 $164,400

What is the cost per equivalent unit for materials during March? A. $2.15 B. $2.50 C. $2.22 D. $4.72 119.

Pilot Protectors manufactures pocket knives in three processes and uses process costing. All materials are added at the start of the Forming Department process. The following information is available for March production for the Forming Department: Beginning Work in Process (20% complete) 2,000 Plus: Units started 34,000 Units to account for 36,000 Less: Ending Work in Process (70% complete) 4,000 Units completed 32,000 The following costs are available for March: Material Conversion Cost Total Cost Beginning Work in Process $ 11,800 $ 22,500 $ 34,300 Current cost 65,600 64,500 130,100 Total cost $77,400 $87,000 $164,400 What is the cost of goods transferred to the next processing department during March? A. $15,600 B. $148,800 C. $167,400 D. $130,100

Chapter 3 Process Costing

120.

3-23

Keystone Snow Boards Manufacturing Company produces entry-level snowboards and uses process costing. In the Cutting Department, all materials are added at the start of the process. The following information on units is available for September production for the Cutting Department: Beginning Work in Process, 30% complete for conversion costs 14,000 Units started 125,000 Ending Work in Process, 60% complete for conversion costs 15,000 Units completed 124,000 The following costs are available for September: Material Conversion Cost Beginning Work in Process $ 8,200 $ 1,350 Current cost 70,600 47,120 Total cost $78,800 $48,470

Total Cost $ 9,550 117,720 $127,270

What is the dollar amount of the total costs to account during September in the Cutting Department? A. $127,270 B. $117,720 C. $48,470 D. $78,800 121.

Keystone Snow Boards Manufacturing Company produces entry-level snowboards and uses process costing. All materials are added at the start of the process. The following information on units is available for September production for the company’s Cutting Department: Beginning Work in Process, 30% complete for conversion costs 14,000 Units started 125,000 Ending Work in Process, 60% complete for conversion costs 15,000 Units completed 124,000 The following costs are available for September: Material Conversion Cost Beginning Work in Process $ 8,200 $ 1,350 Current cost 70,600 47,120 Total cost $78,800 $48,470

Total Cost $ 9,550 117,720 $127,270

What are the equivalent units for conversion costs in September in the Cutting Department? A. 139,000 units B. 124,000 units C. 133,000 units D. 140,000 units

3-24

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

122.

Keystone Snow Boards Manufacturing Company produces entry-level snowboards and uses process costing. In the Forming Department, all materials are added at the start of the process. The following information on units is available for September production for the company’s Cutting Department: Beginning Work in Process, 30% complete for conversion costs 14,000 Units started 125,000 Ending Work in Process, 60% complete for conversion costs 15,000 Units completed 124,000 The following costs are available for September: Material Conversion Cost Beginning Work in Process $ 8,200 $ 1,350 Current cost 70,600 47,120 Total cost $78,800 $48,470

Total Cost $ 9,550 117,720 $127,270

Assume equivalent units for materials are 157,600 units. How much is the cost per unit for materials? A. $0.50 B. $0.81 C. $0.57 D. $2.00 123.

Rooftop Gutters produces polyurethane gutters and uses process costing. All materials are added at the start of the Forming Department process. The following information is available for units produced in the Forming Department for the month of April: Beginning Work in Process, in linear feet (20% complete with respect to conversion costs) Units started Ending Work in Process, in linear feet (60% complete with respect to conversion costs) Units completed The following costs are available for April: Material Beginning Work in Process $11,600 Current cost 63,300 Total cost $74,900

11,500 42,000 9,000 44,500

Conversion Cost $ 8,540 21,400 $29,940

Total Cost $ 20,140 84,700 $104,840

What is the sum of total costs to account that will appear on the production cost report for April for the Forming Department? A. $74,900 B. $104,840 C. $29,940 D. $144,760

Chapter 3 Process Costing

124.

3-25

11,500 42,000 9,000 44,500

Conversion Cost $ 8,540 21,400 $29,940

Total Cost $ 20,140 84,700 $104,840

What are the equivalent units for conversion costs for April in the Forming Department? A. 53,500 units B. 5,400 units C. 9,000 units D. 49,900 units 125.

11,500 42,000 9,000 44,500

Conversion Cost $ 8,540 21,400 $29,940

Total Cost $ 20,140 84,700 $104,840

What is the cost per equivalent unit for materials for April in the Forming Department? A. $0.56 B. $2.00 C. $1.40 D. $1.50

3-26

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

126.

Heinz Bottling Company produces various glass and plastic containers and uses a process costing system. The following information relates to production in the Formulating Department during January for the company’s 2-quart size glass jars: • • • • • • •

Beginning Work in Process inventory: 4,500 units, 85% complete as to conversion costs Beginning Work in Process inventory—cost of direct materials, $18,000 Beginning Work in Process inventory—costs of conversion, $14,000 Number of jars started in January: 270,000 units Ending Work in Process Inventory: 2,000 units, 35% complete as to conversion Direct materials added during January: $78,075 Conversion costs incurred during January: $40,700

Direct materials are added at the beginning of the Formulating process, and conversion costs are incurred uniformly throughout production. How many glass jars were completed during January in the Forming Department? A. 268,000 units B. 272,500 units C. 274,500 units D. 272,000 units 127.

Beginning Work in Process inventory: 4,500 units, 85% complete as to conversion costs Beginning Work in Process inventory—cost of direct materials, $18,000 Beginning Work in Process inventory—costs of conversion, $14,000 Number of jars started in January: 270,000 units Ending Work in Process inventory: 2,000 units, 35% complete as to conversion Direct materials added during January: $78,075 Conversion costs incurred during January: $40,700

Direct materials are added at the beginning of the Formulating process, and conversion costs are incurred uniformly throughout production. How much is the total cost to account for to appear on the Forming Department’s January production cost report? A. $118,775 B. $320,000 C. $149,600 D. $150,775

Chapter 3 Process Costing

128.

3-27

Beginning Work in Process inventory: 4,500 units, 85% complete as to conversion costs Beginning Work in Process inventory—cost of direct materials, $18,000 Beginning Work in Process inventory—costs of conversion, $14,000 Number of jars started in January: 270,000 units Ending Work in Process inventory: 2,000 units, 35% complete as to conversion Direct materials added during January: $78,075 Conversion costs incurred during January: $40,700

Direct materials are added at the beginning of the Formulating process, and conversion costs are incurred uniformly throughout production. How much is the cost per equivalent unit for materials during January in the Forming Department? A. $0.35 B. $0.55 C. $0.20 D. $0.45 129.

Beginning Work in Process inventory: 4,500 units, 85% complete as to conversion costs Beginning Work in Process inventory—cost of direct materials, $18,000 Beginning Work in Process inventory—costs of conversion, $14,000 Number of jars started in January: 270,000 units Ending Work in Process inventory: 2,000 units, 35% complete as to conversion Direct materials added during January: $78,075 Conversion costs incurred during January: $40,700

Direct materials are added at the beginning of the Formulating process, and conversion costs are incurred uniformly throughout production. How much is the total cost accounted for during January for the Forming Department? A. $118,775 B. $320,000 C. $149,600 D. $150,775

3-28

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

130.

Hair Shine Company produces Shine Bright shampoo and uses a process costing system. Conversion costs are added evenly throughout the production process. Materials are added at the beginning of the process. The following information is available for March for the Mixing Department: Units in process, March 1 (40% complete) 200 Units started in March 1,000 Units in process, March 31 (80% complete) 250 Conversion costs in Work in Process, March 1: Labor Overhead Labor costs during March (5,100 hours) Overhead applied during March

$ 38,000 8,000 102,780 49,020

How many units were completed in the Mixing Department during March? A. 950 units B. 1,200 units C. 1,000 units D. 1,050 units 131.

$ 38,000 8,000 102,780 49,020

What is the cost per equivalent unit for conversion costs in March? A. $132.00 B. $164.82 C. $172.00 D. $367.25 132.

$ 38,000 8,000 102,780 49,020

Chapter 3 Process Costing

What is the amount of conversion costs included in units completed during March? A. $197,800 B. $163,400 C. $125,400 D. $348,890 Answers to Multiple Choice 26 D 48 B 27 D 49 A 28 D 50 B 29 D 51 C 30 D 52 A 31 C 53 A 32 D 54 A 33 A 55 B 34 B 56 B 35 D 57 A 36 B 58 C 37 B 59 C 38 D 60 B 39 D 61 B 40 A 62 B 41 C 63 C 42 C 64 A 43 B 65 B 44 B 66 A 45 B 67 D 46 C 68 A 47 C 69 D

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91

A B C D C A A C C A C B A A C A B B B C A D

92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113

C A A C C D D B C A D A C A D B B B A A A C

114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132

B C A C A B A C A B D C B D A D A C B

3-29

3-30

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MATCHING 133.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once. _____ 1.

conversion costs

_____ 2.

cost per equivalent unit

_____ 3.

equivalent units

_____ 4.

lost units

_____ 5.

process costing

_____ 6.

production cost report

_____ 7.

total cost accounted for

_____ 8.

transferred-in cost

_____ 9.

units accounted for

_____ 10.

units to account for

units in beginning Work in Process inventory plus units started during the period

partially completed units converted to a comparable number of completed units

provides a reconciliation of units, a reconciliation of costs, and details of the cost per equivalent unit calculation

the key value in the production cost report; the average unit cost in a process costing system

units that are not finished due to evaporation, damage, or theft

a system of determining costs of units produced that is essentially a system of averaging

units completed and transferred to the next department plus units in ending Work in Process inventory

the sum of the costs for labor and overhead

cost of completed units plus cost of ending Work in Process inventory

costs incurred in one department that are transferred to the next processing department

Answers to Matching 1. H 2. D 3. B 4. E 5. F

6. 7. 8. 9. 10.

C I J G A

Chapter 3 Process Costing

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EXERCISES 134.

Neon Lamp Post uses process costing. During June, the Painting Department of Neon Lamp Post completed production of 43,700 LED lamp posts. At the beginning of June, the company had 1,300 posts that were 75 percent complete with respect to material and 50 percent complete with respect to conversion costs. During the month, the company started production of 44,000 posts. How many posts were in Work in Process at the end of June?

Answer Units in beginning Work in Process Units started Units to be accounted for Units completed Units in ending Work in Process Units accounted for

1,300 44,000 45,300 43,700 1,600 45,300

Units in ending Work in Process = 45,300 ‒ 43,700 = 1,600 lamp posts

135.

Taylor Tackers uses process costing. It produces a tacker used by movers to seal boxes. Taylor has almost no inventories of material, work in process, or finished goods. The balances are so small that the company treats them as zero for purposes of its accounting reports. During July, the company produced and shipped 13,000 tackers at a cost of $13.50 per tacker. The cost consisted of 20 percent material cost, 25 percent labor cost, and 55 percent manufacturing overhead. Prepare journal entries to record the following: a. Issuance of direct material b. Cost of direct labor accrued c. Application of manufacturing overhead d. Completion of units in process and their transfer to Finished Goods e. Cost of goods sold

Answer a.

Work in Process 35,100 Raw Material To record material used in production (13,000 × $13.50 × 20%)

35,100

Work in Process Wages Payable To record labor (13,000 × $13.50 × 25%)

43,875

Work in Process 96,525 Manufacturing Overhead To record overhead applied (13,000 × $13.50 × 55%)

96,525

Finished Goods 175,500 Work in Process 175,500 To record cost of units completed and transferred to finished goods (13,000 × $13.50)

Cost of Goods Sold 175,500 Finished Goods To record cost of units sold (13,000 × $13.50)

175,500

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

136.

Rigid Food Corporation produces gourmet yogurt. The following data pertain to the Mixing Department for the year ended December 31, 2017: Percentage of Completion Units Direct Material Conversion Costs Work in process, January 1 8,000 pounds 25% 15% Work in process, December 31 6,200 pounds 60% 70% During the year, the company started production of 120,000 pounds. Prepare a unit reconciliation schedule and determine the equivalent units for the Mixing Department for 2017.

Answer

137.

Physical Flow 8,000 120,000 128,000

Materials

Conversion

Units in beginning WIP Units started Units to account for Units completed Units in ending WIP Total units accounted for

121,800 6,200 128,000

100 60

121,800 3,720 125,520

100 70

121,800 4,340 126,140

XeroClean Chemicals refines a variety of chemicals for cleaning products and uses process costing. The following data are from the company’s Extracting Department: Work in process, May 1 840,000 gallons Direct material 100% complete Conversion costs 40% complete Units started in process during May 3,110,000 gallons Work in process, May 31 230,000 gallons Direct material 100% complete Conversion costs 60% complete Compute the equivalent units for direct material and equivalent units for conversion costs for the Extracting Department for the month of May.

Answer Physical Flow 840,000 3,110,000 3,950,000

Materials

Conversion

Units in beginning WIP Units started Units to account for Units completed Units in ending WIP Total units accounted for

3,720,000 230,000 3,950,000

100 100

3,720,000 230,000 3,950,000

100 60

3,720,000 138,000 3,858,000

Chapter 3 Process Costing

138.

3-33

DynaDrip’s Mixing Department opened on June 1, 2017. The company uses process costing. During June, 28,000 units were completed and transferred out of the Mixing Department to the next department. On June 30, 2017, the 3,100 units which remained in the Mixing Department were 60% complete with respect to conversion costs and 100% complete with respect to materials. How many equivalent units of product were there in the Mixing Department during June for materials and conversion costs, respectively?

Answer Materials: 28,000 + (3,100 × 100%) = 31,100 units Conversion: 28,000 + (3,100 × 60%) = 29,860 units

139.

Dairy Whip Products uses process costing. Its Blending Department is the second department in the production of Cool Whipper. The beginning inventory in the Blending Department consisted of 10,000 units that were 70% complete with respect to materials and 30% complete with respect to conversion costs. During the month, 60,000 units were transferred in from the previous department. The ending inventory consisted of 6,000 units that were 50% complete with respect to materials and 40% complete with respect to conversion costs. Calculate the equivalent units for transferred-in costs, materials, and conversion costs for the Blending Department for the month of March.

Answer Physical Flow Beginning Work in Process 10,000 Units started 60,000 Units to account for 70,000 Units completed Ending Work in Process Total units accounted for

140.

64,000 6,000 70,000

Materials

100 50

64,000 3,000 67,000

% Conversion

100 40

64,000 2,400 66,400

Transferred In

64,000 6,000 70,000

Prince Marinades uses process costing. Its Mixing Department had a beginning inventory of 650 units that had accumulated conversion costs of $16,486. During June, the Mixing Department incurred conversion costs of $43,400 and started 21,900 new units. Ending inventory consisted of 700 units that were 40% complete with respect to conversion costs. Materials are added at the beginning of the process. Calculate the cost per equivalent unit for conversion costs in the Mixing Department for June.

Answer Costs Beginning Work in Process Cost incurred during period Total cost incurred

Conversion $16,486 43,400 $59,886

Units Units completed Equivalent units in ending WIP (700 × 40%) Units accounted for

21,850 280 22,130

Cost per equivalent unit

$2.71

3-34

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

141.

Erie Lake Fishing processes trout for various distributors and uses process costing. The two departments involved are Cleaning and Packing. The table below summarizes the data related to trout processed in the Cleaning Department during June: Pounds of Percent Trout Complete* Work in process, June 1 12,000 50% Started into processing during June 235,000 — Work in process, June 30 14,000 45% *Labor and overhead only All materials are added at the beginning of the process in the Cleaning Department. Prepare a reconciliation of units and a computation of equivalent units for June for the Cleaning Department.

Answer

142.

Materials

Conversion

Units in beginning WIP Units started Units to account for

Physical Flow 12,000 235,000 247,000

Units completed Units in ending WIP Total units accounted for

233,000 14,000 247,000

100 100

233,000 14,000 247,000

100 45

233,000 6,300 239,300

Red Mountain Coffee uses process costing. At the start of January, there were 14,000 pounds of coffee beans in its Roasting Department’s Work in Process account that were 90 percent complete with respect to material and 25 percent complete with respect to conversion costs. The cost of the beans totaled $23,040 for material and $31,200 for conversion costs as of January 1. During the month, production on 120,000 pounds of coffee beans was started by the Roasting Department and it incurred material costs of $76,000 and labor and overhead costs of $118,080. The cost per equivalent unit totaled $0.80 for material and $1.20 for labor and overhead. The cost of items completed was $97,600 for materials and $146,400 for labor and overhead. The 12,000 pounds in ending Work in Process are 15 percent complete with respect to material and 20 percent complete with respect to conversion costs. a. b.

Answer a.

Prepare a reconciliation of units. How much is the cost of ending Work in Process inventory in the Roasting Department?

Units in beginning Work in Process 14,000 Units started in January 120,000 Units to account for 134,000 Units completed Units in ending Work in Process Total units accounted for

122,000 12,000 134,000

Cost of ending Work in Process: Material ($0.80  12,000 units × 15%) Labor and overhead ($1.20  12,000 units  20%) Ending Work in Process Inventory

$1,440 2,880 $4,320

Chapter 3 Process Costing

143.

3-35

Pest Be Gone uses process costing. Its Mixing Department had 7,500 units in its beginning June inventory. Associated with these units were $20,200 in direct materials and $25,000 in conversion costs. During the period, the department incurred $79,800 in direct materials and $151,800 in conversion costs and started 50,000 units. Ending inventory consisted of 2,000 units that were 100% complete with respect to materials and 60% complete with respect to conversion costs. For the Mixing Department’s production cost report for the month of June: a. b. c. d.

Calculate the equivalent units for materials and conversion costs. Calculate the cost per equivalent unit for materials and conversion costs. Calculate the cost of units transferred out. Calculate the cost of the ending Work in Process.

Answer a. Units in beginning WIP Units started Units to account for Units completed Units in ending WIP Total units accounted for

Physical Flow 7,500 50,000 57,500

Materials

Conversion

55,500 2,000 57,500

100 100

55,500 2,000 57,500

100 60

55,500 1,200 56,700

b. Costs Beginning Work in Process Costs incurred during period Total

Materials $ 20,200 79,800 $100,000

Units Units completed 55,500 Equivalent units in ending Work in Process 2,000 Total 57,500 Cost per equivalent unit Total cost to account for

$1.7391

Conversion Total $ 25,000 $ 45,200 151,800 231,600 $176,800 $276,800

55,500 1,200 56,700 $3.1182

c. Cost of units transferred out: (55,500 × $4.8573) d. Cost of ending Work in Process Materials (2,000 × $1.7391) Conversion (1,200 × $3.1182) Total cost of ending work in process

$4.8573 $276,800

$269,580

$3,478 3,742

7,220 $276,800

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

144.

Air Tracts produces solar-powered robots in a continuous production process. The company uses process costing. 85 percent of materials are added at the beginning of production and the other 15 percent are added immediately before transfer to the finished goods warehouse. Conversion costs are added evenly throughout the process. At the end of March, there were 10 robots in process, 70 percent complete as to labor and overhead. 95 robots were completed during the month. The direct materials cost per equivalent unit during March was $2,000, the labor cost per equivalent unit was $750, and the overhead per equivalent unit was $1,500. a. b.

Answer a.

145.

Determine the cost of the ending Work in Process inventory. Determine the cost of items completed and transferred to Finished Goods Inventory.

Ending Work in Process Material (10 × .85 × $2,000) $17,000 Labor (10 × .70 × $750) 5,250 Overhead (10 × .70 × $1,500) 10,500 Total $32,750 Cost of items completed Material (95 × $2,000) $190,000 Labor (95 × $750) 71,250 Overhead (95 × $1,500) 142,500 Total $403,750

Ideal Cuisine uses process costing. The balance in the beginning Work in Process inventory account for its Cooking Department for direct labor was $14,000. During the month of October, an additional $129,370 of direct labor was incurred, while 15,750 meals were completed and moved to the Packaging Department. At the end of October, 450 meals were in process that were 40 percent complete. At the start of October, the company had 200 meals that were 10 percent complete. Calculate the cost per equivalent unit for labor assuming that labor is added uniformly throughout the production process for October in the Cooking Department.

Answer Direct Labor Beginning Work in Process Cost incurred in October Total cost Units Units completed Equivalent units, ending WIP (450  40%) Total Cost per equivalent unit: $143,370 ÷ 15,930 = $9.00

$ 14,000 129,370 $143,370

15,750 meals 180 15,930 meals

Chapter 3 Process Costing

146.

3-37

During July, Store-All Containers completed 20,000 units. There were 10,000 units in ending Work in Process in the Molding Department that were 30 percent complete with respect to labor and overhead and 100 percent complete with respect to material. During the month of July, the company incurred $250,000 of material cost, $120,000 of labor cost, and $160,000 of manufacturing overhead. Costs per equivalent unit for material, labor, and manufacturing overhead are equal to $10, $6, and $8, respectively. The company uses process costing. Calculate the amount of material cost, labor cost, and overhead cost in beginning Work in Process inventory in the Molding Department during July.

Answer Let X = the cost in beginning Work in Process Material: ($250,000 + X) ÷ (20,000 + 10,000) = $10 ➔ X = $50,000 Labor: ($120,000 + X) ÷ [20,000 + (30% × 10,000)] = $6 ➔ X = $18,000 Overhead: ($160,000 + X) ÷ [20,000 + (30% × 10,000)] = $8 ➔ X = $24,000

147.

Ranger Toys uses process costing. On November 1, Ranger Toys’ Packaging Department had Work in Process inventory of 6,000 units that were 75% complete with respect to materials and 30% complete with respect to conversion costs. Ranger uses process costing. The cost of the beginning units was $93,525, of which $60,000 was transferred-in from previous departments, $26,775 in materials, and $6,750 in labor and overhead. During November, 125,000 units were transferred into the Packaging Department. These units had accumulated costs in previous departments of $1,218,560. The Packaging Department incurred costs of $756,225 for materials and $488,010 for conversion costs in November and transferred 130,000 units out of the department. The 1,000 units remaining in ending inventory are 50% complete with respect to materials and 20% complete with respect to conversion costs. a. b. c.

Answer a.

Calculate the cost per equivalent unit for transferred-in costs, material, and conversion costs in the Packaging Department for November. Calculate the cost of the units transferred out of the Packaging Department for November.. Calculate the cost of the ending Work in Process inventory in the Packaging Department for November.

Cost per equivalent unit: Transferred-in costs = ($60,000 + $1,218,560) ÷ 131,000 = $9.76 Material = ($26,775 + $756,225) ÷ (130,000 + 500) = $6.00 Conversion costs = ($6,750 + $488,010) ÷ (130,000 + 200) = $3.80

Units transferred out = ($9.76 + $6.00 + $3.80) × 130,000 = $2,542,800

Ending inventory = (1,000 × $9.76) + (1,000 × .50 × $6.00) + (1,000 × .20 × $3.80) = $13,520

3-38

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

148.

Sunny Green Tea manufactures loose green tea that it packages into 8-ounce bags sold to retail stores. It uses a process costing system. At the start of September, there were 7,000 pounds of tea in the Drying Department that were 100 percent complete with respect to direct material and 30 percent complete with respect to conversion costs (labor and overhead). During the month, the company began production of 215,000 units. Ending Work in Process Inventory consisted of 5,000 pounds of tea that were 100 percent complete with respect to material and 60 percent complete with respect to conversion costs. Costs for the Drying Department follow for September: Beginning Work in Process Costs Added Direct material $ 2,800 $ 46,040 Direct labor 4,000 85,000 Manufacturing overhead 5,000 71,000 Total $11,800 $202,040 a. b.

Calculate the cost per equivalent unit for materials and conversion costs, respectively for September. Calculate the cost of items completed in September and the cost of ending Work in Process.

Answer a.

Costs Materials Beginning Work in Process $ 2,800 Cost incurred during period 46,040 Total $48,840

Units in beginning WIP Units started Units to account for

Conversion Total $ 9,000 $ 11,800 156,000 202,040 $165,000 $213,840

Physical Flow % Materials 7,000 215,000 222,000

Units completed Units in ending WIP Total units accounted for

217,000 5,000 222,000

100 217,000 100 5,000 222,000

Cost per equivalent unit

Conversion

100 60

217,000 3,000 220,000

$0.22 Total

$0.75 $0.97

b. Total cost to account for

$213,840

Cost of units transferred out: ($0.97 × 217,000) Cost of ending Work in Process: Materials (5,000 × $0.22) Conversion (3,000 × $0.75) Total cost accounted for

$210,490 $1,100 2,250

3,350 $213,840

Chapter 3 Process Costing

149.

3-39

Capstone Readers started its production operations on April 1 and implemented a process costing system . During April, the Printing Department completed 8,000 books. There were 4,400 books in process in the Printing Department on April 30 that were 85% complete with respect to materials and 10% complete with respect to conversion costs. During April, the department accumulated materials costs of $55,765 and conversion costs of $80,180. a. b.

Calculate the cost of the goods transferred out of the Printing Department during April. What is the value of the ending Work in Process inventory in the Printing Department at April 30?

Answer Physical Flow 0 12,400 12,400

Materials

Conversion

Units in beginning WIP Units started Units to account for Units completed Units in ending WIP Total units accounted for

8,000 4,400 12,400

100 85

8,000 3,740 11,740

100 10

8,000 440 8,440

Costs Beginning WIP Cost incurred during period Cost to account for

Materials $ 0 55,765 $55,765

Conversion $ 0 80,180 $80,180

Cost per equivalent unit: Costs to account for Equivalent units Cost per equivalent unit

$55,765 11,740 $ 4.75

$80,180 8,440 $ 9.50

Total 0 135,945 $135,945 $

$14.25

Total cost to account for

$135,945

a. Cost of units transferred out ($14.25 × 8,000)

$114,000

b. Cost of ending Work in Process Materials ($4.75 × 3,740) Conversion ($9.50 × 440) Total cost accounted for

$17,765 4,180

21,945 $135,945

3-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

150.

Bamboo Tiles is a producer of bamboo tiles used in flooring. The company uses process costing. The bamboo is softened, cut, sanded, and treated prior to sale. Material is added in the beginning of the Softening Department and conversion costs are added evenly throughout processing. Bamboo Tiles began the month of August with 14,000 linear feet of bamboo in process that were 100 percent complete as to materials and 60 percent complete as to labor and overhead. The production workers started 120,000 linear feet into production during the month of August, and 8,000 remained in Work in Process inventory at August 31 that were 50 percent complete as to conversion costs. The cost data are as follows: Beginning Work in Process: Direct materials Direct labor Manufacturing overhead Costs added during August: Direct materials Direct labor Manufacturing overhead

$ 74,000 31,000 41,000 $ 86,800 215,000 233,000

Prepare a complete production cost report for the month of August for the Softening Department.. Answer Bamboo Tiles—Softening Department—August Direct materials Conversion Costs Units in beginning Work in Process 14,000 Units started 120,000 Units to account for 134,000 Units completed Units in ending Work in Process Units accounted for

126,000 8,000 134,000

100% 100%

126,000 8,000 50% 134,000

126,000 4,000 130,000

Cost per Equivalent Unit Costs to be accounted for: Beginning inventory Costs added Costs to be accounted for: Cost per equivalent unit: Costs to be accounted for Equivalent units Per unit cost

$ 74,000 86,800 $160,800

Conversion Costs $ 72,000 448,000 $520,000

Total $146,000 534,800 $680,800

$160,800 134,000 $ 1.20

$520,000 130,000 $ 4.00

$5.20

Direct Materials

Cost Reconciliation Total cost to account for Cost of completed units (126,000 units  $5.20) Cost of ending Work in Process Material (8,000  $1.20) Conversion costs (4,000  $4.00) Total cost accounted for

$680,800 $655,200 $9,600 16,000

25,600 $680,800

Chapter 3 Process Costing

151.

3-41

On August 1, Candle World’s Packaging Department had Work in Process inventory of 8,620 units, which had been transferred in from the Finishing Department. Candle World uses process costing. These units had accumulated costs of $211,621 in previous departments. During August, 27,000 units were transferred into the Packaging Department. These units had accumulated costs of $677,098 in the previous departments. The Packaging Department incurred $51,389 in conversion costs during the month. 900 units remained in ending inventory on August 31. These units were 80% complete with respect to conversion costs. Calculate the cost per equivalent unit for transferred-in costs and for conversion costs, respectively, for the Packaging Department for August.

Answer

Units in beginning Work in Process Units started Units to account for

8,620 27,000 35,620

Units completed Units in ending Work in Process Units accounted for

34,720 900 35,620

Transferred in costs = ($211,621 + $677,098) ÷ (34,720 + 900) = $24.95 per equivalent unit Conversion costs = ($15,947 + $51,389) ÷ (34,720 + 720) = $1.90 per equivalent unit

152.

Harry’s Sandwich Shop uses a process costing system for its foot-long sub sandwiches and carries no beginning or ending Work in Process inventories. During 2017, the company produced and sold 5,000 subs and incurred the following costs:

Direct material Direct labor Manufacturing overhead Total

Total $ 5,600 8,800 7,200 $21,600

Per equivalent unit $1.12 1.76 1.44 $4.32

The current selling price is $6.25 per sub and the gross profit for 2017 was ($6.25 × 5,000) ‒ ($4.32 × 5,000) = $9,650. Sales projections for 2018 at the current price look flat, but the manager believes that if the sales price is reduced to $5.80, sales volume would increase by 600 units. Assume that direct material and direct labor are variable costs and that manufacturing overhead costs are primarily fixed. Should Harry’s Sandwich Shop lower the selling price? Answer

The sales price should not be lowered because profit will decrease by $498 over the current level. Incremental revenue (5,600 × $5.80) ‒ (5,000 × $6.25) Incremental direct material ($1.12 × 600) Incremental direct labor ($1.76 × 600) Incremental profit

$1,230 (672) (1,056) $ (498)

3-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

CHALLENGE EXERCISES 153.

Tiny Trains produces wooden toy trains and uses process costing. Each train passes through three processes—cutting, assembly, and finishing. In the Assembly Department, materials are added when the trains are 60% complete, and conversion costs are added evenly throughout the process. Production information for the Assembly Department for July follows: Ending Work in Process, conversion costs Beginning Work in Process, conversion costs Units started during July Units in Work in Process, July 1 Units in Work in Process, July 31 Conversion costs in beginning Work in Process Transferred-in costs in beginning Work in Process Cost of direct materials in beginning WIP Conversion costs added during July Direct material cost added during July Transferred-in costs added during July a. b.

40% complete 70% complete 41,000 5,200 7,000 $31,000 $16,820 $11,280 $21,500 $24,000 $34,000

Calculate the equivalent units for the Assembly Department for July. Identify the nature of ‘transferred-in’ costs and how these costs differ from costs in the beginning Work in Process inventory as it relates to the Assembly Department.

Answer a. Transferred-In Units in beginning Work in Process Units started Units to account for

5,200 41,000 46,200

Units completed Units in ending Work in Process Units accounted for

39,200 7,000 46,200

100% 100%

39,200 7,000 46,200

Direct Materials

100% 100%

39,200 7,000 46,200

Conversion

100% 40%

39,200 2,800 42,000

b. Transferred-in costs are costs that the Cutting Department added to the units before sending them on to the Assembly Department. Beginning Work in Process inventory amounts for materials and conversion costs represent the costs incurred on units that the Assembly Department worked on during the previous period (June), but did not complete.

Chapter 3 Process Costing

154.

3-43

Wiseman Toys produces paint guns and uses process costing. The paint guns pass through three processes—molding, assembly, and testing. In the Assembly Department, materials are added when the guns are 10% complete, and conversion costs are added evenly throughout the process. Production information for July in the Assembly Department follows: Ending Work in Process, conversion costs Beginning Work in Process, conversion costs Units started during July Units in Work in Process, July 1 Units in Work in Process, July 31 Conversion costs in beginning Work in Process Transferred-in costs in beginning Work in Process Cost of direct materials in beginning WIP Conversion costs added during July Direct material cost added during July Transferred-in costs added during July

30% complete 60% complete 6,200 1,100 1,800 $31,048 $11,820 $11,280 $21,500 $23,760 $34,170

Calculate the following for Weisman Toys for the Assembly Department for July: 1. Equivalent units 2. Total cost to account for 3. Cost per unit assigned to units transferred out to the Testing Department

Identify which of Wiseman Toys’ three departments will not have any transferred-in costs. Explain why.

Answer a.

1. Direct Materials

Conversion Costs

Transferred-In Costs

Units in beginning Work in Process Units started Units to account for

1,100 6,200 7,300

Units completed

5,500

100%

5,500

100%

5,500

100%

5,500

Units in ending Work in Process Units accounted for

1,800 7,300

100%

1,800 7,300

30%

540 6,040

100%

1,800 7,300

2. Direct Materials

Conversion Costs

TransferredIn Costs

Total Costs

Beginning inventory Cost added Cost to account for

$11,280 23,760 $35,040

$31,048 21,500 $52,548

$11,820 34,170 $45,990

$ 54,148 79,430 $133,578

Costs to be accounted for Equivalent units Cost per unit cost

$35,040 7,300 $ 4.80 +

$52,548 6,040 $ 8.70 +

$45,990 7,300 $ 6.30

= $19.80

b. The Molding Department is the first step in the process of the production of guns, so there will be no transferred-in cost. The Molding Department begins with materials and then converts the materials as it starts the production of guns.

3-44

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

SHORT-ANSWER ESSAYS 155.

What is meant by the statement, “Process costing is essentially a system of averaging?”

Answer Process costing systems assume that the cost of each item produced is identical because the units produced are somewhat identical. The total production costs are divided by the total number of homogeneous items produced resulting in an average cost per item.

156.

What are transferred-in costs? Which departments will never have transferred-in costs?

Answer Transferred-in costs are costs incurred in one processing department that are transferred to the next processing department. The department where the processing begins will never have transferred-in costs because no costs will be transferred into it.

157.

Why is it necessary to use equivalent units in a process costing system?

Answer In a company that uses process costing, there are typically incomplete units in ending Work in Process inventory. These units are converted to a comparable number of completed units in order to calculate the cost per equivalent unit. Assigning the cost of a full unit to a partial unit would mislead decision makers into thinking that units cost more than they actually cost. Hence, equivalent units are calculated in a process costing system to average cost of production among completed units and ending Work in Process inventory.

158.

List the four basic steps in preparing the production cost report.

Answer 1. 2. 3. 4.

159.

Account for the number of physical units. Calculate the cost per equivalent unit for material, labor, and overhead. Assign cost to items completed and items in ending Work in Process inventory. Account for the amount of product cost.

What are conversion costs? What are the characteristics of the costs that make up conversion costs?

Answer The sum of direct labor and overhead costs are called conversion costs. Direct labor is the cost of labor that can be directly traced to particular products. Manufacturing overhead includes indirect manufacturing costs that are used in order to get products ready to sell, but cannot be directly tied to particular products.

Chapter 3 Process Costing

160.

3-45

The production cost report may contain as many as four cost per equivalent unit calculations. What are the components of total cost for which the cost per equivalent unit may be calculated?

Answer The production cost report may contain calculations for the cost per equivalent unit for material, labor, overhead, and transferred-in costs. The components of total cost for which the cost per equivalent unit may be calculated are materials, labor, overheads and transferred-in costs.

161.

What caution must be considered when using process costing information in incremental analysis, and why?

Answer The cost per unit in process costing is typically an average of fixed and variable costs. Thus, it does not measure the change in cost associated from producing an additional unit. The cost per unit need to be analyzed to determine how much fixed cost is included before incremental analysis can be done. Fixed costs may not be avoidable, and as such, they may not be incremental to a particular decision.

CHAPTER 4 Cost-Volume-Profit Analysis Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1 1 1 1 1 1 1 1 1 1

K K K K K K K K K K

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

K K K K K K K K AP K AP K C K K K K K K K K C AP AP

72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95.

168.

1,2 3

BT Item LO BT Item True-False Statements 1 K 21. 1 K 31. 1 K 22. 1 K 32. 1 K 23. 1 K 33. 1 K 24. 1 K 34. 1 K 25. 2 K 35. 1 K 26. 2 K 36. 1 K 27. 2 K 37. 1 K 28. 2 K 38. 1 K 29. 2 C 39. 1 K 30. 2 C 40. Multiple Choice Questions 1 AP 96. 2 K 120. 1, A1 AP 97. 2 C 121. 1 AP 98. 2 C 122. 1 AP 99. 2 K 123. 1 AP 100. 2 C 124. 1 AP 101. 2 C 125. 1 AP 102. 2 K 126. 1 AP 103. 2 K 127. 1 AP 104. 2 AP 128. 1 K 105. 2 AP 129. 1 K 106. 2 AP 130. 1 C 107. 2 AP 131. 1 K 108. 2 AP 132. 1 K 109. 2 AP 133. 1 AP 110. 2 AP 134. 1 AP 111. 2 AP 135. 1 AP 112. 2 AP 136. 2 K 113. 2 AP 137. 2 C 114. 2 AP 138. 2 C 115. 2 AP 139. 2 K 116. 2 AP 140. 2 K 117. 2 AP 141. 2 C 118. 2 AP 142. 2 C 119. 2 AP 143. Matching

Item

2 2 2 2 2 2 2 2 3 3

C K K K K K K K K K

41. 42. 43. 44. 45. 46. 47.

3 3 3 3 3 3 A1

K C K K K K K

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP K C AP AP AP AP

144. 2 145. 3 146. 3 147. 2 148. 3 149. 2 150. 2 151. 2 152. 3 153. 3 154. 3 155. 3 156. 3 157. 3 158. 2 159. 2 160. 3 161. 3 162. 3 163. 3 164. 1,A1 165. 3 166. 1,A1 167. 3

AP AP AP K AP AP AP AP K K K K K C AP AP K C K K K AP AP AP

4-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Item

169. 170. 171. 172.

1 1 1 1,2

K AP AP AP

173. 174. 175. 176.

1 2 1,2 2

AP AP N AP AP

189.

190.

193. 194.

1 1

K K

195. 196.

1 1

Item

Exercises 177. 2 AP 181. 178. 2 AP 182. 179. 2 AP 183. 180. 2 AP 184. Challenge Exercises AP 191. 1,2 AP 192. Short-Answer Essays A C 197. 2 C 199. K 198. 2 C

Item

2 2 3 2

AP AP AP AP

185. 3 186. 3 187. 1,A1 188. 1,A1

AP AP AP AP

1,2

TRUE-FALSE STATEMENTS 1.

Total variable costs change inversely with changes in volume or activity.

Variable costs per unit remain the same when the level of activity changes within the relevant range.

Total fixed costs remain the same when the level of activity changes within the relevant range.

Total variable costs remain constant across all levels of activity within the relevant range.

Mixed costs are also referred to as semivariable costs.

A step cost is similar to a variable cost, except that the relevant range is smaller for a step cost.

Direct labor and manufacturing overhead costs are examples of fixed costs.

The variable cost per unit is the same at all activity levels within the relevant range.

Fixed costs are the same in total amount at any activity level within the relevant range.

10.

Committed fixed costs are costs that can be changed easily in a relatively brief period of time.

11.

Total production cost is generally a mixed cost.

12.

In order to use CVP analysis, costs must be separated into fixed and variable components.

13.

The account analysis method of estimating fixed and variable costs uses software programs such as Microsoft Excel® to fit a line to multiple data points.

14.

The high-low method is subjective in that different managers viewing the same set of data may select different data points to use in estimating costs.

15.

The high-low method is used to estimate a cost equation that can be used to predict costs at estimated activity levels.

16.

The high-low method fits a straight line to the data points that represent the highest and lowest cost levels of a particular activity.

Chapter 4 Cost-Volume-Profit Analysis

4-3

17.

When using the high-low method, total fixed cost is found by calculating the intercept point of the sloped line on the vertical axis.

18.

Total cost equals total fixed costs plus variable cost per unit times the activity level in units.

19.

Computer software is often used to conduct a regression analysis.

20.

Total costs and activity are assumed to have a linear relationship within the relevant range.

21.

Account analysis is a method used to estimate fixed and variable costs.

22.

A significant weakness of the high-low method is that the two data points chosen may not be representative of the relationship between cost and activity.

23.

Regression analysis is a method of estimating the slope and y-intercept using all available data points.

24.

Cost behavior patterns are assumed to be linear at all activity levels when a regression is used to estimate cost behavior.

25.

Profit is equal to revenue minus total variable costs minus total fixed costs.

26.

At the break-even point, total revenue equals total fixed costs.

27.

The margin of safety is the difference between the current level of sales and break-even sales.

28.

Contribution margin is the difference between revenue and total costs.

29.

If the contribution margin ratio is 32%, this means that every $1.00 of sales will contribute $0.32 towards covering fixed costs and generating a profit.

30.

Contribution margin ratio is another name for the gross margin ratio.

31.

At the break-even point, total fixed costs equal total contribution margin.

32.

The margin of safety is the difference between the expected level of profit and break-even profit.

33.

If x = the number of units sold, profit = (contribution margin per unit × x) ‒ total fixed costs.

34.

The contribution margin ratio is determined by subtracting total costs from total sales revenue, and then dividing by total sales revenue.

35.

When performing cost-volume-profit analysis with multiple products, it is assumed that the sales mix remains constant, even when a different number of total units are expected to be sold.

36.

CVP analysis for companies that sell more than one product assumes that the contribution margin ratio for all products is the same.

37.

Total fixed costs divided by the contribution margin ratio equals the break-even point in sales revenue.

4-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

38.

When performing multiple product CVP analysis, a necessary assumption is that sales mix, variable cost per unit, and fixed cost per unit remain constant.

39.

Companies that have higher operating leverage find that their profit level is more responsive to changes in sales volume than if operating leverage was low.

40.

Firms that have relatively high levels of variable costs have high operating leverage.

41.

Firms have no control over their level of operating leverage.

42.

If a company has only variable costs and its sales revenue increases by 20%, its profit will increase by an amount larger than 20%.

43.

When dealing with a constrained resource situation, a company should generally produce only the product with the highest contribution margin per unit in order to maximize profit

44.

When dealing with a constrained resource situation, a company should generally produce only the product with the highest contribution margin ratio, as this will insure the highest profit level.

45.

When there is a constraint on how many units can be produced, the focus shifts from contribution margin per unit to contribution margin per unit of the constraint.

46.

Common constraints found in business that impact production include hours of labor, hours of machine time, quantities of materials, and the cost of a product.

47.

The R Square is the slope of the regression line.

Answers to True-False

1 2 3 4 5 6 7 8 9 10 11 12

F T T F T F F T T F T T

13 14 15 16 17 18 19 20 21 22 23 24

F F T F T T T T T T T T

25 26 27 28 29 30 31 32 33 34 35 36

T F T F T F T F T F T F

37 38 39 40 41 42 43 44 45 46 47

T F T F F F F F T F F

Chapter 4 Cost-Volume-Profit Analysis

MULTIPLE CHOICE 48.

Which of the following is most likely to be a variable cost? A. Depreciation of a factory building B. Direct labor C. Factory janitor salaries D. Total costs of producing products

49.

Variable cost per unit A. can be estimated by performing break-even calculations. B. increases on a per unit basis when the level of activity increases. C. is represented by the slope of the total cost line. D. All of these answer choices are correct.

50.

Which of the following costs is least likely to be a variable cost? A. Sales commissions B. Direct labor C. Indirect materials D. Supervisory salaries

51.

When the level of activity decreases, total variable costs A. increase. B. remain the same. C. decrease in direct proportion to the decrease in activity. D. decrease, but at a slower rate than the level of activity.

52.

When the level of activity increases, the variable cost per unit A. decreases. B. remains constant within the relevant range. C. increases. D. fluctuates, depending on the amount of the increase in activity.

53.

When the level of activity increases, total fixed costs A. decrease. B. remain the same within the relevant range. C. decrease inversely with the change in activity. D. increase within the relevant range.

54.

When the level of activity increases, the fixed cost per unit A. decreases. B. remains the same. C. increases. D. fluctuates, depending on the amount of the increase in activity.

55.

Which of the following components are included in a mixed cost? A. A sunk cost and an opportunity cost B. A fixed cost and a variable cost C. A step cost and a semivariable cost D. A product cost and a period cost

4-5

4-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

56.

Three costs incurred by Randall Rockers are summarized below at two different activity levels, 600 and 700 units: 600 Units 700 Units Cost A $2,700 $3,150 Cost B 2,940 3,360 Cost C 4,800 5,600 Which of these costs is variable? A. A, B, and C B. A and C C. A only D. C only

57.

Within the relevant range, variable costs A. per unit change when the activity level changes. B. are the same in total at different activity levels. C. are the same amount per unit at any activity level. D. None of these answer choices are correct.

58.

A cost is $4,900 at 800 units, $5,600 at 900 units, and $6,200 at 980 units. This cost is a A. variable cost. B. fixed cost. C. mixed cost. D. step cost.

59.

Step costs A. per unit are the same for each range of volume. B. are classified as step variable or step fixed depending on the range of activity for which the cost remains fixed. C. change in total at every level of activity. D. are considered to be step fixed costs within a relatively small range.

60.

A company has a cost that is $7.00 per unit at a volume of 10,000 units and $5.00 per unit at a volume of 14,000 units. What type of cost is this? A. Fixed costs B. Variable costs C. Mixed costs D. Incremental costs

61.

Which of the following is not a method that is used to estimate variable and fixed costs? A. Account analysis B. High-low method C. CVP analysis D. Regression analysis

62.

Which of the following is a cost estimation approach that is not based on fitting historical data points to a line? A. Account analysis B. High-low method C. Regression analysis D. Margin of safety analysis

Chapter 4 Cost-Volume-Profit Analysis

4-7

63.

The account analysis approach to estimating fixed and variable costs A. requires at least five years of historical data. B. is based on the professional judgment of the manager. C. is not useful for general and selling expenses. D. is only used if the data for the high-low method or regression analysis is not available.

64.

Walsh Company graphed its units produced and total production costs for the past eight months. What is this called? A. Incremental analysis B. Regression analysis C. Contribution margin D. Scattergraph

65.

The high-low method calculates the total fixed cost as the A. difference between total variable costs and total costs at a particular activity level. B. difference between the unit variable cost and the unit total cost. C. change in cost divided by the change in activity level for two points. D. change in activity level divided by the change in cost for two points.

66.

A significant weakness of the high-low method is that A. a significant amount of management expertise is necessary to break out the variable and fixed costs. B. the two data points that are used may not be representative of the general relationship between cost and activity. C. the calculations are so complex that a computer is usually necessary in order to get accurate results. D. monthly data must be collected for at least three years before the method can be used.

67.

Regression analysis A. uses all the available data points to estimate a cost equation. B. is less accurate than other methods of estimating costs. C. estimates a cost equation that indicates the variable and fixed costs per unit. D. is a method of determining the break-even point.

68.

The range of activity for which estimates and predictions are likely to be accurate is the A. incremental range. B. margin of safety. C. relevant range. D. range of opportunity.

69.

A cost is $34,500 at an activity level of 23,000 units, and $42,000 at an activity level of 28,000 units. What type of cost is this? A. Fixed costs B. Variable costs C. Mixed costs D. Sunk costs

4-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

70.

Duradyne, Inc. has total costs of $18,000 when 2,000 units are produced and $26,000 when 5,200 units are produced. During March, 4,000 units were produced and sold for $8 each. If the high-low method is used, how much is the variable cost per unit? A. $2.50 B. $0.40 C. $2.00 D. $4.00

71.

Ranger Pressure Cleaners has total monthly costs of $5,800 when 3,200 units are produced and $6,425 when 3,700 units are produced. If the high-low method is used, how much is the estimated total monthly fixed cost? A. $625 B. $6,113 C. $7,250 D. $1,800

72.

C-Drive Components has collected the following production data for the past four months: Units produced Total cost 7,000 $16,500 10,000 22,500 8,500 17,750 9,000 21,000 If the high-low method is used, what is the monthly total cost equation? A. Total cost = $2,500 + ($2.00 × units produced) B. Total cost = $3,750 + ($2.75 × units produced) C. Total cost = $1,500 + ($2.00 × units produced) D. Total cost = $500 + ($2.25 × units produced)

73.

Management of MRC Enterprises has provided the following output from Excel®: SUMMARY OUTPUT Statistics Multiple R 0.8939072 R Square 0.7990702 Adjusted R2 0.7488377 Standard Error 10744.516 Observations 6

ANOVA Regression Residual Total

Intercept X Variable 1

1 4 5

SS 1836429 46177852 2298208

MS 1836429 11544463

F 15.90745

Significance F 0.0162864

Coefficients 47757.05 6.364

Std Error 34958.30 1.595798

t Stat 1.36611 3.98841

P-value 0.24366 0.01628

Lower 95% -49302.764 1.9340590

Upper 95% 144816.88 10.795352

What is the estimated cost for a production level of 1,200 units? A. $1,730 B. $55,394 C. $7,636 D. There is not enough information provided to determine the answer..

Lower 95%

Upper 95%

49302. 1.9340

144816.8 10.79535

Chapter 4 Cost-Volume-Profit Analysis

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74.

Total costs were $38,400 when 16,000 units were produced and $41,100 when 17,200 units were produced. If the high-low method is used, how much are estimated total costs for a production level of 17,100 units? A. $39,750 B. $40,861 C. $41,040 D. $40,875

75.

Hardigree Insurance has collected the following information over the last six months. Month Units produced Total costs March 2,000 $6,700 April 3,200 9,400 May 2,200 7,100 June 3,000 9,500 July 2,800 8,000 August 2,100 6,600 Using the high-low method, how much is the variable cost per unit? A. $2.25 B. $2.55 C. $2.80 D. $3.14

76.

Hardigree Insurance has collected the following information over the last six months. Month March April May June July August

Units produced 2,000 3,200 2,200 3,000 2,800 2,100

Total costs $6,700 9,400 7,100 9,500 8,000 6,600

Using the high-low method, how much is the total fixed cost? A. $2,300 B. $2,200 C. $4,400 D. $7,910 77.

Hardigree Insurance has collected the following information over the last six months. Month March April May June July August

Units produced 2,000 3,200 2,200 3,000 2,800 1,100

Total costs $6,700 9,400 7,100 9,500 8,000 6,600

Using the high-low method, what is the estimated total cost in a month when 3,100 units are produced? A. $9,175 B. $6,975 C. $4,732 D. $6,932

4-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

78.

Window Shine provides window cleaning service. Information concerning costs and number of windows cleaned for three months during 2017 appear below: Month May July September

Activity 18,000 windows 21,000 windows 20,400 windows

Cost $84,000 94,500 94,800

Using the high-low method, what is the amount of total fixed costs? A. $10,500 B. $3,000 C. $21,000 D. $78,857 79.

Princeton offers a large range of undergraduate courses. The University is interested in determining the cost equation for the facilities cost as a function of student credit hours so that it can more accurately budget its facilities costs as enrollment grows. Information for the high and low cost semesters and volumes for last 5 years appears below: Semester Spring 2016 Fall 2017

Student Credit Hours 160,000 140,000

Facilities Cost $750,000 $660,000

Using the high-low method, with student credit hours as the activity driver, what is the equation for facilities cost (FC) as a function of student credit hours? A. FC = $4.50 / student credit hour B. FC = $1.14 / student credit hour C. FC = $30,000 + $4.50 / student credit hour D. FC = $568,182 + $0.22 / student credit hour 80.

A cost is $11,000 at 1,000 units, $12,000 at 2,000 units, and $13,000 at 3,000 units. Using the high-low method, how much is the fixed portion of these costs? A. $1,000 B. $10,000 C. $20,000 D. The answer depends on the actual activity.

81.

Which of the following methods provides the most accurate predictions of future costs? A. Account analysis. B. Scattergraphs. C. High-low method. D. Regression analysis.

82.

Which of the following correctly describes fixed and variable cost behavior as total volume increases? A. Unit fixed costs stay the same and unit variable costs increase. B. Total fixed costs stay the same and total variable costs increase. C. Unit fixed costs decrease and total variable costs decrease. D. Unit fixed costs decrease and unit variable costs decrease.

Chapter 4 Cost-Volume-Profit Analysis

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83.

Past relationships between cost and activity may not be a useful basis for estimating future costs A. if most of a company’s costs are variable. B. the company is able to accurately estimate its cost behavior. C. if the cost is a mixed cost. D. if future activity levels are expected to be beyond the relevant range.

84.

Which of the following methods requires the most professional judgment in classifying costs? A. Scattergraph B. Regression analysis C. Account analysis D. High-low method

85.

Each point on the scattergraph represents one pair of A. cost and activity values. B. variable cost and revenue values. C. fixed cost and revenue values. D. revenue and activity values.

86.

Carpet Renewal dyes carpets for residential customers. The company is interested in estimating fixed and variable costs. The following data are available for the month of June when 420 carpets were dyed: Office rent $ 1,250 Depreciation - equipment 900 Cleaning supplies 5,140 Hourly wages 11,000 Transportation (variable) 3,600 Owner’s salary 3,100 Total $24,990 Using account analysis, how much is estimated variable cost per carpet? A. $47.00 B. $38.43 C. $59.50 D. $52.12

87.

Lawn Cut Perfection provided data concerning the costs incurred to mow residential lawns for which customers pay $45 per mowing. Data for the past 7 months are as follows: Number of lawns mowed Mowing cost

January

February

March

April

May

June

July

200

110

150

100

220

120

210

$12,900

$8,120

$10,200

$8,200

$13,060

$8,400

$13,280

How much is the estimated variable cost of mowing one lawn using the high-low method? A. $43.00 B. $40.50 C. $44.90 D. $51.60

4-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

88.

January

February

March

April

May

June

July

200

110

150

100

220

120

210

$12,900

$8,120

$10,200

$8,200

$13,060

$8,400

$13,280

How much are the estimated monthly fixed costs using the high-low method? A. $8,200 B. $2,444 C. $4,150 D. $3,180 89.

What are the three elements of the profit equation? A. Selling price per unit, variable cost per unit, and fixed cost per unit B. Total revenues, total variable costs, and total fixed cost C. Selling price per unit, variable cost per unit, and total fixed costs D. Selling price per unit, total variable costs, and fixed cost per unit

90.

What must be true if the contribution margin is less than zero? A. The selling price per unit is less than the variable cost per unit B. Total fixed costs will be greater than total variable costs. C. Not enough units were sold. D. Fixed costs plus variable costs are less than total revenue.

91.

Which of the following assumptions might negatively affect the validity of a CVP analysis? A. Costs can be accurately separated into fixed and variable components. B. Fixed costs remain fixed, and variable costs per unit do not change over the activity levels of interest. C. Both the assumptions—costs can be accurately separated into fixed and variable components, and fixed costs remain fixed, and variable costs per unit do not change over the activity levels of interest—negatively affect the validity of a CVP analysis. D. None of these answer choices are correct.

92.

Which of the following is not considered to be a ‘cost’ in cost-volume-profit analysis? A. Variable costs B. Fixed costs C. Opportunity costs D. Mixed costs

93.

Which of the following statements is correct? A. Total fixed costs are equal to revenue plus variable cost per unit times the quantity produced. B. Profit is equal to total fixed costs plus revenue. C. Total fixed costs are equal to profit minus revenue. D. Profit is equal to revenue minus total variable costs minus total fixed costs.

94.

Which of the following will have no effect on the break-even point in units? A. The selling price increases. B. The variable cost per unit increases. C. The number of units sold declines. D. Total fixed costs increase.

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95.

Hanalei Fishing Trips is operating at its break-even point of 4,200 fishing trips per year. Which of the following statements is true? A. The amount of the company’s total costs equals the amount of its revenues. B. The company’s fixed costs equal its variable costs. C. The company’s profit is equal to its contribution margin. D. Assuming no other changes, if the company sold fewer trips, it will earn a higher contribution margin per trip.

96.

The margin of safety is the difference between A. total revenue and total fixed costs. B. expected level of sales and the break-even point in revenue dollars. C. expected profit and profit at break-even. D. selling price and variable cost per unit.

97.

IM Enterprises sells two products, Crunchies and Munchies. Crunchies have a 32 percent contribution margin and Munchies have a 35 percent contribution margin. Profit earned from each box of Crunchies is $8 and the profit earned from each box of Munchies is $7. If the company is planning to generate revenue of $100, what should the company do? A. It should sell more Crunchies. B. It should sell more Munchies. C. It should sell an equal number of each product. D. No recommendation can be made from the data given.

98.

If the contribution margin is greater than zero, A. the selling price of each product is less than the variable cost per unit. B. total variable costs are less than sales revenue. C. the company will be profitable. D. the fixed costs are greater than variable cost.

99.

The incremental profit generated by the sale of one additional unit is equal to the A. contribution margin per unit. B. selling price. C. margin of safety. D. incremental cost.

100.

Which of the following statements regarding the contribution margin ratio is not true? A. The contribution margin ratio is equal to the contribution margin per unit divided by the selling price per unit. B. The contribution margin ratio is the amount of each sales dollar that goes toward covering fixed costs and generating a profit. C. The contribution margin ratio is equal to variable cost per unit divided by fixed cost per unit. D. The contribution margin ratio is useful when companies that sell a variety of products calculate a break-even point in sales.

101.

Holding all other factors constant, the break-even point will decline if A. fixed costs increase. B. the contribution margin per unit increases. C. the selling price declines. D. the number of units sold decreases.

4-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

102.

Which of the following is not involved in determining the break-even point? A. Anticipated sales for the next period B. Total fixed costs C. Selling price per unit D. Variable cost per unit

103.

Which of the following is not an assumption of CVP analysis? A. Costs can be accurately separated into fixed and variable components. B. Fixed costs per unit remain constant within the relevant range. C. Total variable costs are proportional to the level of activity. D. Selling price per unit remains the same at all activity levels.

104.

Diva Products produces scarves. The estimated fixed costs for the year are $164,500, and the estimated variable costs per unit are $9. The company expects to produce and sell 40,000 scarves at a unit selling price of $16 per unit. How much is the break-even point in units? A. 6,580 units B. 10,300 units C. 23,500 units D. 376,000 units

105.

Diva Products produces scarves. The estimated fixed costs for the year are $164,500, and the estimated variable costs per unit are $9. The company expects to produce and sell 40,000 scarves at a unit selling price of $16 per unit. By how much can sales revenue drop before Diva Products incurs a loss? A. $16,500 B. $264,000 C. $23,500 D. $115,500

106.

At Bahama Foods, the break-even point is 1,600 units. If fixed costs total $44,000 and variable costs are $12 per unit, what is the selling price per unit? A. $15.50 B. $39.50 C. $63,200 D. There is not enough information provided to determine the answer.

107.

Widgely Sales Company’s break-even point is 12,200 units. Each unit incurs variable costs of $2.20 and is sold for $4.90. How much are total fixed costs? A. $24,400 B. $26,840 C. $59,780 D. $32,940

108.

Splurge Electronics sells homework machines for $80 each. Variable costs per unit are $45 and total fixed costs are $43,750. Splurge is considering the purchase of new equipment that would increase fixed costs to $48,700, but decrease the variable costs per unit by $5. At that level, Splurge Electronics expects it can sell 1,500 units next year. What is the company’s break-even point in units if it purchases the new equipment, assuming the selling price remains constant? (Round your answer to the nearest whole number.) A. 1,250 units B. 1,218 units C. 650 units D. 2,312 units

Chapter 4 Cost-Volume-Profit Analysis

4-15

109.

Splurge Electronics sells homework machines for $80 each. Variable costs per unit are $45 and total fixed costs are $43,750. Splurge Electronics expects it can sell 1,500 units next year. By how many units can Splurge’s sales drop before the company incurs a loss? A. 110 units B. 1,250 units C. 16 units D. 250 units

110.

Oak Hill Furniture has a contribution margin ratio of 20%, and a contribution margin per unit of $12. If fixed costs are $156,000, how much sales revenue must the company generate in order to reach its break-even point? A. $780,000 B. $13,000 C. $15,600 D. $31,200

111.

Randolph Corporation sells a single product at a price of $275 per unit. Variable cost per unit is $135 and fixed costs total $356,860. If sales are expected to be $825,000, what is the company’s margin of safety? A. $468,140 B. $124,025 C. $700,975 D. $405,000

112.

MDI Enterprises prepared the following income statement for June: Sales revenue (6,000 units) Cost of goods sold: Fixed costs Variable costs Gross profit Operating expenses: Fixed costs Variable costs Operating income

$150,000 $18,000 30,000

27,000 12,000

48,000 102,000

39,000 $ 63,000

How much is MDI’s total contribution margin? A. $120,000 B. $108,000 C. $105,000 D. $93,000 113.

One Finger Staples produces a single stapler that it sells for $15 per unit. If variable costs per unit are $6 and fixed costs total $42,300, how many units must the company sell in order to earn a profit of $12,150? A. 3,350 units B. 4,700 units C. 3,630 units D. 6,050 units

4-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

114.

The president of DynaMark will not receive a bonus next year unless the company’s profits are at least $435,000. DynaMark sells a single product at a price of $27 per unit. If variable costs are $12 per unit and fixed costs total $150,000, what amount of unit sales must DynaMark generate in order for the president to receive a bonus? A. 48,750 units B. 39,000 units C. 29,000 units D. 21,167 units

115.

$150,000 $18,000 30,000

27,000 12,000

48,000 102,000

39,000 $ 63,000

How many units must MDI sell in order to break-even? A. 2,500 units B. 900 units C. 3,480 units D. There is not enough information provided to determine the answer. 116.

WayFair Clothing has total fixed costs of $34,000 per month. It sells a single product with variable costs of $5.60 per unit. If 8,000 units can be sold this month, what price must Wayfair charge in order to break-even? A. $4.25 B. $5.60 C. $9.85 D. There is not enough information provided to determine the answer.

117.

Revert Creations sells a single product at a price of $50 per unit. Fixed costs total $312,000 and variable costs per unit are $24. Revert is considering the purchase of new equipment that would reduce variable costs per unit to $21, but fixed costs would increase to $334,370. Above what volume would Revert be profitable with the new machine, assuming the selling price remains constant? A. 12,000 units B. 11,530 units C. 23,530 units D. There is not enough information provided to determine the answer.

118.

SkyBucks Bagels sells boxes of bagels each with a variable cost of 45% of sales. Its fixed costs are $36,000 per year. Each box has a contribution margin of $8. How much sales revenue does SkyBucks need to break-even per year if bagels are its only product? A. $65,455 B. $80,000 C. $4,500 D. $19,800

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119.

Plant Bottling needs to reduce the selling price of its acrylic water bottles in order to be competitive. Currently, it has fixed costs of $110,000 and variable costs per unit of $4.10. If Plant Bottling can sell 40,000 units, what price should it charge in order to break-even? A. $4.10 B. $2.75 C. $6.85 D. None of these answer choices are correct.

120.

Rogers Racers makes toy race cars that sell for $12 each with a variable cost of $5 per car. Annual fixed costs are $7,000. How much will profit increase if 600 more units are sold? A. $7,200 B. $4,200 C. $1,000 D. $3,000

121.

Rogers Racers makes toy race cars that sell for $12 each with a variable cost of $5 per car. Annual fixed costs are $7,000. How many cars must be sold to earn a profit of $3,150? A. 1,450 cars B. 450 cars C. 263 cars D. 550 cars

122.

Rogers Racers makes toy race cars that sell for $12 each with a variable cost of $5 per car. Annual fixed costs are $7,000. If Rogers Racers sells 50 units fewer than break-even, how much loss would the company recognize on its income statement? A. $350 B. $4,200 C. $250 D. $70

123.

Angel Toys is a producer of tiny dolls for children. Following is information about its revenue and cost structure: Selling price per doll Variable costs per doll: Production (manufacturing costs) Selling and administration (non-manufacturing costs) Total fixed costs: Production (manufacturing costs) Selling and administration (non-manufacturing costs) In which range does the break-even point fall? A. Between 5,000 and 6,000 units B. Between 6,000 and 7,000 units C. Between 10,000 and 11,000 units D. Between 11,000 and 12,000 units

$8.00 $1.20 $0.40 $40,000 per year $32,000 per year

4-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

124.

$8.00 $1.20 $0.40 $40,000 per year $32,000 per year

Management is proposing to pay sales people a commission equal to 10% of the variable production cost. What will be the new contribution margin ratio if the commission plan is implemented? A. 70% B. 80% C. 78.5% D. The number of units to be sold is needed to determine the answer. 125.

$8.00 $1.20 $0.40 $40,000 per year $32,000 per year

Assume that the current sales level is 14,000 dolls. What impact would a 10% increase in sales have on income? A. Income would increase by 10% B. Income would increase by about 19% C. Income would increase by $11,200 D. Income would increase by about 51% 126.

$8.00 $1.20 $0.40 $40,000 per year $32,000 per year

Assume that sales are expected to fall from 14,000 units this year to 13,000 units next year. Angel Toys would like to raise the selling price next year from the current $8.00 per unit to achieve the same profits next year as the current year. What will the sales price have to be next year, to generate the same profits next year as this year? A. Somewhere between $8.00 and $8.39 B. Somewhere between $8.40 and $8.59 C. Somewhere between $8.60 to $9.00 D. Higher than $10.00

Chapter 4 Cost-Volume-Profit Analysis

127.

4-19

Charlie Shine has written a self-improvement book. The following are its pricing and cost details: Selling price Variable cost per unit: Production Selling & administrative Fixed costs: Production Selling & administrative

$18.00 per book $3.50 1.90 $33,600 per year 15,540 per year

How many books must Charlie sell to break-even? A. 70,200 books B. 3,900 books C. 2,318 books D. 2,667 books 128.

Charlie Shine has written a self-improvement book. The following are its pricing and cost details: Selling price $18.00 per book Variable cost per unit: Production $3.50 Selling & administrative 1.90 Fixed costs: Production $33,600 per year Selling & administrative 15,540 per year What is the cost formula for this operation, where TC = Total cost and x = units sold? A. TC = 12.60x – 49,140 B. TC = 6x + 49,140 C. TC = 5.40x – 49,140 D. TC = 5.40x + 49,140

129.

$18.00 per book $3.50 1.90 $33,600 per year 15,540 per year

Charlie Shine is currently selling 5,200 books per year. What impact would a 22% increase in sales have on profit? A. Profit would increase by 22%. B. Profit would increase by 100%. C. Profit would increase by $20,592. D. Profit would increase by $14,414.

4-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

130.

$18.00 per book $3.50 1.90 $33,600 per year 15,540 per year

Assume the variable production cost and the selling price were each increased by $0.30 per book. Which of the following would change? A. Contribution margin ratio B. Contribution margin per unit C. Break-even point in units D. Total fixed costs 131.

Talk Time Cellular sells smart phones for $150. The unit variable cost per phone is $25 plus a selling commission of 10%. Fixed manufacturing costs total $5,600 per month, while fixed selling and administrative costs total $2,100. What is the contribution margin per phone? A. $125 B. $110 C. $50 D. There is not enough information provided to determine the answer.

132.

Talk Time Cellular sells smart phones for $150. The unit variable cost per phone is $25 plus a selling commission of 10%. Fixed manufacturing costs total $5,600 per month, while fixed selling and administrative costs total $2,100. How many phones must be sold to avoid a loss on the company’s income statement? A. 62 phones B. 51 phones C. 70 phones D. 45 phones

133.

Talk Time Cellular sells smart phones for $150. The unit variable cost per phone is $25 plus a selling commission of 10%. Fixed manufacturing costs total $5,600 per month, while fixed selling and administrative costs total $2,100. Talk Time expects sales of $12,300 during next year. How much is the margin of safety estimated for next year? A. $82 B. $10,500 C. $1,320 D. $1,800

134.

Bunch of Books, a producer of children’s books, has provided the following information: Selling price per unit $6.60 Contribution margin per unit $3.00 Total fixed costs $46,200 What is the break-even point in books? A. 20,790 books B. 15,400 books C. 12,833 books D. 7,000 books

Chapter 4 Cost-Volume-Profit Analysis

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135.

Brewster Café has estimated that fixed costs per month are $114,840 and variable cost per dollar of sales is 42%. Sales during June totaled $220,000. What is the break-even point per month in sales? A. $273,429 B. $198,000 C. $22,000 D. None of these answer choices are correct.

136.

Brewster Café has estimated that fixed costs per month are $114,840 and variable cost per dollar of sales is 42%. Sales during June totaled $220,000. What level of sales is needed for a monthly profit of $31,900? A. $253,000 B. $198,000 C. $239,140 D. $349,381

137. Brewster Café has estimated that fixed costs per month are $114,840 and variable cost per dollar of sales is 42%. For the month of July, the cafe anticipates sales of $300,000. What is the expected level of profit? A. $126,000 B. $59,160 C. $174,000 D. $11,160 138.

If a company sells many different types of products, A. it will have high operating leverage. B. the contribution margin ratio approach may be used to calculate the break-even point. C. it cannot use cost-volume-profit analysis. D. its margin of safety will be negative.

139.

A company that sells many different types of products should approach CVP analysis by assuming that A. all products will have the same contribution margin ratio. B. products will be sold in a constant mix. C. fixed costs per unit will remain constant over the relevant range.. D. the company will sell equal amounts of each product each period.

140.

Tonto Rain Shields sells 3 types of umbrellas. Umbrella A sells for $20 and has variable cost of $9.00 per unit. Umbrella B sells for $17.00 and has variable cost of $12.00 per unit. Umbrella C sells for $9.00 and has variable costs of $6.00 per unit. The company sells in a mix of 2 units of A, 3 units of B, and 5 units of C. What is the weighted average contribution margin per unit for Tonto? A. $5.20 B. $13.60 C. $10.00 D. $6.33

4-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

141.

Mexi-Foods produces tacos and burritos. Its financial information follows for the month of June: Tacos Burritos Sales revenue $40,000 $160,000 Fixed costs 8,000 40,000 Variable costs 15,000 75,000 Profit $17,000 $45,000 How much is the break-even point in total sales dollars for Mexi-Foods assuming the sales mix is stable? A. $120,000 B. $87,273 C. $83,027 D. None of these answer choices are correct..

142.

Beach Time produces two models of beach chairs, Lay Back and Easy Rest. Information regarding these products for May follows: Lay Back Easy Rest Number of units 6,000 14,000 Sales revenue $120,000 $140,000 Fixed costs 24,000 50,000 Variable costs 60,000 42,000 Profit $ 36,000 $ 48,000 Selling price per unit $20 $10 How much is Beach Time’s weighted average contribution margin ratio? A. 60.00% B. 32.31% C. 60.77% D. 71.53%

143.

Idol Creations produces two models of keyboards, compact and deluxe. Information regarding the products is summarized for the month of April in the following table: Number of units Sales Variable costs Fixed costs Profit Profit per unit

Compact 600 $48,000 15,000 21,000 $12,000 $20.00

Deluxe 400 $36,000 12,000 20,000 $ 4,000 $10.00

Total 1,000 $84,000 27,000 41,000 $16,000

If the company’s weighted average contribution margin ratio is 67.86%, and the weighted average contribution margin per unit is $57.00, how much will Idol Creation’s total sales be at break-even? A. $60,419 B. $122,281 C. $68,000 D. $60,552

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144.

145.

Briggs Tools makes 2 products, snips and cutters. Snips have a contribution margin per unit of $8.00 and cutters have a contribution margin per unit of $12.00. Briggs has annual fixed costs of $117,600. Briggs’ historical sales data indicates that snips and cutters are sold in a 2 to 1 sale mix. Each snip takes 2 machine hours and each cutter takes 4 machine hours. Demand for both products is unlimited but the company must produce at least 1,000 units of each to stay competitive. Briggs is limited to 24,000 machine hours per month. How many units of each product should be produced each month? A. 20,000 snips, 1,000 cutters B. 10,000 snips, 4,000 cutters C. 12,000 snips, 6,000 cutters D. 10,000 snips, 1,000 cutters

146.

Yogurt Palace produces two flavors of low-fat frozen yogurt: Blueberry and Raspberry. Information regarding the products is summarized for the month of January in the following table: Blueberry Raspberry Number of units 6,000 2,000 Sales revenue $90,000 $20,000 Fixed costs 20,000 9,000 Variable costs 36,000 5,000 Profit $34,000 $ 6,000 Amount of processing time per unit 1.4 hours 1.1 hours Contribution margin per unit $9.00 $7.50 Profit per unit $5.67 $3.00 Yogurt Palace determined it will have only 9,040 hours of processing time during February for which it can produce yogurt, and it must produce a minimum number of each flavor to remain competitive. Of which flavor should Yogurt Palace produce the most units and why? A. Raspberry. It will contribute a larger amount towards profit for each unit of resource available. B. Blueberry. It will contribute a larger amount towards profit for each unit of resource available. C. Blueberry. It generates a higher contribution margin per unit. D. Raspberry. Fewer units will need to be produced using fewer hours, allowing excess hours for other products.

147.

Which of the following is not an assumption underlying CVP analysis? A. Costs can be accurately separated into their fixed and variable components. B. Fixed costs remain constant over the relevant range. C. Variable costs per unit change over the relevant range. D. The sales mix remains constant.

4-24

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

148.

Yogurt Palace produces two flavors of low-fat frozen yogurt: Blueberry and Raspberry. Information regarding the products is summarized for the month of January in the following table: Blueberry Raspberry Number of units 6,000 2,000 Sales revenue $90,000 $20,000 Fixed costs 20,000 9,000 Variable costs 36,000 5,000 Profit $34,000 $ 6,000 Amount of processing time per unit 1.4 hours 1.1 hours Contribution margin per unit $9.00 $7.50 Profit per unit $5.67 $3.00 Yogurt Palace determined it will have only 5,950 hours of processing time during March for which it can produce yogurt. Yogurt Palace determines that it should produce a minimum of 1,500 units of each flavor to stay competitive, and that it should produce more raspberry flavored yogurt than blueberry yogurt. How many raspberry yogurt should the company produce in February considering the processing constraint? A. 3,500 units B. 3,850 units C. 5,409 units D. 4,250 units

149.

Garden Duty produces shovels and rakes. Sales and costs for the most recent year are indicated below: Shovels Rakes Total Units 8,000 20,000 28,000 Sales revenue $160,000 $40,000 $200,000 Variable costs 98,000 18,000 116,000 Fixed costs 28,000 12,000 40,000 Profit $ 34,000 $10,000 $ 44,000 The number of units and selling price per unit of both products appears to be stable for the foreseeable future. How much total revenue will Garden Duty have at break-even? A. $95,238 B. $13,333 C. $146,663 D. $156,000

150.

Garden Duty produces shovels and rakes. Sales and costs for the most recent year are indicated below: Shovels Rakes Total Units 8,000 20,000 28,000 Sales revenue $160,000 $40,000 $200,000 Variable costs 98,000 18,000 116,000 Fixed costs 28,000 12,000 40,000 Profit $ 34,000 $10,000 $ 44,000 The number of units and selling price per unit of both products appears to be stable for the foreseeable future. How much is the weighted average contribution margin per unit? A. $4.43 B. $1.57 C. $0.42 D. $3.00

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4-25

151.

Experts on Call provides computer repairs on-site and has a contribution margin ratio of 35%, a contribution margin per service call of $15, and fixed costs of $12,000 per month. During March, it made 1,200 service calls. How much will Experts on Call’s profit increase if 200 more service calls are made? A. $1,000 B. $350 C. $1,050 D. $3,000

152.

Why is the level of operating leverage important? A. It affects the change in profit when sales change. B. It predicts how much cost will be incurred at various levels of activity. C. It is calculated using regression analysis which uses all available data points. D. None of these answer choices are correct..

153.

To which of the following is operating leverage related? A. Manufacturing costs versus non-manufacturing costs B. Estimated costs versus actual costs C. Total revenues versus total costs D. Fixed costs versus variable costs

154.

A company with low operating leverage has lower A. profit margins. B. variable costs. C. fixed costs. D. selling prices.

155.

Operating leverage is important because it associates changes in sales with changes in A. profits. B. contribution margins. C. total costs. D. total production costs.

156.

Which of the following is true for a firm with high operating leverage? A. It has a relatively high amount of mixed costs. B. It is generally thought to be riskier than a company with lower operating leverage. C. It has a zero contribution margin ratio at the break-even point. D. If sales increase, its profits will increase at a slower rate than a company with lower operating leverage.

157.

If a company has fixed costs and is operating at a level above the break-even point, what happens to profits when sales increase by 20%? A. Profits will increase by less than 20%. B. Profits will increase by 20%. C. Profits will increase by more than 20%. D. Profits will decrease by less than 20%.

4-26

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

158.

During 2016, Waxley Corporation reported total revenues of $891,640 and profit of $91,486. Fixed costs were $332,043, and 44,582 units were sold. Costs and prices are expected to stay the same in 2017. Waxley expects to sell 50,000 units. How much is the company’s budgeted profit for 2017? A. $142,957 B. $525,000 C. $667,957 D. $475,000

159.

Anniston Gifts makes a product that sell for $40 per unit has and has a unit variable cost of $18. The contribution margin ratio is 55%. Annual fixed costs are $11,990. The company expects to sell 2,000 units this year. By how much would profits increase if 140 more units are sold than expected? A. $3,080 B. $47,080 C. $5,600 D. $545

160.

Firms that have high operating leverage A. have relatively high levels of fixed costs. B. have production costs that are mostly variable. C. will have smaller changes in profit when the activity level changes. D. are generally thought to be less risky.

161.

Total Fitness and Aerobic Town reported the following results for 2017: Total Fitness Aerobic Town Sales $5,000,000 $5,000,000 Variable costs 2,200,000 1,000,000 Fixed costs 1,000,000 2,200,000 Due to an economic downturn, it is estimated that sales for both companies will decrease next year by $300,000. Which company will have the larger percentage decrease in profit next year? A. Neither; both companies will have the same profit. B. Total Fitness will have a higher decrease in profit C. Aerobic Town will have a higher decrease in profit. D. There is not enough information provided to determine the answer.

162.

Which of the following is a resource constraint? A. Dollars of profit generated B. Sales commissions C. Cost per unit D. Pounds of materials for production

163.

When considering a process that involves a resource constraint, the optimal decision A. minimizes the break-even point. B. maximizes the contribution margin per unit of the constraint. C. minimizes the contribution margin per unit of output. D. minimizes total fixed costs.

164.

Which of following will not be a part of the regression output from Excel? A. A plot of the data B. A measure of the R Square C. The equation of the regression line D. Total cost at all activity levels

Chapter 4 Cost-Volume-Profit Analysis

165.

4-27

Team Production produces two models of tailgating tents containing sports logos: NCAA and NFL. Information regarding these products for May follows: NCAA NFL Number of units 3,000 7,000 Sales revenue $120,000 $140,000 Variable costs 60,000 42,000 Fixed costs 24,000 50,000 Profit $ 36,000 $ 48,000 Yards of canvas per tent 22 14 Contribution margin per unit $20 $14 Due to increased demand of canvas in the market, Team Productions can obtain only 42,000 yards of canvas per month. The company can sell as many tents as it can produce of either model. How many NFL tents should the company produce in May considering the constraint? A. 0 NFL tents B. 3,000 NFL tents C. 1,909 NFL tents D. 1,500 NFL tents

166.

Handson Yacht Rentals generated the following regression based on the number and cost of daily rentals of its yachts during May:

SUMMARY OUTPUT Regression Statistics Multiple R 0.825358 R Square 0.681216 Adj RSquare 0.656695 Stand.Error 39.35892 Observations 15 ANOVA df SS MS F Regression 1 43,034.7 43,034.71 27.780017 Residual 13 20,138.6 1,549.12 Total 14 63,173.3

Coefficients Std Error t Stat Intercept 2621.21 101.8073 2.626725 X Variable 1 35.58 6.1023 5.270675

Sig F 0.000151

Lower P-value 95% 0.020917 47.478460 0.000151 18.980154

Upper Lower Upper 95% 95% 95% 487.3612 47.478460 487.3612 45.3467 18.980154 45.3467

If Handson Yacht Rentals provides 45 yacht rentals during June, how much is its total cost for rentals? A. $1,601 B. $4,222 C. $4,581 D. $63,173

4-28

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

167.

Castillo Pens produces two models of titanium pens—Grande and Petite. Operations information appears below for the current year: Grande Petite Units 2,500 4,500 Sales revenue $160,000 $96,000 Variable cost 64,000 42,000 Fixed costs 40,000 16,000 Profit $ 56,000 $ 38,000 Profit per pen $22.40 $8.44 Contribution margin per pen $38.40 $12.00 Ounces of titanium per pen 8.50 2.50 Due to a supplier problem, only 1,400 pounds (22,400 ounces) of titanium will be available during each of the next few months. Each ounce of titanium costs $0.80. Castillo needs to produce at least 900 of each model to stay competitive and can sell all it produces. Given the limited resource, how many Petite’s should Castillo produce to maximize profits? A. 5,900 units B. 900 units C. 8,960 units D. 5,625 units

Answers to Multiple Choice 48 B 72 A 49 C 73 B 50 D 74 D 51 C 75 A 52 B 76 B 53 B 77 A 54 A 78 C 55 B 79 C 56 B 80 B 57 C 81 D 58 C 82 B 59 B 83 D 60 A 84 C 61 C 85 A 62 D 86 A 63 B 87 B 64 D 88 C 65 A 89 C 66 B 90 A 67 A 91 D 68 C 92 C 69 B 93 D 70 A 94 C 71 D 95 A

96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119

B B B A C B A B C B B D B D A B B D B A C B A C

120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143

B A A D C D B B D D A B C D B B A B B B A B C A

144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167

B D A C A A D D A D C A B C A A A C D B D B B A

Chapter 4 Cost-Volume-Profit Analysis

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MATCHING 168.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once. _____ 1.

Break-even point

_____ 2.

Contribution margin

_____ 3.

Fixed costs

_____ 4.

Margin of safety

_____ 5.

Mixed costs

_____ 6.

Operating leverage

_____ 7.

Regression analysis

_____ 8.

Relevant range

_____ 9.

Scattergraph

_____ 10.

Variable costs

A. B. C. D. E. F. G. H. I. J.

Difference between the expected level of sales and the break-even sales A plot of activity levels and the corresponding costs Number of units that must be sold for a company to have a net income of $0 Uses all available historical data to estimate the slope and intercept of the total cost line Levels of activity for which estimates and predictions are likely to be accurate Costs that change in total in proportion to changes in volume or activity Level of fixed versus variable costs in a firm’s cost structure Costs that do not change in total in response to changes in activity levels within the relevant range Difference between selling price and variable cost per unit Costs that contain both a variable cost element and a fixed cost element

Answers to Matching 1. 2. 3. 4. 5.

C I H A J

6. 7. 8. 9. 10.

G D E B F

4-30

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

EXERCISES 169.

Information for three costs incurred at Loranz, Inc. in the first quarter follows: Month January February March

Cost $17,600 $16,225 $17,105

Activity 32,000 miles driven 29,500 miles driven 31,100 miles driven

Internet access

January February March

$2,350 $2,820 $2,390

12,800 gigs of data 13,400 gigs of data 11,000 gigs of data

Monitoring expense

January February March

$2,100 $2,100 $2,100

1,600 calls 1,200 calls 2,700 calls

Auto expense

Classify each cost and support your choice with justification of why your choice is considered as either fixed, variable, or mixed. Answer Auto expense: This cost is not fixed because the total cost differs at each level of activity. It is a variable cost because the unit cost is the same at each of the three levels of activity. Variable unit cost – January: $17,600 / 32,000 = $0.55 Variable unit cost – February; $16,225 / 29,500 = $0.55 Variable unit cost - March $17,105 / 31,100 = $0.55 Internet access: It is not fixed since the total cost differs at each of the three levels of activity. The cost is not variable since the cost per unit is not the same at each level of activity: Unit cost – January: $2,350 / 12,800 = $0.18 Unit cost – February; $2,820 / 13,400 = $0.21 Unit cost - March $2,390 / 11,000 = $0.22 This cost is therefore, mixed, since it does not meet the definition of fixed or variable. Monitoring expense: This is a fixed cost because the total cost is the same at each of the three levels of activity. 170.

Harrell & Harrell wants to predict cell phone expense for the firm’s two partners at different levels of minutes used per month. The following data have been gathered for the past 6 months: Month Cell Phone Expense Minutes Used May $330 1,650 June $320 1,450 July $502 2,450 August $456 2,100 September $470 2,340 October $536 2,800 Determine the fixed and variable components of cell phone expense using the high-low method.

Answer Variable cost = ($536 – $320) ÷ (2,800 – 1,450) = $0.16 per minute used $536 ‒ ($0.16 × 2,800) = $88 per month of fixed cell phone cost

Chapter 4 Cost-Volume-Profit Analysis

171.

Winston Company has collected the following sales data for recent months: Month June July August September a. b.

Answer a.

172.

4-31

Units Sold 20,500 22,300 18,750 21,200

Total Cost $20,960 21,428 20,505 21,395

Using the high-low method, find variable cost per unit, total fixed costs, and the total cost equation. What is the estimated cost for a month in which 21,600 units sold? Variable cost per unit = ($21,428 – $20,505) / (22,300 – 18,750) = $0.26 per unit Total fixed costs = $20,505 – (18,750 × 0.26) = $15,630 Total cost = 15,630 + (0.26 × number of units sold) Total cost = $15,630 + ($0.26 × 21,600) = $21,246

The Ritz Theater is interested in estimating fixed and variable costs. The following data are available: Month January February March April May June a. b.

Answer a.

Total Cost $172,000 $174,000 $180,500 $170,500 $190,000 $188,000

No. of Tickets Sold 20,000 19,500 25,500 21,500 25,000 26,500

Use the high-low method to estimate fixed cost per month and variable costs per ticket sold. The Ritz Theater is considering an advertising campaign that is expected to increase annual sales by 2,000 tickets. Tickets are sold for $11 each. Ignoring the cost of the advertising campaign, what is the expected increase in profit associated with the advertising campaign? ($188,000 − $174,000) ÷ (26,500 − 19,500) = $2.00 variable cost per ticket sold $188,000 – ($2 × 26,500) = $135,000 per month of fixed cost Total cost = $135,000 + $2.00x ($11 × 2,000) − ($2 × 2,000) = $18,000

4-32

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

173.

Safe Ridge Foods is interested in estimating the cost involved in hiring new employees for its retail stores. The following information is available regarding the additional costs of operating the company’s Human Resource Department in May when there were 6 new hires. Human Resource Department Manager salaries $ 3,400 Staff hourly wages 21,600 Supplies 600 Equipment depreciation 1,100 Office rental space 1,800 Total $28,500 a. b. c.

Answer a.

174.

Use account analysis to determine total fixed cost per month and the variable cost per new hire. The company is planning to hire 4 employees in June. Estimate the total cost of the Human Resources Department for June. What is the expected incremental cost associated with hiring 3 more employee in June than were hired in May?

Variable costs = ($21,600 + $600) ÷ 6 hires = $3,700 per new hire Fixed costs = $3,400 + $1,100 + $1,800 = $6,300 per month

$6,300 + ($3,700  4) = $21,100

$3,700  3 = $11,100

The following monthly data are available for Beach Nail Salon which provides manicures for nursing home patients who are charged $22 per manicure. Its unit variable costs are $16 and its total fixed expenses are $5,400. Revenue during April totaled 1,600 units. a. b. c.

Answer a.

How much is the break-even point in sales dollars for Beach Nail Salon? How many manicures must the company provide in order to earn a profit of $3,180? A new employee suggests that Beach Nail Salon sponsor a company softball team as a form of advertising. The cost to sponsor the team is $1,320. How many more manicures must be provided to cover this cost? 22x – 16x – 5,400 = 0 x = 900 manicures Break-even sales = 900 × $22 = $19,800

($5,400 + $3,180) / ($22 − $16) = 1,430 manicures

$1,320 / ($22 − $16) = 220 manicures

Chapter 4 Cost-Volume-Profit Analysis

175.

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Dave’s Dogs sells steamed hot dogs for $2.50 each. The company provided the following units and total cost data concerning its hotdog sales for the last six months of 2017:

. July August September October November December a. b. c. d.

Answer a.

176.

Cost $3,020 2,795 3,040 2,700 2,750 3,085

Units 2,400 2,150 2,300 2,250 2,160 2,340

Use the high-low method to estimate fixed and variable costs. Estimate total profit in a month when 2,200 hotdogs are sold. Based on these estimates, calculate the number of hotdogs that must be sold to breakeven. How does linear regression differ from the high-low method in estimating fixed and variable costs?

July and August: Variable cost per unit = ($3,020 – $2,795) ÷ (2,400 – 2,150) = $0.90 Total cost = Fixed cost + (Variable cost × Number of units) $3,020 = Fixed cost + ($0.90 × 2,400) Fixed cost = $860 Total cost = $860 + $0.90x

($2.50 × 2,200) – ($0.90 × 2,200) – $860 = $2,660

BEP = 2.50x – 0.90x – 860 = 0 x = 537.5 = 538 hotdogs

Linear regression uses all data points while the high-low method uses only the highest and lowest activity points. The high and low data points may be data points (sales levels) which do not reflect the normal activity levels. Regression is more accurate.

Mango Enterprises produces mango-flavored tea bags. March’s budget indicated that sales of 500 boxes of tea bags would incur fixed costs of $2,380. The company's contribution margin ratio is 35%, and its contribution margin per box of tea bags is $4. How much sales revenue must Mango Enterprises generate to break-even?

Answer 0.35x – 2,380 = 0 x = $6,800

4-34

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

177.

Resin Products has estimated that fixed costs per month are $79,200 and variable cost per dollar of sales is $0.52. a. What is the break-even point per month in sales? b. What level of sales is needed for a monthly profit of $24,000? c. For the month of July, the company anticipates sales of $240,000. What is the expected level of profit?

Answer a.

178.

($79,200 + $24,000) ÷ 0.48 = $215,000

($240,000 × 0.48) – $79,200 = $36,000

Disc Buddy, Inc. produces flash drives. The selling price is $8 per drive. The variable cost of production is $2.40 per unit and the fixed cost per month is $3,600. a. Calculate the contribution margin associated with each flash drive. b. In August, the company sold 200 more flash drives than planned. What is the expected effect on profit of selling the additional drives? c. Calculate the contribution margin ratio associated with one flash drive. d. In October, the company had sales that were $2,400 higher than planned. What is the expected effect on profit related to the additional sales?

Answer a.

179.

Contribution margin ratio = 1.00 – 0.52 = 0.48 $79,200 ÷ 0.48 = $165,000

$8.00 – $2.40 = $5.60

Profits will increase by $1,120 ($5.60 × 200)

[$8.00 – $2.40] ÷ $8.00 = 70.00%

Profits will increase by $1,680 (70.00% × $2,400)

Savane Enterprises sells a single product at a price of $57 per unit. Variable costs per unit are $35 and total fixed costs are $719,400. Savane is considering the purchase of new equipment that would increase fixed costs to $1,023,700, but decrease the variable cost per unit to $28. a. If Savane expects to sell 40,000 units next year, should the company purchase this new equipment? b. At what volume in units will your recommendation in part a above change?

Answer a.

Under the current system, Savane’s profit when 40,000 units are sold is (($57 – $35) × 40,000) – $719,400 = $160,600 If the new equipment is purchased, Savane’s profit when 40,000 units are sold is (($57 – $28) × 40,000) – $1,023,700 = $136,300 Savane is better off not buying the new equipment. 57x – 35x – 719,400 = 57x – 28x – 1,023,700 x = 43,472 units (rounded)

Chapter 4 Cost-Volume-Profit Analysis

4-35

180.

Conviser Tools, Inc. produces tape dispensers. The selling price is $12 per dispenser. The variable cost of production is $4.80 per dispenser and the fixed cost per month is $20,448. For November, the company expects to sell 3,100 tape dispensers. a. Calculate expected profit. b. Calculate the margin of safety in dollars. Answer a. 3,100 ($12) – 3,100 ($4.80) − $20,448 = $1,872 b.

Break-even sales: 12x – 4.80x – 20,448 = 0 x = 2,840 dispensers Sales = 2,840 × $12 = $34,080 Margin of safety = Expected sales − Break-even sales = ($12  3,100) − $34,080 = $3,120

181.

Sports To Go is organized into three departments. The following sales and cost data are available for the prior year: Water Sales $160,000 Less variable costs 64,000 Contribution margin 96,000 Less fixed costs 40,000 Profit $ 56,000 a. b. c.

Answer a.

Foot $96,000 42,000 54,000 16,000 $ 38,000

Field $150,000 84,000 66,000 32,000 $ 34,000

Total $406,000 190,000 216,000 88,000 $128,000

What is Sports To Go’s weighted average contribution margin ratio? Round your percentage value to two decimal places. What level of sales is needed for Sports to Go to earn a profit of $156,720 assuming the same ratio of units sold and same selling price per unit? Sports To Go places an advertisement in the local paper each week. All else equal, which department would you emphasize in the advertisement?

$216,000 ÷ $406,000 = 53.20%

($88,000 + $156,720) ÷ 0.5320 = $460,000

Contribution margin ratios of the three departments: Water Department ($96,000 ÷ $160,000) = 60.00% Foot Department ($54,000 ÷ $96,000) = 56.25% Field Department ($66,000 ÷ $150,000) = 44.00% Water Department; because its weekly advertisement earns $0.60 on each incremental dollar of sales.

4-36

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

182.

Iggy’s Ice Pops produces two flavors of ice pops. Information regarding the products is summarized for the month of April below: Number of units Sales revenue Variable costs Fixed costs Profit a. b. c.

Answer a.

183.

Kiwi 2,000 $3,000 1,500 900 $ 600

Melon 3,000 $3,600 900 2,400 $ 300

Total 5,000 $6,600 2,400 3,300 $ 900

If Iggy’s sells 50 more kiwi pops, by how much will profit increase? How much is Iggy’s weighted average contribution margin ratio? What level of sales does Iggy’s need in order to earn a profit of $1,200 assuming the current sales mix? (Round to the nearest dollar.) CM per kiwi ice pop: ($3,000 – $1,500) / 2,000 = $0.75 per ice pop For 50 units: $0.75 × 50 = $37.50. No change in fixed costs.

($6,600 – $2,400) / $6,600 = 0.6364 = 63.64%

0.6364x – $3,300 = $1,200 x = $7,071

Toppers produces two models of hats, fedoras and berets, both made out of cool skin felt fabric. Information regarding the products is summarized for the month of May in the following table: Number of hats produced Sales revenue Variable costs Fixed costs Profit

Fedoras 1,000 $28,000 12,000 3,200 $12,800

Berets 4,000 $72,000 36,000 7,000 $29,000

Yards of fabric per unit Profit per unit

0.80 yds. $12.80

0.40 yds. $7.25

Due to increased demand of hat felt in the market, Toppers can obtain only 3,800 yards of felt per month. Toppers can sell as many hats as it can produce, however, it must produce at least 800 of each to stay competitive. How many of each model of hat should Toppers make to maximize profit in June? Answer Fedoras Berets CM per unit = $16,000/1,000 = $16.00 CM per unit = $36,000/4,000 = $9.00 CM per yard = $16.00/0.80 yds. = $20.00/yd. CM per yard = $9.00/0.40 yds. = $22.50/yd. Berets is the most profitable per yard of felt, i.e., the limited resource. Fedoras: 800 × 0.80 yards = 640 yards Balance to Berets: Yards remaining: 3,800 – 640 = 3,160 yards Number of berets to be produced: 3,160 / 0.40 yards each = 7,900 Produce 800 fedoras and 7,900 berets

Chapter 4 Cost-Volume-Profit Analysis

184.

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Kerwin Chocolates prepared the following concerning its two favors of chocolate covered popcorn sold in 2-pound bags: Units Revenue Variable costs Fixed costs Profit

Very Good 4,000 $100,000 56,000 20,000 $ 24,000

Even Better 12,000 $180,000 105,000 40,000 $ 35,000

$25.00 $11.00 $6.00

$15.00 $6.25 $2.92

Selling price per unit Contribution margin per unit Profit margin per unit a. b. c. d. e. f.

Totals 16,000 $280,000 161,000 60,000 $ 59,000

What is Kerwin’s weighted average contribution margin per unit? Calculate Kerwin’s break-even point in units assuming the current sales mix. What will be the number of Very Good and Even Better bags at the break-even level of sales? What is Kerwin’s weighted average contribution margin ratio? What level of sales (in dollars) will be needed to earn a profit of $64,950 assuming the current sales mix? What will be the sales (in dollars) of Very Good and Even Better bags for Kerwin’s total sales calculated in Part e?

Answer a. ($280,000 – $161,000) ÷ 16,000 = $7.44 b.

$60,000 ÷ $7.44 = 8,065 bags

Very Good: 8,065 × (4,000 ÷ 16,000) = 2,016 bags Even Better: 8,065 × (12,000 ÷ 16,000) = 6,049 bags

($280,000 – $161,000) ÷ 280,000 = 42.50%

($64,950 + $60,000) ÷ 0.4250 = $294,000

Very Good: $294,000 × ($100,000 ÷ $280,000) = $105,000 Even better: $294,000 × ($180,000 ÷ $280,000) = $189,000

4-38

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

185.

Listel Rx and Risen, Inc. are two companies in the pharmaceutical industry. Listel Rx does little research and development. Instead, the company pays for the right to produce and market drugs that have been developed by other companies. The amount paid is a percent of sales. Information for the current year follows: Sales Less variable costs Contribution margin Less fixed costs Profit a. b. c.

Listel Rx $180,000 74,000 106,000 40,000 $ 66,000

Risen, Inc. $116,000 62,000 54,000 36,000 $ 18,000

Calculate the expected percentage change in profit for a 25 percent decrease in sales for each company. Which company has the higher operating leverage? Which company is more risky? Justify your response.

Answer Listel Rx Contribution margin decrease: 25% × $106,000 $26,500 25% × $54,000 Previous profit $66,000 Percentage decrease 40.15%

186.

Risen, Inc.

$13,500 $18,000 75.00%

Risen, Inc.

Risen, Inc. is more risky. Note that if sales decrease by 25%, its profit will decline by 75% (versus a 40.15% decline for Listel Rx.). When sales decrease, variable costs decrease, but fixed costs do not change.

Hayden Garden Tools produces two types of rakes with lifetime warranties. The industrial rake requires 2.4 labor hours and the residential rake requires 1.1 labor hours. The company has only 800 available labor hours per week. The company can sell all it can produce of either product. Industrial Residential Selling price $360 $210 Variable costs 220 150 Contribution margin $140 $ 60 a. b.

Answer a.

Which rake(s) should the company sell? Justify your answer. What would be the incremental benefit of obtaining 200 additional labor hours? Industrial Residential Selling price $360 $210 Variable costs 220 150 Contribution margin 140 60 ÷ Hours to produce 1 item 2.4 1.1 Contribution margin per hour $58.33 $54.55 The company should produce only industrial rakes, which generate $58.33 of profit for each labor hour used. Residential rakes generate only $54.55 per labor hour used. 200 × $58.33 = $11,666.67 additional profit

Chapter 4 Cost-Volume-Profit Analysis

187.

4-39

Burger Time is interested in estimating fixed and variable costs on its triple treat burger. The following data are available: Date

Total Cost

Units

January $4,140 1,030 February 4,220 1,020 March 4,200 1,040 April 3,680 900 May 3,730 890 June 3,970 980 July 4,090 1,000 August 3,850 940 The data generated the following regression analysis: SUMMARY OUTPUT Regression Statistics Multiple R 0.97955 R Square 0.95953 Adjusted R Square 0.95278 Standard Error 45.9460 Observations 8 ANOVA df Regression Residual Total

1 6 7

SS 300333.75 12666.25 313000

Intercept X Variable 1

Coefficients 535.937 3.54

Standard Error 289.622032 0.29658063

a. b.

Answer a.

MS 300333.8 2111.042

F 142.268

Significance F 2.1E-05

t Stat 1.850472 11.92762

P-value 0.11372 2.1E-05

Lower 95% -172.742 2.81179

Upper 95% 1244.6 4.2632

Lower 95.0% -172.74 2.81179

Upper 95.0% 1244.62 4.26321

Use the regression output to estimate fixed cost per month and variable costs per burger sold, and show the total cost equation. Burger Time is considering an advertising campaign that is expected to increase monthly sales by 200 burgers. Assume that each burger sells for $9. What is the expected increase in profit associated with the advertising campaign based on the regression output?

Fixed cost per month = $535.937 Variable cost per burger = $3.54 Total cost = 3.54x + 535.937 ($9 × 200) − ($3.54 × 200) = $1,092

4-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

188.

Dyna Dog Diet’s regression for bags of organic dog food sold and the related costs appears below:

Regression Statistics Multiple R 0.981063 R Square 0.962484 Adjusted R Square 0.949978 Standard Error 672.8269 Observations 5 ANOVA df SS MS Regression 1 34841912 34841912 Residual 3 1358088 452696.1 Total 4 36200000

CoefficientsStd Error t Stat Intercept 2504.41 9305.639 0.269128 Variable 1 1.98 0.226296 8.77299

a. b. c. d. e. f. Answer a. b. c. d. e. f.

F 76.96535

P-value 0.805279 0.003119

Sign F 0.003119

Lower 95% -27110.3 1.265119

Upper 95% 32119.11 2.70547

Lower Upper 95% 95% -27110.3 32119.11 1.265119 2.70547

How much is the variable cost per unit? How much is total fixed cost? What is the amount of the slope? At what point does the total cost line cross the y-axis if the data points used to construct the regression are graphed? Write the total cost equation in good form. If 2,500 bags of dog food are sold, how much is total cost?

$1.98 $2,504.41 $1.98 $2,504.41 Total cost = 1.98x + 2,504.41 (2,500 × 1.98) + 2,504.41 = $7,454.41

Chapter 4 Cost-Volume-Profit Analysis

4-41

CHALLENGE EXERCISES 189.

Sharply Knives produces two models of titanium knives, Ginsu and Deluxe. Information regarding the products is summarized for the month of May in the following table: Number of knives Sales revenue Variable costs Fixed costs Operating income Contribution margin per unit Contribution margin ratio Profit per knife Ounces of titanium per knife

Deluxe 2,500 $ 88,000 30,800 22,900 $34,300 $22.88 65.00% $13.72 7.5

Ginsu 1,500 $66,000 29,700 11,400 $24,900 $24.20 55.00% $16.60 9

Total 4,000 $154,000 60,500 34,300 $ 59,200 $23.38 60.71%

Due to a strike, only 24,750 ounces of titanium will be available during each of the next few months. Each ounce of titanium costs $0.70. a. b.

Given the limited resource, of which product should Sharply produce more? Support with calculations and provide sufficient conceptual justification why this product should be chosen. Assume Sharply needs to produce at least 750 of each model per month to stay competitive and it can sell all it produces. Assume that you chose Deluxe knives as your answer to part a. Show the calculation of how many deluxe knives that Sharply should produce to maximize profits. a.

Deluxe Choose the product with the higher contribution margin per limited resource, in this case per ounce of titanium. CM/ounce for Deluxe = $22.88/7.5 ounces = $3.05 per ounce CM/ounce for Ginsu = $24.20/9 ounces = $2.69 per ounce Deluxe should be chosen because for every ounce of titanium used to make Deluxe knives, profit increases by $3.05, while it increases by only $2.69 per ounce for titanium used to make Ginsu knives, resulting in $0.36 or $3.05 – $2.69 per ounce more profit.

b. Ginsu Ounces of titanium needed: 750 × 9 ounces Ounces remaining: 24,750 – 6,750 = 18,000 ounces

6,750 ounces 18,000 ounces

Ounces to be used for Deluxe: Number of Deluxe to be made with 18,000 ounces: 18,000 / 7.5 = 2,400 Number of knives

Deluxe

750 knives

2,400 knives

4-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

190.

MusicRx produces two MP3 players, standard and mini. Information regarding the products is summarized for the month of April in the following table:

Sales revenue Variable costs Fixed costs Operating income Contribution margin ratio Contribution margin per unit

Standard $126,000 30,800 36,400 $ 58,800 75.56% $22.67

Mini $84,000 29,700 28,000 $26,300 64.64% $7.76

Total $210,000 60,500 64,400 $ 85,100

MusicRx sells 3 standard MP3 players for every 5 mini players sold. It generates $3 of sales for standard players for every $2 of mini players. The sales mix is expected to stay stable. a. b. c.

How much will total revenue be for MusicRx at break-even? (Round intermediate calculations to four decimal places.) What would be the sales (in dollars) of mini players for total sales calculated in Part a? Suppose that 60 additional standard MP3 players and 100 additional mini MP3 players are sold. By how much will profit increase?

Answer

191.

WACM ratio = ($210,000 – $60,500) / $210,000 = 71.19% 0.7119x − 64,400 = 0 x = $90,462.14 = $90,462

2/5 × $90,462 = $36,185

(60 × $22.37) + (100 × $7.76) = $2,136.20

The RiverTown Shuttle provides a water taxi across the St. Johns River for $4 per ride. It has provided the following data concerning its costs of operating its water taxi:

# of riders Operating costs a.

Answer a.

January 2,500 $7,475

February 2,800 $8,120

March 4,200 $11,130

April 4,100 $11,225

May 2,600 $7,390

Use the high-low method to answer the following: 1. Variable cost per rider 2. Fixed costs per month 3. Write the cost equation in good form. How many water taxi customers does RiverTown need to generate a profit of $4,190 per month? 1. Variable cost per rider = ($11,130 – $7,475) / (4,200 – 2,500) = $2.15 per rider 2. Fixed costs per month = $11,130 = ($2.15 × 4,200) + FC FC = $2,100 3. TC = 2.15x + 2,100 4.00x – 2.15x – 2,100 = 4,190 x = 3,400 riders per month

Chapter 4 Cost-Volume-Profit Analysis

192.

4-43

Duplicator Shipping, Inc. provides 11 inch by 17 inch color copying as an added service at its shipping store for $1.20 cents per copy. Information for two months of operations appears below: Month June July a. b. c. d.

Answer a.

Cost $6,500 $7,800

Number of Copies 11,000 15,000

Indicate the type of cost behavior of this cost and justify your choice. Include computations. Write the cost equation in good form. Determine the break-even point in units for Duplicator Shipping. (Round to the nearest whole number.)

VC per unit = $6,500/11,000 = $0.59 VC per unit = $7,800/15,000 = $0.52 This is not a fixed cost because the total cost differs at the two activity levels. It is not a variable cost because the cost per unit differs at both activity levels. At 11,000 copies, the cost per unit is $0.59 per copy, while at 15,000 copies, it is $0.52 per copy. Therefore, it must be a mixed cost.

($7,800 – $6,500) / (15,000 – 11,000) = $0.325 $7,800 = (0.325 × 15,000) + FC FC = $2,925 TC = 0.325x + 2,925

1.20x – 0.325 – 2,925 = 0 x = 3,343 copies

4-44

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

SHORT-ANSWER ESSAYS 193.

What is a mixed cost? How are mixed costs handled in a CVP analysis?

Answer A mixed cost is a cost that contains both a variable cost element and a fixed cost element. Mixed costs must be separated into their variable and fixed components before any CVP analysis can be performed.

194.

Fixed and variable costs can be estimated using account analysis or regression analysis. Briefly explain each of these techniques and any advantages or disadvantages associated with each of them.

Answer Account analysis requires the manager to use professional judgment to classify costs as either fixed or variable. An advantage of this technique is that it can be used without any historical data. Disadvantages are that the method is subjective and that the manager must have a good understanding of the costs in order to make reliable classifications. Regression analysis is a statistical technique that uses all the available historical data points to estimate the slope and intercept of a cost equation. It is difficult to do without a computer and requires historical data. However, when used appropriately, it provides accurate predictions of future cost behavior. 195.

Identify the strengths and weaknesses of the high-low method of separating mixed costs? Do you believe it would be widely selected over the regression method in practice today? Why or why not?

Answer The high-low method is easy to apply, but it ignores all of the data points except the two that are most extreme. This can lead to somewhat poor results. While the regression method is mathematically much more demanding, it can be easily run on most personal computers, and is widely used.

196.

What is the relevant range? Why is it important in CVP analysis?

Answer The relevant range is the range of activity for which estimates and predictions are likely to be accurate. CVP estimates and predictions for operating levels which are outside the relevant range are not likely to be valid.

Chapter 4 Cost-Volume-Profit Analysis

197.

How would each of the following events affect a company’s break-even point? Each item is independent of the others. Use I for increase, D for decrease, and N for no effect. ______

decrease in fixed manufacturing cost

______

increase in variable cost per unit

______

increase in the number of units sold

______

increase in the selling price

______

decrease in fixed selling and administrative costs

Answer a. b. c.

198.

4-45

D I N

d. e.

D D

When is the contribution margin ratio approach to CVP analysis most useful? Why?

Answer The contribution margin ratio approach to CVP analysis is most useful in a company that sells a variety of substantially different products. In these cases, it makes more sense to calculate the number of sales dollars that must be generated in order for the company to break-even rather than the number of units needed to break-even.

199.

What is operating leverage? What effect does operating leverage have on a company’s profit?

Answer Operating leverage relates to the level of fixed costs versus variable costs in a firm’s cost structure. Firms with high operating leverage will experience greater increases in net income when sales increase. However, when these firms have a decrease in sales, net income will decrease more dramatically than it would for firms with less leverage.

CHAPTER 5 Variable Costing Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5.

2 2 2 1 1, 2

C C C K C

6. 7. 8. 9. 10.

2 2 1 1 1

26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42.

1 1 1 1 2 1 1 1 1 1 1 1 1 1, 2 1 1 2

K K C C K K K K K AP AP AP AP AP K K K

43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59.

1 1,2 1,2 1,2 1 1 1 1,2 1 1,2 1, 2 1,2 2 2 2 2 2

110. 111. 112.

1,2 1,2 1,2

AP AP AP

113. 114. 115.

1,2 1,2 1,2

125.

1,2

126.

1,2

127.

128.

BT Item LO BT Item True-False Statements K 11. 2 K 16. K 12. 2 C 17. K 13. 2 C 18. C 14. 1 K 19. K 15. 2 C 20. Multiple Choice Questions C 60. 2 AP 77. AP 61. 2 AP 78. AP 62. 2 C 79. AP 63. 2 C 80. AP 64. 2 C 81. AP 65. 2 AP 82. AP 66. 2 AP 83. AP 67. 2 K 84. AP 68. 2 AP 85. AP 69. 2 K 86. AP 70. 2 K 87. AP 71. 1,2 AP 88. C 72. 1,2 AP 89. C 73. 2 AP 90. AP 74. 2 AP 91. AP 75. 1,2 AP 92. AP 76. 1,2 AP 93. Exercises AP 116. 1,2 AP 119. AP 117. 1,2 AP 120. AP 118. 1,2 AP 121. Challenge Exercises AN Short-Answer Essays C 129. 2 AN 130.

Item

2 2 2 2 2

C C C C C

21. 22. 23. 24. 25.

2 2 2 2 2

C C K K K

1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109.

1,2 1,2 1,2 1,2 1,2 1,2 1,2 1,2 2 2 1,2 1,2 1,2 1,2 1,2 1,2

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

1,2 2 1,2

AP AP AP

122. 123. 124.

1,2 1,2 1,2

AP AN AP

131.

5-2

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

TRUE-FALSE STATEMENTS 1.

The cost of ending inventory using variable costing is always greater than or equal to full costing ending inventory.

The cost of goods sold is always greater using variable costing than when full costing is used.

During periods in which inventory levels increase, sales revenue will be larger when using full costing than if variable costing is used.

Absorption costing is another name for variable costing.

If a company has no fixed costs, variable costing income will equal full costing income, regardless of any increase or decrease in inventory levels during the period.

Variable costing income is more useful for decision making because costs are separated by function.

Absorption costing is required for external reporting under generally accepted accounting principles.

Under full costing, all fixed costs of production are included in Finished Goods Inventory and remain there until all inventory units are sold.

The total amount reported on an income statement for selling and administrative expenseis the same amount regardless if variable of full costing is used. .

10.

In variable costing, fixed manufacturing overhead is considered a period cost.

11.

Income statements of manufacturing firms prepared for external purposes use variable costing because it provides higher profits for making decisions.

12.

Under full costing, ending inventory includes both fixed and variable manufacturing and nonmanufacturing costs.

13.

Under variable costing, ending inventory reported on a company’s balance sheet includes variable production costs and variable selling and administrative costs.

14.

Contribution margin is reported on an absorption costing income statement.

15.

If the number of units sold is equal to the number of units produced, then contribution margin will equal gross margin.

16.

Full costing income can be increased by decreasing production even though the additional inventory items will not be sold during the current period.

17.

When the number of units produced exceeds the number of units sold, variable costing yields a lower net income than if full costing had been used.

Chapter 5 Variable Costing

5-3

18.

Under variable costing, net income can be increased by increasing production without increasing sales.

19.

The inventoriable cost per unit can be reduced, under variable costing, by decreasing the number of units produced.

20.

When the number of units produced is greater than the number of units sold, variable costing yields higher income than full costing.

21.

A full costing income statement will display a higher net income than variable costing as long as inventory levels continue to increase.

22.

If a company increases production levels without increasing its units sold, both its full costing income and cash flows will be larger than if production were at a lower level.

23.

Just-in-time (JIT) inventory management systems cause the difference between variable costing income and full costing income to be much greater than if standard inventory levels had been maintained by the company.

24.

The use of variable costing encourages management of earnings by adjusting production volume.

25.

Variable costing facilitates CVP analysis.

Answers to True-False 1 F 6 2 F 7 3 F 8 4 F 9 5 T 10

F T F T T

11 12 13 14 15

F F F F F

16 17 18 19 20

F T F F F

21 22 23 24 25

T F F F T

5-4

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

MULTIPLE CHOICE 26.

Full costing A. is another name for variable costing. B. considers fixed manufacturing overhead as an inventory cost. C. often provides the information needed for CVP analysis. D. considers fixed production cost as period cost.

27.

Which of the following is accounted for differently in full costing compared to variable costing? A. Direct material B. Fixed manufacturing overhead C. Direct labor D. Variable manufacturing overhead

28.

Which of the following is accounted for as a product cost in variable costing? A. Product delivery costs to customers B. Variable manufacturing overhead C. Fixed manufacturing overhead D. Product advertising costs

29.

Which of the following is treated as a product cost in full costing? A. Sales commissions B. Product advertising C. Depreciation on factory machines D. Security at corporate headquarters

30.

Full costing is A. more useful for decision making than variable costing because it treats all costs of production as an inventory cost. B. required for financial reporting under generally accepted accounting principles. C. less likely to enable managers to manipulate income by increasing production. D. based on cost behavior.

31.

In variable costing, when does fixed manufacturing overhead become an expense? A. Never B. In the period when the product is sold C. In the period when the expense is incurred D. At the time when units are produced

32.

In full costing, when does fixed manufacturing overhead become an expense? A. In the period when all other fixed costs are expensed B. In the period when the product is sold C. In the period when the expense is incurred D. At the time units when are produced

33.

In variable costing, which of the following will be included as part of inventory on a company’s balance sheet? A. Fixed production cost B. Variable selling cost C. Fixed selling costs D. None of the answer choices will be part of inventory in variable costing.

Chapter 5 Variable Costing

34.

In full costing, which of the following will be included as part of inventory on a company’s balance sheet? A. Fixed production cost B. Variable selling cost C. Fixed selling costs D. None of the answer choices will be in inventory in full costing.

35.

Rango Enterprises’ manufacturing costs for 2017 are as follows: Direct materials Direct labor Manufacturing supplies Depreciation of factory equipment Other fixed manufacturing overhead

5-5

$ 65,000 118,000 9,000 22,000 43,000

What amount should be considered as product costs for external reporting purposes? A. $183,000 B. $192,000 C. $257,000 D. $248,000 36.

Sticker Creations’ fixed manufacturing overhead costs totaled $68,000 and its variable selling costs totaled $45,000. Under full costing, how should these costs be classified? A. B. C. D.

37.

Period Costs $68,000 $113,000 $0 $45,000

Product Costs $45,000 $0 $113,000 $68,000

Diecast Tools’ manufacturing costs for 2017 are as follows: Direct materials Direct labor Depreciation of factory equipment Production supervisor’s salary Other fixed manufacturing overhead

$100,000 120,000 30,000 72,000 50,000

What amount should be considered product costs for external reporting purposes? A. $220,000 B. $293,000 C. $402,000 D. $372,000 38.

Robley Company’s fixed manufacturing overhead costs totaled $235,000 and fixed corporate operating costs totaled $116,000. Under full costing, how should these costs be classified? A. B. C. D.

Period Costs $235,000 $0 $351,000 $116,000

Product Costs $116,000 $351,000 $0 $235,000

5-6

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

39.

Cold City Blowers produces snow blowers. The selling price per snow blower is $80. Costs involved in production are: Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year

22 15 6 206,400

In addition, the company has fixed selling and administrative costs of $88,000 per year. During the year, Cold City Blowers produced 8,600 snow blowers and sold 8,000 snow blowers. There is no beginning inventory. Ignoring taxes, how much will full costing net income differ from variable costing net income? A. $15,480 B. $14,400 C. $206,400 D. $192,000 40.

Which of the following items appears on a variable costing income statement but not on a full costing income statement? A. Sales B. Gross margin C. Net income D. Contribution margin

41.

Variable costing income is a function of A. only units sold. B. only units produced. C. both units sold and units produced. D. neither units sold nor units produced.

42.

Which of the following items on a variable costing income statement will change in direct proportion to a change in sales? A. Sales, contribution margin, and net income B. Sales, variable costs, and contribution margin C. Sales, variable costs, contribution margin, fixed costs, and net income D. Sales, variable costs, and fixed costs

43.

If a company’s income is positive and fixed costs exist, which of the following items will increase or decrease at a greater rate than the change in the amount of sales on a variable costing income statement? A. Variable costs B. Fixed costs C. Contribution margin D. Net income

Chapter 5 Variable Costing

44.

5-7

Ranger Productions experienced the following costs in 2017: Direct materials Direct labor Variable manufacturing overhead Variable selling costs Fixed manufacturing overhead Fixed selling costs Fixed administrative costs

$1.50 per unit $2.60 per unit $1.20 per unit $4.40 per unit $84,000 $32,000 $15,000

During 2017, the company manufactured 65,000 units and sold 62,000 units. The unit cost is the same throughout the year. Beginning inventory is zero. How much will the company report as total variable product costs on its 2017 contribution income statement? A. $328,600 B. $601,400 C. $344,500 D. $630,500 45.

Anders Supply experienced the following costs in May: Direct materials Direct labor Manufacturing overhead costs Variable Fixed Selling & administrative costs Variable selling costs Fixed selling costs Fixed administrative costs

$6.50 per unit $2.20 per unit $3.10 per unit $44,000 $1.50 per unit $21,000 $16,000

During May, the company manufactured 22,000 units and sold 24,000 units. Beginning inventory totaled 3,400 units. If the average selling price per unit was $28, how much is the company’s contribution margin? A. $327,400 B. $352,800 C. $323,400 D. $344,800 46.

Roger Excavating Company experienced the following costs in 2017: Direct materials Direct labor Variable manufacturing overhead Variable selling Fixed manufacturing overhead Fixed selling Fixed administrative

$1.75 per unit $2.00 per unit $2.50 per unit $0.75 per unit $50,000 $15,000 $5,000

During 2017, the company manufactured 100,000 units and sold 80,000 units. If the average selling price per unit was $22.65, what is the amount of the company’s contribution margin per unit? A. $16.40 B. $15.65 C. $18.90 D. $13.65

5-8

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

47.

Data from Rannier Metals for 2017 is as follows: Sales $20 per unit Variable cost of goods sold ?? Fixed manufacturing overhead $85,000 Variable selling & administrative costs ?? Fixed selling & administrative costs $150,000 The company produced 145,000 units during the year and sold 130,000 units. Variable production costs per unit and fixed costs have remained constant all year. Net income for the year was $1,000,000. How much was the company’s contribution margin? A. $765,000 B. $1,235,000 C. $1,365,000 D. Not enough information is provided to determine the answer

48.

During the past year, Waxman Electronics manufactured 25,000 speakers during 2017 and sold 26,000 speakers. Production costs during the year were as follows: Fixed manufacturing overhead Variable manufacturing overhead Direct labor Direct materials

$546,000 234,000 312,000 780,000

Sales totaled $3,120,000, variable selling and administrative costs totaled $182,000, and fixed selling and administrative costs totaled $114,000. There were 2,200 speakers in beginning inventory. How much is the contribution margin per unit? A. $48.00 B. $69.00 C. $62.00 D. None of these answer choices are correct. 49.

Cold City Blowers produces snow blowers. The selling price per snow blower is $100. Costs involved in production are: Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year

22 15 6 23,400

In addition, the company has fixed selling and administrative costs of $9,360 per year. During the year, Cold City Blowers produced 780 snow blowers and sold 800 snow blowers. Beginning inventory consisted of 50 snow blowers. How much is considered to be product cost under variable costing? A. $34,400 B. $33,540 C. $29,600 D. None of these answer choices are correct.

Chapter 5 Variable Costing

50.

5-9

22 15 6 23,400

In addition, the company has fixed selling and administrative costs of $9,360 per year. During the year, Cold City Blowers produced 780 snow blowers and sold 800 snow blowers. Beginning inventory consisted of 50 snow blowers. How much is net income using variable costing? A. $11,700 B. $12,240 C. $12,840 D. $45,600 51.

The following information relates to Charlin Industries for the year ending December 31, 2017, the company’s first year of operations: Units produced Units sold Units in ending inventory Fixed manufacturing overhead

100,000 80,000 20,000 $650,000

How much fixed manufacturing overhead would be expensed in 2017 using variable costing? A. $520,000 B. $130,000 C. $650,000 D. $0 52.

Sol Enterprises’ contribution income statement utilizing variable costing appears below: Sol Enterprises Income Statement For the Year ended December 31, 2017 Sales ($12 per unit) Less variable costs: Cost of goods sold $100,000 Selling & administrative costs 18,000 Contribution margin Less fixed costs: Manufacturing overhead 60,900 Selling & administrative costs 15,000 Net income

$240,000

118,000 122,000

75,900 $ 46,100

Sol produced 21,000 units during the year. Variable costs per unit and fixed production costs have remained constant the entire year. There were no beginning inventories. How much is the dollar value of the ending inventory using variable costing? A. $5,000 B. $7,900 C. $8,800 D. $2,900

5-10

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

53.

Acosta Supplies experienced the following costs in 2017: Direct materials Direct labor Variable manufacturing overhead Variable selling Fixed manufacturing overhead Fixed selling and administrative

$1.50 per unit $4.50 per unit $2.00 per unit $1.00 per unit $70,000 $80,000

During 2017, the company manufactured 4,000 units and sold 4,200 units. Assume the same unit costs in all years. Beginning inventory consists of 800 units. How much are total variable costs on the company’s 2017 contribution margin income statement? A. $37,800 B. $36,000 C. $33,600 D. $32,000 54.

Beiber Boxers contribution income statement utilizing variable costing for 2017 variable costing appears below: Sales ($12 per unit) Less variable costs: Cost of goods sold Selling & administrative Contribution margin Less fixed costs: Manufacturing overhead Selling & administrative costs Net income

$78,000 $26,000 9,750

12,600 14,950

35,750 42,250

27,550 $ 14,700

The company produced 7,000 units during the year. Variable and fixed production costs have remained constant the entire year. There were no beginning inventories. How much is the dollar value of the ending inventory using full costing? A. $2,000 B. $2,900 C. $3,850 D. None of these answer choices are correct. 55.

When the number of units sold is equal to the number of units produced, the net income using absorption costing will be A. greater than net income using variable costing. B. equal to net income using variable costing. C. less than net income using variable costing. D. None of the answer choices is always correct.

56.

If the number of units sold is greater than the number of units produced, A. full costing and variable costing will yield the same net income. B. variable costing will assign some fixed manufacturing costs to the units in ending inventory. C. net income will be higher under variable costing than under full costing. D. inventory levels will increase.

Chapter 5 Variable Costing

57.

5-11

Meow Foods had 2,000 25-pound bags of cat food in beginning inventory. During 2017, the company manufactured 16,000 bags and sold 15,000 units. Assume the same unit costs in all years. Each bag of food is sold for $17. The company experienced the following costs: Direct materials Direct labor Variable manufacturing overhead Variable selling Fixed manufacturing overhead Fixed selling Fixed administrative

$4.50 per unit $2.10 per unit $1.90 per unit $1.00 per unit $48,000 $24,000 $30,000

If the company uses full costing, how much will be reported as inventory on the December 31, 2017 balance sheet? A. $9,000 B. $25,500 C. $28,500 D. $34,500 58.

Meow Foods had 2,000 25-pound bags of cat food in beginning inventory. During 2017, the company manufactured 16,000 bags and sold 15,000 units. Each bag of food is sold for $17. Assume the same unit costs in all years. The company experienced the following costs: Direct materials Direct labor Variable manufacturing overhead Variable selling Fixed manufacturing overhead Fixed selling Fixed administrative

$4.50 per unit $2.10 per unit $1.90 per unit $1.00 per unit $48,000 $24,000 $30,000

If the company uses variable costing, at what amount is the ending inventory for the year valued? A. $25,500 B. $28,500 C. $34,500 D. $9,000 59.

Macho Enterprises experienced the following costs in 2017: Direct materials Direct labor Variable manufacturing overhead Variable selling Fixed manufacturing overhead Fixed selling Fixed administrative

$2.65 per unit $1.80 per unit $3.25 per unit $1.15 per unit $94,000 $35,000 $10,000

During the year, the company manufactured 47,000 units and sold 40,000 units. How much is the unit product cost using full costing? A. $7.70 B. $9.70 C. $8.85 D. $10.85

5-12

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

60.

Ranger Roadsters experienced the following costs in 2017 (Assume the same unit costs in all years): Direct materials Direct labor Manufacturing overhead costs Variable Fixed Selling & administrative costs Variable selling Fixed selling Fixed administrative

$4.85 per unit $2.10 per unit $2.25 per unit $75,075 $0.95 per unit $8,000 $2,000

There were 6,000 units in beginning inventory. During the year, the company manufactured 45,500 units and sold 48,000 units. If net income using variable costing was $82,500, how much is net income using full costing? A. $78,375 B. $86,625 C. $76,725 D. $88,275 61.

The Crab Shack experienced the following costs in 2017 (Assume the same unit costs in all years): Direct materials $2.25 per unit Direct labor $1.50 per unit Manufacturing overhead costs Variable $1.10 per unit Fixed $60,000 Selling & administrative costs Variable selling $0.80 per unit Fixed selling $9,000 Fixed administrative $13,000 There were 1,800 units in beginning inventory. During the year, the company manufactured 24,000 units and sold 25,000 units. If net income using variable costing was $76,250, how much is net income using full costing? A. $5,880 B. $79,250 C. $73,750 D. $74,350

62.

If a company’s levels of total fixed costs and unit variable costs remain unchanged from one year to the next, under which costing method is it possible for managers to manipulate net income through production? A. Variable costing B. Full costing C. Both variable and full costing D. Neither variable nor full costing

63.

Full costing income is a function of A. units sold only. B. units produced only. C. both units sold and units produced. D. neither units sold nor units produced.

Chapter 5 Variable Costing

5-13

64.

Which of the following is true when units produced exceed units sold? A. Full costing and variable costing will yield the same net income. B. Full costing assigns a portion of the fixed manufacturing costs to the units in ending inventory. C. Net income will be higher under variable costing than under full costing. D. Inventory levels will decrease.

65.

Futon Delight experienced the following costs in 2017 (Assume the same unit costs in all years): Direct materials Direct labor Manufacturing Overhead Costs: Variable Fixed

$2.00 per unit $1.00 per unit $1.50 per unit $45,000

There were 600 units in beginning inventory. During the year, the company manufactured 18,000 units and sold 17,600 units. If net income for the year was $54,000 using full costing, how much will net income be if the company uses variable costing? A. $53,000 B. $50,000 C. $55,000 D. More information is needed to determine the answer. 66.

Radial Fuel Cells experienced the following costs in 2017 (Assume the same unit costs in all years): Direct materials Direct labor Manufacturing Overhead Costs Variable Fixed Selling & Administrative Costs Fixed selling Variable selling Fixed administrative

$4 per unit $8 per unit $2 per unit $150,000 $30,000 $1 per unit $20,000

During the year, the company manufactured 50,000 units and sold 45,000 units. Beginning inventory is zero. If net income for the year was $265,000 using full costing, what would net income be if the company used variable costing? A. $250,000 B. $265,000 C. $270,000 D. $450,000 67.

If a company employs JIT inventory techniques, which statement is true? A. Variable and full costing income will differ very little since there is almost no inventory on hand. B. Variable and full costing income will differ very little since there are almost no fixed costs incurred on production. C. Variable and full costing income will differ greatly since actual costs are difficult to determine. D. Variable and full costing income will differ greatly since there will be a large difference between gross margin and contribution margin.

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

68.

Waterloo Skyline experienced the following costs in 2017: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$3.15 per unit $2.80 per unit $1.45 per unit $12.60 per unit

There was no beginning inventory. During the year, the company sold 190,000 units. If net income using full and variable costing was $939,020 and $905,000, respectively, how many units did the company produce in 2017? A. 192,700 B. 2,700 C. 187,300 D. 46,951 69.

Which is most consistent with cost-volume-profit analysis? A. Variable costing B. Full costing C. Absorption costing D. JIT

70.

Which method provides an incentive for managers to produce more units in order to increase income for performance evaluations? A. Full costing B. Variable costing C. Both full costing and variable costing D. Neither full costing nor variable costing

71.

Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units. What is Brand Products’ net income using variable costing? A. $125,960 B. $149,960 C. $169,740 D. $124,240

72.

Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units. What is Brand Products’ net income using full costing? A. $124,240 B. $125,960 C. $120,720 D. $149,960

Chapter 5 Variable Costing

5-15

73.

Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units. Brand Products uses variable costing. How much will the company’s contribution margin increase if sales increase 10%? A. $16,974 B. $23,000 C. $14,996 D. $12,420

74.

Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each. Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500. Selling and administrative costs are all fixed and totaled $24,000. Beginning inventory consists of no units. Brand Products uses full costing. How much will the company’s gross margin increase if sales increase 10%? A. Less than 10% B. More than 10% C. 10% D. It depends on other factors not given.

75.

Affinity makes a single product, pool pumps. Information for 2017 appears below: Sales in units Production in units Beginning inventory Variable production cost per unit Variable selling cost per unit Fixed production cost per year Fixed selling and administrative cost per year Selling price per unit How much is the contribution margin per unit of inventory? A. $29.00 B. $24.00 C. $23.00 D. $18.00

5,800 6,200 1,500 $46.00 $6.00 $31,000 $24,000 $75.00

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

76.

Affinity makes a single product, pool pumps. Information for 2017 appears below (Assume the same unit costs in all years): Sales in units Production in units Beginning inventory Variable production cost per unit Variable selling cost per unit Fixed production cost per year Fixed selling and administrative cost per year Selling price per unit

5,800 6,200 1,500 $46.00 $6.00 $31,000 $24,000 $75.00

How much is the full cost per unit of inventory? A. $46.00 B. $51.00 C. $57.00 D. $52.00 77.

5,800 6,200 1,500 $46.00 $6.00 $31,000 $24,000 $75.00

How much is net income for the year under variable costing? A. $78,400 B. $87,600 C. $80,400 D. None of these answer choices are correct. 78.

5,800 6,200 1,500 $46.00 $6.00 $31,000 $24,000 $75.00

Chapter 5 Variable Costing

79.

5-17

5,800 6,200 1,500 $46.00 $6.00 $31,000 $24,000 $75.00

Under which method will net income be larger? A. Variable costing B. Full costing C. Net income under both the variable and full costing methods will be the same. D. The answer cannot be determined from the information provided. 80.

5,800 6,200 1,500 $46.00 $6.00 $31,000 $24,000 $75.00

How much will be reported for inventory on the balance sheet if variable costing is used? A. $87,400 B. $96,900 C. $108,300 D. $118,400 81.

Leesburg Bags produces backpacks. The costs and prices for the backpacks follow (Assume the same unit costs in all years): Selling price Variable costs: Production Selling Fixed Costs: Production Selling and administrative

$23.00 per backpack $11.00 per backpack $2.00 per backpack $900,000 per year $540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much is the cost of ending inventory under variable costing? A. $550,000 B. $650,000 C. $730,000 D. $1,450,000

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

82.

$23.00 per backpack $11.00 per backpack $2.00 per backpack $900,000 per year $540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much is the cost of ending inventory under full costing? A. $730,000 B. $550,000 C. $650,000 D. $938,000 83.

$23.00 per backpack $11.00 per backpack $2.00 per backpack $900,000 per year $540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much is net income under variable costing? A. $740,000 B. $848,000 C. $560,000 D. $2,000,000

Chapter 5 Variable Costing

84.

5-19

$23.00 per backpack $11.00 per backpack $2.00 per backpack $900,000 per year $540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much is net income under full costing? A. $560,000 B. $380,000 C. $340,000 D. $740,000 85.

$23.00 per backpack $11.00 per backpack $2.00 per backpack $900,000 per year $540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. How much higher or lower will variable costing be than full costing income? A. $180,000 higher B. $320,000 higher C. $320,000 lower D. $180,000 lower

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

86.

$23.00 per backpack $11.00 per backpack $2.00 per backpack $900,000 per year $540,000 per year

Leesburg Bags produced 250,000 backpacks for the year and sold 200,000. There was no beginning inventory, and costs throughout the year were stable. What would be the difference in income between variable costing income and full costing income if the company had produced 215,000 backpacks instead of 250,000? A. $62,791 B. $54,000 C. $46,400 D. $77,400 87.

WebFlicks is an online DVD company that produces its own DVD copies of first-run movies that it sells for $8.00 each. The following information is available (Assume the same unit costs in all years): Variable costs: Product royalty fees DVD production Selling and admin costs Fixed costs: Production Selling and administration

$3.30 per DVD $1.20 per DVD $0.80 per DVD $128,000 per month $130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in beginning inventory. How much is net income per month under variable costing? A. $143,600 B. $130,800 C. $130,640 D. None of these answer choices are correct.

Chapter 5 Variable Costing

88.

5-21

$3.30 per DVD $1.20 per DVD $0.80 per DVD $128,000 per month $130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in beginning inventory. How much is net income per month under full costing? A. $143,600 B. $130,640 C. $130,800 D. None of these answer choices are correct. 89.

$3.30 per DVD $1.20 per DVD $0.80 per DVD $128,000 per month $130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in beginning inventory. How much is inventory at the end of the month under variable costing? A. $72,000 B. $148,500 C. $174,900 D. $84,800

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

90.

$3.30 per DVD $1.20 per DVD $0.80 per DVD $128,000 per month $130,000 per month

During June, 160,000 DVDs were produced and 144,000 were sold. There were 17,000 DVDs in beginning inventory. How much is inventory at the end of the month under full costing? A. $72,000 B. $148,500 C. $174,900 D. $84,800 91.

Aerotrino produces and sells popular t-shirts. Following is information about its t-shirts for 2017: Selling price Variable costs: Production (manufacturing costs) Selling & administration Fixed costs: Production (manufacturing costs) Selling & administration

$15.00 per t-shirt $3.00 per t-shirt $1.00 per t-shirt $1,000,000 per year $2,000,000 per year

During 2017, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there was no beginning inventory. How much is the net income under variable costing? A. $975,000 B. $1,400,000 C. $850,000 D. $2,250,000 92.

$15.00 per t-shirt $3.00 per t-shirt $1.00 per t-shirt $1,000,000 per year $2,000,000 per year

During 2017, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there was no beginning inventory. How much is the net income under full costing? A. $975,000 B. $1,400,000 C. $850,000 D. $2,250,000

Chapter 5 Variable Costing

93.

5-23

$15.00 per t-shirt $3.00 per t-shirt $1.00 per t-shirt $1,000,000 per year $2,000,000 per year

During 2017, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there was no beginning inventory. How much is the inventory under variable costing at December 31, 2017? A. $150,000 B. $275,000 C. $200,000 D. $325,000 94.

$15.00 per t-shirt $3.00 per t-shirt $1.00 per t-shirt $1,000,000 per year $2,000,000 per year

During 2017, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there was no beginning inventory. How much is the inventory under full costing at December 31, 2017? A. $150,000 B. $275,000 C. $200,000 D. $325,000

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

95.

Brislin Gifts makes ceramic mugs and has the following amounts for 2017 (Assume the same unit costs in all years): Selling price Variable production cost Variable selling cost Fixed production cost Fixed selling and administrative cost

$9.00 per mug $2.50 per mug $1.10 per mug $100,000 per month $60,000 per month

Production and sales in units for the first three months of 2017 are as follows: Year Production Sales January 50,000 44,000 February 40,000 45,000 March 44,000 46,000 Inventory at January 1, 2017 consisted of 1,000 mugs. How much is net income for January using variable costing? A. $89,600 B. $77,600 C. $67,480 D. None of these answer choices are correct. 96.

Brislin Gifts makes ceramic mugs and has the following amounts during 2017 (Assume the same unit costs in all years): Selling price Variable production cost Variable selling cost Fixed production cost Fixed selling and administrative cost

$9.00 per mug $2.50 per mug $1.10 per mug $100,000 per month $60,000 per month

Production and sales in units for the first three months of 2017 are as follows: Year Production Sales January 50,000 44,000 February 40,000 45,000 March 50,000 45,000 Inventory at January 1, 2017 consisted of 1,000 mugs. How much is net income for February using variable costing? A. $70,500 B. $83,000 C. $183,000 D. None of these answer choices are correct.

Chapter 5 Variable Costing

97.

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$9.00 per mug $2.50 per mug $1.10 per mug $100,000 per month $60,000 per month

Production and sales in units for the first three months of 2017 are as follows: Year Production Sales January 50,000 44,000 February 40,000 45,000 March 50,000 45,000 Inventory at January 1, 2017 consisted of 1,000 mugs. During which months will ending inventory be the same if variable costing is used? A. January and February B. February and March C. January and March D. No two months would have the same ending inventory 98.

$9.00 per mug $2.50 per mug $1.10 per mug $100,000 per month Fixed selling and administrative cost $60,000 per month Production and sales in units for the first three months of 2017 are as follows: Year Production Sales January 50,000 44,000 February 40,000 45,000 March 50,000 45,000 Inventory at January 1, 2017 consisted of 1,000 mugs. Which two months would have the same net income under full costing? A. January and February B. February and March C. January and March D. No two months would have the same net income.

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

99.

Brislin Gifts makes ceramic mugs and has the following amounts during 2017 (Assume the same unit costs in all years): Selling price $9.00 per mug Variable production cost $2.50 per mug Variable selling cost $1.10 per mug Fixed production cost $100,000 per year Fixed selling and administrative cost $60,000 per year Production and sales in units for the first three months of 2017 are as follows: Year Production Sales January 50,000 44,000 February 40,000 45,000 March 50,000 45,000 Inventory at January 1, 2017 consisted of 1,000 mugs. How many units will remain in inventory at the end of February? A. 2,000 B. 0 C. 7,000 D. 6,000

100.

Brislin Gifts makes ceramic mugs and has the following amounts during 2017 (Assume the same unit costs in all years): Selling price $9.00 per mug Variable production cost $2.50 per mug Variable selling cost $1.10 per mug Fixed production cost $100,000 per year Fixed selling and administrative cost $60,000 per year Production and sales in units for the first three months of 2017 are as follows: Year Production Sales January 50,000 44,000 February 40,000 45,000 March 50,000 45,000 Inventory at January 1, 2017 consisted of 1,000 mugs. How much is the inventory cost per unit under full costing during March? A. $4.50 B. $4.00 C. $2.50 D. $5.10

Chapter 5 Variable Costing

101.

5-27

Brislin Gifts makes ceramic mugs and has the following amounts during 2017 (Assume the same unit costs in all years): Selling price $9.00 per mug Variable production cost $2.50 per mug Variable selling cost $1.10 per mug Fixed production cost $100,000 per year Fixed selling and administrative cost $60,000 per year Production and sales in units for the first three months of 2017 are as follows: Year Production Sales January 50,000 44,000 February 40,000 45,000 March 50,000 45,000 Inventory at January 1, 2017 consisted of 1,000 mugs. How much is the inventory cost per unit under variable costing during March? A. $4.50 B. $3.60 C. $2.50 D. $5.60

102.

A company with fixed manufacturing costs of $500,000 produces 100,000 units in 2017 and 125,000 units in 2015. The company sells 90,000 units each in both years. Other costs and selling price are unchanged for 2017 and 2018. Assume that there was no beginning inventory in 2017. Which of the following is true? A. Variable costing income will be greater in 2017 than in 2018. B. The dollar amount of ending inventory will be greater in 2017 than in 2018. C. Variable costing income will be the same in 2018 and 2017. D. All of these answer choices are correct.

103.

Zintec has fixed manufacturing costs of $400,000 and produces 10,000 and sells 8,000 wagons during the year. There is no beginning inventory. Which of the following conclusions can be drawn? A. Variable costing income will be $80,000 higher than full costing income. B. Full costing income will be $80,000 higher than variable costing income. C. Variable and full costing income will be the same. D. There is not enough information to draw a conclusion.

104.

Boulder Blowers produces snow blowers. The selling price per snow blower is $100. Costs involved in production are: Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year

20 12 10 148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no beginning inventory. What is the value of ending inventory using full costing? A. $679,500 B. $630,000 C. $652,500 D. $780,000

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

105.

20 12 10 148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no beginning inventory. What is the value of ending inventory using variable costing? A. $679,500 B. $630,000 C. $652,500 D. $780,000 106.

20 12 10 148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no beginning inventory. How much is the cost of goods sold using full costing? A. $1,359,000 B. $1,260,000 C. $2,038,500 D. $1,408,500 107.

20 12 10 148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. There was no beginning inventory. How much is net income using full costing? A. $1,641,000 B. $1,590,000 C. $1,441,500 D. $1,491,000

Chapter 5 Variable Costing

108.

5-29

20 12 10 148,500

In addition, the company has fixed selling and administrative costs of $150,000 per year. During the year, Boulder produces 45,000 snow blowers and sells 30,000 snow blowers. Beginning inventory consists of no units. How much fixed manufacturing overhead is in ending inventory under full costing? A. $0 B. $49,500 C. $148,500 D. $99,000 109.

The following information relates to Winslee Widgets during the company’s first year of operations: Units produced Units sold Units in ending inventory Fixed manufacturing overhead

11,000 10,000 1,000 $220,000

How much fixed manufacturing overhead will be expensed during the year using full costing? A. $220,000 B. $20,000 C. $200,000 D. $0

Answers to Multiple Choice 26 B 41 A 27 B 42 B 28 B 43 D 29 C 44 A 30 B 45 B 31 C 46 B 32 B 47 B 33 D 48 D 34 A 49 A 35 C 50 C 36 D 51 C 37 D 52 A 38 D 53 A 39 B 54 B 40 D 55 B

56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

C D A B A C B C B A A A A A A

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85

D B A B C B A B B A A A C D D

86 87 88 89 90 91 92 93 94 95 96 97 98 99 100

A B A B C C A A B B B C D A A

101 102 103 104 105 106 107 108 109

C C B A B A D B C

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

EXERCISES 110.

Arctic AC Company is a small manufacturer of window air conditioners. There were 65 units in beginning inventory. The units sell for $180 each. In 2017, the company produced 1,000 units and sold 940 units. Beginning inventory was zero. Below is the variable costing income statements for 2017: Arctic AC Company Variable Costing Income Statement For the Year Ending December 31, 2017 Sales Less variable costs: Variable cost of goods sold Variable selling expense Contribution margin Less fixed costs: Fixed manufacturing expense Fixed selling expense Fixed administrative expense Net income a. b.

Answer a.

$26,320 12,220

38,540 130,660

21,000 6,580 4,700

32,280 $98,380

How much net income will be reported under full costing? Reconcile the difference in profit between the two income amounts.

Fixed manufacturing overhead Divided by units produced Fixed manufacturing overhead per unit Sales Variable manufacturing cost Fixed manufacturing cost ($21 x 940) Gross margin Variable selling and administrative costs Fixed selling & administrative costs Net income

$169,200

$21,000 1,000 $ 21.00 $169,200 $26,320 19,740 12,220 11,280

Variable costing net income Add: Fixed costs deferred in inventory ($21 × 60) Full costing net income

46,060 123,140 23,500 $ 99,640 $98,380 1,260 $99,640

Chapter 5 Variable Costing

111.

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The following information is available for Trailblazer, a manufacturer of four-wheel allterrain vehicles: Vehicles produced Vehicles sold

2017 20,000 18,000

2018 16,000 18,000

Selling price per unit Direct material per unit Direct labor per unit

$8,000 $1,600 $3,000

$600 $4,800,000 Fixed selling and administrative expense per year $3,000,000

$600 $4,800,000 $3,000,000

Variable manufacturing overhead per unit Fixed manufacturing overhead per year

Beginning inventory contained zero units. In the company’s second year, the company needed to get rid of excess inventory (the extra units produced but not sold in 2017), so it cut back production to 16,000 units. a. b. c.

Calculate profit for both years using variable costing. How much is reported as ending inventory when using variable costing for each year? Does variable costing profit present a more realistic view of performance during the two years? Explain.

Answer a. Variable manufacturing costs per unit Sales ($8,000 × 18,000 units) Less cost of goods sold: ($5,200 × 18,000 units) Contribution margin Less fixed costs: Manufacturing Selling and administrative Net income

2017 $5,200

2018 $5,200

Total

$144,000,000 $144,000,000 93,600,000 50,400,000

93,600,000 50,400,000

4,800,000 4,800,000 3,000,000 3,000,000 $ 42,600,000 $ 42,600,000

$85,200,000

Ending inventory

$10,400,000 $0 ($5,200 × 2,000 units) ($5,200 × 0 units)

Variable costing presents a more realistic view of firm performance in that income is the same in both years, which is consistent with the firm having the same cost structure and level of sales in both years.

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

112.

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$11 per unit 15 per unit 12 per unit $448,000

In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and administrative costs per year

$175,000 75,000 $6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years. What is the value of ending inventory using variable costing? Answer Ending inventory in units = 1,800 + 28,000 – 29,400 = 400 units Ending inventory under variable costing: ($11 + $15 + $12) × 400 = $15,200

113.

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$11 per unit 15 per unit 12 per unit $448,000

In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and administrative costs per year

$175,000 75,000 $6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years. How much is net income using variable costing? Answer Sales ($80 × 29,400) Less variable cost of goods sold ($38 × 29,400) Less variable selling and administrative costs ($6 × 29,400) Contribution margin Less Fixed manufacturing overhead $448,000 Selling expense 175,000 Administrative expense 75,000 Net income

$2,352,000 1,117,200 176,400 1,058,400

698,000 $ 360,400

Chapter 5 Variable Costing

114.

5-33

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$11 per unit 15 per unit 12 per unit $448,000

In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and admin costs per year

$175,000 75,000 $6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years. a. b. Answer a.

How much is net income using full costing? How much fixed manufacturing overhead is in ending inventory under full costing?

Sales ($80 × 29,400) $2,352,000 Less cost of goods sold ($54 × 29,400)* 1,587,600 Gross margin 764,400 Less selling and administrative expenses: Fixed selling and administrative expense $250,000 Variable selling and admin expenses ($6 × 29,400) 176,400 426,400 Net income $ 338,000 * Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 per unit Product cost per unit = $11 + $15 + $12 + $16 = $54

Units in ending inventory = 1,800 + 28,000 – 29,400 = 400 Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 per unit Cost of ending inventory = $16 × 400 = $6,400

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

115.

Below is a variable costing income statement for Hops Dollar Store. The budget for 2017 follows: Hops Dollar Store Budgeted Variable Costing Income Statement For the Year Ending December 31, 2017 Sales Less variable costs: Cost of goods sold Selling expense Contribution margin Less fixed costs: Manufacturing expense Selling expense Administrative expense Net income

$15,000,000 $5,000,000 4,000,000

9,000,000 6,000,000

2,300,000 1,200,000 2,000,000 $

5,500,000 500,000

For the coming year, the company is considering hiring two additional sales representatives at $80,000 each for base salary plus 5 percent of their sales for commissions. The company anticipates that each sales representative will generate $900,000 of incremental sales. Calculate the impact on profit of the proposed hiring decision. Should the company hire the two additional sales representatives? Answer Contribution margin ÷ Sales = Contribution margin ratio $6,000,000 ÷ $15,000,000 = 0.40 = 40.00% (Incremental sales × CMR) − Salaries – Commission = Incremental profit ($1,800,000 × .40) − $160,000 − ($1,800,000 × .05) = $470,000 profit increase Since profit increases, Hops Dollar Store should hire the two additional sales representatives.

Chapter 5 Variable Costing

116.

5-35

Perfect Buy produces electronic garage door openers. Information on the first three years of business follows: Units sold Units produced Fixed production costs Variable production costs per unit Selling price per unit Fixed selling and administrative expense a. b.

2017 20,000 20,000 $500,000 $100 $200

2018 20,000 25,000 $500,000 $100 $200

2019 20,000 15,000 $500,000 $100 $200

$150,000

Calculate net income and the value of ending inventory for each year using variable costing. Explain why, using variable costing, profit does not fluctuate from year to year.

Answer a. 2017 Units sold 20,000 Selling price per unit $ 200 Sales 4,000,000 Less variable cost of goods sold: ($100 × 20,000) 2,000,000 Contribution margin 2,000,000 Less fixed costs: Production 500,000 Selling and administrative 150,000 Net income $1,350,000 Ending inventory ($100 × 5,000)

2018 20,000 $ 200 4,000,000

2019 20,000 $ 200 4,000,000

2,000,000 2,000,000

500,000 150,000 $1,350,000

$500,000

b. Under variable costing system, profit remains the same each period because fixed manufacturing overhead is treated as a period cost and expensed each year even if units produced differ from the units sold.

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

117.

The following information is available for Trailblazer, a manufacturer of four-wheel allterrain vehicles for its first two years of operation: 2017 2015 Vehicles produced 1,000 1,400 Vehicles sold 900 1,200 Selling price per unit Direct material per unit Direct labor per unit Variable manufacturing overhead per unit Fixed manufacturing overhead per year Variable selling and administrative expense per unit Fixed selling and administrative expense per year

$1,200 $350 $220

$40 $112,000 $20 $35,000

Calculate net income for 2015 using full costing. Answer Variable costs Fixed cost Total unit cost

2017 Unit Cost $610 $112,000/1,000 = $112 $722

2018 Unit Cost $610 $112,000/1,400 = $80 $690

Sale during 2015: (100 × $722) + (1,100 × $690) = $831,200 Sales (1,200 × $1,200) Less cost of goods sold Gross margin Less selling and administrative expense Fixed Variable ($20 × 1,200) Net income

$1,440,000 831,200 608,800 35,000 24,000 $549,800

Chapter 5 Variable Costing

118.

5-37

The following information relates to Markley Mattresses for fiscal year 2017, the company’s first year of operations: Units produced 20,000 Units sold 17,000 Selling price per unit $30 Direct material per unit $5 Direct labor per unit $5 Variable manufacturing overhead per unit $2 Variable selling cost per unit $3 Annual fixed manufacturing overhead $160,000 Annual fixed selling and administrative expense $80,000 a. b.

Prepare an income statement using full costing. Prepare an income statement using variable costing.

Answer a. Markley Mattresses Full Costing Income Statement For the Year Ending December 31, 2017 Sales ($30 × 17,000) Less cost of goods sold ($20 × 17,000)* Gross margin Less selling and administrative expenses Fixed selling and administrative expense Variable selling expenses ($3 × 17,000) Net income

$510,000 340,000 170,000 $80,000 51,000

131,000 $ 39,000

* Product cost per unit: $5 + $5 + $2 + $8 ($160,000 ÷ 20,000) = $20 b. Markley Mattresses Variable Income Statement For the Year Ending December 31, 2017 Sales ($30 × 17,000) Less variable expenses Production costs ($12 × 17,000) Selling costs ($3 × 17,000) Contribution margin Less fixed expenses Manufacturing overhead Selling and administrative expense Net income

$510,000 $204,000 51,000

160,000 80,000

255,000 255,000

240,000 $ 15,000

5-38

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

119.

Adam Tools produces screwdrivers and had 1,700 in inventory at the beginning of the year. It has a variable manufacturing cost of $5.00 per unit, a variable selling cost of $0.75 per unit; a fixed manufacturing cost of $45,000 per year; and a fixed selling and administrative cost of $24,000 per year. The selling price is $14.00 per screwdriver. During the year, 18,000 screwdrivers were produced and 18,400 were sold. Assume the same unit costs in all years. a. b. c. d.

Answer a.

$5.00

$5.00 + ($45,000 ÷ 18,000) = $7.50

Sales (18,400 × $14) Variable manufacturing cost (18,400 × $5) Variable selling cost (18,400 × $0.75) Contribution margin Fixed production costs Fixed selling & administrative costs Net income

120.

What is the product cost per screwdriver using variable costing? What is the product cost per screwdriver using full costing? Prepare an income statement using variable costing. Omit the statement heading. Prepare an income statement using full costing. Omit the statement heading.

$257,600 $92,000 13,800 151,800 45,000 24,000 $ 82,800

105,800

69,000

Sales (18,400 × $14) $257,600 Cost of goods sold (18,400 × $7.50) 138,000 Gross margin 119,600 Selling & administrative [$24,000 + ($0.75 × 18,400)] 37,800 Net income $ 81,800

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$11 per unit 15 per unit 12 per unit $448,000

In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and admin costs per year

$175,000 75,000 $6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years. What is the value of ending inventory using full costing? Answer Ending inventory in units = 1,800 + 28,000 – 29,400 = 400 units Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 per unit Product cost per unit = $11 + $15 + $12 + $16 = $54 Ending inventory under full costing: $54 × 400 units = $21,600

Chapter 5 Variable Costing

121.

5-39

Nader, Inc. produces e-readers that it sells for $80 each. Costs involved in production are: Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year

$11 per unit 15 per unit 12 per unit $448,000

In addition, the company has selling and administrative costs: Fixed selling costs per year Fixed administrative costs per year Variable selling and admin costs per year

$175,000 75,000 $6 per unit

During the year, Nader produced 28,000 readers and sold 29,400. Beginning inventory totaled 1,800 units. Assume the same unit costs in all years. How much is gross margin per unit and in total? Answer Fixed manufacturing cost per unit = $448,000 ÷ 28,000 = $16 Gross margin per unit = $80.00 – $11.00 – $15.00 – $12.00 – $16.00 = $26.00 Total gross margin = $26 × 29,400 = $764,400

122.

Last month, Toro Tools produced 6,000 wheelbarrows and sold 6,200 at a price of $62 each. Toro had 900 wheelbarrows in beginning inventory. Manufacturing costs consisted of direct materials of $84,000, direct labor of $27,300, variable manufacturing overhead of $21,000, and fixed manufacturing overhead of $120,000. General and administrative fixed costs totaled $32,000. Variable selling costs were $1 per wheelbarrow. Assume the same unit costs in all years. a. b.

Answer a.

Calculate Toro Tools’ net income using full costing. Calculate Toro Tools’ net income using variable costing.

Net income using full costing approach: Revenue = 6,200 × $62 = $384,400 Variable manufacturing cost per unit = ($84,000 + $27,300 + $21,000) ÷ 6,000 = $22.05 Fixed manufacturing cost per unit = $120,000 ÷ 6,000 = $20.00 Cost of goods sold = ($42.05 × 6,200) = $260,710 Variable selling costs = $1 × 6,200 = $6,200 Net income = $384,400 – $260,710 – $32,000 – $6,200 = $85,490 Net income using variable costing approach: Revenue = 6,200 × $62 = $384,400 Variable manufacturing cost per unit = ($84,000 + $27,300 + $21,000) ÷ 6,000 = $22.05 Variable selling costs = $1 × 6,200 = $6,200 Net income = $384,400 – ($22.05 × 6,200) – $120,000 – $32,000 – $6,200 = $89,490

5-40

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

123.

Assess Digital produces digital controls. Information on its first three years of business is as follows: 2017 Units sold 20,000 Units produced 20,000 Fixed production costs $500,000 Variable production costs per unit $100 Selling price per unit $200 Fixed selling and administrative exp. $150,000 a. b.

2018 20,000 25,000 $500,000 $100 $200 $150,000

2019 20,000 15,000 $500,000 $100 $200 $150,000

Total 60,000 60,000

Calculate net income and the value of ending inventory for each year using full costing. Explain why profit fluctuates from year to year even though the number of units sold, the selling price, and the cost structure remain constant.

Answer 2017 Fixed production overhead $500,000 Divided by units produced 20,000 Fixed production overhead per unit $25.00 Variable production costs per unit 100.00 Full cost per unit $ 125.00

2018 $500,000 25,000 $20.00 100.00 $ 120.00

2019 $500,000 15,000 $33.33 100.00 $ 133.33

Sales ($200 × 20,000 units) $4,000,000 Less cost of goods sold: ($125 × 20,000) 2,500,000 ($120 × 20,000) ($120 × 5,000) + ($133.33 × 15,000)

$4,000,000

Gross margin Less selling and admin expense Net income

1,500,000 150,000 $1,350,000

1,600,000 150,000 $1,450,000

1,400,050 150,000 $1,250,050

Ending inventory ($120 × 5,000)

$600,000

2,400,000 2,599,950

Even though sales revenue amounts are the same in each period, profit fluctuates. This results because different quantities are produced each period which affects the fixed manufacturing overhead included in cost of goods sold versus ending inventory.

Chapter 5 Variable Costing

124.

5-41

Wise Company began operations in 2017. A company has $8.00 per unit in variable production costs and $3.00 per unit in variable selling and administrative costs. The annual fixed production cost is $180,000. The annual fixed selling and administrative cost is $20,000. a.

Complete the table below for the number of units and dollar value of ending inventory under variable costing for each year.

Units produced Units sold Units in ending inventory Ending inventory using variable costing b.

2017 60,000 55,000

2018 70,000 72,000

2019 80,000 82,000

2020 90,000 91,000

Assume that the selling price and cost structure stayed the same over the 4-year period. How would the total net income compare for the entire period between variable and full costing?

Answer a. 2017 Units produced 60,000 Units sold 55,000 Units in ending inventory 5,000 Ending inventory using variable costing $8 × 5,000 = $40,000 $8 × 3,000 = $8 × 1,000 = b.

2018 70,000 72,000 3,000

2019 80,000 82,000 1,000

2020 90,000 91,000 0

$8,000

$24,000

Since sales equals production for the 4-year period, net income will remain the same.

5-42

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

CHALLENGE EXERCISES 125.

ABT makes a single product, bucket stoppers. During 2017, 155,000 units were sold and 150,000 units were produced. Information for 2017 appears below: Beginning inventory in units 6,000 Variable production cost per unit $1.20 Variable operating costs per unit $0.80 Fixed production cost per year $127,500 Fixed selling and administrative cost per year $32,000 Selling price per unit $6.00 a. b. c.

Answer a.

How much is the contribution margin for 2017 under variable costing? How much is the gross margin for 2017 under full costing? Explain why variable and full costing produce different results.

Sales ($6 × 155,000) $930,000 Variable cost of production ($1.20 × 155,000) 186,000 Variable operating costs ($0.80 × 155,000) 124,000 Contribution margin $620,000 Fixed cost per unit = $127,500 ÷ 150,000 = $0.85 Full cost per unit = $0.85 + $1.20 = $2.05 Sales ($6 × 155,000) Cost of goods sold ($2.05 × 155,000) Gross margin

$930,000 317,750 $612,250

Under full costing, a proportional share of the fixed manufacturing overhead costs is attached to each unit produced. The fixed costs associated with the extra units are reported on the balance sheet as ending inventory, rather than on the income statement as an expense. The entire fixed manufacturing cost is expensed under variable costing, making income smaller than if only part of the fixed cost was expensed.

Chapter 5 Variable Costing

126.

5-43

Bucket Zone had 2,200 buckets in its beginning inventory. It manufactured 23,000 buckets and sold 23,400 buckets during the year. Costs involved in production are $3 for direct materials, $2 for direct labor, and $1.20 for variable overhead, each on a per unit basis. The company has annual fixed selling and administrative costs of $78,000 and fixed annual manufacturing overhead costs totaling $86,250. Operating income using variable costing is $33,000. a. b. c.

Answer a.

Determine the amount by which net income will differ under absorption costing compared to variable costing. Determine operating income under absorption costing. How would the difference between variable and full costing be impacted if the company switched to a JIT system? Explain. Change in inventory level = 23,400 – 23,000 = 400 units decrease Fixed manufacturing cost per unit = $86,250 ÷ 23,000 = $3.75 per unit Difference = $3.75 × 400 units = $1,500

Variable costing operating income Less fixed costs difference Absorption costing operating income

$33,000 (1,500) $31,500

Companies that use JIT inventory systems have very low inventory levels since they don’t produce until they are ready to sell products. Units they produce are approximately equal to those they sell, so the change in the inventory level is very close to zero. Since the difference in variable and full costing income is due to the change in inventory units, the net income difference will be close to zero as well.

5-44

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

SHORT-ANSWER ESSAYS 127.

Explain the significant difference between variable costing and full costing.

Answer The significant difference between variable costing and full costing is the treatment of fixed manufacturing overhead. In variable costing, fixed manufacturing overhead is treated as a period cost and expensed as it is incurred. In full costing, fixed manufacturing overhead is considered a cost that becomes part of inventory and is not expensed until the goods are sold.

128.

Why is a variable costing income statement more useful for internal purposes?

Answer The format separates fixed and variable costs facilitating cost-volume-profit analysis. Also, it discourages over-production since managers cannot increase income by increasing production. 129.

Under full costing, how does increasing production increase income? Does this work under variable costing? Why or why not?

Answer Since fixed production costs are included in the unit product cost using full costing, increasing production will reduce the fixed cost per unit. When these reduced costs are included in cost of goods sold, income will be higher. Variable costing treats fixed production costs as a period cost, and expenses the full amount regardless of production. Thus, income is unaffected by increasing production.

130.

Can a company continue to increase income indefinitely by using full costing?

Answer It is possible that a growing company can do this. The only way to do this is to produce more than is sold in each year. This will result in a continuous buildup of inventory. For most companies, that would not be a good strategy as it would lead to expensive cash outflow for buildups of inventories along with all the associated carrying costs.

131.

What is the implication of a company using JIT with full costing versus using JIT with variable costing?

Answer JIT companies have very little inventory and so there is very little difference between full and variable costing income.

CHAPTER 6 Cost Allocation and Activity-Based Costing Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

K K K K K K

7. 8. 9. 10. 11. 12.

1 1 1 1 1 1

29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 1 1 1 1 1 1

K K K K K C K K C C K K K C K K K K K K K K K K K

54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78.

1 1 2 2 2 2 2 2 1 1,2 1 2 2 2 2 2 2 2 2 2 2 2 A1 2 2

152.

1,2

153. 154. 155. 156.

1 1 2 2

AP C AP AP

157. 158. 159. 160.

2 2 1 1

BT Item LO BT Item True-False Statements K 13. 1 K 19. K 14. 1 K 20. K 15. 1 K 21. K 16. 1 K 22. K 17. 2 K 23. K 18. 2 K 24. Multiple Choice Questions C 79. 2 AP 104. K 80. 1 AP 105. K 81. 1 AP 106. K 82. 1 AP 107. K 83. 1 AP 108. K 84. 1 AP 109. K 85. 1 AP 110. K 86. 1 AP 111. C 87. 1 AP 112. C 88. 2 AP 113. C 89. 2 AP 114. K 90. 1 AP 115. C 91. 1 AP 116. K 92. 1 AP 117. K 93. 1 AP 118. K 94. 2 AP 119. K 95. 2 AP 120. K 96. 2 AP 121. C 97. 1 AP 122. C 98. 2 AP 123. C 99. 1 AP 124. K 100. 2 AP 125. K 101. 1 AP 126. AP 102. 1 AP 127. AP 103. 1 AP 128. Matching

AP AP AP AP

Exercises 161. 1 AP 162. 1 AP 163. 1 AP 164. 1 AP

165. 166. 167. 168.

Item

2 2 2 2 2 2

K K K K C K

25. *26. *27. 28.

2 A1 A1 2

K K K K

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2

AP AP AP AN AP AP AP AP AP AP AP AP AP AP AP AP AN AN AP AP AP AP AP AP AP

129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

AP AP AP AP AP AP AN AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C

1 2 2 2

AP AP AP C

169. 170.

1,2 2

AP AN

6-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

171.

1,2

172.

174. 175.

1 1

K C

176. 177.

1 1

Challenge Exercises 173. 1 AN Short-Answer Essays K 178. 1 C 180. C 179. 1 C *181.

2 A1

C C

*182.

TRUE-FALSE STATEMENTS 1.

Indirect costs occur because resources are shared by more than one cost objective.

Cost allocation is the process of assigning direct and indirect costs to products.

Cost allocation methods that provide the most accurate full cost information for financial reporting, also provide the most accurate information for cost-plus contracts.

One of the reasons that companies allocate costs is to allow for the frivolous use of common resources.

One of the reasons that companies allocate costs is to encourage managers to use externally provided services, rather than those that are internally provided.

From a decision-making standpoint, the allocated cost should measure the opportunity cost of using a company resource.

Once the opportunity cost associated with a shared resource is determined, it is unlikely to change.

In order to provide full cost information for external reporting purposes, indirect production costs must be allocated to goods produced.

Cost-plus contracts guarantee that the supplier will pay for production costs and the customer will pay a fixed amount or percentage of the cost.

10.

The more costs that are allocated to a cost-plus contract, the smaller the profit will be for the supplier of the contract.

11.

A cost objective is the product, service, or department that will receive the allocated cost.

12.

Large cost pools that contain many different kinds of costs are most useful to managers in making decisions.

13.

The allocation base selected should ideally have a relative benefits relationship with the costs to be allocated.

14.

In the direct method of allocating costs, service department costs are allocated only to production departments, not to other service departments.

15.

When service department costs are allocated using actual costs and actual usage, the amount allocated to one department will depend on the usage of other departments.

Chapter 6 Cost Allocation and Activity-Based Costing

6-3

16.

Allocating actual service department costs allows the service departments to pass on the costs of inefficiencies to the production departments.

17.

Managers should not be held responsible for noncontrollable costs.

18.

Allocating unitized fixed and variable costs leads to better decision making than allocating total costs.

19.

Allocating fixed costs on a per unit basis will often cause the managers receiving the allocations to perceive the costs as variable.

20.

ABC is more likely than traditional costing systems to undercost complex, low-volume products.

21.

ABC allocates cost pools to cost objectives using cost drivers as the allocation base.

22.

Under the ABC approach, costs are assigned to cost drivers based on a chosen cost objective.

23.

An example of a unit-level activity is the design of a particular product.

24.

Activity-based management aims at improving the efficiency and effectiveness of business processes.

25.

Activity-based costing uses benchmarking to compare the cost of an activity in one organization to the cost for a similar activity in another organization.

*26.

Before resources used by the major activities of a business can be identified, managers using activity-based management must identify ways to improve the effectiveness of the activities.

*27.

The process of determining major activities occurs before the resources used by each activity are identified in performing an activity-based management study.

28.

A batch-level activity is an activity that supports all other activities.

Answers to True-False 1 T 6 T 2 F 7 F 3 T 8 T 4 F 9 F 5 F 10 F

11 12 13 14 15

T F F T T

16 17 18 19 20

T T F T F

21 22 23 24 25

T F F T F

*26 F *27 T 28 F

6-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MULTIPLE CHOICE 29.

Indirect costs occur when A. resources are shared by more than one product or service. B. costs are directly traced to products or services. C. controllable costs are incurred by cost objectives. D. All of these answer choices are correct.

30.

The process of assigning indirect costs is called A. benchmarking. B. tracing. C. cost allocation. D. cost unitizing.

31.

Which of the following is not a reason that companies allocate costs? A. To calculate the full cost of products for financial reporting purposes B. To discourage managers from using external suppliers C. To reduce the frivolous use of company resources D. To provide information needed by managers to make appropriate decisions

32.

Costs may not be allocated to A. cost drivers. B. services. C. departments. D. cost objectives.

33.

From a decision-making standpoint, the allocated cost should measure the A. sunk cost of the resource involved. B. variable costs of the materials purchased. C. opportunity cost of using a company resource. D. product cost of the goods produced.

34.

If managers are not charged for centrally administered services, what may managers likely do? A. Seek outside suppliers B. Limit their frivolous use of these services C. Consider the services as free D. Evaluate and consider lower-cost alternatives for the services

35.

Full cost information A. is required by GAAP for internal reporting purposes. B. requires the allocation of indirect costs. C. provides managers with cost information on uncontrollable costs. D. treats all costs as fixed costs.

36.

A contract that specifies that the supplier will be paid for the cost of production as well as some fixed amount or percentage of cost is called a(n) A. relative-benefits contract. B. cost-plus contract. C. allocation cost pool. D. indirect cost budget.

Chapter 6 Cost Allocation and Activity-Based Costing

6-5

37.

In which of the following industries are cost-plus contracts common? A. Hybrid car manufacturers B. Soft drink bottlers C. Governmental defense suppliers D. Newspaper publishers

38.

A major problem with cost-plus contracts is that they A. include costs that do not follow GAAP. B. cause the supplier to take significant financial risks. C. require the supplier to use variable costing. D. create an incentive to allocate as much cost as possible to the goods produced under the contract.

39.

Which of the following is not a step in the cost allocation process? A. Calculate the cost involved in each step of the production process. B. Select an allocation base to relate the cost pools to the cost objectives. C. Form cost pools. D. Identify the cost objectives.

40.

A cost objective is the A. reason for allocating the cost. B. basis on which costs are allocated. C. product, service, or department that is to receive the allocation. D. relative benefit received from using a resource.

41.

What is the product, service, or department that is to receive the cost allocation called? A. Cost-plus recipient B. Cost objective C. Cost driver D. Cost pool

42.

Which of the following is least likely to be a cost objective? A. Salaries such as those in the accounting and personnel departments B. Individual products such as spades and mowers C. Product lines such as loans and estate plans D. Departments such as assembly and finishing

43.

Which of the following is a grouping of individual costs whose total is allocated using one allocation base? A. Cost objective B. Cost pool C. Direct cost D. Cost driver

44.

A cost pool is A. not necessary in cost-plus contracts. B. useful when separating mixed costs into their fixed and variable components. C. allocated using a single allocation base. D. a method of allocating costs among service departments.

6-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

45.

Which of the following is a measure of activity used to distribute indirect costs? A. Cost objective B. Cost pool C. Cost driver D. Cost unitization

46.

Which of the following is the overriding concern in forming a cost pool? A. To ensure that there are no variable costs in the cost pool B. To ensure that the total amount in the cost pool is less than the direct costs for the product C. To ensure that only costs which have been budgeted are included in the cost pool D. To ensure the costs in the pool are homogeneous or similar

47.

Which of the following statements about cost pools is true? A. The costs in each of the cost pools should be homogeneous or similar. B. The number of cost pools must be the same as the number of products produced by a company. C. Only four different kinds of costs may be included in a single cost pool. D. Each cost pool should include the costs of one expense account.

48.

An allocation base A. is the minimum amount to be allocated to a cost objective. B. is also called a cost pool. C. represents the items to which a cost will be allocated. D. relates the cost pool to the cost objectives.

49.

An allocation base A. is also called a cost objective. B. is a characteristic that is the same for all cost drivers. C. ideally uses a cause-and-effect relationship to the cost pool. D. All of these answer choices are correct.

50.

Which of the following is not a criterion typically used to allocate indirect fixed costs? A. Ability to bear costs B. Equity C. Feasible outcomes D. Relative benefits

51.

Which of the following is not a service department in a typical manufacturing firm? A. Security B. Fabrication C. Maintenance D. Personnel

52.

Which of the following is a method of allocation used to assign service department costs to production departments, but not to other service departments? A. Equity method B. Direct method C. Lump-sum method D. Traditional method

Chapter 6 Cost Allocation and Activity-Based Costing

6-7

53.

Service department costs are allocated to producing departments A. so that the costs can be allocated to the products in the producing departments. B. so that less cost is allocated to service departments. C. so that the service will not be purchased externally. D. All of these answer choices are correct.

54.

Which of the following allocations would not occur when the direct method is used in a manufacturing company? A. Personnel department costs are allocated to the maintenance department. B. Maintenance department costs are allocated to the mixing department. C. Security department costs are allocated to the packaging department. D. Payroll department costs are allocated to the assembly department.

55.

The advantage of allocating budgeted rather than actual service department costs is that A. managers are not motivated to evaluate the charges. B. only one cost pool is necessary. C. service departments cannot pass on the costs of inefficiencies and waste. D. this practice is acceptable under GAAP.

56.

What costs are affected by the manager’s decisions for which the manager should be held accountable? A. Indirect costs B. Controllable costs C. Sunk costs D. Pooled costs

57.

Managers are correct when they perceive that almost all cost allocations are A. insignificant. B. arbitrary. C. designed to make them look bad. D. unnecessary.

58.

When fixed costs are unitized, they A. are stated on a per unit basis. B. may appear to remain the same in total at all levels of activity. C. may cause managers to use volume-related allocation. D. All of these answer choices are correct.

59.

An allocation of a predetermined amount that is not affected by changes in the activity level of the organizational unit receiving the allocation is called a(n) A. allocation base. B. unitized cost. C. lump-sum allocation. D. cost driver.

60.

Lump-sum allocations A. generally changes year after year. B. do not change when the activity levels of any of the user departments change. C. are impacted by the usage of the allocated resource by other departments. D. make fixed costs appear variable.

6-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

61.

Which of the following statements is true concerning lump-sum allocations of service department costs? A They make fixed costs appear to be variable to the manager receiving the allocation. B. They are not affected by the activity level in the department receiving the allocation. C. They make fixed costs appear to be variable to the manager receiving the allocation and are not affected by the activity level in the department receiving the allocation. D. They do not make fixed costs appear to be variable to the manager receiving the allocation and are affected by the activity level in the department receiving the allocation

62.

Which of the following is not a problem caused by assigning actual service department costs to operating departments based on actual usage of service department activities by the operating departments? A. The cost assigned to one manager will be affected by the service usage of another manager. B. Inefficiencies in the service department will be passed along to the operating departments. C. Operating managers having high peak capacity requirements will not have to bear the full cost of meeting this peak capacity. D. All of these answer choices are problems caused by assigning actual service costs to operating departments.

63.

The Copy Department of Hernandez Hardware is budgeted to incur $30,000 per month in fixed costs plus a cost of $0.02 per copy. The company allocates copy costs to user departments as follows: • Fixed costs are allocated as a lump sum based on budgeted fixed costs and estimated peak demand for each department. • Variable costs are allocated based on the budgeted rate per copy times the department's actual usage. Which of the following is an advantage of this allocation scheme over allocating all actual service costs based on actual usage? A. Departments that use copy services are charged for cost overruns in the copy department. B. The amount charged to a particular user department is affected by the number of copies used by another department. C. Managers in departments that use services pay for the fixed costs that fluctuate based on their changing needs. D. Managers are charged for the activities they use.

64.

From the perspective of a manager of a producing department, which of the following is a desired feature of a cost allocation received from a service department? A. The amount of the allocation should be based solely on the usage of the service by the producing department and not a function of the usage of the service by other departments. B. The budgeted cost should be allocated rather than actual service department costs. C. The allocation should force the production manager to pay for fluctuating demands that the production manager is creating. D. All of these answer choices are correct.

Chapter 6 Cost Allocation and Activity-Based Costing

6-9

65.

Companies that use only one or two cost pools rather than several cost pools A. incurs more cost of record keeping. B. will experience more profit than if more pools are used. C. may price products incorrectly due to inaccurate cost allocation. D. are likely to be using ABC.

66.

When activity-based costing is implemented, the initial outcome is that A. the unit cost of all products will be higher. B. the unit cost of all products will be lower. C. the unit cost of low-volume products will be higher and the unit cost of highvolume products will be lower. D. the unit cost of low-volume products will be lower and the unit cost of highvolume products will be higher.

67.

Which of the following is likely to occur when fewer overhead cost pools are used? A. Product costs will be less accurate. B. Recordkeeping will be more expensive. C. Decisions such as product pricing will be improved. D. All products will be undercosted.

68.

The traditional approach to cost allocation A. tends to over-cost high volume core products. B. usually requires more cost pools than ABC. C. attempts to identify the activities that cause costs. D. produces more accurate costs than other allocation methods.

69.

Which of the following steps is not involved in the ABC approach? A. Identify activities that cause costs to be incurred. B. Allocate costs to products based on activity usage. C. Group costs of activities into cost pools. D. Improve processes based on benchmarking.

70.

How many distinct activities are used by most companies that design ABC systems? A. Fewer than 3 B. 3 to 10 C. 11 to 24 D. 25 to 100

71.

Happy Foods uses ABC costing. Which of the following is most likely to be a cost driver for the cost of cashiering at a convenience store? A. Cost of items purchased B. Direct labor cost C. Number of customers processed D. Number of employees handling the job

72.

Which of the following is generally true when a company compares activity-based costing (ABC) and traditional volume-based costing? A. ABC uses fewer cost drivers in an effort to reduce total costs. B. ABC allocates costs based primarily on production volume. C. ABC is less expensive. D. ABC is less likely to undercost complex, low-volume products.

6-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

73.

Which of the following is not an advantage of activity-based costing over traditional volume-based costing systems? A. ABC may lead to cost control improvement as managers are charged for using activities. B. ABC is less likely than a traditional system to undercost complex, low-volume products. C. ABC is less costly to implement than traditional systems. D. ABC allows managers to get an understanding of the cost of their respective department’s activities.

74.

What is the major difference between ABC and ABM? A. ABC is used in managerial accounting, while ABM is used in financial accounting. B. ABC focuses on measurement, while ABM focuses on control. C. The goal of ABC is to accurately control costs, while the goal of ABM is to allocate costs most effectively to cost objectives. D. There is no difference; ABC and ABM are two names for the same thing.

75.

Activity-based management A. is the management of activities that cause costs. B. requires cost pools to be formed consisting of costs that are homogenous in nature. C. allocates costs in a cause and effect manner to cost objectives. D. is a method of allocating direct costs to cost objectives.

*76.

Which one of the following lists the major steps in activity-based management in the correct order? A. Determine major activities, form cost pools, evaluate the performance of the activities, and identify ways to improve the activities B. Determine major activities, identify resources used by each activity, evaluate the performance of the activities, and identify ways to improve the activities C. Determine major activities, identify ways to improve the activities, evaluate the performance of the activities, and identify resources used by each activity D. Determine major activities, evaluate the performance of activities, form cost pools, and identify ways to improve the activities

77.

Teal Sports offers 2 different types of water sport activities—sailfish rental and banana boat rides. The company has two different activities—lifeguarding and maintenance— that provide input into its cost objectives. Data on estimated overhead for the year follows: Activity

Driver

Estimated Overhead Cost

Sailfish Rental Estimate

Boat Rides Estimate

Lifeguarding Maintenance

# of Labor hours Hours of riding time

$63,940 $88,000

3,280 hours 1,500 hours

2,280 hours 2,500 hours

What overhead rates will be used in each department to assign costs to the banana boat rides? Lifeguarding Maintenance A. $28.04 $22.00 B. $11.50 $22.00 C. $28.04 $35.20 D. $11.50 $35.20

Chapter 6 Cost Allocation and Activity-Based Costing

6-11

78.

Terrel Gifts produces logo platters and cups bearing the name of the city in which the items will be sold to tourists. Indirect logo printing costs are allocated to platters and cups based on the amount of time spent on the logo machine. The company has budgeted indirect logo costs of $4,224 per month and expects to spend 4,800 hours on printing logos each month. Each platter uses 24 minutes and each cup spends 6 minutes on the logo machine. How much of the logo printing costs will be allocated to each platter? A. $0.35 B. $0.88 C. $21.12 D. $8.12

79.

Driver

Lifeguarding Maintenance

# of Labor hours Hours of riding time

Estimated Overhead Cost $63,940 $88,000

Sailfish Rental Estimate

Boat Rides Estimate

3,280 hours 1,500 hours

2,280 hours 2,500 hours

The company provides 2,400 banana boat rides and 1,200 sailfish rentals each year. How much overhead will be assigned to each banana boat ride? A. $42.20 B $73.24 C $22.56 D. $33.84 80.

The law firm of Barnes & Cohen purchased a new $17,600 copier. Copying costs will be shared by the purchasing, accounting, and information technology departments since those are the only departments that will have access to the machine. The company has decided to allocate the copying cost based on the number of copies made by each department. The sales person who sold the copier to the attorneys expects it will generate 1,000,000 copies. The manager of each department has estimated the number of copies that his or her department will make over the life of the copier: Department Purchasing Accounting Information Technology

Copies 150,000 450,000 200,000

How much overhead will be allocated each time a copy is made by the accounting department? A. 2.2 cents B. 3.9 cents C. 1.76 cents D. None of these answer choices are correct.

6-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

81.

Marley Music produces toy instruments—trumpet and flute— for children. Molding costs are allocated to products based on a percentage of material costs. Molding costs of $15,000 per month are budgeted and the store anticipates spending $30,000 in materials. By the end of the month, it was determined that actual molding costs were $14,500. If the company spends $6.50 per trumpet for materials, and $3.50 per flute for materials, how much of the molding costs will be allocated to each trumpet? A. $0.50 B. $0.48 C. $3.14 D. $3.25

82.

Copies 150,000 450,000 200,000

If the purchasing department makes 23,000 copies this quarter, how much copying cost will Barnes & Cohen allocate to purchasing? A. $405 B. $2,699 C. $506 D. None of these answer choices are correct. 83.

Ransom Widgets allocates the estimated cost of its accounting department, $200,000, to its production and sales departments since the accounting department supports these departments with regard to payroll and accounts payable functions. The accounting department costs will be allocated based on the number of employees using the direct method. Information regarding employees follows: Department Accounting Production Sales

Employees 4 36 12

How much of the accounting department costs will be allocated to the production and sales departments, respectively? Production Sales A. $150,000 $50,000 B. $180,000 $60,000 C. $1,800,000 $600,000 D. $22,222 $66,667

Chapter 6 Cost Allocation and Activity-Based Costing

84.

6-13

Intermodal Moving uses the direct method and allocates its maintenance costs on the basis of repair hours and its payroll department costs on the basis of employees. Estimated costs and information on the services and production departments follows: Payroll $36,000 Maintenance $48,000 Packing 30 employees, 280 repair hours Driving 10 employees, 1,960 repair hours How much of the payroll and maintenance costs will be allocated to the packing department? Payroll Maintenance A. $900 $171.43 B. $27,000 $6,000 C. $27,000 $21.43 D. $1,200 $6,000

85.

Freely Service provides residential and commercial monthly swimming pool cleaning services. Information on this service is as follows: Service revenue Direct materials Direct labor

$140,000 18,000 44,000

Estimated travel costs for the month total $2,340 and are allocated to each client based on miles driven to each pool cleaning. The company estimates it will clean 50 residential pools and 80 commercial pools per month with 1,200 total miles used for commercial pools and 2,400 total miles used for residential pools. Because commercial pools are much larger, they take 3 hours to clean, while residential pools take a half hour each. During the month, the actual mileage totaled 2,600 miles. How much is the rate at which travel costs will be allocated to residential pools? A. $0.65 B. $0.975 C. $18.00 D. $8.83 86.

The building maintenance department for Advantage Toys budgets annual costs of $4,200,000 based on the expected operating level for the coming year. The costs are allocated to two production departments. The following data relate to the potential allocation bases: Production Dept. A Production Dept. B Square footage 15,000 45,000 Direct labor hours 25,000 50,000 If Advantage assigns costs to departments based on square footage, how much maintenance cost will be allocated to Production Department A? A. $1,400,000 B. $1,050,000 C. $1,575,000 D. $2,100,000

6-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

87.

The building maintenance department for Advantage Toys budgets annual costs of $4,200,000 based on the expected operating level for the coming year. The costs are allocated to two production departments. The following data relate to the potential allocation bases: Production Dept. A Production Dept. B Square footage 15,000 45,000 Direct labor hours 25,000 50,000 If Advantage assigns costs to departments based on direct labor hours, how much maintenance cost will be allocated to Production Department B? A. $1,400,000 B. $1,050,000 C. $2,800,000 D. $2,100,000

88.

Sweet Cocoa produces chocolate syrup used by candy companies. Recently, the company has had excess capacity due to a foreign supplier entering its market. Sweet Cocoa is currently bidding on a potential order from Kilwin’s Candy for 5,000 cases of syrup. The estimated cost of each case is $27.50, as follows: direct material, $10; direct labor, $5; and manufacturing overhead, $12.50. The overhead rate of $2.50 per direct labor dollar is based on estimated annual overhead of $1,500,000 and estimated direct labor cost of $600,000, composed 40% of variable costs and 60% of fixed costs. The largest fixed cost relates to depreciation of plant and equipment. How much is the variable cost of producing a case of chocolate syrup? A. $16.00 B. $27.50 C. $11.00 D. $20.00

89.

Sweet Cocoa produces chocolate syrup used by candy companies. Recently, the company has had excess capacity due to a foreign supplier entering its market. Sweet Cocoa is currently bidding on a potential order from Kilwin’s Candy for 5,000 cases of syrup. The estimated cost of each case is $27.50, as follows: direct material, $10; direct labor, $5; and manufacturing overhead, $12.50. The overhead rate of $2.50 per direct labor dollar is based on estimated annual overhead of $1,500,000 and estimated direct labor cost of $600,000, composed 40% of variable costs and 60% of fixed costs. The largest fixed cost relates to depreciation of plant and equipment. Should Sweet Cocoa bid on the Kilwin’s Candy business at $21 per case? A. No, because the incremental loss will be $6.50 per case B. Yes, because the incremental profit will be $1.00 per case C. No, because there are too many qualitative considerations D. Yes, because the incremental profit will be $10 per case

90.

Maintenance costs at Sturgeon Company are allocated to the production departments based on area occupied. Maintenance costs of $300,000 are budgeted to maintain a 60,000 square foot production area. If the finishing department occupies 25,000 square feet, how much of the maintenance department costs will be allocated to the finishing department? A. $125,000 B. $175,000 C. $100,000 D. $5,000

Chapter 6 Cost Allocation and Activity-Based Costing

6-15

91.

Dewey, Cheatham, and How, Attorneys-at-Law, specialize in three areas: criminal, civil, and family law. When specifications for a new IT system were established, the partners agreed to allocate fixed costs based on gigabytes needed by each department. The criminal law division needed 40% of the capacity, civil law needed 35%, and family law needed 25%. Variable costs for the IT department are allocated on the amount of bandwidth used by each division used. The IT department’s budgeted monthly fixed costs are $640,000, and the budgeted monthly variable costs are $160,000. The firm estimates that 8,000,000 gigabytes of computer time will be used in June. The criminal law division actually used 3,040,000 gigabytes of bandwidth during June. How much fixed IT costs will be allocated to the criminal law division during June? A. $256,000 B. $240,000 C. $512,000 D. None of these answer choices are correct.

92.

Dewey, Cheatham, and How, Attorneys-at-Law, specialize in three areas: criminal, civil, and family law. When specifications for a new IT system were established, the partners agreed to allocate fixed costs based on gigabytes needed by each department. The criminal law division needed 40% of the capacity, civil law needed 35%, and family law needed 25%. Variable costs for the IT department are allocated on the amount of bandwidth used by each division used. The IT department’s budgeted monthly fixed costs are $640,000, and the budgeted monthly variable costs are $160,000. The firm estimates that 8,000,000 gigabytes of computer time will be used in June. During June, the family law division used 1,900,000 gigabytes of bandwidth. How much are total variable IT costs to be allocated to the family law division during June? Compute cost allocation rates to 3 significant digits. A. $160,000 B. $60,000 C. $40,000 D. $38,000

93.

Dewey, Cheatham, and How, Attorneys-at-Law, specialize in three areas: criminal, civil, and family law. When specifications for a new IT system were established, the partners agreed to allocate fixed costs based on gigabytes needed by each department. The criminal law division needed 40% of the capacity, civil law needed 35%, and family law needed 25%. Variable costs for the IT department are allocated on the amount of bandwidth used by each division used. The IT department’s budgeted monthly fixed costs are $640,000, and the budgeted monthly variable costs are $160,000. The firm estimates that 8,000,000 gigabytes of computer time will be used in June. The criminal law division actually used 3,040,000 gigabytes of bandwidth during June. The family law division used 2,100,000 and the civil law division used 3,100,000 gigabytes of bandwidth during June. What amount of the IT fixed costs will be allocated to the civil law division during June? (Compute cost allocation rates to 3 significant digits.) A. $224,000 B. $248,000 C. $241,984 D. None of these answer choices are correct.

6-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

94.

Dragon Fire Hot Sauce makes two types of hot sauces—meek and mild. Budgeted information for the two flavors appears below: Sales Direct materials Direct labor cost Labor hourly cost

Meek $600,000 $100,000 $108,000 $12.00

Mild $400,000 $120,000 $180,000 $12.00

The company estimates it will incur $345,600 in overhead costs for the period. Dragon Fire allocates overhead cost to products based on the labor hours worked on each product. What is the overhead application rate to be used when allocating to Meek? A. $14.40 B. $1.20 C. $3.20 D. None of these answer choices are correct. 95.

Manufacturing overhead is allocated to products based on the number of machine hours required. In a year when 40,000 machine hours and 60,000 direct labor hours were anticipated, indirect costs were budgeted at $252,000. If production of wagons requires 9,000 machine hours and 10,800 direct labor hours, how much manufacturing overhead will be allocated to wagons? A. $45,360 B. $56,700 C. $2,268 D. $28

96.

Dragon Fire Hot Sauce makes two types of hot sauces—meek and mild. Budgeted information for the two flavors appears below: Sales Direct materials Direct labor cost Labor hourly cost

Meek $600,000 $100,000 $108,000 $12.00

Mild $400,000 $120,000 $180,000 $12.00

The company estimates it will incur $345,600 in overhead costs for the period. Dragon Fire allocates overhead cost to products based on the labor hours worked on each product. How much is the total overhead applied to Meek? A. $130,500 B. $129,600 C. $1,566 D. $348,000 97.

The production departments at Windsor Parke occupy a total area of 50,000 square feet. Heating costs total $600,000 and are allocated based on the area that each department occupies. The finishing department occupies 30,000 square feet and the packaging department occupies 20,000 square feet. What amount of heating cost will be allocated to the finishing and packaging departments, respectively? A. $360,000 and $240,000 B. $300,000 and $300,000 C. $36,000 and $24,000 D. $32,727 and $21,818

Chapter 6 Cost Allocation and Activity-Based Costing

98.

6-17

Dragon Fire Hot Sauce makes two types of hot sauces—meek and mild. Budgeted information for the two flavors appears below: Sales Direct materials Direct labor cost Labor hourly cost

Meek $600,000 $100,000 $108,000 $12.00

Mild $400,000 $120,000 $180,000 $12.00

The company estimates it will incur $345,600 in overhead costs for the period. Dragon Fire allocates overhead cost to products based on the labor cost incurred. How much overhead is assigned to Mild? A. $216,000 B. $28,800 C. $56,250 D. None of these answer choices are correct. 99.

Maintenance cost is allocated to Wakshaw’s three producing departments based on the machine hours used in each department. The maintenance cost expected for June is $200,000. The three departments had the following usage for June: Department Assembly Fabrication Testing

Machine hours used 600 600 800

Direct labor hours used 2,000 5,000 3,000

How much maintenance cost should be allocated to the fabrication department for June? A. $60,000 B. $100,000 C. $66,667 D. $6,000 100.

Excellence Pastries produces baked goods. Utility costs are allocated to the products based on the baking time required for the product. Utility costs of $291,500 are budgeted in a period when 550,000 total minutes of baking time and 100,000 minutes of cooling time are anticipated. If a batch of rolls bakes for 45 minutes, and then cools for 15 minutes, what amount of utility cost will be allocated to each batch of rolls? A. $38.87 B. $23.85 C. $20.18 D. $31.80

101.

ZanaTech has an on-site cafeteria in which it provides free meals for employees. The company allocates the cost of the cafeteria to production departments using the direct method based on the number of employees in each department. The four production departments in the company have the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging, 15. There are 20 employees in the cafeteria. The cafeteria’s costs are budgeted at $144,000 for the year. When the cafeteria’s costs are allocated, what is the amount per employee that will be allocated to the packaging department each year? A. $2,400 B. $9,600 C. $1,800 D. None of these answer choices are correct.

6-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

102.

ZanaTech has an on-site cafeteria in which it provides free meals for employees. The company allocates the cost of the cafeteria to production departments using the direct method based on the number of employees in each department. The four production departments in the company have the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging, 15. There are 20 employees in the cafeteria. The cafeteria’s costs are budgeted at $144,000 for the year. What amount of the cafeteria’s cost will be allocated to the molding department? A. $27,000 B. $9,600 C. $2,400 D. $36,000

103.

ZanaTech has an on-site cafeteria in which it provides free meals for employees. The company allocates the cost of the cafeteria to production departments using the direct method based on the number of employees in each department. The four production departments in the company have the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging, 15. There are 20 employees in the cafeteria. The cafeteria’s costs are budgeted at $144,000 for the year. What amount of cafeteria cost will be allocated to the engraving department? Use 4 significant digits for calculations. A. $2,400 B. $24,000 C. $18,000 D. $14,400

104.

ZanaTech has an on-site cafeteria in which it provides free meals for employees. The company allocates the cost of the cafeteria to production departments using the direct method based on the number of employees in each department. The four production departments in the company have the following number of employees: molding, 15; polishing, 20; engraving, 10; and packaging, 15. There are 20 employees in the cafeteria. The cafeteria’s costs are budgeted at $144,000 for the year. The actual cafeteria costs totaled $147,000 for the year. What is the total amount of the cafeteria’s costs that will be allocated to the production departments? A. $108,000 B. $144,000 C. $147,000 D. None of these answer choices are correct.

105.

Ransall Auto Parts has two service departments—maintenance and personnel, and three production departments—fabrication, assembly, and packaging. Service costs are allocated to producing departments using the direct method. Information on overhead in each department and possible allocation bases appear below: Maintenance Personnel Fabrication Assembly Packaging Cost $90,000 $130,000 Machine hours 12,000 30,000 18,000 Employees 4 16 24 30 26 Using the most logical activity base, how much maintenance cost will be allocated to packaging? A. $3,600 B. $27,000 C. $33,750 D. $30,000

Chapter 6 Cost Allocation and Activity-Based Costing

106.

6-19

Maintenance $90,000 4

Personnel $130,000 16

Fabrication

Assembly

Packaging

12,000 24

30,000 30

18,000 26

Using the most logical activity base, how much personnel cost will be allocated to the packaging department? A. $7,150 B. $39,000 C. $33,800 D. $42,250 107.

Maintenance $90,000 4

Personnel $130,000 16

Fabrication

Assembly

Packaging

12,000 24

30,000 30

18,000 26

Using the most logical activity base, how much maintenance cost will be allocated to the personnel department? A. $26,000 B. $39,000 C. $18,000 D. $0 108.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the specifications for the new computer system were established, the audit division needed 50% of the capacity, the tax division required 30%, and business consulting required 20%. The fixed computer department costs are allocated based on computer needs. The variable costs of the computer department are allocated based on the minutes of computer time that each department uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs is $145,600. The company anticipates using 520,000 minutes of computer time. What amount of variable costs will be allocated when a division uses a minute of computer time? A. $4.50 B. $2.80 C. $1.15 D. $0.28

6-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

109.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the specifications for the new computer system were established, the audit division needed 50% of the capacity, the tax division required 30%, and business consulting required 20%. The fixed computer department costs are allocated based on computer needs. The variable costs of the computer department are allocated based on the minutes of computer time that each department uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs is $145,600. The company anticipates using 520,000 minutes of computer time. If the audit division uses 250,000 minutes of computer time, what amount of variable costs will be allocated to the audit division (round your intermediate calculation to two decimal places)? A. $70,000 B. $302,848 C. $286,346 D. $48,533

110.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the specifications for the new computer system were established, the audit division needed 50% of the capacity, the tax division required 30%, and business consulting required 20%. The fixed computer department costs are allocated based on computer needs. The variable costs of the computer department are allocated based on the minutes of computer time that each department uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs is $145,600. The company anticipates using 520,000 minutes of computer time. If the tax division uses 104,000 minutes of computer time this year, what is the total amount of computer department costs that will be allocated to the tax division (round your intermediate calculation to two decimal places)? A. $173,680 B. $135,000 C. $164,120 D. $119,120

111.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the specifications for the new computer system were established, the audit division needed 50% of the capacity, the tax division required 30%, and business consulting required 20%. The fixed computer department costs are allocated based on computer needs. The variable costs of the computer department are allocated based on the minutes of computer time that each department uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs is $145,600. The company anticipates using 520,000 minutes of computer time. What amount of the computer department’s fixed costs will be allocated to the business consulting division? A. $150,000 B. $29,120 C. $90,000 D. $119,120

Chapter 6 Cost Allocation and Activity-Based Costing

6-21

112.

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the specifications for the new computer system were established, the audit division needed 50% of the capacity, the tax division required 30%, and business consulting required 20%. The fixed computer department costs are allocated based on computer needs. The variable costs of the computer department are allocated based on the minutes of computer time that each department uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs is $145,600. The company anticipates using 520,000 minutes of computer time. If the business consulting division uses 78,000 minutes of computer time, what is the total amount of computer department costs that will be allocated to the business consulting division (round your intermediate calculation to two decimal places)? A. $21,840 B. $89,340 C. $111,840 D. $119,120

113.

Bayard Backup is a manufacturer of data storage devices. Bayard operates two service departments—maintenance and technology, and two production departments— assembly and testing. Maintenance costs are allocated on the basis of square footage occupied, and technology costs are allocated on the basis of the number of workstations. The following data relate to allocations of service department costs: Service department costs

Square footage Workstations

Maintenance Technology $400,000 $230,000 2,000 3,000 4 16

Assembly

Testing

20,000 10

30,000 30

How much maintenance costs will be allocated to the assembly department using the direct method? A. $160,000 B. $133,333 C. $266,667 D. $4,000 114.

Square footage Workstations

Maintenance Technology $400,000 $230,000 2,000 3,000 4 16

Assembly

Testing

20,000 10

30,000 30

How much technology department costs will be allocated to the testing department using the direct method? A. $92,000 B. $65,714 C. $172,500 D. $115,000

6-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

115.

Costs $150,000 $220,000

Number of Employees 2 8 75 50 25

Number of Square Feet Occupied 2,000 64,000 100,000 60,000 40,000

What amount of the payroll department costs will be allocated to the molding department? A. $70,313 B. $185,000 C. $75,000 D. $132,353 116.

Costs $150,000 $220,000

Number of Employees 2 8 75 50 25

Number of Square Feet Occupied 2,000 64,000 100,000 60,000 40,000

When the payroll department costs are allocated, what is the amount per employee that will be charged to each of the departments? A. $937.50 B. $15,000 C. $6.67 D. $1,000

Chapter 6 Cost Allocation and Activity-Based Costing

117.

6-23

Costs $150,000 $220,000

Number of Employees 2 8 75 50 25

Number of Square Feet Occupied 2,000 64,000 100,000 60,000 40,000

What amount of the payroll department costs will be allocated to the packaging department? A. $23,438 B. $73,333 C. $25,000 D. $36,667 118.

VelCraft allocates costs from its payroll department and the maintenance department to its production departments using the direct method of allocation. Payroll department costs are allocated based on the number of employees in the department and maintenance department costs are allocated based on the number of square feet that the production department occupies within the factory. Information about the departments is presented below: Number of Number of Square Department Costs Employees Feet Occupied Payroll $150,000 2 2,000 Maintenance $220,000 8 64,000 Molding 75 100,000 Finishing 50 60,000 Packaging 25 40,000 When the maintenance department costs are allocated, what amount will be charged to the packaging department? (Round your intermediate calculation to two decimal places) A. $44,000 B. $33,083 C. $70,400 D. $52,932

6-24

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

119.

Costs $150,000 $220,000

Number of Employees 2 8 75 50 25

Number of Square Feet Occupied 2,000 64,000 100,000 60,000 40,000

When the maintenance department costs are allocated, what amount will be charged to the molding department? (Round your intermediate calculation to two decimal places) A. $44,000 B. $82,707 C. $110,000 D. $52,932 120.

The manager of the molding department at the Category Products Company is evaluated based on the profit performance of his department. Personnel costs at Category Products are estimated to be $40,000. These costs are allocated based on the number of employees in each production department. The welding department has 40 employees, and the molding department has 60 employees. The personnel department actually incurred $52,000 in personnel costs. The profit of the molding department is down this year because the molding department’s share of allocated personnel costs is much higher than last year. The allocation of personnel costs to the molding department is higher in the current year. This is most likely due to A. the increase in the company’s total production costs. B. allocating actual personnel costs to the production departments. C. more number of efficient employees in the welding department. D. more number of employees in the molding department.

121.

Vystar Credit Union has six service departments (human resources, duplicating, janitorial, accounting, graphic design, and food services) whose fixed costs are allocated to the company’s two subsidiaries (Vystar Personal Banking and Vystar Business Banking) on the basis of their relative revenue. What type of costs will the president of Vystar Business Banking subsidiary perceive the allocated service department costs to be? A. Fixed costs B. Opportunity costs C. Direct costs D. Variable costs

Chapter 6 Cost Allocation and Activity-Based Costing

122.

6-25

Unique Finds sells fine collectible statues 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. Unique 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

Estimated Total Costs

Cost Driver

Packaging and shipping

$ 67,200

Number of boxes shipped

Final inspection

200,000

Number of individual items inspected

General operations

85,000

Number of orders

Estimated Annual Activity 16,000 boxes 100,000 items 10,000 orders

During June, 2,100 boxes were packed and shipped. How much is the packaging and shipping cost for each box shipped? A. $0.24 B. $7.62 C. $4.20 D. $32.00 123.

Estimated Total Costs $ 67,200 200,000 85,000

Cost Driver Number of boxes shipped Number of individual items inspected Number of orders

Estimated Annual Activity 16,000 boxes 100,000 items 10,000 orders

During June, 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. $29.53 C. $8.50 D. $10.00

6-26

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

124.

Estimated Total Costs $ 67,200 200,000 85,000

Cost Driver Number of boxes shipped Number of individual items inspected Number of orders

Estimated Annual Activity 16,000 boxes 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. $4.20 B. $4.03 C. $25.20 D. $12.60 125.

Estimated Total Costs $ 67,200 200,000 85,000

Cost Driver Number of boxes shipped Number of individual items inspected Number of orders

Estimated Annual Activity 16,000 boxes 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. $16.70 B. $14.70 C. $8.20 D. None of these answer choices are correct.

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6-27

Cost Pool Packaging and shipping Final inspection

200,000

General operations

85,000

Cost Driver Number of boxes shipped Number of individual items inspected Number of orders

Estimated Annual Activity 16,000 boxes 100,000 items 10,000 orders

During the period, the Eastern sales office generated 240 orders for a total of 3,560 items of which were shipped in 1,200 boxes. What amount of shipping department costs should be allocated to these sales? A. $9,480 B. $5,040 C. $14,200 D. None of these answer choices are correct. 127.

Fox Hunting Gear manufactures two products: camouflage jackets and camouflage hats. The company makes 50,000 jackets and 20,000 hats each year. Information for overhead costs and for the two products appears below.

Activity Setups Ordering parts Machining Inspections Shipping Total overhead

Driver # of setups # of parts # of machine hours # of inspections # of shipments

Estimated Total Overhead Cost $ 200,000 300,000 600,000 400,000 300,000 $1,800,000

Jackets

Hats

500 setups 60,000 parts

1,500 setups 40,000 parts

12,000 machine hrs. 10,000 inspections 10,000 shipments

6,000 machine hrs. 40,000 inspections 10,000 shipments

Assume that all overhead is assigned to products using machine hours. How much overhead will be assigned to each jacket? A. $100,000 per jacket B. $24 per jacket C. $150 per jacket D. $17.20 per jacket

6-28

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

128.

Activity Setups Ordering parts Machining Inspections Shipping Total overhead

Driver # of setups # of parts # of machine hours # of inspections # of shipments

Estimated Total Overhead Cost $ 200,000 300,000 600,000 400,000 300,000 $1,800,000

Jackets

Hats

500 setups 60,000 parts

1,500 setups 40,000 parts

12,000 machine hrs. 10,000 inspections 10,000 shipments

6,000 machine hrs. 40,000 inspections 10,000 shipments

Assume that activity-based costing is used. What is the rate per setup that should be used to assign setup cost to hats? A. $100 per setup B. $200,000 per setup C. $133.33 per setup D. $900 per setup 129.

Activity Setups Ordering parts Machining Inspections Shipping Total overhead

Driver # of setups # of parts # of machine hours # of inspections # of shipments

Estimated Total Overhead Cost $ 200,000 300,000 600,000 400,000 300,000 $1,800,000

Jackets

Hats

500 setups 60,000 parts

1,500 setups 40,000 parts

12,000 machine hrs. 10,000 inspections 10,000 shipments

6,000 machine hrs. 40,000 inspections 10,000 shipments

How much is the overhead cost of each hat if all overhead is assigned using ABC? A. $159.33 per hat B. $24.00 per hat C. $100.00 per hat D. $47.00 per hat

Chapter 6 Cost Allocation and Activity-Based Costing

130.

6-29

Activity Setups Ordering parts Machining Inspections Shipping Total overhead

Driver # of setups # of parts # of machine hours # of inspections # of shipments

Estimated Total Overhead Cost $ 200,000 300,000 600,000 400,000 300,000 $1,800,000

Jackets

Hats

500 setups 60,000 parts

1,500 setups 40,000 parts

12,000 machine hrs. 10,000 inspections 10,000 shipments

6,000 machine hrs. 40,000 inspections 10,000 shipments

If the company uses a single cost pool and assigns overhead using machine hours, how much overhead will be assigned to each hat? A. $24.00 per hat B. $100 per hat C. $30.00 per hat D. $300.00 per hat 131.

Activity Setups Ordering parts Machining Inspections Shipping Total overhead

Driver # of setups # of parts # of machine hours # of inspections # of shipments

Estimated Total Overhead Cost $ 200,000 300,000 600,000 400,000 300,000 $1,800,000

Jackets

Hats

500 setups 60,000 parts

1,500 setups 40,000 parts

12,000 machine hrs. 10,000 inspections 10,000 shipments

6,000 machine hrs. 40,000 inspections 10,000 shipments

Fox Hunting Gear uses activity-based costing. What is the rate per inspection that should be used to assign inspection cost to hats? A. $10 per inspection B. $40 per inspection C. $8 per inspection D. $16 per inspection

6-30

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

132.

Driver

Estimated Total Overhead Cost

Jackets

Hats

# of setups # of parts

$ 200,000 300,000

500 setups 60,000 parts

1,500 setups 40,000 parts

# of machine hours # of inspections # of shipments

600,000

12,000 machine hrs. 10,000 inspections 10,000 shipments

6,000 machine hrs. 40,000 inspections 10,000 shipments

400,000 300,000 $1,800,000

What will be the overhead cost of each jacket if overhead is assigned using ABC? A. $159.33 per jacket B. $100 per jacket C. $47 per jacket D. $17.20 per jacket 133.

Rather Bedding makes two types of pillow—down and foam. It is currently implementing an activity-based costing system. In the past, all overhead had been applied on the basis of machine hours. The company produces 6,000 down pillows and 18,000 foam pillows per year. Cost Pool Equipment setup Materials ordering Quality control Machining

Driver and Level

Estimated Costs

Use of Driver by Down Pillows

Use of Driver by Foam Pillows

360 setups

$216,000

120 setups

240 setups

6,000 orders

$60,000

2,400 orders

3,600 orders

$36,000

800 inspections

1,200 inspections

$86,800

4,200 machine hours

3,800 machine hours

2,000 inspections 8,000 machine hours

What is the overhead cost for each foam pillow when all overhead is applied based on machine hours? A. $10.52 per foam pillow B. $638.85 per foam pillow C. $49.85 per foam pillow D. $20.67 per foam pillow

Chapter 6 Cost Allocation and Activity-Based Costing

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6-31

Driver and Level

Estimated Costs

Use of Driver by Down Pillows

Use of Driver by Foam Pillows

360 setups

$216,000

120 setups

240 setups

6,000 orders

$60,000

2,400 orders

3,600 orders

$36,000

800 inspections

1,200 inspections

$86,800

4,200 machine hours

3,800 machine hours

2,000 inspections 8,000 machine hours

What is the overhead cost for each down pillow using ABC? A. $50.00 per down pillow B. $26.00 per down pillow C. $13.49 per down pillow D. $16.67 per down pillow 135.

Driver and Level

Estimated Costs

Use of Driver by Down Pillows

Use of Driver by Foam Pillows

360 setups

$216,000

120 setups

240 setups

6,000 orders

$60,000

2,400 orders

3,600 orders

$36,000

800 inspections

1,200 inspections

$86,800

4,200 machine hours

3,800 machine hours

2,000 inspections 8,000 machine hours

Which two cost pools could be combined without affecting the unit costs using ABC? A. Equipment setup and machining B. Materials ordering and quality control C. Materials ordering and machining D. None. The drivers for each activity differ.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

136.

Driver and Level

Estimated Costs

Use of Driver by Down Pillows

Use of Driver by Foam Pillows

360 setups

$216,000

120 setups

240 setups

6,000 orders

$60,000

2,400 orders

3,600 orders

$36,000

800 inspections

1,200 inspections

$86,800

4,200 machine hours

3,800 machine hours

2,000 inspections 8,000 machine hours

Using ABC, what is the cost per setup to be assigned to down pillows? A. $600 per setup B. $0.10 per setup C, $3.02 per setup D. None of these answer choices are correct. 137.

Driver and Level

Estimated Costs

Use of Driver by Down Pillows

Use of Driver by Foam Pillows

360 setups

$216,000

120 setups

240 setups

6,000 orders

$60,000

2,400 orders

3,600 orders

$36,000

800 inspections

1,200 inspections

$86,800

4,200 machine hours

3,800 machine hours

2,000 inspections 8,000 machine hours

What is the overhead cost for each down pillow when all overhead is applied based on machine hours? A. $34.90 per down pillow B. $49.85 per down pillow C. $10.85 per down pillow D. None of these answer choices are correct.

Chapter 6 Cost Allocation and Activity-Based Costing

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6-33

Driver and Level

Estimated Costs

Use of Driver by Down Pillows

Use of Driver by Foam Pillows

360 setups

$216,000

120 setups

240 setups

6,000 orders

$60,000

2,400 orders

3,600 orders

$36,000

800 inspections

1,200 inspections

$86,800

4,200 machine hours

3,800 machine hours

2,000 inspections 8,000 machine hours

What is the overhead cost for each foam pillow using ABC? A. $10.56 per foam pillow B. $26.00 per foam pillow C. $13.49 per foam pillow D. $50.00 per foam pillow 139.

Driver and Level

Estimated Costs

Use of Driver by Down Pillows

Use of Driver by Foam Pillows

360 setups

$216,000

120 setups

240 setups

6,000 orders

$60,000

2,400 orders

3,600 orders

$36,000

800 inspections

1,200 inspections

$86,800

4,200 machine hours

3,800 machine hours

2,000 inspections 8,000 machine hours

Using ABC, what is the cost per machine hour in the machining pool? A. $10.85 per machine hour B. $20.67 per machine hour C. $50.00 per machine hour D. None of these answer choices are correct.

6-34

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

140.

Recker Recreational uses activity-based costing. The company produces wooden playground equipment. It has two models manufactured in its Texas plant—swings and slides. The estimated costs and expected activity for each of the overhead activity pools follow: Activity Estimated Expected Activity Cost Pool Cost Swings Slides Total Activity 1 $15,675 800 300 1,100 Activity 2 $11,900 500 200 700 Activity 3 $36,000 800 400 1,200 Which of the following is the rate for Activity 3 that will used to allocate costs to swings? A. $90 B. $12,000 C. $30 D. There is not enough information provided to determine the answer.

141.

Random House uses activity-based costing. The company produces soft and hardcover books. The estimated costs and expected activity for each of the overhead activity pools follow: Activity Estimated Expected Activity Cost Pool Cost Hard-Cover Soft-Cover Total Activity 1 $15,000 800 700 1,500 Activity 2 $14,900 500 1,500 2,000 Activity 3 $27,600 800 400 1,200 How much are total overhead costs to be charged to hardcover books? A. $30,125 B. $8,000 C. $84,945 D. $25,691

142.

Hurst Productions uses activity-based costing. The company produces weekly and monthly magazines. The estimated costs and expected activity for each of the activity pools follow: Expected Activity Cost Pool Pressing Printing Binding

Estimated Cost $24,600 6,250 9,000

Weekly

Monthly

Total

600 400 800

400 100 1,200

1,000 500 2,000

How much pressing cost will be assigned to monthly magazines? A. $24.60 B. $9,840 C. $61.50 D. None of these answer choices are correct.

Chapter 6 Cost Allocation and Activity-Based Costing

143.

6-35

Estimated Cost $24,600 6,250 9,000

Weekly

Monthly

Total

600 400 800

400 100 1,200

1,000 500 2,000

How much are the total costs to be allocated to monthly magazines? A. $16,490 B. $41.60 C. $131.50 D. None of these answer choices are correct. 144.

PaperPro produces two models of staplers—Executive and Basic. The annual production and sales of Executive and Basic are 800 and 500 units, respectively. The company has traditionally used direct labor hours to apply manufacturing overhead. Executive requires 0.3 labor hours per unit and Basic requires 0.2 labor hours per unit. The company has decided to utilize activity-based costing with three cost pools. Estimated costs for each pool are as follows: Activity Cost Pool Assembly Packaging General Factory Total

Estimated Overhead Costs $24,025 16,880 32,014 $72,919

Expected Activity Executive Basic 450 420 2,000 750 120 150

Total 870 2,750 270

Which of the following is closest to the overhead rate for assembly using activity-based costing? A. $81.81 B. $53.39 C. $57.20 D. $27.61

6-36

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

145.

Kamber Designs produces floral bouquets for commercial businesses (i.e. hotels) and uses an activity-based costing system. The company estimated that it would design 15,000 bouquets, make 2,000 deliveries totaling 25,000 miles, and accept 300 online orders. Data concerning overhead costs and activity pools is as follows: Bouquet designs Deliveries Online ordering Total

$60,000 21,000 6,000 $87,000

During May, the company made 1,400 bouquets using 1,300 designs, made 420 deliveries, and accepted 30 online orders. Using activity-based costing, what is the approximate overhead cost per bouquet during May? A. $16.50 B. $7.29 C. $62.14 D. None of these answer choices are correct. 146.

Gator Dockside produces two products, A and B. The annual production and sales of product A and B are 600 and 400 units, respectively. The company has traditionally used direct labor hours to apply manufacturing overhead. Product A requires 0.5 labor hours per unit and product B requires 1.2 labor hours per unit. The company has decided to utilize activity-based costing with three cost pools. Estimated costs for each pool are as follows: Activity Cost Pool Activity 1 Activity 2 General factory Total

Estimated Overhead Costs $24,000 10,800 19,200 $54,000

Expected Activity Product A Product B 1,500 500 450 1,350 80 320

Total 2,000 1,800 400

When using activity-based costing, to which of the following amounts is the total overhead cost for one unit of product A closest? A. $66.00 B. $280.00 C. $40.90 D. $61.35

Chapter 6 Cost Allocation and Activity-Based Costing

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6-37

Fifth Third Bank is a banking services company that offers several different types of checking accounts. The bank has recently adopted an activity-based costing system to assign costs to its checking accounts. The following data relate to the Mind Your Money checking accounts and the ABC cost pools: Annual number of accounts = 60,000 accounts Cost Pool Returned check costs Account reconciliation costs New account setup Archive requests Web site costs Total checking account costs

Cost $3,000,000 60,000 650,000 400,000 195,000 $4,305,000

Cost Drivers Number of returned checks Number of account reconciliation requests Number of new accounts Number of archive requests Per account type

Annual activity information related to cost drivers: Cost Pool Returned checks Account reconciliation costs New account setups Archive requests Web site costs

All Products Mind Your Money Checking 200,000 returned checks 18,000 3,000 reconciliation requests 420 60,000 new accounts 15,000 100,000 archive requests 60,000 10 types of accounts 1

How much is the rate to be used to apply the cost of new accounts to each Mind Your Money checking account? A. $10.83 B. $43.33 C. $71.75 D. $60.39 148.

$60,000 21,000 6,000 $87,000

During June, the company made 1,500 bouquets using 1,100 designs, made 325 deliveries and accepted 45 online orders. Using activity-based costing, what is the approximate overhead cost per bouquet during June? A. $7.92 B. $5.81 C. $5 D. None of these answer choices are correct.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

149.

Cost $3,000,000 60,000 650,000 400,000 195,000 $4,305,000

Cost Drivers Number of returned checks Number of account reconciliation requests Number of new accounts Number of archive requests Per account type

Annual activity information related to cost drivers: Cost Pool Returned checks Account reconciliation costs New account setups Archive requests Web site costs

All Products Mind Your Money Checking 200,000 returned checks 18,000 3,000 reconciliation requests 420 60,000 new accounts 15,000 100,000 archive requests 60,000 10 types of accounts 1

How much is the rate to be used to allocate account reconciliation cost to each Mind Your Money checking account? A. $20.00 B. $1.00 C. $0.14 D. $142.85 150.

Retirement Planning is a consulting firm with clients across the nation. Within the company is a travel group that arranges flights and hotel accommodations for its 250 consultants. The overhead cost of operating the travel group amounts to approximately $204,000 annually. Recently the company conducted an ABM study that has determined the following: • Each consultant completed approximately 15 business trips per year. • On average, 17 trips are scheduled, with 2 trips cancelled and rescheduled. • Benchmarking with a Retirement Planning’s client indicates that the client incurs a cost of $60 per scheduled trip to book travel. How much overhead cost should be allocated to each completed trip? A. $54.40 B. $48.00 C. $60.00 D. None of these answer choices are correct.

Chapter 6 Cost Allocation and Activity-Based Costing

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6-39

Sanford Tracking has two production plants. Recently, the company conducted an ABM study to determine the cost of activities involved in processing orders for parts at each of the plants. How might an operations manager use this information to manage the cost of processing orders? A. By closing down the plant with the highest cost B. By comparing the cost to process an order at each plant and the nature of the orders to determine if costs are out of control—if out of control, investigate C. By setting up an ABC costing system D. By including all manufacturing overhead in a single cost pool to reduce the cost of analysis

Answers to Multiple Choice 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

A C B A C C B B C D A C B A B C C D A D C C

51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72

B B A A C B B A C B B D D D C C A A D D C D

73 74 75 *76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94

C B A B B A D A D C A B A B C D B A A D A A

95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116

B B A A A B A D B B B D D D A C C C A C C D

117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138

C A C B D C C D A C B A D C C D A B D A A C

139 140 141 142 143 144 145 146 147 148 149 150 151

A C A B A D B C A B A A B

6-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MATCHING 152.

A. B. C. D. E. F. G. H. I. J.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once. _____ 1.

Cost driver

_____ 2.

Cost objective

_____ 3.

Cost pool

_____ 4.

Cost-plus contract

_____ 5.

Lump-sum allocation

_____ 6.

Unitized costs

_____ 7.

Ability to bear costs

_____ 8.

Activity-based costing

_____ 9.

Activity-based management

_____ 10.

Cost allocation

Assigning indirect costs to cost objectives A method of allocation that assigns more costs to more profitable cost objectives A measure of the activity that is used to allocate costs Fixed costs stated on a per unit basis Price for this includes actual costs plus a fixed amount or percentage A method of cost allocation that uses cost drivers to allocate costs to products The object or recipient of the cost allocation A management tool that involves analyzing and costing activities with the goal of improving efficiency and effectiveness A grouping of individual costs whose total is allocated using one allocation base Allocations of fixed costs in which predetermined amounts are allocated regardless of changes in the level of activity

Answers to Matching 1. C 2. G 3. I 4. E 5. J

6. 7. 8. 9. 10.

D B F H A

Chapter 6 Cost Allocation and Activity-Based Costing

6-41

EXERCISES 153.

APC Service’s copy department, which does almost all of the photocopying for the sales and administrative departments, budgets the following costs for the year, based on the expected activity of 4,000,000 copies: Salaries $90,000 Employee benefits for salaried employees 10,000 Depreciation of copy machines 10,000 Utilities (fixed) 5,000 Paper (variable, 1 cent per copy) 40,000 Toner (variable, 1 cent per copy) 40,000 The costs are assigned to two cost pools—one for fixed and one for variable costs. The costs are then assigned to the sales department and the administrative department. Fixed costs are assigned on a lump-sum basis, 30 percent to sales and 70 percent to administration. During the year, 4,800,000 copies were made consisting of 2,500,000 for Sales and 2,300,000 for Administration. Calculate the copy department costs allocated to the Sales Department and separately to the Administration Department.

Answer Total fixed costs to be allocated = $90,000 + $10,000 + $10,000 + $5,000 = $115,000 Variable cost per unit = $80,000 ÷ 4,000,000 = $0.02 per copy Fixed costs allocated to Sales ($115,000  .30) Variable costs allocated to Sales (2,500,000 copies  $0.02) Total costs allocated to Sales

$34,500 50,000 $84,500

Fixed costs allocated to Administration ($115,000  .70) $ 80,500 Variable costs allocated to Administration (2,300,000 copies  $0.02) 46,000 Total costs allocated to Administration $126,500

154.

Cheez-It Financial has a website department that maintains and updates its website used by clients of the company’s two subsidiaries—Commercial Banking and Personal Banking. For practical purposes, the costs of the website department are primarily fixed and consist primarily of salaries of the department’s two employees and depreciation on workstations and the web server. Each subsidiary receives a cost allocation of $35 per website hour. Jobs requested by the subsidiaries generally take weeks to complete often causing the subsidiaries to go outside the company for emergency services rather than wait for jobs to be completed. Outside website maintenance services cost $65 per hour. How does the allocation of $35 per website hour compare to the opportunity cost of using internal services?

Answer The allocation of $35 per hour must be less than the opportunity cost (subsidiaries are willing to pay $65 per hour to avoid delays). Subsidiaries must have a benefit that exceeds $65 per hour.

6-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

155.

Harrod Productions manufactures small electric motors used by appliance companies. In the past year, the company has experienced severe excess capacity due to competition from a foreign company that has entered Harrod’s market. The company is currently bidding on a potential order from Kenmore Elite for 4,000 Model 44 motors. The estimated cost of each motor follows: Direct material Direct labor Overhead Total

$ 40 20 110 $170

The predetermined overhead rate is $5.50 per direct labor dollar based on estimated annual overhead of $2,640,000 and estimated annual direct labor of $480,000. The overhead is composed of $1,104,000 of variable costs and $1,536,000 of fixed costs. The largest fixed cost relates to depreciation of plant and equipment. a. b. c.

Answer a.

156.

What is the incremental cost of producing one Model 44 motor? Suppose Harrod can win the Kenmore Elite business by bidding a price of $160 per motor. Should Harrod bid $160? Support your answer with explanation. Discuss how an allocation of overhead based on opportunity cost would facilitate an appropriate bidding decision.

Direct material $40 Direct labor 20 Variable overhead ($2.30 × $20)* 46 Total $106 * Variable overhead rate = $1,104,000 ÷ $480,000

Any bid won that is greater than $106 will generate incremental profit. If Harrod can win a bid of $160, the company should bid this amount as it will generate an incremental profit of $54 per motor.

The opportunity cost related to overhead, in this case, is the variable overhead amount. An allocation based on the opportunity cost idea, helps managers focus on incremental costs—the information needed for decision making.

Sanders Enterprises allocates manufacturing overhead costs to its two products—gears and rims—based on the machine hours used. Manufacturing overhead costs are expected to total $108,800 in the coming year and the company plans to use 34,000 machine hours in the year. The production of rims requires 2 machine hours per rim and gears require 15 minutes per gear. The current production schedule calls for 2,000 rims and 15,000 gears during the year. a. b.

Answer a. b.

What is the overhead rate per machine hour? If production and overhead costs occur as scheduled, how much manufacturing overhead will be allocated to each of the two products? $108,800 ÷ 34,000 hours = $3.20 per machine hour Gears = 15,000 × 15/60 machine hours × $3.20 per machine hour = $12,000 Rims = 2,000 × 2 machine hours × $3.20 per machine hour = $12,800

Chapter 6 Cost Allocation and Activity-Based Costing

157.

Likewise Instruments manufactures a variety of electronic instruments that are used in military and civilian applications. Sales to the military are generally on a cost-plus profit basis with profit equal to 10 percent of cost. Instruments used in military applications require more direct labor time because “fail-safe” devices must be installed. At the start of the year, Likewise estimates that the company will incur $50,000,000 of overhead, $8,000,000 of direct labor, and 250,000 machine hours. Consider the Model ET40 gauge that is produced for both civilian and military uses: Direct material Direct labor Machine hours a. b.

Answer a.

Civilian $3,000 $900 42

Military $3,500 $1,200 45

Calculate the cost of civilian and military versions of Model ET40 using both direct labor dollars and machine hours as alternative allocation bases. Explain why Likewise Instruments may decide to use machine hours as an overhead allocation base.

Overhead rate based on direct labor dollars: ($50,000,000 ÷ $8,000,000 labor) = $6.25 per dollar of labor Overhead rate based on machine hours: ($50,000,000 ÷ 250,000 machine hours) = $200 per machine hour

Direct material Direct labor Overhead Cost

158.

6-43

Civilian Labor $ Mach. Hrs. $3,000 $ 3,000 900 900 5,625 8,400 $9,525 $12,300

Military Labor $ Mach. Hrs. $ 3,500 $ 3,500 1,200 1,200 7,500 9,000 $12,200 $13,700

The price charged for the civilian version of the Model ER40 does not depend on allocated costs. However, the military version is sold for “cost” plus 10 percent of cost. Therefore, the company has an incentive to make cost appear higher rather than lower. This can be accomplished by allocating overhead cost using machine hours as the allocation base. This base results in a higher cost ($13,700) compared to an allocation based on direct labor dollars, which results in a cost of only $12,200.

Venus Swimwear is the designer and maker of elite swimwear. The president of Venus wants to switch to an activity-based costing approach in the upcoming year to assign prices to the suits. Production line setups are a major activity at Venus. In the coming year, Venus expects to perform 450 setups at a total cost of $81,000. Venus plans to produce bandeau swimsuits that will require 2 setups for the batch of 40. How much setup cost will be allocated to each bandeau swimsuit that is produced?

Answer Cost per setup = $81,000 ÷ 450 = $180 Cost of setups related to the bandeau swim suits = 2  $180 = $360 Setup cost per swim suit = $360 ÷ 40 = $9.00

6-44

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

159.

Fanatics Company has three service departments (C1, C2, and C3) and two production departments (B1 and B2). The following data relate to Fanatic’s allocation of service department costs: Budgeted Costs Number of Employees C1 $3,000,000 80 C2 2,000,000 60 C3 1,000,000 30 B1 300 B2 500 Service department costs are allocated by the direct method. The number of employees is used as the allocation base for all service department costs. Calculate the total service department cost allocated to each production department.

Answer B1: 300 ÷ 800 = 37.5% of production department employees B2: 500 ÷ 800 = 62.5% of production department employees

Department Costs C1 $3,000,000 C2 2,000,000 C3 1,000,000 Total cost $6,000,000

160.

Cost Allocated to B1 B2 $1,125,000 $1,875,000 750,000 1,250,000 375,000 625,000 $2,250,000 $3,750,000

CSI Equipment produces surveillance equipment for security purposes. Maintenance costs are allocated to assembly and testing on the basis of square footage occupied, and computing costs are allocated on the basis of the number of computer terminals. The following data relate to allocations of service department costs: Service department costs Square footage Terminals

Maintenance $400,000

Computing $340,000

Assembly

Testing

24,000 35

16,000 15

Allocate the service department costs to production departments using the direct method. Answer Assembly Maintenance $400,000 × (24,000 ÷ 40,000) $400,000 × (16,000 ÷ 40,000) Computing $340,000 × (35 ÷ 50) $340,000 × (15 ÷ 50) Total

Testing

$240,000 $160,000 238,000 $478,000

102,000 $262,000

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6-45

Rickets Consulting has two divisions: Internal Audit and Management Services. The firm’s accountants are in the process of selecting an allocation base to allocate centrally provided personnel costs to the two departments. Two allocation bases have been proposed—dollars of salary and number of employees. Personnel costs are expected to be $2,500,000. The following data relate to the allocations: Salaries in dollars Number of employees a. b.

Internal Audit $14,000,000 150

Management Services $18,000,000 50

Prepare a schedule showing the allocations to the two divisions using each allocation base. Referring to your answer to part a, explain why allocations are sometimes considered arbitrary.

Answer a.

Salaries Employees b.

162.

Internal Audit Proportion Amount .4375 $1,093,750 .75 1,875,000

Management Services Proportion Amount .5625 $1,406,250 .25 625,000

Both number of employees and salary appear to be plausible allocation bases, but they result in very different allocations. This suggests that in many cases allocations are somewhat arbitrary.

The personnel department at Dansford Company has $45,000 in budgeted costs for the coming period. Dansford is trying to determine whether to allocate these costs to the two production departments based on the number of employees or based on machine hours used in the department. Information about the production departments is given below: Number of employees Anticipated machine hours

Molding 15 600

Engraving 35 400

Calculate the costs allocated to each of the production departments using each allocation base. Which allocation base is preferable? Answer When number of employees is used as the allocation base: Molding = $45,000 × (15 ÷ 50) = $13,500 Engraving = $45,000 × (35 ÷ 50) = $31,500 When number of machine hours is used as the allocation base: Molding = $45,000 × (600 ÷ 1,000) = $27,000 Engraving = $45,000 × (400 ÷ 1,000) = $18,000 The number of employees is a better allocation base because it is more closely related to personnel department costs.

6-46

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

163.

The costs of the personnel department at Mama Maids total $37,800 annually. These costs are allocated based on the number of employees in the production departments using the direct method. If 12 of Mama Maids’ 36 employees work in the residential services department, what amount of the personnel department costs should be allocated to the residential services?

Answer ($37,800 ÷ 36) × 12 = $12,600 164.

Sentry Company has three departments, Civil, Criminal, and Probate. Each department uses the services of the photocopying department. The photocopying department has 10 copiers, and each copier can produce 100,000 copies per month and has a budgeted fixed annual cost of $7,800. The variable cost to produce a copy is $0.031 per copy. During March, the Copying Department incurred $6,930 fixed and $23,870 in variable copying costs. Following is the three production departments’ monthly consumption information: Peak Demand Average Demand March Usage Civil 600,000 copies 300,000 copies 410,000 copies Criminal 200,000 copies 180,000 copies 190,000 copies Probate 200,000 copies 180,000 copies 170,000 copies a. b.

d. Answer a.

Describe three alternative ways that the production departments can be charged for services. Assign the actual cost of March copying to the production departments based on the actual copies used by each department. What is the cost per copy? (Round cost per copy to two decimal places and charges to departments to nearest whole dollar.) Assign the cost of March copying to the production departments, where the budgeted fixed cost is based on peak usage requirements, and the budgeted variable cost is based on actual usage. What is the total cost per copy assigned to each department? Which allocation do you believe is more equitable? Why? 1. 2. 3.

Actual cost per copy on actual copies used Budgeted total cost per copy based on average usage times actual copies used Fixed costs allocated on budgeted amounts; variable costs allocated on actual usage

$30,800 ÷ 770,000 = $0.04 per copy Civil - $0.04 × 410,000 = $16,400 Criminal - $0.04 × 190,000 = $7,600 Probate - $0.04 × 170,000 = $6,800

Civil: 4.24 cents per copy (600,000/1,000,000 × $7,800) + (410,000 × $0.031) = $17,390 Criminal: 3.92 cents per copy (200,000/1,000,000 × $7,800) + (190,000 × $0.031) = $7,450 Probate: 4.02 cents per copy (200,000/1,000,000 × $7,800) + (170,000 × $0.031) = $6,830

Dual rate (c) will encourage the departments demanding the capacity to pay capacity costs.

Chapter 6 Cost Allocation and Activity-Based Costing

165.

Waller Company has a regional division and a national division. A travel department supports the employees in both divisions. The fixed costs of the travel department ($54,000 per month) are allocated based on the peak usage of reservation services. The national division has a peak monthly usage of 160 reservations and the regional has a peak usage of 240 reservations. The variable costs of the travel department are allocated to the divisions based on the number of reservations made at a rate of $15 per reservation. a.

Answer a.

166.

6-47

If the national division requires 28 reservations in November and the regional division requires 20 reservations during November, calculate the amount of travel department costs that will be allocated to each of the divisions. Explain why the allocation is higher to the regional division when it uses fewer reservations.

Regional division = [$54,000 × (240 ÷ 400)] + ($15 × 20) = $32,700 National division = [$54,000 × (160 ÷ 400)] + ($15 × 28) = $22,020 Regional has higher peak needs, so it is being charged a higher amount for capacity.

Hanson Inc. is operating at 60 percent of its capacity. Hanson has received an offer from a retail company to purchase 600 granite tables for $158 each. Hanson’s accountants determined that the order can be accommodated within the excess capacity. The following costs information is provided: Direct material Direct labor Manufacturing overhead Total

$ 80 55 40 $175

Of the $40 of overhead, $18 is variable and $22 relates to fixed costs. The $22 of fixed overhead is allocated as $3.00 per direct labor hour. a. b.

Answer a.

What will be the effect on profit if the order is accepted? Explain why managers who focus on the full reported cost per unit may be inclined to turn down the order.

The manufacturing overhead allocation includes $22 of fixed cost which will not increase if the special order is accepted (i.e., it is not an incremental cost). The incremental revenue and incremental costs associated with the order suggests that the company will be better off by $3,000 if the order is accepted. Incremental revenue (600  $158) Incremental costs Material (600  $80) Labor (600  $55) Variable overhead (600  $18) Incremental net income

$94,800 $48,000 33,000 10,800

91,800 $3,000

6-48

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

167.

Managers who focus on the full reported cost may incorrectly treat the $22 of fixed cost as an incremental cost. In this case, they will incorrectly conclude that the order should not be accepted because the total full cost of $175 is more than the offer price of $158.

Bowcock Manufacturing allocates factory overhead using one cost pool with direct labor hours as the allocation base. Bowcock has two production departments (A1 and A2). The new accountant at Bowcock estimates that next year the total factory overhead costs will be $4,000,000 and approximately 500,000 direct labor hours will be worked. The accountant also estimates that A1 will use 150,000 direct labor hours and there will be about $2,000,000 in overhead costs in A1. A2 will use 350,000 direct labor hours and there will be $2,000,000 in overhead costs in A2. Bowcock has two products: R4 and R5. It takes two direct labor hours in A1 and three direct labor hours in A2 to complete one unit of R4. It takes one direct labor hour in A1 and four direct labor hours in A2 to complete one unit of R5. Which product will be undercosted and which will be overcosted using a single cost pool system? Support your answer with appropriate calculations.

Answer One-cost pool overhead rate = $4,000,000 ÷ 500,000 DLH = $8 per DLH Product R4: $8  5 hours = $40 Product R5: $8  5 hours = $40 Separate cost pools: A1’s overhead rate will be $2,000,000 ÷ 150,000 DLH = $13.33 per direct labor hour A2’s overhead rate will be $2,000,000 ÷ 350,000 DLH = $5.71 per direct labor hour Overhead allocated to each R4 = (2 labor hours  $13.33) + (3 labor hours  $5.71) = $43.79 Overhead allocated to each R5 = (1 labor hour  $13.33) + (4 labor hours  $5.71) = $36.17

The use of a single cost pool causes R4 to be undercosted and R5 to be overcosted. With a single cost pool, both products receive the same allocation of cost per labor hour. However, R4 uses relatively more time in A1 where overhead costs are high, while R5 uses relatively more time in A2, where overhead costs are low.

Chapter 6 Cost Allocation and Activity-Based Costing

168.

6-49

The following are six cost pools established for a company using activity-based costing. The pools are related to the company’s products using cost drivers. For each of the cost pools, identify a possible cost driver. COST POOL

COST DRIVER

(1) Handling of raw materials (2) Production equipment repairs and maintenance (3) Raw materials storage (4) Plant heat, light, water, and power (5) Finished product quality control (6) Production line setups Answer (1) Number of inspections (2) Number of machine hours (3) Square footage 169.

(4) Hours of usage (5) Number of inspections (6) Number of setups

Carriage Hill Tooling produces specialized equipment. Currently, overhead costs are allocated at a rate of $25 per machine hour and the company used 4,200 machine hours last year. Carriage Hill’s CEO, Ralston, would like to see if ABC would make any difference in the costs allocated to jobs at the company. The accounting staff has provided the following information about manufacturing overhead: Amount Cost Driver Setups $31,200 Number of setups Equipment 11,340 Number of machine hours Inspection 62,460 Number of inspections The company estimates that it will perform 120 setups and 400 inspections each year and will use 4,200 machine hours. Job 345 will require 5 setups, 700 machine hours, and 12 inspections. a. b. c.

Answer a. b. c.

Using ABC, what amount of manufacturing overhead will be allocated to Job 345? What amount would Ralston allocate to job 345 using the company’s current, traditional system? Why do the two methods yield such different answers?

[5 × ($31,200 ÷ 120)] + [700 × ($11,340 ÷ 4,200)] + [12 × ($62,460 ÷ 400)] = $5,063.80 700 × ($105,000 ÷ 4,200) = $17,500 Job 345 uses 4.17% of annual setups, 16.67% of machine hours, and 3.00% of annual inspections. It is a heavy user of machine hours, and is costed much higher when its usage of machine hours is viewed as the job’s primary resource.

6-50

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

170.

GH Mcgraw Appliances supplies parts for laundry and kitchen appliances. Customer orders are placed over the Internet and are generally filled in one or two days using express mail services. The company is conducting an ABM study of inventory management. Management has determined that the cost of filling customer orders in the past year consisted primarily of $250,000 of salary expense related to five workers who “pick” parts from the warehouse and $550,000 of salary expense related to six workers who pack the orders for shipment. In the past year, the company filled 100,000 orders annually. Based on work performed for a chain of appliance manufacturers, management has determined a benchmark cost of $4 per order. a. b.

Answer a.

Comment on the advisability of comparing the costs at GH McGraw Appliances to those at the appliance manufacturers’ chain store. Management has observed the following: Workers go to a box that contains individual customer order sheets. They take the bottom order (the “oldest”) and go into the warehouse with a handcart and a box. They then fill the order and carry the parts to a packing station. Can you suggest ways of improving this process?

The cost of filling orders at GH McGraw Appliances is: ($250,000 + $550,000) ÷ 100,000 = $8 per order The cost of filling orders at the appliance chain is only $4 per order. While the chain has a lower cost per order, it may be that, due to its size, the appliance chain has a “state of the art” warehouse. It may be unrealistic for GH McGraw Appliances, which is relatively small, to compare itself to such a large company. Order “pickers” can take multiple order sheets out to the warehouse when individual orders are small. This will save considerable time going back and forth to the warehouse and may lead to lower costs if the company is willing to fire or reassign one or more of the five workers who pick parts. In addition, the packing station can be moved close to the area where the parts are being picked from the warehouse to avoid time used to take the parts to the packing station.

Chapter 6 Cost Allocation and Activity-Based Costing

6-51

CHALLENGE EXERCISES 171.

VeraTrac has traditionally used direct labor cost to allocate overhead to its two products—hammers and mallets. To improve cost determination, VeraTrac set up 3 activity pools: setups, purchase ordering, and quality control. VeraTrac provided the following information for the last quarter of 2017 related to the actual production of 2,400 hammers and 1,600 mallets:

Setups Purchase ordering Quality control Direct labor Direct materials

Estimated Cost

Expected Activity

Actual Cost

Actual Activity Hammers Mallets

$78,000 35,100 41,000 43,800 19,360

240 setups 900 orders 500 inspections 3,650 hours 4,400 pounds

$81,400 34,800 42,300 46,875 19,800

145 setups 90 setups 420 orders 470 orders 220 inspections 275 inspections 2,150 hours 1,600 hours 2,100 pounds 3,400 pounds

Actual labor cost is $12.50 per hour and actual material cost is $3.60 per pound. a. b.

How much is the overhead unit cost of each hammer using activity-based costing? How much is the overhead unit cost of each hammer if the company continues to use one cost pool? (Round your intermediate calculations to two decimal places) Is the cost of the hammer over or undercosted? Explain some possible consequences of this.

Answer a. Setups: $78,000 ÷ 240 = $325 per setup Orders: $35,100 ÷ 900 = $39 per order Quality control: $41,000 ÷ 500 = $82 per inspection Total overhead cost for all hammers Number of hammers Overhead cost per hammer

$325 × 145 = $39 × 420 = $82 × 220 =

$47,125 16,380 18,040 81,545 2,400 $ 33.98

Rate: ($78,000 + $35,100 + $41,000) ÷ $43,800 = $3.52 per direct labor dollar Allocate overhead: $3.52 × 2,150 × $12.50 = $94,600 Overhead cost per hammer: $94,600 ÷ 2,400 hammers = $39.42

The hammers are overcosted because the amount allocated under the more accurate, activity-based costing method assigns $5.44 less to each hammer than the allocation assigns using one cost pool. If managers rely on the $39.42 overhead cost per hammer, they may price the product too high and lose customers to competitors.

6-52

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

172.

Sandifer Company is contemplating the establishment of an activity-based costing system. It current applies all overhead cost based on direct labor costs. The company has estimated the following costs and activities for May: Cost Activity $33,600 400 setups 60,000 200,000 usage hours 84,000 12,500 crates 35,520 $20 per labor hour 60,000 $1 per pound

Machine Setups Utilities Materials Handling Direct labor Direct material

Direct labor cost is $20 per hour. The following information pertains to the actual production of buckets and pails during May: Units produced Direct material cost incurred Direct labor cost incurred ($20 per hour) Setups implemented Crates handled Utility hours used a.

b. c. Answers a.

Buckets 60,000 $30,000 $24,000 120 6,800 80,000

Pails 40,000 $31,200 $12,000 290 5,200 125,000

1. Which items are cost pools? 2. Which are cost drivers? 3. Which are cost objectives? How much is the product cost per pail if Sandifer uses one cost pool to allocate all overhead costs to the cost objectives? How much is the product cost per pail if Sandifer uses ABC?

1. 2. 3.

Machine setups, utilities, materials handling ABC: Number of setups, number of usage hours, number of crates One cost pool: Direct labor cost Buckets and pails

b. Estimated MOH Estimated DL $

= =

Direct materials Direct labor Overhead ($5 × $12,000) Cost of all pails Number of pails Product cost of each pail

$33,600 + $60,000 + $84,000 $35,520 $5.00 per direct labor dollar $ 31,200 12,000 60,000 $103,200 40,000 $ 2.58

Chapter 6 Cost Allocation and Activity-Based Costing

c. Setups: $33,600 ÷ 400 = $84 per setup Utilities: $60,000 ÷ 200,000 = $0.30 per hour Materials handling: $84,000 ÷ 12,500 = $6.72 per crate Direct materials Direct labor

$84 × 290 setups.=

$24,360

$0.30 ×125,000 hours =

37,500

$6.72 × 5,200 crates =

34,944 31,200 12,000 $140,004 40,000 $ 3.50

Total cost Total units Product cost per pail

173.

6-53

Clark Inc. has 3 operating departments—commercial, industry, and private for which the corporate office provides 2 kinds of services, accounting and housekeeping. Accounting costs are allocated on the basis of number of employees, and housekeeping costs are allocated based on the basis of number of square feet.

Accounting Housekeeping Commercial Industry Private a. b. Answer: a,

Direct costs $ 56,000 33,000 116,000 124,000 105,000

# of Square feet 2,000 3,000 6,000 4,000 8,000

# of Employees 10 5 35 40 25

How much total cost will Clark, Inc. allocate to the commercial department? As it relates to Clark, Inc., what is meant by a cause-and-effect relationship?

Accounting allocated to commercial: $56,000 × (35 ÷ 100) = $19,600 Housekeeping allocated to commercial: $33,000 × (6,000 ÷ 18,000) = $11,000 Total = $30,600 If the cost driver (the allocation base) selected relates costs to cost objectives that caused the costs to be incurred, the allocation is said to be based on a cause-and-effect relationship One expects that when the activity or driver increases, the cost pool should increase. The more activity generated by a particular production department, the more cost that should be allocated to that department.

6-54

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

SHORT-ANSWER ESSAYS 174.

List the four major reasons that companies allocate costs.

Answer Companies allocate costs (1) to provide information needed to make appropriate decisions, (2) to reduce the frivolous use of common resources, (3) to encourage managers to evaluate the efficiency of internally provided services, and (4) to calculate the “full cost” of products for financial reporting purposes and for determining cost-based prices.

175.

What is a cost-plus contract? Why are cost-plus contracts used?

Answer The supplier is paid for all costs of production as well as some fixed amount or percentage of cost in a cost-plus contract. Cost-plus contracts are used when suppliers need to be assured that they will be reimbursed for their costs and will not bear any of the financial risk associated with the project.

176.

What is the difference between a cost pool and a cost objective?

Answer A cost pool is a grouping of individual costs whose total is allocated using one allocation base. A cost objective is the product, service, or department that will receive the cost allocation.

177.

Why is it better to allocate budgeted rather than actual service department costs?

Answer If budgeted costs are allocated, service departments cannot pass on the costs of inefficiencies and waste to the user departments. If actual service department costs are allocated, the service departments will have no incentive to control their costs. Budgeted allocations can also be more timely.

178.

Why is lump-sum allocations used to allocate fixed costs?

Answer When lump-sum allocations are used to allocate fixed costs, the costs will appear fixed to the managers whose departments receive the allocations. If lump-sum allocations are not used, an increase in volume will lead to an increased allocation of fixed costs and may cause incorrect decisions.

Chapter 6 Cost Allocation and Activity-Based Costing

179.

6-55

If a manager is allocated the costs of service departments based on actual costs and actual activity usage levels, what frustrations might the manager feel?

Answer The manager will not be able to plan or control costs since the charge the manager receives will be a function of the manager’s usage as well as cost control in the service department.

180.

Describe the difference between the traditional approach to allocating costs and activitybased costing.

Answer The traditional approach to allocating costs assumes that all overhead costs are proportional to production volume. In activity-based costing, the company identifies the activities that cause costs and allocates costs based on the volume of the activities that caused the costs. These activities may or may not be related to production volume. *181. What is the difference between ABC and ABM? Answer While ABC focuses on activities with the goal of measuring the costs of products and services produced by them, ABM focuses on activities with the goal of managing the activities themselves.

*182. What are the four steps in ABM? Answer 1. 2. 3. 4.

Determine major activities. Identify resource used by each activity. Evaluate the performance of the activities. Identify ways to improve the efficiency and effectiveness of the activities.

CHAPTER 7 The Use of Cost Information in Management Decision-Making Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

K K K K K K

7. 8. 9. 10. 11. 12.

1 1 1 1 1 1

28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

K K K C K C C K C K K K K C K AP C K AP AP AP

49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.

1 1 1 1 1 1 1 1 1 1 1 1 1 1,2 1 1,2 1 1 1 1 2

131. 1,2

132. 133. 134. 135. 5. 150.

1 1 1 1

C AP AN AN

136. 137. 138. 139.

1 1 1 1

1,2

151.

154. 155.

1 1

K K

156. 157.

1 1

BT Item LO BT Item True-False Statements K 13. 1 C 19. K 14. 1 K 20. K 15. 1 K 21. K 16. 1 K 22. K 17. 2 K 23. C 18. 2 K *24. Multiple Choice Questions AN 70. 2 K *91. AP 71. 2 C *92. AN 72. 2 K 93. AN 73. 2 C 94. AP 74. 2 K 95. AP 75. 2 C 96. AP 76. 2 C 97. AN 77. 2 K 98. AP 78. 2 C 99. AN 79. 2 K 100. AN 80. 2 AP 101. AP 81. 2 AP 102. AP 82. 2 K 103. AP 83. 2 K 104. AP 84. 1 K 105. AP 85. 1 AN 106. AP 86. 1 AN 107. AN 87. 1 AN 108. AP 88. 1 AP 109. AP *89. A1 K 110. K *90. A1 K 111. Matching

Exercises 140. 1 C 144. 141. 1 C 145. 142. 1 AP 146. 143. 2 AN 147. Challenge Exercises AP 152. 1 AN 153. Short-Answer Essays C 158. 2 K *160. C 159. 2 K .... *161. AP AP AP AP

Item

2 2 2 2 2 A1

C K K K K C

*25. *26. *27.

A1 A1 A1

K K K

A1 A1 1,2 1,2 1,2 1,2 1,2 1 1 1 1 1 1 1 1 1 1 1 1 1 2

K K AP AP AP AP AP AN AN AP AN AP AP AP AN AP AN AN AN AN AP

112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. *127. *128. *129. *130.

2 2 2 2 2 1,2 2 2 2 2 2 1,2 2 2 2 A1 A1 A1 A1

AP AP AP AP AP AN AP AP AP AP AP AN AP AP AP AP AP AN AP

2 2 2 2

AP AN AN AP

*148. *149.

A1 A1

AN AP N NN

A1 A1

K C

7-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

TRUE-FALSE STATEMENTS 1.

Incremental profit is the additional revenue received as a result of selecting one decision alternative over another.

Sunk costs are incremental costs because they increase or decrease with the choice of one alternative over another.

Differential costs are relevant in decision-making.

In deciding whether to sell or process further, the costs that have been incurred to process the product to the split-off point are incremental costs.

In a make-or-buy decision, direct materials and direct labor are usually incremental costs.

In a make-or-buy decision, the original purchase price of equipment that is currently used in the manufacturing process is usually a relevant cost because the equipment can be sold for its salvage value.

Avoidable fixed costs are incremental in a make-or-buy decision.

Avoidable costs are always relevant.

Decision alternatives that provide the largest incremental profit are always the best option.

10.

The proper way to analyze the decision to drop a product line is to compare sunk costs to incremental costs.

11.

Common costs are not directly traceable to an individual product line.

12.

If a company decides to eliminate a product, fixed costs allocated to that product line will be avoided.

13.

When deciding whether to eliminate a segment, the segment should be dropped if its contribution margin less the avoidable fixed costs is positive.

14.

Opportunity costs represent the benefits foregone by selecting one alternative over another.

15.

Avoidable costs are always incremental to business decisions.

16.

Fixed costs are always sunk costs.

17.

Two or more products which result from common inputs are called cut-off products.

18.

The best way to allocate the cost of common inputs to joint products is based on the physical quantities of the outputs.

Chapter 7 The Use of Cost Information in Management Decision Making

7-3

19.

Allocating joint costs to products based on physical quantities will make all of the products have the same gross margin ratio if they are sold at the split-off point.

20.

The stage of production at which individual products are identifiable is referred to as the spin-off point.

21.

One advantage of using an outside supplier is the possibility that the outside supplier is particularly efficient at manufacturing the needed part or component.

22.

The qualitative aspects of a decision must receive the same careful attention as the quantitative aspects.

23.

A primary disadvantage of using an outside supplier is that the supplier may not be able to deliver the needed parts or components on a timely basis.

*24.

When applying the theory of constraints, management attempts to improve throughput in factory bottlenecks.

*25.

A manufacturing company will have a binding constraint unless the capacity in all its departments exceeds the demand of its products.

*26.

According to the theory of constraints, everything else should be subordinate to the binding constraint.

*27.

Throughput is the amount of inventory produced in a period.

Material from the appendix to the chapter is marked with an asterisk (*).

Answers to True-False 1 F 6 F 2 F 7 T 3 T 8 T 4 F 9 F 5 T 10 F

11 12 13 14 15

T F F T T

16 17 18 19 20

F F F F F

21 22 23 *24 *25

T T T T T

*26 T *27 T

7-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MULTIPLE CHOICE 28.

Which of the following is quite often not incremental? A. Direct labor B. Direct material C. Variable manufacturing overhead D. Fixed manufacturing overhead

29.

Which of the following is never considered in incremental analysis? A. Incremental revenue B. Sunk costs C. Incremental profit D. Differential costs

30.

Which of the following is a cost that does not differ between decisions? A. Controllable costs B. Opportunity costs C. Unavoidable costs D. Incremental costs

31.

Which one of the following is the preferred alternative when deciding between two alternatives? A. No opportunity or sunk costs exist. B. Revenues are greater than under the other alternatives. C. Expenses are less than under the other alternatives. D. Incremental profit is greater than under the other alternatives.

32.

Which of the following is a cost that was incurred in the past that will never be incremental? A. Sunk costs B. Opportunity costs C. Avoidable costs D. Relevant costs

33.

A company is trying to decide whether to sell partially completed goods in their current state or incur additional costs to finish the goods and sell them as complete units. Which of the following is not relevant to the decision? A. The selling price of the completed units B. The costs incurred to process the units to this point C. The selling price of the partially completed units D. The costs that will be incurred to finish the units

34.

A company is trying to decide whether to keep or drop the organic foods department in its grocery store. If organic foods are dropped, the manager will be laid off. What is the manager's salary in relation to the decision to keep or drop the department? A. An opportunity cost and therefore relevant B. Avoidable and therefore incremental C. Sunk and therefore not relevant D. The same for all alternatives and therefore not relevant

Chapter 7 The Use of Cost Information in Management Decision Making

7-5

35.

Which of the following is most likely relevant in a make-or-buy decision? A. Unavoidable costs B. Sunk costs C. Incremental revenues D. Opportunity costs

36.

Wilson is currently producing a component for one of its products. Wilson has received an offer to buy the component from an outside supplier. A machine is currently being rented to manufacture the component. If the company buys the component, the rental will be cancelled. What is the rent on the machine, in relation to the decision to make or buy the component? A. Sunk and therefore not relevant B. Avoidable and therefore not relevant C. Avoidable and therefore relevant D. Unavoidable and therefore relevant

37.

Costs that will be eliminated if a particular course of action is undertaken are called A. sunk costs. B. opportunity costs. C. accounting costs. D. avoidable costs.

38.

The value of benefits foregone by selecting one decision alternative over another is a(n) A. unavoidable cost. B. incremental benefit. C. differential revenue. D. opportunity cost.

39.

A product line should be dropped when A. it has a positive contribution margin. B. it has unavoidable fixed costs. C. there will be a positive change in income if the product line is dropped. D. All of these answer choices are correct.

40.

Which of the following statements is(are) true concerning common costs? I. They are costs that are directly traceable to an individual product line. II. They are normally avoidable. A. I only B. II only C. Both I and II D. Neither I nor II

41.

Which of the following is a direct cost of a specific department in a retail store? A. Supplies used in cleaning the store B. Rent of the store C. Utilities used by the store, such as electricity D. Cost of the department manager’s salary

7-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

42.

When a department or product line is dropped, the common fixed costs that had been allocated to that department A. are eliminated. B. become variable costs. C. are allocated to the remaining departments or product lines. D. become sunk costs.

43.

Harrison Enterprises currently produces 8,000 units of part B13. Current unit costs for part B13 are as follows: Direct materials Direct labor Factory rent Administrative costs General factory overhead (allocated) Total

$12 9 7 10 7 $45

If Harrison decides to buy part B13, 50% of the administrative costs would be avoided. All of the company’s items, including part B13, are manufactured in the same rented production facility. The company has an offer from a wholesaler that wishes to sell the part to Harrison for $31 per unit. What will occur if the company accepts the offer? A. The cost for this part will increase by $5 per unit. B. The cost for this part will be the same. C. The cost for this part will decrease by $14 per unit. D. The cost for this part will decrease by $10 per unit. 44.

You have tickets to go to Jamaica over spring break. Just this week your best friend informs you that he (she) is getting married over spring break. Your friend would like you to stay back in the city and be the wedding attendant. The tickets to Jamaica are nonrefundable. Which of the following is a sunk cost relating to your decision of attending the wedding or going on the trip to Jamaica? A. The cost of the airline tickets to Jamaica B. The cost of wedding gift C. The cost of the clothing you will have to buy/rent to be in the wedding D. The cost of the rent on your apartment for the month

45.

Which of the following statements regarding opportunity costs is true? A. Opportunity costs are recorded as an expense since they are a cost of accepting another option. B. Opportunity costs are always incremental. C. Opportunity costs are unavoidable. D. The same decision will be reached whether or not opportunity costs are considered in an incremental analysis.

Chapter 7 The Use of Cost Information in Management Decision Making

46.

7-7

Samson Designers produces a lady’s handbag that normally sells for $120. The company produces 800 units annually but has the capacity to produce 1,100 units. An order from a customer has been received for 200 handbags at $85 each that would not disrupt current operations. Current costs for the handbag are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$23.00 45.00 7.00 12.00 $87.00

In addition, the customer would like to add a monogram to each bag which would require an additional $4 per bag in additional labor costs. Samson would also have to purchase a piece of equipment to create the monogram which would cost $800. This equipment would not have any other uses. Which statement is true with regard to this situation? A. Incremental revenues will exceed incremental costs by $400. B. Incremental revenues will exceed incremental costs by $1,200. C. Incremental costs will exceed incremental revenues by $1,200. D. Incremental costs will exceed incremental revenues by $2,000. 47.

Speedo produces signature goggles which it sells for $35. The company produces 15,000 pairs of these goggles annually but has the capacity to produce 20,000. An order for manufacturing and selling 1,000 pairs at $25 has been received from the U.S. Olympic swim team that would not disrupt current operations. Current costs for the signature goggles are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 6.00 10.00 3.00 8.00 $27.00

In addition, the Olympic coach would like to add the U.S. Olympic logo to each pair which would require an additional $2 per pair of goggles in additional labor costs. The company would also have to rent a logo stamper to stamp the logo which would cost $600. Which statement is true with regard to this order? A. Incremental profit will be $4,000. B. Incremental costs will be $27,000. C. Incremental costs will be $21,600. D. Incremental costs will exceed incremental revenues by $4,600. 48.

Denray Deli has two locations, downtown and in the town mall. During March, the company reported total net income of $144,000 with sales of $1,200,000. The contribution margin in the downtown store was 30%. The contribution margin in the town mall store is $80,000. Total fixed costs are allocated as $110,000 in the downtown store and $90,000 in the town mall location. How much are sales at the downtown location? A. $880,000 B. $1,146,667 C. $254,000 D. None of these answer choices are correct.

7-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

49.

Mel’s Diner owns a single restaurant, which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering eliminating the cantina. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of square footage. Sales Variable costs Direct fixed costs Allocated fixed costs Net income

Restaurant $800,000 475,000 50,000 212,500 $ 62,500

Cantina $200,000 160,000 15,000 37,500 ($ 12,500)

Total $1,000,000 635,000 65,000 250,000 $ 50,000

What effect will occur if Mel’s Diner eliminates the cantina if there is no effect on restaurant sales? A. Net income will increase by $12,500. B. Net income will decrease to $37,500. C. Net income will decline by $25,000. D. Net income will be $62,500. 50.

The Book Rack has two locations, downtown and on campus. During March, the company reported net income of $164,000 and sales of $1.2 million. The contribution margin in the downtown store was $320,000 (32% of sales). The contribution margin in the campus store is $110,000. Direct fixed costs are $90,000 in the downtown store and $93,000 in the campus location. How much are total variable costs? A. $953,000 B. $770,000 C. $680,000 D. $430,000

51.

Abacus has 800 obsolete calculators that are carried in inventory at a cost of $1,920. If these calculators are upgraded at a cost of $3,100, they could be sold for $4,500. Alternatively, the calculators could be sold “as is” for $1,600. What is the net advantage or disadvantage of reworking the calculators? A. $1,400 advantage B. $2,900 advantage C. $5,440 disadvantage D. $200 disadvantage

52.

Swell Computers has 12 obsolete computers that are carried in its inventory at a cost of $13,200. If these computers are upgraded at a cost of $7,500, they could be sold for $15,300. Alternatively, the computers could be sold “as is” for $9,000. What is the net advantage or disadvantage of upgrading the computers? A. $6,300 advantage B. $1,200 disadvantage C. $5,400 disadvantage D. $3,000 advantage

Chapter 7 The Use of Cost Information in Management Decision Making

53.

7-9

The following are production and cost data for two products, buckets and pails, produced in batches of 600 each. Contribution margin per batch Machine set-ups needed per batch

Buckets $360 14

Pails $250 9

The company can only perform 9,450 set-ups each period, yet there is unlimited demand for each product. What is the maximum contribution margin for the year? A. $366,000 B. $243,000 C. $1,050 D. $262,500 54.

The following are production and cost data for two products, A and B, produced in batches of 100 units. Contribution margin per batch Machine set-ups needed per batch

Product A $450 25

Product B $340 20

The company can only perform 12,000 set-ups each period yet there is unlimited demand for each product. What is the incremental profit from producing Product A instead of Product B for the year? A. $216,000 B. $204,000 C. $12,000 D. $54,000 55.

Marshal Costumes owns two stores and management is considering eliminating the Mandarin store due to declining sales. Common fixed costs are allocated on the basis of sales. Contribution income statements are as follows: Arlington Mandarin Total Sales $300,000 $200,000 $500,000 Variable costs 160,000 130,000 290,000 Direct fixed costs 40,000 20,000 60,000 Allocated fixed costs 80,000 65,000 145,000 Net Income $ 20,000 $ (15,000) $ 5,000 Marshal’s management feels that if they eliminate the Mandarin store, that sales in the Arlington store will increase by 10%. If the Mandarin store is closed, what is the incremental effect on profit for Marshal Costumes? A. Increase by $17,000 B. Decrease by $36,000 C. Increase by $22,000 D. Decrease by $20,000

7-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

56.

Publix has 2,700 pounds of bananas with a total cost of $864. Because the bananas have become too ripe, Publix is contemplating whether it should use the bananas to bake banana bread or sell the bananas ‘as is’ to the homeless center for $1,485. In addition to the cost of the bananas, it would cost $2,565 to convert the bananas into bread, which could then be sold for a total of $4,480. However, a special oven to bake the bread will have to be rented for an additional $300. What is the incremental effect on income if Publix converts the bananas to banana bread? A. Increase of $130 B. Increase of $430 C. Decrease of $734 D. Increase of $1,615

57.

Fanatic Footwear has two store locations, midtown and at the beach. During October, the company reported net income of $80,000 on sales of $450,000. Sales in the midtown store were $170,000 and variable costs in the beach store were 40% of sales. The contribution margin in the midtown store was $85,000. If total direct fixed costs are $40,000, how much are total fixed costs for Fanatic Footwear? A. $93,000 B. $150,000 C. $370,000 D. None of these answer choices are correct.

58.

Watson Wheels currently makes 6,000 wheels annually that are used in other products it manufactures. Current unit costs for the wheels are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total

$22.00 16.00 12.00 15.00 $65.00

The company has an offer from a manufacturer to produce the wheels for $60 per wheel. If the company decides to buy the wheels, the empty warehouse space could be rented for $22,000 annually. In addition, half of the fixed manufacturing overhead costs would be avoided if the company decides to buy the wheels. If the company decides to accept the offer, what is the incremental effect on the company’s net income? A. A savings of $7,000 B. A savings of $37,000 C. A decrease in net income of $15,000 D. An increase in net income of $52,000 59.

Trebecker Construction plans to discontinue its roofing segment which last year generated a contribution margin of $65,000 and incurred $70,000 in fixed costs. If the segment is discontinued, half of the fixed costs will be avoided. What effect is expected to occur to the company’s overall profit? A. A decrease of $5,000 B. A decrease of $30,000 C. An increase of $5,000 D. An increase of $30,000

Chapter 7 The Use of Cost Information in Management Decision Making

7-11

60.

Tannimen Square has 800 obsolete calculators in its inventory which have a cost of $16 each. If the calculators are reworked they could be sold for $23 each. If sold ‘as-is’, the revenue would be only $12 each. If Tannimen decides to rework the calculators, how much should the company be willing to invest to ensure that no additional loss occurs on the sale of the calculators? A. $5,600 B. $8,800 C. $0 D. $3,200

61.

Blue Chip Company sells gears for $9 per unit. The unit cost of each gear follows: Direct materials Direct labor Manufacturing overhead Total

$1.50 2.20 2.10 $5.80

An order to purchase 4,000 gears was recently received from a new customer. There is enough capacity to fill the order and filling this order would not disrupt current operations. Blue Chip Company would incur an additional $1.80 per gear for shipping costs. Half of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced. In negotiating a price, how much is the minimum acceptable selling price? A. $7.60 B. $5.80 C. $4.75 D. $6.55 62.

Conviser Tools manufactures a number of products from the same raw material. Joint processing costs total $10,000. Product A could be sold at the cut-off point for $18,000 or it can be further processed at a cost of $9,000 and then sold for $35,000. Conviser should: A. Further process product A because its incremental revenues will exceed incremental costs by $8,000. B. Further process product A because its incremental revenues will exceed incremental costs by $26,000. C. Sell as-is because the incremental loss is $2,000 if processed further. D. Further process product A because its incremental revenues will exceed incremental costs by $16,000.

7-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

63.

Barnett Brass sells economy door knobs for $15 each. Unit product costs are as follows: Direct materials Direct labor Manufacturing overhead Total

$3 2 4 $9

An order to purchase 4,000 units was recently received from a new customer. There is enough capacity to fill the order and filling this order would not disrupt current operations. Barnett Brass would incur an additional $1.50 per unit for shipping costs. Thirty percent of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced. In negotiating a price, how much is the minimum acceptable selling price? A. $10.50 B. $7.80 C. $9.30 D. $7.70 64.

Meehan Gifts manufactures a number of products from the same raw material. Joint processing costs total $4,000. Product Z could be sold at the cut-off point for $6,000 or it can be further processed at a cost of $9,000 and then sold for $14,000. Meehan Company should A. sell product Z at the split-off point because its incremental costs will exceed incremental revenues by $5,000 than if processed further. B. further process product Z because its incremental revenues will exceed incremental costs by $1,000 with this option. C. sell product Z at the split-off point because its incremental costs will exceed incremental revenues by $1,000 than if processed further. D. sell product Z at the split-off point because its incremental revenues will exceed incremental costs by $5,000 than if processed further.

65.

B&B Flooring produced 8,000 yards of its economy-grade carpet. In the coloring process, there was a pigment defect and the resulting color faded. The carpet normally sells for $18 per yard, with $6 of variable cost per yard and $3 of fixed cost per yard assigned to the carpet. The company realizes that it cannot sell the faded carpet for $18 per yard through its normal channels, unless the coloring process is repeated. The incremental cost of the coloring process is $4 per yard. Ace Apartments is willing to buy the carpet in its current faded condition for $13 per yard. Should B&B repeat the coloring process or sell the carpet to Ace Apartments? A. Repeat coloring for $8,000 benefit B. Sell ‘as is’ to Ace for $32,000 benefit C. Repeat coloring for $56,000 benefit D. Sell ‘as is’ to Ace for $56,000 benefit

Chapter 7 The Use of Cost Information in Management Decision Making

66.

7-13

Foot Print has three product lines in its retail stores: shoes, boots, and sandals. The allocated fixed costs are based on units sold and are unavoidable. Results of June follow: Units sold Revenue Variable costs Direct fixed costs Allocated fixed costs Net income (loss)

Socks 800 $24,800 13,600 5,000 8,000 $(1,800)

Boots 1,200 $30,400 13,200 7,000 9,000 $ 1,200

Sandals 2,400 $36,600 16,800 6,500 8,000 $ 5,300

Total 4,400 $91,800 43,600 18,500 25,000 $ 4,700

Demand of individual products is not affected by changes in other product lines. How much is the incremental effect on income of dropping socks? A. Decrease of $11,200 B. Decrease of $6,200 C. Increase of $1,800 D. Decrease of $1,500 67.

Deep South Dairy gathered the following data about the two products that it produces: Product Milk Yogurt

Current Sales Value $8,000 12,000

Estimated Added Sales Value if Processing Costs Processed Further $2,000 $11,000 7,000 18,000

Which of the products should be processed further? A. Milk, because profits increase by $1,000, whereas Yogurt results in decrease of profit B. Yogurt, because profits increase by $1,000, which exceeds the profits increased by Milk C. Both products, because revenue will increase by $9,000 for Milk, and by $6,000 for Yogurt D. Both products, because profits for Milk will be $1,000, and profit for Yogurt will be $1,000 68.

Way Living sells unfinished oak shelves for $35 each. Budgeted sales for the year are expected to be 4,000 shelves. Each shelf requires 4 linear feet of wood to produce. The cost of wood is $4.80 per linear foot. Direct labor is $6.00 per shelf. Variable overhead and fixed overhead costs per unfinished shelf are $1.00 and $0.50 respectively. Way Living is considering whether it should stain the shelves so it can sell them for $48.00 each. It estimates it will sell 60% of the budgeted shelves ‘stained’ with the others unfinished. The direct costs of staining each shelf are $9.00. How much is the incremental effect on profit if the company stains the shelves? A. $16,000 B. $67,200 C. $52,000 D. None of these answer choices are correct.

7-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

69.

Two or more products that result from common inputs are called A. split products. B. joint products. C. split-off products. D. common products.

70.

Joint costs A. are the cost of the common inputs for joint products. B. are the costs incurred after the split-off point for joint products. C. are expensed because they have no future benefit for a company. D. only exist when there are no opportunity costs involved in the decision.

71.

Which of the following is a common input resulting in joint products? A. Logwood that is made into shelves of different lengths B. Uncooked pasta, which is made into cooked meals at a restaurant C. Flour that is made into bread, cookies, and other baked goods D. A hog that is made into ham, bacon, and other meat products

72.

What is the stage of production at which the individual joint products are identified? A. Split-off point B. Joint processing point C. Joint identification point D. Relative sales point

73.

Which of the following is not a joint product? A. Milk converted into cream and butter B. Logs converted into paper and cardboard C. Crude oil converted into gasoline and jet fuel D. 4’ x 8’ plywood converted into chairs and tables

74.

At the split-off point, A. the production process stops and profitable products can be sold. B. inventory becomes obsolete. C. the company recognizes profit by selling the product. D. the cost incurred can be separated into individual joint products.

75.

The allocation of joint costs to joint products influences A. the dollar amount of profit of each joint product. B. the overall profitability of the company. C. the decision to sell or process further the joint products. D. the timing of when the split-off point will occur.

76.

Production of all the joint products should cease if A. any of the individual joint products sells for less than its allocated cost. B. the total joint cost is less than the total revenue generated when all of the joint products are sold. C. any of the joint products have a negative gross margin after the joint costs have been allocated. D. total revenue from the sale of all the joint products is less than the joint cost.

Chapter 7 The Use of Cost Information in Management Decision Making

7-15

77.

Which method of allocating joint costs is based on the proportional sales values at the split-off point? A. Proportional method B. Physical quantities method C. Relative sales value method D. Joint allocation method

78.

Which statement is true of the relative sales value method if all joints products are sold at the split-off point? I. The products will have the same gross margin ratio. II. The products will have the same gross margin per unit. A. Both I and II B. Neither I nor II C. Only I D. Only II

79.

When making a decision to sell a joint product at the split-off point or process it further, which of the following is not relevant? A. The amount of joint costs assigned B. The sales value at the split-off point C. The cost of further processing D. The sales value after further processing

80.

LanaTech produces three products, X, Y, and Z, from recycled paper. Budgeted data for next month follows: Units produced Sales value at split-off per unit Additional processing costs per unit Joint production costs per unit Sales value if processed further per unit

X 800 $6 $1 $2 $9

Y 2,400 $15 $4 $6 $20

Z 1,600 $12 $5 $4 $16

The joint cost of the recycled paper is $110,000. Which of the products should be produced beyond the split-off point? X Y Z A. No Yes Yes B. Yes Yes No C. No No No D. No Yes No

7-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

81.

Ralston Tile produces three types of ceramic tiles, models 33, 41, and 56 from clay, which is mined in the Arizona desert. Budgeted data for next month follows: 33 41 56 Units produced 3,000 4,500 6,000 Sales value at split-off per unit $15 $18 $24 Additional processing costs per unit $4 $6 $7 Joint production costs per unit $2 $5 $5 Sales value if processed further per unit $20 $23 $32 The joint cost of mining the clay is $80,000. Which of the products should be produced beyond the split-off point? 33 41 56 A. Yes Yes Yes B. Yes Yes No C. No Yes Yes D. Yes No Yes

82.

One advantage of using an outside supplier is that A. the adverse effect of a downturn in the business will be less severe. B. it will enhance the manager’s control over the production process. C. the component produced will always be of a better quality. D. it will boost employee morale.

83.

Which of the following is a disadvantage of using an outside supplier? A. Employees may have to be laid off if production is outsourced. B. The supplier assumes the risk of obsolete inventory. C. The supplier may provide a cost savings due to increased efficiencies. D. The supplier may have better quality control. Which of the following costs are always incremental and relevant in decision analysis? A. Opportunity costs and sunk costs B. Sunk costs and avoidable costs C. Unavoidable costs and opportunity costs D. Relevant costs and opportunity costs

84.

Chapter 7 The Use of Cost Information in Management Decision Making

85.

7-17

State University is considering hiring an outside company for its grounds maintenance. In this regard, State University has received a bid from Mackin Services. Mackin states that its bid of $410,000 will cover all services and planting materials required to “keep State University’s grounds in a condition comparable to prior years.” State University’s cost for grounds maintenance in the preceding year was $412,000 as follows: Salary of three full-time gardeners Plant materials Fertilizer Fuel Depreciation of other equipment Depreciation of tractor and mowers Total

$295,000 80,000 9,000 8,000 5,000 15,000 $412,000

If State University hires Mackin, it will be able to sell its other equipment for $30,000, and the three gardeners will be laid off. What is the first year financial impact of hiring the outside company for its grounds maintenance? A. $13,000 additional cost B. $2,000 savings C. $17,000 savings D. $30,000 savings 86.

$295,000 80,000 9,000 8,000 5,000 15,000 $412,000

If State University hires Mackin, it will be able to sell its other equipment for $30,000, and the three gardeners will be laid off. What will savings be in the second year? A. $13,000 additional costs B. $2,000 savings C. $7,000 savings D. $30,000 savings

7-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

87.

Sanders Toys is beginning to manufacture Bungey Wagons. The product will be sold to toy store chains for $30 each. Management allocates $120,000 of fixed manufacturing overhead costs to Bungey Wagons. The manufacturing cost for each wagon at the expected production of 10,000 wagons is as follows: Direct material Direct labor Overhead ($1.20 fixed and $2.00 variable) Total

$ 13.00 4.00 3.20 $20.20

The company has contacted a number of suppliers to determine whether it is better to buy or manufacture the wheels. The lowest quote for a set of 4 wheels needed for each wagon is $3.15. It is estimated that purchasing the wheels from a supplier will save 10 percent of direct materials, 20 percent of direct labor, and 15 percent of variable overhead. Sanders Toys’ manufacturing space is highly constrained. By purchasing the wheels, the company will not have to lease additional manufacturing space that currently cost $8,000 per year. What is the incremental cost or benefit of buying the wheels as opposed to making them? A. $500 net benefit B. $7,500 net cost C. $14,500 net cost D. None of these answer choices are correct. 88.

Hanson Sports has three product lines: footballs, basketballs, and bats. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2017 follows: Footballs Basketballs Bats Total Sales $600,000 $800,000 $400,000 $1,800,000 Cost of goods sold 260,000 400,000 230,000 890,000 Gross margin 340,000 400,000 170,000 910,000 Less other variable costs 85,000 120,000 80,000 285,000 Contribution margin 255,000 280,000 90,000 625,000 Less direct salaries 50,000 60,000 45,000 155,000 Less common fixed costs 85,000 100,000 55,000 240,000 Net income $120,000 $120,000 ($10,000) $ 230,000 Since the profit for bats is relatively low, the company is considering dropping this product line. What is the incremental effect of dropping bats? A. $185,000 B. ($45,000) C. $240,000 D. $280,000

*89.

The theory of constraints seeks to A. improve throughput in all departments. B. improve throughput in the department with the binding constraint. C. create more constraints. D. sell at the split-off point.

Chapter 7 The Use of Cost Information in Management Decision Making

7-19

*90.

As it pertains to the theory of constraints, inspections should be conducted A. after the process with the binding constraint. B. during the process with the binding constraint. C. before the work is transferred to a constrained department. D. without regard to the binding constraint.

*91.

In theory of constraints, what does “break the binding constraint” mean? A. Improve the process that was the binding constraint. B. Improve all processes simultaneously. C. Make sure that the items made in the constrained process yield the highest contribution margin. D. Make across-the-board cuts to all processes that are binding.

*92.

When operating in a constrained environment, which products should be produced? A. Those with the highest contribution margin per unit B. Those with the highest contribution margin per unit of the constrained process C. Those with the highest selling price D. Those with the lowest allocated joint cost

93.

94.

95.

7-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

96.

Zanatech’s market for its remote control has changed significantly, and Zanatech has had to drop the selling price per unit from $45 to $38. There are some units in the work in process inventory that have costs of $30 per unit associated with them. Zanatech can sell these units in their current state for $22 each. It will cost Zanatech $11 per unit to rework these units so that they can be sold for $38 each. A new employee looks at the analysis and exclaims, “We’ll lose money with either of these alternatives! Let’s just throw these units in the trash!” What effect will this option have on net income? A. Profit will decrease by $45 per unit for each unit discarded. B. Profit will decrease by $30 per unit for each unit discarded. C. Profit will increase by $11 per unit since the completion costs will not have to be incurred. D. Profit will decrease by $5 per unit for each unit discarded.

97.

Reason Food Store has 4,000 pounds of raw pork approaching its expiration date. Each pound has a cost of $4.50. The pork could be sold ‘as is’ for $3.00 per pound to the dog food processing plant, or roasted and sold in the deli. The cost of roasting the pork will be $2.80 per pound and each pound could be sold for $6.50. What should be done with the pork and why? A. The pork should be thrown away since there will be a loss with each of the other alternatives. B. The pork should be processed further since the sales price increases by $3.50 per pound and the cost only increases by $2.80 per pound. C. The pork should be sold ‘as is’ since there is no reason to put more cost into a product that is already selling below its $4.50 cost. D. It does not matter which option is undertaken since all alternatives result in a loss.

98.

Winton Corporation currently makes rolls for deli sandwiches it produces. It uses 30,000 rolls annually in the production of deli sandwiches. The costs to make the rolls are given below: Materials Labor Variable overhead Fixed overhead

$0.24 per roll $0.40 per roll $0.16 per roll $0.20 per roll

A potential supplier has offered to sell Winton the rolls for $0.90 each. If the rolls are purchased, 30% of the fixed overhead could be avoided. If Winton accepts the offer, what will the effect on profit be? A. $1,200 decline in profit B. $1,200 increase in profit C. $3,000 decline in profit D. $3,000 increase in profit

Chapter 7 The Use of Cost Information in Management Decision Making

7-21

99.

Tool Time manufactures carpenter-grade screwdrivers. The company is trying to decide whether to continue to make the case in which the screwdrivers are sold, or to outsource the case to another company. The direct material and direct labor cost to produce the cases total $2.00 per case. The overhead cost is $1.00 per case which consists of $0.40 in variable overhead that would be eliminated if the cases are bought from the outside supplier. The $0.60 of fixed overhead is based on expected production of 200,000 cases per year and consists of the salary of the case production manager of $40,000 per year, along with the remainder consisting of rent, insurance, and depreciation on equipment that will have no resale value. The manager will be laid off if the cases were bought externally. The outside supplier has offered to supply the cases for $2.80 each. How much will Tool Time save or lose if the cases are bought externally? A. Save $0.40 per case B. Lose $0.20 per case C. Lose $0.80 per case D. Save $0.20 per case

100.

Diamond Brands manufactures rice, wheat, and oat cereals. Sanders Company has approached Diamond Brands with a proposal to sell the company the rice cereals at a price of $22,000 for 20,000 pounds. The following costs are associated with production of 20,000 pounds of rice cereal: Direct material Direct labor Manufacturing overhead Total

$13,000 5,000 7,000 $25,000

The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated to fixed costs. What is the amount of avoidable costs if Diamond Brands buys rather than makes the rice cereal? A. $25,000 B. $22,000 C. $23,000 D. $20,000 101.

$13,000 5,000 7,000 $25,000

The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated to fixed costs, which are 30% unavoidable. What is the incremental cost per pound that Diamond will (incur) or save if it buys the rice cereal from Sanders? A. $1.175 savings B. $0.10 cost C. $0.075 savings D. $23.50 cost

7-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

102.

$13,000 5,000 7,000 $25,000

The manufacturing overhead consists of $2,000 of variable costs with the balance being allocated fixed costs. Should Diamond Brands make or buy the rice cereal? A. Buy the cereal to save $4,000. B. Continue to make the cereal because the incremental cost of buying is $2,000. C. Buy them to save $2,000. D. Continue to make the cereal because the incremental cost of buying is $22,000. 103.

Macho Sports Company sells soccer and baseball merchandise. The company is trying to decide whether or not to continue the baseball merchandise given the decline in the demand and current loss of this product line. The following information is available for the segments: Sales Variable costs Contribution margin Direct fixed costs Allocated common fixed costs Net income

Baseball $120,000 72,000 48,000 32,000 20,000 ($ 4,000)

Soccer $420,000 220,000 200,000 70,000 70,000 $ 60,000

If the baseball segment is dropped, soccer sales will be unaffected. What will be the effect on overall profits if the baseball segment is eliminated? A. Overall profits will increase $4,000. B. Overall profits will decrease by $48,000. C. Overall profits will decrease by $16,000. D. Overall profits will decrease by $120,000.

Chapter 7 The Use of Cost Information in Management Decision Making

104.

7-23

Baseball $120,000 72,000 48,000 32,000 20,000 ($ 4,000)

Soccer $420,000 220,000 200,000 70,000 70,000 $ 60,000

The company will allocate more space to the soccer product line if the baseball line is dropped. This will allow soccer sales to increase by 25%. What is the incremental effect of the decision to drop the baseball line? A. Net income will increase by $2,000. B. Net income will increase by $30,000. C. Net income will increase by $34,000. D. Net income will increase by $54,000. 105.

Wedding Supply is trying to decide whether or not to continue distributing reception supplies. The following information is available for Wedding Supply’s business segments. Reception Supplies Bridal Dresses

Sales $160,000 Variable costs 84,000 Contribution margin 76,000 Direct fixed costs 50,000 Allocated common fixed costs 30,000 Net income ($ 4,000)

$110,000 50,000 60,000 20,000 25,000 $ 15,000

If reception supplies are dropped, what change will occur to profit? A. Decrease by $26,000 B. Decrease by $76,000 C. Increase by $4,000 D. None of these answer choices are correct.

Floral Decorations

$210,000 120,000 90,000 25,000 30,000 $ 35,000

7-24

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

106.

Wedding Supply is trying to decide whether or not to continue distributing reception supplies. The following information is available for Wedding Supply’s business segments. Reception Supplies

Sales $160,000 Variable costs 84,000 Contribution margin 76,000 Direct fixed costs 50,000 Allocated common fixed costs 30,000 Net Income ($ 4,000)

Bridal Dresses Floral Decorations

$110,000 50,000 60,000 20,000 25,000 $ 15,000

$210,000 120,000 90,000 25,000 30,000 $ 35,000

If reception supplies are dropped, floral decoration sales are expected to increase by 20%. What impact will the increase in floral decorations have on overall profitability? A. Income will increase by $7,000. B. Income will increase by $16,000. C. Income will decrease by $18,000. D. Income will decrease by $8,000. 107.

Diva Footwear is contemplating if it should continue producing platform shoes. The following information is available for the company’s segments Sales Variable costs Contribution margin Direct fixed costs Allocated fixed costs Net income

Platform Shoes $120,000 64,000 56,000 45,000 20,000 ($ 9,000)

Athletic Shoes $420,000 220,000 200,000 70,000 70,000 $ 60,000

Boots $360,000 140,000 220,000 90,000 60,000 $ 70,000

Based on the information provided, which of the following is most likely to be the basis of allocating the fixed costs to the segments? A. Sales B. Direct fixed costs C. Net income D. Variable costs 108.

Diva Footwear is contemplating if it should continue producing platform shoes. The following information is available for the company’s segments. Sales Variable costs Contribution margin Direct fixed costs Allocated fixed costs Net income

Platform Shoes $120,000 64,000 56,000 45,000 20,000 ($ 9,000)

Athletic Shoes $420,000 220,000 200,000 70,000 70,000 $ 60,000

Boots $360,000 140,000 220,000 90,000 60,000 $ 70,000

If platform shoes are dropped, what effect will occur to Diva Footwear’s net income? A. Increase by $9,000 B. Decrease by $56,000 C. Decrease by $11,000 D. Increase by $56,000

Chapter 7 The Use of Cost Information in Management Decision Making

109.

7-25

Platform Shoes $120,000 64,000 56,000 45,000 20,000 ($ 9,000)

Athletic Shoes $420,000 220,000 200,000 70,000 70,000 $ 60,000

Boots $360,000 140,000 220,000 90,000 60,000 $ 70,000

If platform shoes are dropped, sales of athletic shoes are expected to drop by 10%. What impact will occur to Diva Footwear’s net income? A. Income will decrease by $11,000. B. Income will decrease by $31,000. C. Income will decrease by $53,000. D. Income will increase by $9,000. 110.

The following information is available for Diva Footwear’s segments: Sales Variable costs Contribution margin Direct fixed costs Allocated fixed costs Net income

Platform Shoes $120,000 64,000 56,000 45,000 20,000 ($ 9,000)

Athletic Shoes $420,000 220,000 200,000 70,000 70,000 $ 60,000

Boots $360,000 140,000 220,000 90,000 60,000 $ 70,000

Diva Footwear normally sells boots for $90 per pair. An exporter has approached Diva about buying 1,000 pairs of boots for a one-time export deal for $81 per pair. Diva can avoid $3.00 per pair of the normal variable cost on this sale, but Diva must pay a fixed cost of $4,000 to have the boots shipped. Diva has the capacity to produce this order, and no regular sales will be affected. What affect will occur on Diva’s profits if the order is accepted? A. Profits will increase by $42,000. B. Profits will increase by $49,000. C. Profits will increase by $45,000. D. More information is needed to answer. 111.

Hurley Processors processes clay into two joint products—molding foam and craft blocks. When processed, each pound of clay yields 20 units of foam and 80 units of blocks. Foam sells for $2 per unit and blocks sells for $1.50 per unit. The total cost to process a 100-pound batch of clay is $35. If the physical quantities method is used to allocate the joint costs, how much will be allocated to each batch of modeling foam? A. $7.00 B. $8.75 C. $28.00 D. $40.00

7-26

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

112.

Hurley Processors processes clay into two joint products, molding foam and craft blocks. When processed, each pound of clay yields 20 units of foam and 80 units of blocks. Foam sells for $2 per unit and blocks sells for $1.50 per unit. The total cost to process a 100-pound batch of clay is $35. If the physical quantities method is used to allocate the joint costs, how much will be allocated to each batch of craft blocks? A. $1.20 B. $28.00 C. $8.75 D. $120.00

113.

Hurley Processors processes clay into two joint products, molding foam and craft blocks. When processed, each pound of clay yields 20 units of foam and 80 units of blocks. Foam sells for $2 per unit and blocks sells for $1.50 per unit. The total cost to process a 100-pound batch of clay is $35. If the relative sales value method is used to allocate the joint costs, what is the total amount that will be allocated to each batch? A. $55 B. $35 C. $160 D. None of these answer choices are correct.

114.

Hurley Processors processes clay into two joint products, molding foam and craft blocks. When processed, each pound of clay yields 20 units of foam and 80 units of blocks. Foam sells for $2 per unit and blocks sells for $1.50 per unit. The total cost to process a 100-pound batch of clay is $35. If the relative sales value method is used to allocate the joint costs, how much will be allocated to each batch of modeling foam? A. $7.00 B. $8.75 C. $28.00 D. $15.00

115.

Hurley Processors processes clay into two joint products, molding foam and craft blocks. When processed, each pound of clay yields 20 units of foam and 80 units of blocks. Foam sells for $2 per unit and blocks sells for $1.50 per unit. The total cost to process a 100-pound batch of clay is $35. If the relative sales value method is used to allocate the joint costs, how much will be allocated to craft blocks? A. $8.75 B. $26.25 C. $28.00 D. $15.00

Chapter 7 The Use of Cost Information in Management Decision Making

116.

7-27

Soren Company makes two products from a joint input that have the following information: Units Produced Product A 40,000 Product B 150,000

Sales Value Total Additional Sales Value Per Unit Processing Per Unit After At Split-Off Costs Additional Processing $10 $400,000 $15 4 300,000 7

The joint cost incurred to produce the two products to the split-off point is $600,000. How much joint cost should be allocated to Product A using the relative sales value at split-off as the allocation method? A. $600,000 B. $126,316 C. $400,000 D. $240,000 117.

Soren Company makes two products from a joint input that have the following information: Units Produced Product A 40,000 Product B 150,000

Sales Value Total Additional Sales Value Per Unit Processing Per Unit After At Split-Off Costs Additional Processing $10 $400,000 $15 4 300,000 7

The joint cost incurred to produce the two products to the split-off point is $600,000. Which product(s) should be processed further? A. A B. B C. Neither A nor B D. Both A and B 118.

Each pound of the raw material, ore, yields 5 units of Beta and 15 units of Gamma. Ore costs $20 per pound. A pound of ore has processing costs (not including the cost of the raw material) of $30 at the split-off point. The selling price for a unit of Beta is $80. The selling price for a unit of Gamma is $40. If the physical quantities method is used to allocate the joint costs, what is the total cost that will be allocated to each unit of Beta? A. $12.50 B. $16.67 C. $7.50 D. $5.00

119.

7-28

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

120.

Each pound of the raw material, ore, yields 5 units of Beta and 15 units of Gamma. Ore costs $20 per pound. A pound of ore has processing costs (not including the cost of the raw material) of $30 at the split-off point. The selling price for a unit of Beta is $80. The selling price for a unit of Gamma is $40. If the relative sales value method is used to allocate the joint costs, what is the total cost allocated to each unit of Beta? A. $12.00 B. $20.00 C. $33.33 D. $12.50

121.

Each pound of the raw material, ore, yields 5 units of Beta and 15 units of Gamma. Ore costs $20 per pound. A pound of ore has processing costs (not including the cost of the raw material) of $30 at the split-off point. The selling price for a unit of Beta is $80. The selling price for a unit of Gamma is $40. If the relative sales value method is used to allocate the joint costs, what is the total cost allocated to each unit of Gamma? A. $30.00 B. $37.50 C. $16.00 D. $16.67

122.

Brevall Industries makes corn oil and corn meal from harvested corn in a joint process. The corn oil can be further processed into margarine, and the corn meal can be further processed into corn muffin mix. The joint cost incurred to process the corn to the split-off point is $140,000. Information on the quantities, value, and further processing costs for the joint products appear below:

Corn Oil Corn Meal

Quantity 800,000 lbs. 1,600,000 lbs.

Sales Value At Split-off $0.30/lb. 0.10/lb.

Estimated Further Sales Value Processing Cost After Processing $0.15/lb. $0.60/lb. 0.46/lb. 0.55/lb.

Brevall allocates the joint cost to the products based on the relative sales value at splitoff point. How much joint cost should be assigned to the corn oil? A. $46,667 B. $84,000 C. $105,000 D. $70,000

Chapter 7 The Use of Cost Information in Management Decision Making

123.

7-29

Brevall Industries makes corn oil and corn meal from harvested corn in a joint process. Corn oil can be further processed into margarine, and the corn meal can be further processed into corn muffin mix. The joint cost incurred to process the corn to the split-off point is $140,000. Information on the quantities, value, and further processing costs for the joint product appears below: Sales Value Estimated Further Sales Value Quantity At Split-off Processing Cost After Processing Corn Oil 800,000 lbs. $0.30/lb. $0.15/lb. $0.60/lb. Corn Meal 1,600,000 lbs. 0.10/lb. 0.46/lb. 0.55/lb. Brevall allocates the joint cost to the products based on physical units. Corn oil is assigned $46,667 of joint cost and corn meal is assigned $93,333 of joint cost. Which products should be processed further? A. Corn oil B. Corn meal C. Both corn oil and corn meal D. Neither corn oil nor corn meal

124.

Teruba Melons purchased a truckload of watermelons weighing 3,000 pounds for $900. The company separated the melons into two grades: superior and economy. The superior grade melons have a total weight of 2,400 pounds and the economy grade melons total 600 pounds. The company sells the superior grade at $0.60 per pound and the economy grade at $0.30 per pound. How much of the $900 cost of the truckload will be allocated to the superior grade melons using the physical quantity method? Use five significant digits in calculations. A. $540 B. $720 C. $771 D. $1,440

125.

Teruba Melons purchased a truckload of watermelons weighing 3,000 pounds for $900. The company separated the melons into two grades: superior and economy. The superior grade melons have a total weight of 2,400 pounds and the economy grade melons total 600 pounds. The company sells the superior grade at $0.60 per pound and the economy grade at $0.30 per pound. How much of the $900 cost of the truckload will be allocated to the superior grade melons using the relative sales value method? Use five significant digits in calculations. A. $800 B. $720 C. $600 D. $1,440

7-30

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

126.

Havenstock produces lime juice and lime margarita mix. A 500-pound batch of limes costing $70 is processed and results in two components—concentrate and nectar. The labor to achieve this process is $120 per batch. The concentrate is used to produce lime juice and the nectar is used to produce margarita mix. The concentrate is processed into 80 pints of lime juice at a batch cost of $30, and the nectar is processed into 40 pints of margarita mix at a cost of $20 per batch. The sales price of each pint of juice is $5, and each bottle of margarita mix has a sales value of $2.50. How much is the joint cost allocated to lime juice using the relative sales value method? A. $46.67 B. $56.00 C. $96.00 D. $152.00

*127. Express Toys makes 2 products, both of which currently have very strong demand. Product P sells for $7.00 per unit, has a variable cost of $3.00 per unit, and requires 2 minutes of processing time on Machine A. Product Q sells for $9.00 per unit, has variable cost of $2.00 per unit, and requires 10 minutes processing time on Machine A. If there are only 3,000 hours available on Machine A during the month, which product should be produced? A. Product P B. Product Q C. Neither product P nor Q D. Equal quantities of each product *128. Raintree makes 2 products, rain jackets and rain pants. Each passes through the cutting machine, which is the binding constraint. Rain jackets take 16 minutes on the cutting machine and have a contribution margin per jacket of $20. Rain pants take 24 minutes on the cutting machine and have a contribution margin per pair of pants of $32. Which product should be made if there is unlimited demand for each? A. Rain jackets B. Rain pants C. An equal number of pants and jackets D. There is not enough information provided to answer. *129. Raintree makes 2 products, rain jackets and rain pants. Each passes through the cutting machine, which is the binding constraint. Rain jackets take 15 minutes on the cutting machine and have a contribution margin per jacket of $16. Rain pants take 24 minutes on the cutting machine and have a contribution margin per pair of pants of $32. Assume that there are 4,800 hours available on the cutting machine and that the minimum demand for each product is 3,000 units. How many of each product should be made? A. 3,000 jackets and 10,125 pants B. 600 jackets and 4,200 pants C. 3,600 jackets and 1,200 pants D. 3,000 jackets and 3,000 pants

Chapter 7 The Use of Cost Information in Management Decision Making

7-31

*130. Raintree makes 2 products, rain jackets and rain pants. Each passes through the cutting machine, which is the binding constraint. Rain jackets take 15 minutes on the cutting machine and have a contribution margin per jacket of $16. Rain pants take 24 minutes on the cutting machine and have a contribution margin per pair of pants of $32.Assume that there are 4,800 hours available on the cutting machine and that the minimum demand for each product is 3,000 units. If 100 more hours of machine time can be obtained, how much will profits increase? A. $1,600 B. $3,200 C. $8,000 D. None of these answer choices are correct. Material from the appendix to the chapter is marked with an asterisk (*).

Answers to Multiple Choice 28 D 46 A 29 B 47 C 30 C 48 A 31 D 49 C 32 A 50 B 33 B 51 D 34 B 52 B 35 D 53 D 36 C 54 C 37 D 55 B 38 D 56 A 39 C 57 D 40 D 58 A 41 D 59 B 42 C 60 B 43 A 61 D 44 D 62 A 45 B 63 C

64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81

C A B A D B A D A D D A D C C A B D

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

A A D C A A B B C A B B A A B B A B

100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117

D C B C C A D A C B C A B B B B D B

118 119 120 121 122 123 124 125 126 *127 *128 *129 *130

A B B A B A B A D A B A C

7-32

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MATCHING 131.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once. _____ 1.

Opportunity costs

_____ 2.

Relative sales value method

_____ 3.

Relevant costs

_____ 4.

Split-off point

_____ 5.

Sunk costs

_____ 6.

Avoidable costs

_____ 7.

Common costs

_____ 8.

Differential costs

_____ 9.

Incremental costs

_____ 10.

Joint costs

The additional cost incurred as a result of selecting one decision alternative over another; the same as a relevant or differential cost

A cost that can be avoided if a company takes a particular course of action

The costs of the common inputs that result in two or more products

D. E.

Another term for an incremental or relevant cost Costs incurred in the past that are not relevant to present decisions

The only kind of cost that managers need to consider when deciding whether to make or buy a product; the same as a differential or incremental cost

The point where joint products can be separately identified

Value of the benefits foregone when one decision alternative is selected over another

The cost incurred for the benefit of multiple departments or products

The preferred method of allocating common costs to joint products

Answers to Matching 1. H 2. J 3. F 4. G 5. E

6. 7. 8. 9. 10.

B I D A C

Chapter 7 The Use of Cost Information in Management Decision Making

7-33

EXERCISES 132.

Print Jiff manufactures books. The company is trying to decide whether to print the individual pages in-house (the current practice) or have a printing company perform this task. For each of the following items, indicate if the item is relevant or not relevant to this decision. ________

Cost of buying ink

________

Rent on the Print Jiff factory

________

Original price of the book binder owned by Print Jiff

________

Salvage value of the binding equipment owned by Print Jiff

________

Cost of paper for printing books

________

Morale of employees in the printing company

Answer A. B. C.

133.

Relevant Not relevant Not relevant

D. E. F.

Relevant Relevant Relevant

Marcus Company requires three units of P11 for every unit of A5 that it produces. Currently, P11 is made by Marcus, with the following per unit costs in a month when 4,000 units were produced: Direct materials Direct labor Manufacturing overhead Total

$4.00 1.50 2.60 $8.10

Variable manufacturing overhead is applied at $1.00 per unit. The other $1.60 of overhead consists of allocated fixed costs. Marcus will need 6,000 units of P11 for next year’s production. Landers Corporation has offered to supply 6,000 units of P11 at a price of $7.00 per unit. If Marcus accepts the offer, all of the variable costs and $1,200 of the fixed costs will be avoided. Should Marcus Company accept the offer from Landers Corporation? Answer Cost to buy: 6,000 × $7 = Cost to make: Variable costs ($4.00 + $1.50 + $1.00) × 6,000 Fixed costs Total costs Incremental decrease in profit if offer is accepted = $1,800 Marcus should not accept the offer.

$42,000 $39,000 1,200 $40,200

7-34

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

134.

An employee of SaniTan has found some partially completed units of Model 45 in a dusty corner of the warehouse. A job ticket attached to the units indicates that a total of $600 in manufacturing costs have been used to bring the materials to this point in the manufacturing process. The units can be sold in their current condition for $200 to a scrap metal dealer. If SaniTan spends $180 to complete the units, they can be sold for $500. a. b.

Answer a.

135.

What should SaniTan? Justify your answer. Identify a sunk cost in this problem. SaniTan should finish the units. The incremental revenue of $300 ($500 – $200) is greater than the incremental cost of $180. Profit increases by $120. The $600 in costs incurred is sunk and not relevant.

Each year, Randall Data Source surveys 5,000 former and prospective customers regarding satisfaction and brand awareness. For the current year, the company is considering outsourcing the survey to Sanderson Data, a company that has offered to conduct the survey and summarize results for $50,000. Randall Wince, the president of Randall Data Source, believes that Sanderson will do a higher-quality job than his company has been doing, but is unwilling to spend more than $12,000 above current costs. The head of bookkeeping for Randall has prepared the following summary of costs related to the survey in the prior year. Mailing Printing (done by Sanderson Data) Salary of part-time employee who stuffs envelopes and summarizes survey data (130 hours × $16) Share of depreciation of computer and software used to track survey responses and summarize results Share of electricity/phone/etc. based on square feet of space occupied by the part-time employee Total

$27,000 9,000 2,080 1,200 600 $39,880

Prepare an incremental analysis in good form to determine the impact on net income of hiring an outside company versus conducting the survey in house. Will Randall Data Source accept the Sanderson offer? Why or why not? Answer Cost of Sanderson Data Less cost savings: Mailing Printing Salary of part-time employee Incremental cost of hiring Sanderson Data

($50,000) $27,000 9,000 2,080

38,080 ($11,920)

The incremental cost is less than $12,000, so Randall Data Source should accept the Sanderson Data offer.

Chapter 7 The Use of Cost Information in Management Decision Making

136.

7-35

Starwood Aviation produces an executive jet for which it currently manufactures an airflow lever. The cost of each lever is indicated below: Variable costs Direct material Direct labor Variable overhead Total variable costs Fixed costs Depreciation of equipment Depreciation of building Supervisory salaries Total fixed costs Total cost

$300 200 150 $650 120 80 140 340 $990

The company has an offer from Lans Levers to produce the part for $700 per unit who is able to supply the 600 levers needed in the coming year. If the company accepts this offer and shuts down production of levers, supervisors will be reassigned to other areas needing their services. The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the lever can be used by another production group that is currently leasing space for $21,000 per year. Prepare a single column incremental analysis in good form to determine if the company should make or buy the lever. Answer Incremental cost to buy (600 × $700) Incremental cost savings: Direct material (600 × $300) Variable overhead (600 × $150) Direct labor (600 × $200) Leasing cost reduction Incremental additional cost to buy 137.

($420,000) $180,000 90,000 120,000 21,000

411,000 ($ 9,000)

Deason Distributors has decided to discontinue manufacturing its Venus model blender. Currently, the company has 4,600 partially completed blenders on hand. The government has taken the blades off the market that the company uses in the blender, so each base must be reworked to accommodate a new style of blades. The company has spent $110 per unit to manufacture these blenders to their current state. Reworking each blender will cost $20 for material and $20 for direct labor. In addition, $7 of variable overhead and $32 of allocated fixed overhead (relating primarily to depreciation of plant and equipment) will be allocated per unit. If Deason completes the blenders, it can sell them for $160 per unit. On the other hand, another manufacturer is interested in purchasing the partially completed blenders for $104 each and converting them into choppers. In good form, prepare an incremental analysis per unit to determine if Deason should complete the blenders or sell them in their current state.

Answer Incremental revenue per unit ($160 – $104) Incremental costs: Materials ($20) Direct labor (20) Variable overhead (7) Incremental benefit per blender

$56

(47) $ 9

7-36

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

138.

Football Fanatics sells logo sports merchandise and does custom embroidery. The company is contemplating whether or not to continue the embroidery service. All of the company’s direct fixed costs can be avoided if a segment is dropped. The following information is available for the segments. Sales Variable costs Contribution margin Direct fixed costs Allocated common fixed costs Net income a. b.

c. Answer a.

139.

Embroidery $60,000 30,000 30,000 22,000 12,000 ($ 4,000)

Apparel $250,000 110,000 140,000 40,000 50,000 $ 50,000

What will be the impact on net income if the embroidery segment is dropped? Assume that if the embroidery segment is dropped, apparel sales will increase 10%. What is the impact on contribution margin and net income solely for the apparel ? Identify one cost that is not relevant in this analysis.

If the embroidery segment is dropped, the contribution margin of $30,000 will be lost and only the direct fixed costs of $22,000 will be saved, so there will be a decrease of $8,000 in net income.

For the apparel segment: Contribution margin = 140,000 × 10% = $14,000 increase Net income = $140,000 × 10% = $14,000 increase

The common fixed costs are not relevant since they will exist in either option.

Sausalita’s Cantina has been approached by Luck & Dewey that wants to hold an employee recognition dinner next month. The restaurant manager agreed to a charge of $50 per person for food, wine, and dessert for 90 people. The manager estimates that the cost of the food will be $17 per person and beverages will be $15 per person. To be able to accommodate the group, the restaurant must be closed for dinner that night. Typically, 100 people with an average bill of $44 per person would be served each evening, with the cost of food estimated at $14 per person and beverages at $11 per person. No additional staff will need to be hired to accommodate the group from Luck & Dewey. a. b.

In good form, prepare an incremental analysis to determine the effect on net income associated with accepting the Luck & Dewey group. What is the opportunity cost of accepting the Luck & Dewey group?

Answer a. Incremental revenue ($50 × 90) Cost of food and beverage ($32 × 90) Lost revenue ($44 × 100) Cost savings for food and beverage ($25 × 100) Incremental decrease in profit b.

$4,400 – $2,500 = $1,900

$4,500 (2,880) (4,400) 2,500 ($ 280)

Chapter 7 The Use of Cost Information in Management Decision Making

140.

7-37

Acer Computing manufactures tablets. The manufacturing process uses a processor that Acer currently manufacturers. The resource officer of Acer has been asked to determine if it is advisable to purchase the processors rather than make them internally (the current practice). Identify which of the following items are relevant to the resource officer’s decision by circling the number preceding each relevant item. 1.

The original cost of equipment currently used to manufacture the processors

The market value of equipment currently used to manufacture the tablets

The cost of buying processors from suppliers

Rent revenue for the space freed up if the processors are not manufactured internally

The salary of the president of Acer Computing

The quality of the processors made internally

The quality of the processors purchased from suppliers

Depreciation on equipment used to manufacture the processors

The labor contract with production workers

10.

The selling prices of tablets

Answer 2, 3, 4, 6, 7, and 9

141.

Rocking Express manufactures rocking chairs. Recently, the company began manufacturing and marketing a chair with an automatic rocker. Demand for this rocker is very strong and the CEO of Rocking Express is considering dropping production of the company’s original rocker. This will give the company increased capacity to devote to the new model. Identify which of the following items are relevant to the CEO’s decision by circling the number preceding each relevant item. 1.

The original cost of equipment used to manufacture the old rocker

Depreciation of the equipment used to manufacture the old rocker (ignore taxes)

The rent on the warehouse used to store the completed inventory and materials

The time it takes to manufacture each rocker

The factory janitor’s salary

The selling price of the new rocker

The variable cost of producing the new rocker

The cost of retraining personnel to make the newer rocker

Depreciation of the factory building allocated to the old rocker

Answer 4, 6, 7, and 8

7-38

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

142.

Sandford Electronics sells desktops and notebook computers. Currently, the desktop product line takes up approximately 50 percent of the company’s retail floor space. The president of the company is trying to decide whether the company should continue offering desktops or just concentrate on notebooks. If the desktop product line is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of notebooks will increase by 10 percent. Allocated fixed costs are assigned based on labor hours. Sales Less cost of goods sold Contribution margin Less direct fixed costs: Salaries Other Less allocated fixed costs: Rent Insurance Cleaning President’s salary Other Total costs Net income

Notebooks $1,200,000 700,000 500,000

Desktops $800,000 500,000 300,000

Total $2,000,000 1,200,000 800,000

175,000 60,000

350,000 120,000

14,118 3,529 4,117 76,470 7,058 340,292 $ 159,708

9,882 2,471 2,883 53,530 4,942 308,708 ($ 8,708)

24,000 6,000 7,000 130,000 12,000 649,000 $ 151,000

Prepare an incremental analysis in good form to determine the incremental effect on net income of discontinuing the desktop computer line. Answer Incremental drop in desktop revenue Incremental cost savings on desktops: Cost of goods sold Salaries Other Incremental increase in revenue of notebooks (10% × $1,200,000) Incremental increase in variable costs of notebooks (10% × $700,000) Incremental decrease in profit

($800,000) 500,000 175,000 60,000 120,000 (70,000) ($ 15,000)

Chapter 7 The Use of Cost Information in Management Decision Making

143.

7-39

Dairy Fresh makes a variety of dairy products. During June, 45,000 gallons of raw milk were processed at a joint cost of $36,000. This produced 36,000 gallons of skim milk and 4,000 gallons of cream. The cream could be processed further into butter and the skim milk could be processed further into farmer's cheese. Information on these items follows:

Skim Milk Cream a.

b. c. Answer a.

Sales Value Estimated Further At Split-off Point Processing Cost $94,500 $10,000 40,500 40,000

Sales Value After Processing $115,000 70,000

Assume that the joint cost is allocated to the products based on the physical quantity of output of each product. How much joint cost should be assigned to each product? How much joint cost should be assigned to each product if the relative sales value allocation method is used? Which products should be processed further?

Skim milk = (36,000 ÷ 40,000) × $36,000 = $32,400 Cream = (4,000 ÷ 40,000) × $36,000 = $3,600

Skim milk = $94,500 ÷ ($94,500 + $40,500) × $36,000 = $25,200 Cream = $40,500 ÷ ($94,500 + $40,500) × $36,000 = $10,800

Skim milk should be processed further since the additional revenue ($115,000 – $94,500) of $20,500 is greater than the additional cost of $10,000. Cream should not be processed further since the additional revenue ($70,000 – $40,500) of $29,500 is less than the additional cost of $40,000.

144.

Sanders Products produces two joint products, A and B. Prior to the split-off point, the company incurred costs of $12,000. Product A weighs 10 pounds and product B weighs 30 pounds. Product A sells for $50 per pound and product B sells for $25 per pound. Based on a physical measure of output, allocate joint costs to products A and B.

Answer Product A Product B Total

10 pounds 30 pounds 40 pounds

Product A allocation: 10/40 × $12,000 = $3,000 Product B allocation: 30/40 × $12,000 = $9,000

7-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

145.

Mexo Products produces two joint products, A and B. Prior to the split-off point, the company incurred costs of $12,000. Product A weighs 100 pounds and product B weighs 300 pounds. Product A sells for $50 per pound and product B sells for $25 per pound. Mexo uses a physical measure of output to allocate joint costs to products A and B. Comment on the profitability and recommend if the products should be sold at the indicated prices or not.

Answer

Sales - Product A: $50  100 $5,000 Product A allocation: $12,000 × (100 ÷ 400) 3,000 Product A profit $2,000 Sales - Product B: $25  300 $7,500 Product B allocation: $12,000 × (300 ÷ 400) 9,000 Product B loss ($1,500)

Product A generates a profit margin of about 40%, while product B generates a loss of 20%. While the selling price of Product A is adequate to cover the cost of Product A, the selling price of Product B does not cover the cost of Product B. Product A should be sold at the $50 per pound selling price. Product B should not be sold at the $25 per pound selling price.

146.

Answer a.

Based on relative sales values at the split-off point, allocate joint costs to the two products. Under what condition will the cost allocated using relative sales values be greater than the selling price of a joint product? Product A (100 pounds  $50) Product B (300 pounds  $25) Total

$ 5,000 7,500 $12,500

Product A allocation: ($5,000 ÷ $12,500) × $12,000 = $4,800 Product B allocation: ($7,500 ÷ $12,500) × $12,000 = $7,200 b.

The only time the allocated cost of a joint product will be greater than the sales value will be if the total revenue of all joint products is less than the joint costs, in which case, the company should drop all of the joint products.

Chapter 7 The Use of Cost Information in Management Decision Making

147.

7-41

For each of the following situations, indicate a qualitative factor that should be considered prior to making the decision: a.

b. c.

Answer a.

A company that produces and sells bottled water is considering outsourcing its bottling operation. The company will still sell the water and deliver it to wholesalers. A wine producer is considering dropping its premium brand wine and concentrating exclusively on less costly wines. A software company currently has a large facility for producing videos used in games and advertisements. The company is considering shutting down the facility and using resources provided by other companies.

Will there be a quality assurance program at the company that will do the bottling? Will the bottled water be delivered timely? Will the supplier increase its selling prices in the future?

Will customers abandon all of the company’s products in favor of competitors?

Will quality decline? Will talented workers depart to competitors? Will the media view the shut down detrimental to the community?

*148. Sport Luck makes baseballs and soccer balls in a three-step process. The sewing machine has been identified as the bottleneck in the process. Each soccer ball has a contribution margin of $6.00 and each baseball has a contribution margin of $2.00. The sewing machine can make 10 soccer balls or 25 baseballs in one hour. a.

If demand for both products is unlimited and the sewing machine capacity cannot be expanded, which product should be produced?

If demand for each ball is limited to 6,000 balls and there are 3,000 hours available on the machine, how many of each product should be produced?

Answer a.

Soccer balls: Contribution margin/hour ($6.00 × 10) = $60.00 Baseballs: Contribution margin/hour ($2.00 × 25) = $50.00 Make soccer balls only Produce 6,000 baseballs using 240 hours: 6,000 × 0.04 hours = 240 hours Produce 27,600 soccer balls using the remaining 2,760 hours: 2,760 ÷ 0.10 = 27,600 soccer balls

7-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

149.

At Express Production, the engraving department is a bottleneck. The company is considering hiring an extra worker whose salary will be $51,000 per year, to mitigate the problem. With the extra worker, the company will be able to produce and sell 6,000 more units per year. The selling price per unit is $15. The cost per unit currently is $7.85 as follows: Direct material Direct labor Variable overhead Fixed overhead (primarily depreciation of equipment) Total

$3.50 1.10 0.45 2.80 $7.85

Calculate the annual financial impact of hiring the extra worker. Answer Selling price per unit Less variable costs per unit: Direct material $3.50 Direct labor 1.10 Variable overhead 0.45 Contribution margin per unit Incremental units Incremental profit before cost of additional worker Cost of additional worker Profit increase of hiring an additional worker

$ 15.00

5.05 9.95 6,000 59,700 51,000 $ 8,700

Chapter 7 The Use of Cost Information in Management Decision Making

7-43

CHALLENGE EXERCISES 150.

Seats Galore sells 3 models of deck chairs: Blue Magoo, Red Ahead, and Green Seen. Operating results for June are below:

4,000 $36,000

Red Ahead 4,500 $22,500

Green Seen 3,500 $35,000

12,000 $93,500

14,000 6,000 8,000 $ 8,000

13,500 4,000 9,000 ($ 4,000)

17,500 5,000 7,000 $ 5,500

45,000 15,000 24,000 $ 9,500

Blue Magoo Units sold Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income a.

b. c. d.

Answer a.

Total

If Red Ahead is discontinued, management estimates that sales of Blue Magoo will increase by 20%. In good form, prepare an incremental analysis to determine if Red Ahead should be discontinued. What qualitative factors should Seats Galore’s managers consider? Should Red Ahead be discontinued based solely on quantitative aspects? Briefly justify your response. Without creating new income statements, and using your results from your analysis in part A, determine the amount of the company’s new net income if Red Ahead is discontinued. Show your calculations.

Effects on Red Ahead: Lost sales Variable departmental cost savings Direct fixed cost savings Effects on Blue Magoo: Increase in revenue (20% × $36,000) Increase in variable departmental costs (20% × 14,000) Incremental decline in profit if Red Ahead is dropped

($22,500) 13,500 4,000 7,200 (2,800) ($ 600)

Factors to consider will include: Will some customers who favor the Red Ahead chairs be lost to competitors? Will terminated employees obtain other jobs or contribute to unemployment in the local community? How will the suppliers who currently supply materials for Red Ahead chairs be affected?

Based solely on financial aspects, Red Ahead should not be discontinued because profit will drop by $600 if dropped.

$9,500 – $600 = $8,900

7-44

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

151.

Lance, Inc. produces a line of products, which includes umbrellas. During 2017, there are 4,400 umbrellas budgeted for production. Total material costs for the umbrellas are budgeted at $7,700 and direct labor is $5,500. Overhead costs are $2.15 per unit of which $0.95 is variable. Forty-five percent of the fixed overhead is allocated and unavoidable. Supplier, Inc. has contacted Lance, Inc. with an offer to sell the umbrellas to Lance, Inc. for $4.50 each. a. b.

Prepare an incremental analysis to assess the decision. Explain the nature of the ‘allocated’ fixed overhead. Why is this amount considered to be ‘unavoidable’?

Answer a. Incremental cost to buy ($4.50 × 4,400) Incremental cost savings: Direct materials Direct labor Variable overhead ($0.95 × 4,400) Fixed overhead [($2.15 – $0.95) × 55% × 4,400] Incremental increase in net income if umbrellas are bought b.

($19,800) 7,700 5,500 4,180 2,904 $ 484

Allocated fixed overhead consists of fixed costs that cannot be traced to a particular product or service provided. The costs are grouped together in a cost pool and then allocated to all products using a basis on which the company thinks will best distribute the costs to the products that use the resources. If a product is eliminated, the total allocated costs do not change, and any cost that was allocated to the eliminated product must be reallocated to the remaining products. In total, there is no cost reduction of allocated fixed overhead.

Chapter 7 The Use of Cost Information in Management Decision Making

152.

7-45

For each situation listed as items 1 through 3, identify the type of decision situation that is presented, and recommend the appropriate action assuming only the financial impact is considered. Justify your choice. Scenario 1. Blockbuster has 3 product lines. Compact Discs (CDs) have a loss of $4,000 for last year, while the other lines are profitable. If the CD product line is dropped, allocated costs are unavoidable. The allocated costs exceed the operating loss of the CD product line. 2. The incremental cost to make widgets for June is $3,380. The incremental cost to buy from a supplier is $3,200.

Type of Decision

Appropriate Action

Comments 1. Dropping products/product lines causes profits to decline due to fixed costs that must be allocated. 2. Cost to buy ($3,200) + cost savings $3,380 = $180 incremental profit if widgets are bought.

Type of Decision

Appropriate Action

Drop a product or product line (i.e., Keep or drop)

Do not drop; Keep the CD product line

Make or buy

Buy from supplier

Answer

7-46

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

153.

PaperPro produces staplers, which it regularly sells for $11.25 each. The following unit cost data are based on a normal production of 7,800 staplers produced each year: Direct materials Direct labor Factory overhead (70% variable)

$2.60 1.32 4.40

PaperPro has received an order from a new customer who wants to buy 1,200 staplers. The customer is willing to pay $10.00 per stapler, but also wants its logo imprinted on each stapler. The logo imprint will cost $0.40 per stapler. a. b. c. Answer a.

How much is the minimum price that PaperPro should charge for the entire order if its factory has the capacity to produce 10,500 staplers annually? How much is the minimum price that PaperPro should charge for the entire order if its factory has the capacity to produce 8,500 staplers annually? Why does the answer to part b differ from part c?

Unit variable cost = $2.60 + $1.32 + ($4.40 × 70%) = $7.00 Incremental costs = Minimum sales revenue = [($7.00 + $0.40) × 1,200] = $8,880

Unit variable cost = $2.60 + $1.32 + ($4.40 × 70%) = $7.00 Opportunity cost = (8,500 – 7,800) × ($11.25 – $7.00) = $2,975 Incremental costs + Opportunity cost = Minimum sales revenue [($7.00 + $0.40) × 1,200] + $2,975 = $11,855

In order to provide the 1,200 staplers to the new customer, Paper Pro will have to turn down sales of 700 staplers to its current customers, which cause Paper Pro to give up the contribution margin the company could earn if it does not accept the order. PaperPro will want to recover not only its incremental costs, but also its opportunity cost related to the 700 staplers.

Chapter 7 The Use of Cost Information in Management Decision Making

7-47

SHORT-ANSWER ESSAYS 154.

What are the components of incremental analysis that are used to calculate incremental profit or incremental loss?

Answer Incremental analysis uses incremental revenues and incremental costs to calculate the incremental profit or the incremental loss.

155.

What are avoidable costs? Which costs are usually avoidable in a make-or-buy decision?

Answer Avoidable costs are those costs that can be avoided, or eliminated, if a particular action is undertaken. If a company chooses to buy an item, rather than make it, direct materials, direct labor, variable overhead, and perhaps a portion of fixed manufacturing overhead are usually avoidable costs.

156.

What is the cause of the cost allocation death spiral?

Answer The cost allocation death spiral is caused by not realizing that when a department that appears to be unprofitable is dropped, the common fixed costs that had been allocated to that department will need to be allocated to other departments. This may make these departments appear to be unprofitable. If these departments are dropped, the same costs will continue to be allocated to fewer and fewer departments.

157.

What is the role of opportunity costs in a make-or-buy decision?

Answer Opportunity costs are always incremental costs and should be considered in a make-orbuy decision. If some components are purchased instead of made, the space and other resources that are used for the production of these components can be used to generate additional profit.

158.

What are joint costs and how are these costs allocated?

Answer Joint costs are the costs of the common inputs (materials and processing) when two or more products result from the common input. The costs can be allocated to the resulting products using the physical quantities method or the relative sales value method.

7-48

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

159.

List three disadvantages of using an outside supplier.

Answer 1. 2. 3.

There is a loss of control over the production process, so quality control specifications and delivery schedules may not be met. The outside supplier may raise prices significantly in the future. Employee morale may suffer if employees are transferred or terminated when an outside supplier is used.

*160. List the steps in the theory of constraints process.

Answer 1. 2. 3. 4. 5.

Identify the binding constraint Optimize use of the binding constraint Subordinate everything else to the binding constraint Break the constraint Identify the new binding constraint

*161. Explain what is meant by “subordinate everything else to the binding constraint.” Give an example of what this means. Answer This means that process improvements should be focused on increasing the throughput at the binding constraint, and not on increasing it in other areas. For example, goods should be inspected before reaching the binding constraint so that time is not wasted on defective units. Material from the appendix to the chapter is marked with an asterisk (*).

CHAPTER 8 Pricing Decisions, Analyzing Customer Profitability, and Activity-Based Pricing Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6. 7.

1 1 1 1 1 1 1

K C K K K C K

8. 9. 10. 11. 12. 13. 14.

1 1 1 1 1 1 2

32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51.

1 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

K K K K K AP K K AP AP AP AP AP AP C AP AP C AP AP

52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.

1 1 1 1 1 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1

129.

1, 2,3

130. 131. 132. 133.

1 1 1 1

AP AP AP AP

134. 135. 136. 137.

1 1 2 2

147.

148.

150.

151.

BT Item LO BT Item True-False Statements K 15. 2 K 22. K 16. 2 K 23. K 17. 2 K 24. K 18. 2 K 25. C 19. 2 K 26. C 20. 2 K 27. K 21. 2 K 28. Multiple Choice Questions AP 72. 1 AP 92. AP 73. 1 AP 93. AP 74. 1 AP 94. AP 75. 1 AP 95. AP 76. 1 AP 96. AP 77. 1 AP 97. AP 78. 2 K 98. AP 79. 2 K 99. AP 80. 1 AP 100. C 81. 2 C 101. C 82. 2 AP 102. C 83. 2 AP 103. C 84. 2 AP 104. C 85. 2 AP 105. C 86. 2 AP 106. AP 87. 2 AP 107. AP 88. 2 AP 108. AP 89. 2 AN 109. AP 90. 2 AP 110. AP 91. 2 AP 111. Matching

Exercises AP 138. 2 AP 142. AP 139. 2 AN 143. AP 140. 2 AN 144. AP 141. 2 AP 145. Challenge Exercises AN 149. 2 AP Short-Answer Essays C 152. 3 C 153.

Item

2 2 3 3 3 3 3

K K K K K C K

29. 30. 31.

3 3 3

K K K

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

AP AP AP AP AP AP K K C C AP AP AP AP AP AP AP AP AP AP

112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128.

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

K K AP AP AP K C K AP AP AP AP AP AP AP AP AP

3 3 3 3

AP AP AP AP

146.

8-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

TRUE-FALSE STATEMENTS 1.

The most difficult part of determining the profit-maximizing price is determining the demand function.

Even though the same percentage markup may be applied to all customers, some customers may be more profitable than others.

Generally, the higher the price, the lower the quantity demanded.

The selling price that maximizes revenues is the price that will also maximize profit.

A demand function is the relation between price and quantity demanded.

Charging a higher price per unit causes an increase in profits for the company because the selling price is larger than the variable cost.

A company should never price a product below full cost.

Fixed costs will affect a special order decision when the selling company is at capacity.

A company cannot increase profits if it accepts a special order at a price below its incremental variable cost.

10.

In order for a special order to be accepted, the full cost of the product must be covered.

11.

When evaluating a special order, only costs that are incremental in nature should be a part of the analysis.

12.

A company should accept all orders for which a company has the capacity to produce.

13.

As long as fixed costs increase by less than the excess of incremental revenue over incremental cost, the acceptance of a special order will increase a company’s net income.

14.

The most difficult part of using cost-plus pricing is determining the demand function.

15.

Cost-plus pricing is circular for the manufacturing industry in that demand must be estimated to determine the fixed manufacturing costs per unit before the cost is marked up to obtain a selling price, which has a major impact on the quantity demanded.

16.

A company using cost-plus pricing starts with an estimate of the cost and adds a markup to arrive at a price that allows for a reasonable level of profit.

17.

Cost-plus pricing is the pricing method that begins with a careful analysis of competing products and customer needs and wants.

18.

Product cost can be easily adjusted after the design phase is complete as long as production has not begun.

19.

The target costing process begins with the design of the product.

Chapter 8

Pricing Decisions

8-3

20.

The first step in the target costing process is to estimate how much a product will cost to develop.

21.

Prices developed using target costing are based on competing products and customer needs and wants.

22.

Target costing establishes selling prices based on the full cost of the product.

23.

Target cost is computed by determining the appropriate selling price and then subtracting desired profit from it.

24.

In effect, a CPM system uses ABC to allocate costs to customers instead of to products and services.

25.

A customer’s profitability is calculated by dividing the sales revenue generated from each customer by the cost of goods sold for each customer.

26.

In a CPM system, costs are allocated to customers, who are the cost objectives.

27.

When order processing costs do not vary based on the size of the order, a customer who makes large, infrequent orders is generally more profitable than a customer who makes small, more frequent orders, for the same quantity and price.

28.

Activity-based pricing is utilized when a customer buying products is charged for the full cost of a product or service plus a markup added to the cost.

29.

In activity-based pricing, customers are offered separate prices for separate items or services they choose in addition to the price of goods they purchase.

30.

Suppliers adopting activity-based pricing may encourage customers to limit the variety of goods they purchase to mitigate the price to be charged.

31.

Activity-based pricing uses ABC concepts to determine one optimum uniform price to charge all customers.

Answers to True-False 1 T 8 2 T 9 3 T 10 4 F 11 5 T 12 6 F 13 7 F

T T F F F T

14 15 16 17 18 19

F T T F F F

20 21 22 23 24 25

F T F T T F

26 27 28 29 30 31

T T F T T F

8-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MULTIPLE CHOICE 32.

Which one of the following does economic theory suggest? A. Set a price that allows profit maximization B. Set a price that allows the minimum number of units to be sold at the highest unit price C. Set a price that will maximize revenues D. Set a price that will maximize market share

33.

Which of the following factors is considered in a product pricing decision made using cost-plus pricing? A. Price customers are willing to pay B. Selling and administrative costs C. Competitors’ actions D. Fixed cost per unit

34.

What occurs to the quantity demanded as the price decreases? A. It will increase. B. It will decrease. C. It will remain constant. D. It will increase and then decrease.

35.

Which of the following stays constant when the price per unit changes? A. Demand B. Contribution margin per unit C. Total fixed costs D. Profit

36.

Which of the following statements about price, demand, and profit is generally true? A. As price increases, demand decreases. B. As demand increases, profit decreases. C. As price increases, demand increases. D. As price decreases, demand decreases.

37.

Rosetone Retail sells one product with a variable cost of $3.50 per unit. The demand at different prices to be charged is shown below: Units Demanded Unit Price 10,000 $9 15,000 $8 20,000 $7 25,000 $6 If fixed costs are $42,000, what price should Rosetone charge in order to maximize profits? A. $9 B. $8 C. $7 D. $6

Chapter 8

Pricing Decisions

8-5

38.

Which of the following statements about prices and profit is true? A. Higher prices always lead to lower profits because fewer units will be sold. B. Higher prices always lead to lower demand and higher profits. C. Higher prices combine with lower demand to change the level of profits. D. Higher prices will be offset by lower demand so profits will stay constant.

39.

What should be maximized when setting the price for a product? A. Total revenue B. Contribution margin per unit C. Net income D. The number of units of product sold

40.

Winslow Carpet produces and sells berber carpet by the yard with a variable cost of $16 per yard. Total fixed costs are $280,000. The following chart represents the estimated demand at various price levels. Yards Demanded 57,000 67,500 72,500 86,000

Unit Price $25 $24 $23 $21

Which price will generate the largest profit for Winslow Carpets? A. $25 B. $24 C. $23 D. $21 41.

Wilkes Manufacturing sells one product with a variable unit cost of $18. The company knows that the price charged will affect demand. Fixed costs are $275,000. If sales exceed 50,000 units, the company will need to lease additional manufacturing space and equipment at an additional cost of $100,000 per year. The following chart represents the estimated demand at various price levels: Units Demanded 25,000 50,000 75,000 100,000

Unit Price $30 $28 $25 $23

Based on this information which of the following statements is true? A. Selling the units at $23 will generate the largest profit. B. Selling the units at either $23 or $28 will generate a profit of $225,000. C. Selling the units at either $25 or $28 will generate a profit of $225,000. D. Selling the units at $28 will generate the largest profit.

8-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

42.

Testor Paints sells varnish with a variable cost of $6.50 per gallon. The company is unsure which price to charge in order to maximize profits. The price charged will also affect the demand. Gallons Demanded 20,000 30,000 40,000 50,000

Unit Price Per Gallon $11 $10 $9 $8

If fixed costs are $80,000 and the chart above represents the demand at various prices, what price should be charged in order to maximize profits? A. $11 B. $10 C. $9 D. $8 43.

Dollar Deals sells a single product that has a unit variable cost of $9 per unit. The company’s total fixed costs are $220,000. The company estimates demand at various activity levels as follows: Units Demanded 54,000 65,000 72,000 82,000

Unit Price $15 $14 $13 $12

What price should Dollar Deals charge to maximize profits? A. $15 B. $14 C. $13 D. $12 44.

Calico Joe Fabrics sells a single product. The company estimates total fixed costs at $360,000 with demand, price, and total variable costs as follows: Units Demanded 73,000 83,000 93,000 103,000 113,000

Unit Price $31 30 29 28 27

Total Variable Costs $1,606,000 1,826,000 2,046,000 2,266,000 2,486,000

What price should Calico Joe Fabrics charge to maximize profits? A. $31 B. $30 C. $29 D. $28 E. $27

Chapter 8

45.

Pricing Decisions

8-7

Calico Joe Fabrics sells a single product. The company estimates total fixed costs at $360,000 with demand and unit variable costs at various activity levels as follows: Units Demanded 73,000 83,000 93,000 103,000 113,000

Unit Price $31 30 29 28 27

Total Variable Costs $1,606,000 1,826,000 2,046,000 2,266,000 2,486,000

How much profit will Calico Joe Fabrics have if a price of $26 is charged and demand is 120,000? A. $120,000 B. $3,120,000 C. $480,000 D. $2,760,000 46.

Unit Price $31 30 29 28 27

Total Variable Costs $1,606,000 1,826,000 2,046,000 2,266,000 2,486,000

How would you best describe Calico’s variable cost per unit over the range shown? A. It is constant. B. It is increasing as volume increases. C. It is decreasing as volume increases. D. There is not enough information provided to determine the answer. 47.

Palm Decor sells a single product that has variable costs of $12 per unit. The company estimates the following demand at various unit prices: Units Demanded 31,000 37,000 44,000 56,000 60,000

Unit Price $19 18 17 16 15

What price should Palm Decor charge to maximize profits? A. $19 B. $18 C. $17 D. $16

8-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

48.

Right Air Supply sells a specialized air filter that has a variable cost of $10 each. Fixed costs are estimated to be $700,000 across all levels of sales shown below: Units Demanded 80,000 90,000 100,000 110,000 120,000

Unit Price $35 $33 $31 $30 $28

What price should Right Air Supply charge to maximize profits? A. $35 B. $33 C. $31 D. $30 E. $28 49.

Unit Price $35 $33 $31 $30 $28

What information given, if any, is not relevant to the price maximization decision? A. The selling prices B. The variable costs per unit C. The quantities demanded D. The total fixed costs 50.

Unit Price $35 $33 $31 $30 $28

What price should Right Air Supply charge to maximize revenues? A. $35 B. $33 C. $31 D. $28

Chapter 8

51.

Pricing Decisions

8-9

Maker Sun Chairs is trying to determine the optimal price to charge for its galvanized deck chairs. The company has total fixed costs of $120,000 and the deck chairs have a unit variable cost of $27.00 per unit. Maker Sun Chairs has determined that the following relationships exist between price and demand: Unit Price $45 $44 $43 $42

Unit Demand 7,200 7,800 8,400 8,800

How much is the contribution margin at a price of $45? A. $324,000 B. $129,600 C. $12,600 D. $9,600 52.

Unit Demand 7,200 7,800 8,400 8,800

What is the anticipated revenue at a price of $44? A. $343,200 B. $132,600 C. $12,600 D. $387,200 53.

Unit Demand 7,200 7,800 8,400 8,800

What is the anticipated profit at a price of $43? A. $134,400 B. $14,400 C. $194,400 D. $361,200

8-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

54.

Unit Demand 7,200 7,800 8,400 8,800

What is the anticipated profit at a price of $42? A. $12,000 B. $132,000 C. $249,600 D. $369,600 55.

Unit Demand 7,200 7,800 8,400 8,800

What price should Maker Sun Chairs charge in order to maximize its profit? A. $45 B. $44 C. $43 D. $42 56.

Tong Chin is the manager of an Asian restaurant. She is considering four price levels for an all-you-can-eat buffet. Her estimate of price and quantity demanded are: Buffet Meal Price $17.00 $16.00 $15.00 $14.00

Meals Demanded 3,200 3,700 4,000 4,400

Monthly operating costs include $16,400 of fixed costs and average variable costs of $9.40 per meal. Which price will yield the largest monthly profit? A. $17 B. $16 C. $15 D. $14

Chapter 8

57.

Pricing Decisions

8-11

Ramsey Foods has analyzed its customer and order handling data for the past year and has determined the following costs: Order processing cost per order Additional costs if order must be expedited (Per order) Customer technical support calls (Per call) Relationship management costs (Per customer per year)

$5.50 $6.00 $3.50 $1,900

In addition to these costs, product costs amount to 75% of sales. In the prior year, Ramsey had the following experience with one of its customers, Turnkey Enterprises: Sales Number of orders Percent of orders marked rush Calls to technical support

$18,000 28 25% 14

Calculate the profit earned on the Turnkey Enterprises account. A. $2,355 B. $4,153 C. $4,482 D. $2,229 58.

Allstate HVAC recently developed a low-end electronic thermostat that it plans on selling via a cable channel marketing program. The cable program’s fee for selling the item is 20% of revenue. For this fee, the program will advertise the thermostat over six 10-minute segments in September. Allstate’s fixed costs of producing the thermostats are $110,000 per production run. The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered. Variable production costs are $25 per unit. In addition, it will cost approximately $5 per unit to ship the thermostats to customers. Production time will be less than three weeks. Henry Kristen, a product manager at Allstate, is charged with recommending a price for the thermostat. Based on his experience with similar items, focus group responses, and survey information, he has estimated the number of units that can be sold at various prices: Unit Price $74.99 $63.99 $54.99 $49.99

Quantity 15,000 20,000 25,000 35,000

At what price is profit maximized? A. $74.99 B. $63.99 C. $54.99 D. $49.99

8-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

59.

Quantity 5,000 8,000 11,000 13,000

At which price should the company sell it products? A. $90 B. $77 C. $65 D. $62 60.

Vanana Tees sells its cool-zone t-shirts for $24 each. Unit product costs are as follows: Direct materials Direct labor Manufacturing overhead Total

$4.50 1.80 3.50 $9.80

A special order to purchase 1,200 shirts was recently received. There is enough capacity to fill the order. Filling this order will not disrupt current operations. Vanana expects to incur an additional $1.10 per unit for additional labor costs due to a slight modification the buyer wants made to the shirts. The manufacturing overhead costs consist of 30% allocated fixed costs. In negotiating a price, how much is Vanana Tees’ minimum acceptable selling price per t-shirt? A. $6.30 B. $8.75 C. $9.85 D. $7.35 61.

Which of the following must be true for a company to accept a special order? A. Variable costs must be less than the contribution margin. B. Incremental revenues must be greater than incremental costs. C. Opportunity costs must be greater than total revenue. D. Total fixed costs must stay constant.

Chapter 8

Pricing Decisions

8-13

62.

When deciding to accept or reject a special order, which of the following costs is most likely to be irrelevant? A. The wages of direct labor to make the order B. Depreciation on the machinery used to make the order C. The raw material used to make the order D. The electricity used to run the machine to make the order

63.

In accepting a special order, which one of the following is not considered? A. Whether production capacity exists to complete the order B. Whether demand for other products will be affected C. Whether the fixed costs of production will increase D. Whether the contribution margin per unit is greater for products in the special order than the contribution margin for the same products sold to regular customers

64.

Which of the following is relevant in deciding whether to accept or reject a special order? A. The impact the order will have on existing business B. The price that will be charged on the special order C. The impact the order will have on existing business and the price that will be charged on the special order D. None of these answer choices are correct.

65.

Which of the following statements is true of fixed costs of production in determining whether to accept or reject a special order? A. They are increased in proportion to the amount that production increases when a special order is accepted. B. They are often considered relevant if the plant is operating at capacity. C. If the order can be completed without creating additional fixed costs, they are relevant. D. They are always relevant in the decision.

66.

Wagner Enterprises is contemplating accepting a special order. The company determined that the order will cause an increase in fixed costs. Should the order be accepted? A. No, as any increase in fixed costs will reduce the company’s profit B. Yes, as long as the total revenue is greater than the associated variable costs C. Yes, if the increase in fixed costs is less than the incremental revenue D. Yes, if the incremental revenue is greater than the total incremental costs

8-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

67.

Cinotti Bread Depot bakes and sells each bagel for $1.25. The cost of producing 600,000 bagels in the prior year was: Revenues Direct materials Direct labor Manufacturing overhead - fixed Manufacturing overhead - variable

$750,000 330,000 66,000 132,000 84,000

At the start of the current year, Cinotti received a special order for 15,000 bagels to be sold for $1.10 per bagel. The company estimates it will incur an additional $700 in total fixed costs in order to lease a special machine needed to bake the bagels in the customer’s logo shape. Also, this order will not affect any of its other operations. Should the company accept the special order? A. No, profit will decrease by $2,950 B. No, profit will decrease by $2,250 C. Yes, profit will increase by $3,800 D. Yes, profit will increase by $500 68.

Bell Supply House produces recycled paper that it sells by the case. Budgeted amounts for the coming year are as follows: Revenues (20,000 cases at $12 each) Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Net income

$240,000 $40,000 70,000 50,000 30,000

190,000 $ 50,000

LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case. This special order will have additional variable costs of $0.35 per case due to delivery costs. Bell Supply House has the capacity to produce this order and it will not affect any of its other operations. How much is the incremental revenue associated with accepting this special order? A. $8,300 B. $25,000 C. $165,000 D. $9,000

Chapter 8

69.

Pricing Decisions

8-15

$240,000 $40,000 70,000 50,000 30,000

190,000 $ 50,000

LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case. This special order will have additional variable costs of $0.35 per case due to delivery costs. Bell Supply House has the capacity to produce this order and it will not affect any of its other operations. How much is the incremental cost of accepting the special order? A. $16,000 B. $46,000 C. $16,700 D. $19,000 70.

$240,000 $40,000 70,000 50,000 30,000

190,000 $ 50,000

LTS Enterprises has offered to purchase 2,000 cases of the paper from Bell at a price of $12.50 per case. This special order will have additional variable costs of $0.35 per case due to delivery costs. Bell Supply House has the capacity to produce this order and it will not affect any of its other operations. How much is the incremental profit (loss) associated with the special order? A. $8,300 B. $9,000 C. ($21,000) D. ($11,700)

8-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

71.

Element Boards makes skateboard wheels. Budget information regarding current period operations reflecting the sale of 200,000 wheels appears below: Revenue (200,000 wheels at $3.00 each) Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$600,000 120,000 220,000 50,000 70,000

The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of $2.75 per wheel. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company’s orders. However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. What is the incremental revenue associated with accepting the special order? A. $616,500 B. $200 C. $16,700 D. $16,500 72.

Element Boards makes skateboard wheels. Budget information regarding the current period is given below: Revenue (200,000 wheels at $3.00 each) Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$600,000 120,000 220,000 50,000 70,000

The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of $2.75 per wheel. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company’s orders. However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. What is the incremental cost associated with accepting the special order? A. $16,500 B. $11,700 C. $18,800 D. $16,700

Chapter 8

73.

Pricing Decisions

8-17

$600,000 120,000 220,000 50,000 70,000

The USA Skate Team has approached Element with a special order for 6,000 wheels at a price of $2.75 per wheel. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company’s orders. However, Element is operating at capacity and will incur an additional $5,000 in fixed manufacturing overhead if the order is accepted. What is the incremental net income (loss) associated with accepting the special order? A. ($2,300) B. $2,700 C. ($2,700) D. ($200) 74.

P&T Furniture has a capacity to produce 40,000 oak shelves per year and is currently selling 36,000 shelves for $32 each. Bates Hotel has approached P&T about buying 1,200 shelves for a new hotel it is building and is willing to pay $26 for each shelf. The shelves can be packaged in bulk, saving P&T $1.50 per shelf compared to the normal packaging cost. Normally, the shelves have a unit variable cost of $27. The annual fixed costs of $450,000 will be unaffected by the special order and the order will not affect any of its other operations. What would be the impact on profit if P&T accepts this special order? A. Profit will decrease by $6,000. B. Profit will increase by $31,200. C. Profit will increase by $600. D. Profit will decrease by $1,200.

75.

P&T Furniture has a capacity to produce 40,000 oak shelves per year and is currently selling all 40,000 shelves for $32 each. Bates Hotel has approached P&T about buying 1,200 shelves for a new hotel it is building and is willing to pay $26 each. The shelves can be packaged in bulk, saving P&T $1.50 per shelf compared to the normal packaging cost. Normally, the shelves have a unit variable cost of $27. The annual fixed costs of $450,000 will be unaffected by the special order and it will not affect any of its other operations. What is the minimum price per shelf that P&T should accept for this special order? A. $27.00 B. $25.50 C. $30.50 D. $32.00

8-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

76.

Accent Furniture has a capacity of 30,000 desk chairs per year and is currently selling all 20,000 for $240 each. Country Bank has approached Accent with an offer to buy 800 chairs for only $210 each. Accent has a normal variable cost of $165 per chair, including $50 per unit in direct labor per chair. Accent can produce the special order on an overtime shift. This would result in direct labor being paid overtime at 150% of the normal pay rate. The annual fixed costs will be unaffected by the special order and it will not affect any of its other operations. What will be the impact on profit of accepting the order? A. Profit will decrease by $24,000. B. Profit will increase by $16,000. C. Profit will increase by $36,000. D. Profit will decrease by $4,000.

77.

Tenna Electronics sells arc monitors for $55 per unit. Unit product costs are as follows: Direct materials Direct labor Manufacturing overhead Total

$14 20 3 $37

A special order to purchase 15,000 arc monitors was recently received from a customer. There is enough capacity to fill the order and filling this order would not disrupt current operations. Tenna will incur an additional $2 per arc monitor for additional labor costs due to a slight modification the buyer wants made to the original product. One-third of the manufacturing overhead costs is fixed and will be incurred no matter how many units are produced. In negotiating a price, how much is the minimum selling price that Tenna Electronics should accept for this special order? A. $34 B. $39 C. $38 D. $36 78.

Why is cost-plus pricing criticized? A. It includes selling and administrative costs in determining the product cost. B. It does not consider the fixed manufacturing overhead in determining the product cost. C. It is inherently circular for manufacturing firms. D. It requires a high level of technical expertise to price products using this method.

79.

To what amount does a company set a price equal if it uses a cost-plus approach to pricing? A. Total costs incurred B. Variable product costs plus a markup for profit C. Estimated total costs plus a markup for profit D. Total variable costs plus a share of the fixed costs

Chapter 8

80.

Pricing Decisions

8-19

Sky Blue Plans provides financial planning for senior citizens. The costs of preparing 800 financial plans in the prior year were: Direct labor $400,000 Variable overhead 296,000 Fixed overhead 250,000 Total cost $946,000 At the start of the current year, the company received an offer from MooseHaven, a retirement home for Moose members. MooseHaven wants Sky Blue Plans to prepare financial plans for its 150 assisted living citizens. Sky Blue has the capacity to prepare up to 1,000 plans in a given year, so this special order would not take away revenue from any of Sky Blue’s current clients. MooseHaven is willing to pay $880 per plan. What will be the effect on Sky Blue Plan’s profit if it agrees to prepare plans for the 150 citizens of MooseHaven? A. Profit will increase by $1,500. B. Profit will decrease by $45,375. C. Profit will increase by $132,000. D. Profit will decrease by $1,500.

81.

Which of the following is not a valid criticism of cost-plus pricing? A. It is difficult to determine the appropriate markup. B. The method depends on technical expertise in determining a cost. C. The firm’s demand curve is ignored in setting the price and quantity. D. The method is inherently circular for manufacturing firms.

82.

Garden Corporation uses cost-plus pricing with a 30% mark-up. The company is currently selling 12,000 units at $21.45 per unit. Each unit has a variable cost of $11.50. In addition, the company incurs $60,000 in fixed costs annually. If demand falls to 10,000 units, how much will the company have to charge per unit in order to earn the same annual profit? A. $22.45 B. $21.45 C. $23.44 D. $22.75

83.

SawTown Tools uses cost-plus pricing with a 30% mark-up. The company is currently selling 80,000 units at $65 per unit. Each unit has a variable cost of $47. In addition, the company incurs $240,000 in fixed costs annually. If demand falls to 40,000 units and the company wants to continue to charge the same price per unit, what markup percentage is the company using? A. 22.6% B. 26.2% C. 36.1% D. 30.1%

8-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

84.

Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity. The company is currently selling 40,000 units at $19.60 per unit. Each unit has a variable cost of $9. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge? A. $15.25 B. $21.35 C. $19.60 D. $6.10

85.

Ragtown Grill uses cost-plus pricing with a 40% mark-up. The company is currently selling 20,000 units annually, but has a capacity of 30,000 units. Each unit has a variable cost of $15. In addition, the company incurs $60,000 in fixed costs annually. For how much is the company selling each unit? A. $25.20 B. $21.00 C. $24.00 D. $23.80

86.

Segundo Office Tech uses cost-plus pricing and produces 100,000 calculators at a total cost of $3.5 million. Total fixed costs are $1.5 million. If the company increases production by 20% and uses a 30% markup, how much will the price per unit be? A. $32.50 B. $42.25 C. $45.50 D. $54.40

87.

DT Company uses cost-plus pricing and has $30 per unit in variable costs and $800,000 per year in fixed costs. Demand is estimated to be 200,000 units annually. What is the price if a markup of 30% on total cost is used to determine the price? A. $34.00 B. $39.00 C. $44.20 D. $43.00

88.

A company uses cost-plus pricing and has a total cost of $40.00 per unit at a volume of 120,000 units. The variable cost per unit is $25.00. What will the price be if the company expects a volume of 110,000 units and uses a markup of 50%? A. $41.36 B. $62.05 C. $37.50 D. $60.00

89.

A company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units. If the company uses cost-plus pricing, which of the following should the company use to determine the price? A. The company should use a unit cost of $8.70 per unit only at a volume of 40,000 units. B. The company should use a unit cost of $8.70 at any volume level. C. The company should use a unit cost of $8.70 at any volume within the relevant range. D. The company should use a unit cost of $6.50 per unit only at a volume of 40,000 units.

Chapter 8

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90.

A company has $8.00 per unit in variable costs and $4.00 per unit in fixed costs at a volume of 50,000 units. If the company marks up total cost by 60%, what price should be charged if 60,000 units are expected to be sold? A. $7.20 B. $18.13 C. $19.20 D. $11.33

91.

Harp Widgets determined each deluxe widget it produces has a unit variable cost of $15.00, with total fixed costs of $600,000 for the period. Harp expects to sell 60,000 deluxe widgets and has applied a markup percentage of 35%. What contribution margin will Harp earn from the sale of each deluxe widget? A. $33.75 B. $8.75 C. $18.75 D. $25.75

92.

Magic Fun has total fixed costs of $4,000,000 and total variable cost of $2,000,000 during a month when it sold 200,000 units. What price will Magic Fun charge if it uses cost-plus pricing and a markup of 20%? A. $30.00 B. $24.00 C. $36.00 D. $48.00

93.

Cain Manufacturing produces 40,000 clocks at a total cost of $908,000. Total fixed costs are $408,000. If Cain increases production by 20% and uses a 50% markup, how much will the selling price per unit be? A. $49.35 B. $21.00 C. $31.50 D. $34.05

94.

A manufacturing company produces and sells 50,000 units of a single product. Total product costs are $8 per unit. If total sales are $550,000, what markup percentage is the company using? A. 37.5% B. 72.7% C. 50.0% D. 137.5%

95.

A manufacturing company produces and sells 40,000 buckets. At this level of activity, variable costs total $80,000 and fixed costs total $120,000. If each bucket is sold for $8, what markup percentage is the company using? A. 60% B. 160% C. 75% D. 133%

8-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

96.

The chief engineer at Wilson Electronics has proposed the production of a digipad to be sold at a 30 percent markup on full cost. Management estimates that the fixed costs per year will be $150,000 and the variable cost of the digipad will be $28 per unit. If Wilson sells 30,000 digipads, what is the full cost of each unit? A. $42.90 B. $33.00 C. $36.40 D. $9.90

97.

The chief engineer at Wilson Electronics has proposed the production of a digipad to be sold at a 30 percent markup. Management estimates that the fixed costs per year will be $150,000 and the variable cost of the digipad will be $28 per unit. If Wilson sells 30,000 digipads, how much is the selling price of each digipad? A. $42.90 B. $33.00 C. $36.40 D. $9.90

98.

The target costing process for a new product A. starts with the features that customers want and the price customers are willing to pay. B. is applied after the product has been designed. C. focuses on creating products that include all possible product features to broaden the company’s market share. D. adds a markup percentage for profit once the price of the product has been determined.

99.

Which of the following lists the steps in the target costing process in the proper order? A. Analyze customer needs and wants, determine the desired profit, find the target cost, and design the product B. Design the product, analyze customer needs and wants, determine the desired profit, and find the target cost C. Analyze customer needs and wants, find the target cost, design the product, and determine the desired profit D. Analyze customer needs and wants, determine the desired profit, design the product, and find the target cost

100.

What is the basic premise of target costing? A. Products should be designed to meet customer needs at a price customers are willing to pay that allows the company to make a reasonable profit. B. Products should be designed at the least cost possible to enable the lowest price in the market. C. Products should be designed based on features that competitors’ products include to enhance the company’s ability to compete more effectively. D. The price with the highest profit should always be selected.

101.

In which stage are most of the manufacturing costs for a product determined? A. Design stage B. Preproduction stage C. During production D. At the completion of production

Chapter 8

Pricing Decisions

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102.

A company believes it can sell 2,000,000 units of its proposed new bottle stopper at a price of $16.00 each. If the company desires to make a profit of $3,000,000 on the bottle stopper, what is the target cost for each bottle stopper? A. $14.50 B. $16.00 C. $17.50 D. $9.67

103.

Light Bright believes it can sell 40,000 of its newly developed laser lights at a price of $24.00 each. There will be $680,000 in fixed costs associated with the laser light. If the company desires to make a profit of $100,000 on the laser light, what is the target variable cost for each laser light? A. $4.50 B. $32.50 C. $28.33 D. $8.50

104.

A company believes it can sell 8,000 units of its proposed new garage door opener at a price of $100 each. If the company desires to make a profit of 30% of selling price on the garage door opener, what is the target cost per opener? A. $130 B. $110 C. $70 D. $30

105.

Mays Tools believes it can sell 80,000 of its proposed new Dirt Dodgers at a price of $50 each. If the company desires to make a profit of 60% of selling price, what is the target variable cost per Dirt Dodger? A. $25.00 B. $30.00 C. $31.25 D. There is not enough information provided to determine the answer.

106.

Clinton Creations believes it can sell 10,000 of its proposed new waterproof camera at a price of $200 each. There will be annual fixed costs associated with developing, marketing and manufacturing the camera of $540,000. If the company desires to make a profit of 40%, how much is the target variable cost per camera? A. $80 B. $120 C. $66 D. There is not enough information provided to determine the answer.

107.

Tire Kingdom requires a 60% profit margin on it dirt bike racing tires. At a price of $78 per tire the company expects to sell 16,000 tires. How much is the company’s target cost on each tire? A. $31.20 B. $48.75 C. $130.00 D. $46.80

8-24

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

108.

Mason Kitchenware requires a 30% profit margin on the selling price of its jar openers. At a price of $16 per opener, the company expects to sell 8,000 openers. Total fixed costs are expected to be $28,000. How much is the target cost per jar opener? A. $17.30 B. $11.20 C. $7.70 D. $20.80

109.

A new product is being designed by an engineering team at Gray Security. Several managers and employees from the cost accounting department and the marketing department are also on the team to evaluate the product and determine the cost using a target costing methodology. An analysis of similar products on the market suggests a price of $135 per unit. The company requires a profit of 30% of selling price. How much is the target cost per unit? A. $175.50 B. $81.00 C. $40.50 D. $94.50

110.

Sunshine Travel is designing a travel mug and has determined that a price of $8 will be attractive in the marketplace. The company seeks to earn a profit of 30% percent of selling price, and estimates it can sell 21,000 mugs. Total fixed costs are expected to be $23,100. How much is the target cost per mug? A. $2.40 B. $5.60 C. $6.70 D. $4.50

111.

Sunshine Travel is designing a travel mug and has determined that a price of $8 will be attractive in the marketplace. The company seeks to earn a profit of 30% percent of selling price, and estimates it can sell 21,000 mugs. Total fixed costs are expected to be $23,100. By how much will the target cost change per mug if the profit is raised to 40% instead of 30%? A. A decrease of $0.80 B. An increase of $0.80 C. An increase of $0.45 D. A decrease of $3.70

112.

Which one of the following is not assigned to individual customers when employing a customer profitability analysis? A. Sales revenue B. Cost of goods sold C. Cost of filling the customer’s orders D. Cost of designing a new product

113.

Which one of the following might result from performing a customer profitability analysis? A. Dropping some customers that are unprofitable B. Increasing prices or offering incentives to profitable customers C. Eliminating products that cause customers to complain D. Offering customers that use more services than others a special customer service unit that provides more one-on-one time

Chapter 8

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Pricing Decisions

8-25

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Results for the year appear below: Cost Pool

Cost

Cost Driver

Quantity

Processing electronic orders Processing non-electronic orders Picking orders Packaging orders Returns

$400,000 120,000 240,000 180,000 15,000

Number of orders Number of orders Number of different products ordered Number of items ordered Number of returns

40,000 8,000 120,000 150,000 3,000

What is the cost allocation for two Internet orders for 22 items with 7 different products and one return? A. $65.40 B. $33.20 C. $60.40 D. $40.40 115.

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Results for the year appear below: Cost Pool

Cost

Cost Driver

Quantity

Processing electronic orders Processing non-electronic orders Picking orders Packaging orders Returns

$400,000 120,000 240,000 180,000 15,000

Number of orders Number of orders Number of different products ordered Number of items ordered Number of returns

40,000 8,000 120,000 150,000 3,000

If all costs were assigned to customers based on the number of items ordered, what would be the cost per item ordered? A. $6.37 B. $33.20 C. $1.20 D. $0.16 116.

First Décor has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Results for the year appear below: Cost Pool

Cost

Cost Driver

Quantity

Processing electronic orders Processing non-electronic orders Picking orders Packaging orders Returns

$400,000 120,000 240,000 180,000 15,000

Number of orders Number of orders Number of different products ordered Number of items ordered Number of returns

40,000 8,000 120,000 150,000 3,000

One customer of First Décor placed 30 electronic orders with a total selling price of $25,400. The direct cost of these orders is $17,200. The orders consist of five different products with a total of 2,200 items, and two returns. Using an activity-based costing method, how much are the indirect costs associated with serving this customer? A. $2,960 B. $996 C. $2,660 D. $3,110

8-26

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

117.

Activity-based pricing A. encourages customers to use as many services as possible that are provided by the seller. B. charges customers for each service they use. C. allows all customers to pay lower total prices. D. reduces the direct costs of offering products for sale.

118.

For which of the following items might a customer be charged extra for an order under activity-based pricing? A. Placing the order during non-peak times B. Requesting an order be delivered in three separate shipments C. Using an automated order system D. Tracking delivery via an online support utility

119.

Which one of the following is a goal of activity-based pricing? A. To charge customers for the costs that they are creating B. To increase profits by charging all customers at higher prices C. To maintain all customers in the customer base D. To broaden market share

120.

A company estimates that ordering costs are $2.00 per order, picking costs are $1.00 for each different item ordered, packing costs are $0.07 per item, and return costs are $40.00 per return. A customer orders $8,000 worth of goods with direct costs of $6,200. The customer places 70 orders, orders 24 unique items, 940 total items, and makes 7 returns. What is the customer profit? A. $509.80 B. $1,290.20 C. $7,490.20 D. $1,800

121.

A company estimates that ordering costs are $3.20 per order, picking costs are $2.15 per unique item ordered, packing costs are $0.04 per item, and return costs are $15.00 per return. A customer orders $8,440 worth of goods with direct costs of $5,200. The customer places 85 orders, orders 72 unique items, 450 total items, and makes 5 returns. What is the customer profit? A. $519.60 B. $3,240 C. $2,720.20 D. $7,920.20

122.

A company estimates that ordering costs are $4.00 per order, picking costs are $3.00 per unique item ordered, packing costs are $0.04 per item, and return costs are $70.00 per return. A customer makes 50 orders, orders 80 unique items, and 900 total items. The customer makes 11 returns. The pricing structure is to charge customers for the cost of the services that are provided. Using activity-based pricing for each of the above items, what will be the total amount of additional cost paid by the customer? A. $1,246 B. $77.04 C. $1,540 D. $476

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123.

A company using activity-based pricing marks up the direct cost of goods by 30% and then adds the cost of the services that are provided. Indirect costs are charged as follows: $8.00 per order placed; $4.00 per separate item ordered; $30.00 per return. A customer places 10 orders with a total direct cost of $3,000, orders 300 separate items, and makes 5 returns. What will the customer be charged? A. $3,000 B. $3,900 C. $5,330 D. $5,759

124.

Marquez Enterprises uses activity-based pricing and marks up the direct cost of goods by 40%. In addition, the customer is charged for indirect costs based on the activities utilized. Indirect costs are as follows: $7 per order placed and $11 per return. A customer places 12 orders with a direct cost of $6,100 and makes 2 returns. How much in indirect costs will the customer be charged? A. $18 B. $106 C. $6,206 D. $2,440

125.

A custom yacht-building company uses activity-based pricing. The company’s annual activity pools and related information follow: Cost Pool Estimated Cost Design $2,500,000 Production 4,000,000 Customer service 80,000

Cost Driver Number of designs Labor hours Number of customers

Driver Quantity 80 designs 125,000 labor hours 20 customers

The pricing structure is to charge customers for the cost of the services that are provided. One particular customer requested 2 different designs which led to the production of one yacht which took 2,400 labor hours to complete. What additional costs will be charged to this customer? A. $143,300 B. $112,050 C. $139,300 D. $108,050 126.

A law firm uses activity-based pricing. The company’s annual activity pools and related information are as follows: Cost Pool Estimated Cost Consultation $125,000 Administrative costs 66,000 Client service 34,000

Cost Driver Number of consultations Admin labor hours Number of clients

Driver Quantity 200 consultations 6,000 labor hours 400 clients

The pricing structure is to charge customers for the cost of the services that are provided. The firm had four consultations with Doris Lansing and required 88 administrative labor hours. What additional costs will be charged to this customer? A. $636 B. $721 C. $3,468 D. $3,553

8-28

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

127.

Cost Driver Number of consultations Admin labor hours Number of clients

Driver Quantity 200 consultations 6,000 labor hours 400 clients

The pricing structure is to charge customers for the cost of the services that are provided. The firm had two consultations with Randall’s Auto Shop and required 64 administrative labor hours. What additional costs will be charged to this customer? A. $1,954 B. $2,039 C. $721 D. $1,442 128.

Veterinarians Johns & Doggins have analyzed their customer data for the past year and have determined the following costs: Customer inquiries cost each Additional costs if inquiry is after hours Dispensing of prescriptions Relationship management costs (Per customer per year)

12 20 18 800

In addition to these costs, product costs amount to 75% of sales. In the prior year, Johns & Doggins had the following experience with one of its customers, Millie Woods: Sales Total number of inquiries Percent of after-hours inquiries Prescriptions dispensed

$3,100 50 80% 26

For the coming year, Johns & Doggins have told Woods that she will be switched to an activity-based pricing system or will be dropped as a customer. In addition to regular prices, Woods will be required to pay: Inquiries After hours inquiries Prescription dispensing

$18 each $21 each $22 each

How much is the additional revenue to be charged to Woods account if activity is the same as in the prior year? A. $2,312 B. $2,392 C. $3,112 D. $3,952

Chapter 8

Pricing Decisions

Answers to Multiple Choice 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51

A D A C A C C C B D B B B A A D D D D B

52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71

A B A C B A A D C B B D C B D C B C A D

72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91

D D C B B C C C A B C A B A B C B A B C

92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111

C C A A B A A A A A A A C D C A B D B A

112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128

D A A A A B B A B C A C B A D B A

8-29

8-30

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MATCHING 129.

Match each of the following terms with the phrase that most closely describes it. 1.

Activity-based pricing

Customer profitability analysis

Target costing

Economic pricing

Cost-plus pricing

A system that starts with what consumers are willing to pay for a product and tries to design a product at a cost that allows a reasonable profit

A way of using activity-based methods to assess which customers are covering the costs they are generating

A system that charges customers for the services they consume

A system that prices based on the laws of supply and demand

A system that sets prices based on costs

Answers to Matching 1. C 2. B 3. A 4. D 5. E

Chapter 8

Pricing Decisions

8-31

EXERCISES 130.

Suez Bakery produces and sells chocolate silk pies, each having a variable cost of $3.80. Total fixed costs are $34,000. Management estimates demand at various activity levels as follows: Units Demanded 6,000 7,200 8,000 8,900 10,100 a. b.

Unit Price $10.20 9.40 8.50 8.00 7.50

Calculate the total contribution margin at each price level. Which price maximizes profit?

Answer a.

131.

Quantity

Unit Price

6,000 7,200 8,000 8,900 10,100

$10.20 9.40 8.50 8.00 7.50

Unit Variable Cost $3.80 3.80 3.80 3.80 3.80

Contribution Margin $38,400 40,320 37,600 37,380 37,370

$9.40

The editor of Times Daily is considering three alternative prices for his new monthly periodical. His estimate of price and quantity demanded are: Price $7.99 $6.50 $4.75

Quantity Demanded 27,000 36,000 57,000

Monthly costs of producing and delivering the magazines include $100,000 of fixed costs and variable costs of $2.50 per issue. Which price will yield the largest monthly profit? Answer Quantity

Unit Price

Unit Variable Cost

Contribution Margin

Fixed Costs

Profit

27,000 36,000 57,000

$7.99 6.50 4.75

$2.50 2.50 2.50

$148,230 144,000 128,250

$100,000 100,000 100,000

$48,230 44,000 28,250

$7.99 will yield the largest monthly profit.

8-32

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

132.

Kitchen Zone has come out with a new line of electric can openers that it plans to test market through a series of demonstrations at the local mall throughout the month of August. If the demonstrations result in enough sales, the program will be expanded to other malls in the region. The cost of the demonstrations is a flat fee of $2,400 to the mall owner/operator and a commission of 15% of revenue to the person giving the demonstrations. Kitchen Zone’s fixed costs of producing the can opener are $3,200 per production run. The company plans to wait for all orders to come in, and then it will produce exactly the number of units ordered (there will be no beginning or ending inventory). Variable production costs are $7 per can opener. In addition, it will cost approximately $3.50 per set to ship each can opener to customers. Based on experience with similar items, focus group responses, and survey information, estimates for unit amounts at estimated activity levels follow:

a. b.

Price Quantity $38 400 $52 360 $66 280 Calculate the expected profit for each price. Which price maximizes company profit?

Answer a.

b. 133.

Quantity

Unit Price

400 360 280

$38.00 52.00 66.00

Unit Variable Cost $16.20 18.30 20.40

Contribution Margin

Fixed Costs

Profit

$ 8,720 12,132 12,768

$5,600 5,600 5,600

$3,120 6,532 7,168

$66 maximizes company profit

WDT, Inc. is a large company that publishes ‘how-to’ books for small construction projects. WDT is considering the purchase of a new binding machine to bind the books. The variable cost of each book is estimated to be $7.40. Management has estimated demand at various prices as follows: Unit Price Quantity $16 720 15 850 13 830 11 900 9 930 Calculate the profit-maximizing price for the “how-to” books.

Answer Quantity

Unit Price

720 $16 850 15 830 13 900 11 930 9 Profit maximizing price = $15

Unit Variable Cost $7.40 7.40 7.40 7.40 7.40

Contribution Margin $6,192 6,460 4,648 3,240 1,488

Chapter 8

134.

8-33

Budget Enterprises is considering a special order from an overseas customer for 10,000 units at a price of $40.00 per unit. The company’s product normally sells for $52.00 per unit and has variable manufacturing costs of $21.00 per unit and variable selling costs of $4.00 per unit. Fixed manufacturing costs are $500,000 and fixed selling and administrative costs are $200,000. Budget Enterprises has the capacity to produce 100,000 units and is currently producing 80,000. If Budget accepts the order, it will incur legal and accounting fees of $7,000 in connection with the order, though variable selling costs will not be incurred on the special order and it will not affect any of its other operations. a. How much are the incremental revenues associated with the special order? b. How much are the incremental costs associated with the special order? c. How much additional profit or loss will result if the order is accepted?

Answer a.

$40.00 × 10,000 =

$400,000

$21.00 × 10,000 =

$210,000 7,000 $217,000

$400,000 – $217,000 =

$183,000 profit

135.

Pricing Decisions

Canon Equipment produces a machete that it sells for $45 each. The cost of producing 20,000 machetes in the prior year was: Direct material Direct labor Variable overhead Fixed overhead Total cost

$220,000 100,000 140,000 120,000 $580,000

At the start of the current year, the company received an order for 2,000 machetes from a company in South America. Management of Canon has mixed feelings about the order. On the one hand, they welcome the order because they currently have excess capacity. This is also the company’s first international order. On the other hand, the company in South America is only willing to pay $37 for each machete. What will be the effect on profit of accepting the order? Answer Accepting the order will result in $28,000 of incremental profit. Incremental revenue ($37 × 2,000) Incremental costs: Direct material ($11 × 2,000) Direct labor ($5 × 2,000) Variable overhead ($7 × 2,000) Incremental profit

$74,000 $22,000 10,000 14,000

46,000 $28,000

8-34

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

136.

Janus Decor produces and sells stainless steel patio chairs. Janus uses cost-plus pricing. The chairs have a variable cost per unit of $40.00. Janus has annual fixed costs of $500,000. a. If Janus can sell 50,000 chairs and has a markup of 40% of total cost, what price will Janus charge? b. If Janus can sell 100,000 chairs and has a markup of 30% of total cost, what price will Janus charge?

Answer: a.

1.4 × ($40 + ($500,000 ÷ 50,000)) = $70.00

1.3 × ($40 + ($500,000 ÷ 100,000) = $58.50

137.

Mayfair Furniture is considering the production of an automatic reclining office chair that the company would price at a markup of 30% above full cost. Management estimates that the variable cost of each chair will be $80 and total fixed costs per year will be $34,000. a. Assuming sales of 800 chairs, what is the full cost of a chair? b. Assume that the quantity demanded at the price calculated in part a. is only 680 chairs. What is the full cost of each chair and what is the anticipated selling price?

Answer a.

138.

Variable cost per unit Fixed costs per unit ($34,000 ÷ 800) Full cost per unit

$ 80.00 42.50 $122.50

Variable cost per unit Fixed costs per unit ($34,000 ÷ 680) Full cost per unit

$ 80.00 50.00 $130.00

Full cost per unit Markup of 30% Price

$130.00 39.00 $169.00

A company believes it can sell 40,000 of its proposed new combo cell phone/garage door openers at a price of $250 each. There will be annual fixed costs associated with developing, marketing, and manufacturing the gadget of $5,000,000. If the company desires to make a profit of 20% of selling price on the phone/opener, what is the target variable cost per unit?

Answer Revenues ($250 × 40,000) Profit (0.20 × $10,000,000) Fixed costs Total variable cost Variable cost per phone/opener

$10,000,000 (2,000,000) (5,000,000) $3,000,000 $75

Chapter 8

139.

8-35

The product design team of Steed Motors is in the process of designing a new 20” dirt bike. The company estimates that variable costs will be $80 per unit and fixed costs will be $120,000 per year. a. Suppose the company wants to set its price equal to full cost plus 25% and it estimates that it can sell 4,000 units. What price will the company set? b. Suppose the company sets a price as in Part a, but the number of units demanded at that price turns out to be 3,000. Revise the price in light of the change in demand. c. Compare the two prices you calculated. Why are the prices different? What is likely to happen to the quantity demanded if the company is forced to raise its price to the price calculated in part b?

Answer a.

140.

Pricing Decisions

Variable cost per unit Fixed cost per unit ($120,000 ÷ 4,000) Total Markup of 25% Price

$ 80.00 30.00 110.00 27.50 $137.50

Variable cost per unit Fixed cost per unit ($120,000 ÷ 3,000) Total Markup of 25% Price

$ 80.00 40.00 120.00 30.00 $150.00

The price in the second scenario is higher because the fixed costs are being spread over fewer units causing the fixed cost per unit to be higher. As the full cost goes up, so does the markup and price. However, if price goes up, demand is likely to fall, so the company will not sell as many units as previously estimated.

Sanders Oven Company is developing a “professional” model oven aimed at the home market. The company estimates that variable costs will be $980 per oven and total fixed costs will be $840,000 per year. a. Suppose the company wants to set its price equal to full cost plus 40 percent. The company estimates that it can sell 4,000 units. What price will the company set? b. What is the risk involved with setting the price based on an estimate of how many units will be sold?

Answer a.

Variable cost per unit Fixed cost per unit ($840,000 ÷ 4,000) Total Markup of 40% Price

$ 980 210 1,190 476 $1,666

Price influences the quantity demanded, but the estimated quantity demanded is being used to determine the price.

8-36

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

141.

A cross-functional team at Enrich, Inc. is developing a new product using the target costing method. Product features in comparison to competing products suggest a price of $1,500 per unit. The company requires a profit of 30% of selling price. How much is the target cost per unit?

Answer $1,500 – (30% × $1,500) = $1,050

142.

Savor Enterprises has determined the following costs for customers: Order processing (per order) Additional handling costs if order marked rush (per order) Customer service calls (per call) Relationship management costs (per customer per year)

$ 8.00 10.00 14.00 3,500

In addition to these costs, product costs amount to 85 percent of sales. In the prior year, the company had the following experience with Hanson Electronics, one of its customers: Sales Number of orders Percent of orders marked rush Calls to customer service

$54,000 250 70% 160

Calculate the profitability of the Hanson Electronics account. Answer Sales Expenses: Cost of goods sold (0.85 × $54,000) $45,900 Order processing (250 × $8.00) 2,000 Rush handling (0.7 × 250 × $10.00) 1,750 Customer service (160 × $14.00) 2,240 Relationship management costs 3,500 Profitability/(loss) on customer Hanson Electronics

143.

$54,000

55,390 ($1,390)

Randall Equipment uses activity-based pricing. The pricing structure is to charge customers the direct cost of the products they order with a markup of 40% on direct costs plus the cost of the services that are provided. The service costs are $8.00 per order, $2.00 for each product that is ordered, and $1.50 per pound for shipping. Wilson, Inc. made 10 orders for goods with a total direct cost of $4,000. Wilson ordered 50 different products that weighed a total of 560 lbs. What is the total price paid by Wilson?

Answer Direct cost Markup on direct cost Ordering cost (10 × $8) Picking costs (50 × $2) Shipping (560 × $1.50) Total price paid

$4,000 1,600 80 100 840 $6,620

Chapter 8

144.

Pricing Decisions

8-37

Moscovitz Produce developed the following information on indirect costs for assessing customer profitability.

Cost Pool

Processing electronic orders Processing nonelectronic orders Picking orders Packaging orders Returns

Annual Driver Quantity

Customer Boson Acme Deli Cafe

Annual Cost

Cost Driver

$1,000,000

Number of orders

500,000

500

$2,000,000

Number of orders

400,000

1000

1,000,000

800

1800

50,000,000

1,000,000

50,000

200

$3,000,000 $1,500,000 $3,000,000

Number of different products ordered Number of items ordered Number of returns

Acme Deli and Boson Cafe each generated revenues in the last year of $600,000 and had direct costs associated with their orders of $450,000. How much is the cost per unit of the cost driver in each of the cost pools? Answer Cost Pool

Annual Cost

Processing electronic orders Processing non-electronic orders Picking orders Packaging orders Returns

$1,000,000 $2,000,000 $3,000,000 $1,500,000 $3,000,000

Annual Driver Quantity

500,000 400,000 1,000,000 50,000,000 50,000

Cost per Driver unit

$2.00 per order $5.00 per order $3.00 per product $0.03 per item $60 per return

8-38

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

145.

Project Depot has determined the following costs for its customers using an activitybased costing system: Order processing (per order) $ 6 Additional handling costs if order marked rush (per order) 9 Customer service calls (per call) 14 Relationship management costs (per customer per year) 3,500 In addition to these costs, product costs amount to 85 percent of sales. In the prior year, the company had the following experience with one of its customers, Shannon Tools: Sales Number of orders Percent of orders marked rush Calls to customer service

$54,000 250 70% 160

For the coming year, Project Depot has told Shannon Tools that it will be switched to an activity-based pricing system. In addition to regular prices, Shannon Tools will be required to pay: Order processing (per order) $8 Additional handling costs if order marked rush (per order) 10 Customer service calls (per call) 18 Calculate the expected profitability of the Shannon Tools account for the coming year if activity is the same as in the prior year. Answer Revenue Sales $54,000 Order processing fee (250 × $8) 2,000 Rush order fee (0.70 × 250 × $10) 1,750 Customer service fee (160 × $18) 2,880 Total revenue Expenses: Cost of goods sold (0.85 × $54,000) 45,900 Order processing (250 × $6.00) 1,500 Rush handling (0.70 × 250 × $9.00) 1,575 Customer service (160 × $14.00) 2,240 Relationship management costs 3,500 Profitability of Shannon Tools account

$60,630

54,715 $ 5,915

Chapter 8

146.

Pricing Decisions

8-39

APL Internet Services has analyzed its customer and order handling data for the past year and has determined the following costs: Order processing cost per order Customer tech support calls (per call) Additional costs if tech support is after hours Relationship management costs (per customer per year)

4 7 12 $950

In addition to these costs, product costs amount to 80% of sales. In the prior year, APL had the following experience with Tapper Recreation, one of its customers: Sales $9,400 Number of orders 42 Calls to tech support 62 Percent of tech support calls after hours 40% For the coming year, APL has told Tapper Recreation that it will be switched to an activity-based pricing system. In addition to regular prices, Tapper will be required to pay: Order processing (per order) $ 7 Customer tech support calls (per call) 15 Additional costs if a tech support call is after hours 28 Calculate the total revenue to be billed to Tapper Recreation if activity is the same as in the prior year. Answer Sales Order processing fees ($7 × 42) Tech support calls ($15 × 62) After hours tech support calls ($28 × 40% × 62) Total revenue

$ 9,400 294 930 694 $11,318

8-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

CHALLENGE EXERCISES 147.

Smythe Moving Company has estimated monthly sales of $255,000. It estimates $166,000 of total manufacturing costs with 25% of these costs fixed. Its selling and distribution costs are estimated at a total of $42,000 with 30% of these costs fixed. a. b. c.

Answer a.

How much is Smythe’s markup percentage on full cost to arrive at the target selling price? How much is Smythe’s markup percentage on variable costs to arrive at the target selling price? Which approach might a manager prefer and why?

Sales $255,000 Manufacturing costs $166,000 Selling and distribution 42,000 Full cost 208,000 Profit $ 47,000 Markup = $47,000 ÷ $208,000 = 22.60%

Sales Manufacturing variable costs ($166,000 × 75%) Selling and distribution ($42,000 × 70%) Variable cost Contribution margin Markup = $101,100 ÷ $153,900 = 65.69%

$255,000 $124,500 29,400 153,900 ` $101,100

Managers will prefer the approach that allows them to generate the highest amount of profit. In this case, both methods use the same selling price. Only the basis on which the markup is calculated differs. While the profit based on variable costs displays ‘profit’ at $101,100, fixed costs have not been deducted, so the profit only appears to be greater.

Chapter 8

148.

Pricing Decisions

8-41

Lawn Butler is a local operation that provides mowing services for 300 customers each month. The company has analyzed the indirect costs associated with servicing its various customers in order to assess customer profitability. Budgeted amounts for 2017 appear below: Cost Pool

Cost

Repairs made due to mowing damage Processing billings Travel costs to customer's home Return visits for inadequate services

Cost Driver

$18,200 4,180 57,750 24,000

Quantity

Number of repairs Number of invoices sent Number of miles driven Hours incurred for return visits

350 880 105,000 800

The direct cost of each mowing is $24. Two customers are of concern to management, each of whom seem to be ‘high maintenance’. Data on these customers follows: S. Wallace Number of mowings Number of repairs Number of invoices sent Number of miles driven Hours incurred for return visits Customer revenue

Quantity 52 7 26 416 6 $2,220

H. Willis Number of mowings Number of repairs Number of invoices sent Number of miles driven Hours incurred for return visits Customer revenue

Quantity 24 2 12 620 15 $1,080

Discuss the profitability of each customer and recommend to management what action should be taken. Answer Cost Pool

Cost

Repairs made due to mowing damage Processing billings Travel costs to customer's home Return visits for inadequate services

$18,200 4,180 57,750 24,000

Revenue Cost of mowing ($24*52); ($24*24) Gross margin Other costs: Repairs made due to mowing damage Processing billings Travel costs to customer's home Return visits for inadequate services Total other costs ABC Customer profitability

÷ ÷ ÷ ÷

Driver Quantity

Cost per Driver Unit

350 880 105,000 800

$52.00 4.75 0.55 30.00

S. Wallace

H. Willis

$2,220 1,248

$1,080 576

972

504

364 124 229 180 897 $ 75

104 57 341 450 952 ($ 448)

While customer Wallace has generated only a small amount of profit, he is still contributing $75 of profit for the year. Although he requests a number of repairs and requires numerous billings, the company is still earning a profit on his account. Customer Willis’s location is apparently quite a distance away as seen by the number of miles driven in spite of fewer mowings. He also has required several return visits for issues that may be considered ‘picky’ by some. One option is to charge for return visits, but sales may be lost to competitors since customers often

8-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

think they are entitled to ‘good’ service done right the first time. The company may consider applying late fee charges for past due accounts, to cover the cost of additional billings. In addition, a mileage fee may be charged for customers who live outside a designated area to offset the additional costs of traveling. Lawn Butler should also consider training its employees to avoid situations that require repairs to be made, such as mowing sprinkler heads and damaging property with the mowers. 149.

Southeast Pools uses cost-plus pricing with a 30% mark-up on total cost. The company is currently building 320 pools per year with total variable cost of $5,760,000. In addition, the company incurs $720,000 in fixed costs annually and has a capacity to build 450 pools. a. How much will the company price each pool on average? b. If demand falls to 250 pools and the company wants to continue to earn the same markup percentage on total cost as earned in part a., what price should the company charge per pool? c. Identify two problems with cost-plus pricing.

Answer a.

Variable cost per pool Fixed cost per pool ($720,000 ÷ 320) Total Markup of 30% Price

$18,000 2,250 20,250 6,075 $26,325

Variable cost per pool Fixed cost per pool ($720,000 ÷ 250) Total Markup of 30% Price

$18,000 2,880 20,880 6,264 $27,144

One problem is choosing what markup percentage to use. A second problem relates to a circular issue. Demand must be estimated to determine the fixed manufacturing costs per unit in order to determine the price. However, the price affects the quantity demanded, causing the number of units demanded to change.

Chapter 8

Pricing Decisions

8-43

SHORT-ANSWER ESSAYS 150.

Explain why cost-plus pricing is “circular”?

Answer Cost-plus pricing lets both the price and the quantity be selected without regard to market conditions. When the price is set, the quantity demanded in the market will most likely not be the quantity used to set the price in the first place. This means that a new price will have to be computed based on the actual quantity demanded at the old price. But again, the new price will not likely result in the quantity used to set it being achieved.

151.

Explain the steps involved in target costing and contrast it to cost-plus pricing.

Answer Target costing starts with the price that consumers are willing to pay for a given quantity of a product with a set of features. Then the company’s desired profit is subtracted to determine how much the cost can be. It is then the task of the design team to assess if a product can be developed at that cost. Cost-plus pricing takes the costs as a given, adds a markup and just assumes that the quantity used in setting the price can be sold at the price determined.

152.

What is activity-based pricing and why is it used?

Answer Activity-based pricing charges customers not only for the goods they purchase, but also for the costs of servicing them. It will encourage customers to minimize the use of expensive services, thus allowing the company to use fewer resources.

153.

What is CPM? For what purpose might managers use it?

Answer CPM is customer profitability measurement. It is a system that allocates the indirect costs of servicing customers to cost pools, and then assigns the costs to customers’ accounts using cost drivers. Subtracting indirect and product costs from customer revenue, results in a measure of profitability. Managers use this analysis to assess how profitable each customer is, and often decide to eliminate or change pricing for customers who consume excessive amounts of resources.

CHAPTER 9 Capital Budgeting Decisions Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6. 7.

1 1 1 1 1 1 1,3

K K K C AP K K

8. 9. 10. 11. 12. 13. 14.

1 1 1 1 1 1 1

35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

C K K K K K C C C AP C C K K AP AP K K AP C C K AP AP

59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82.

2 1,2 1 1 1,2 1,2 1 1 1 1 1 1 1 1 1 1 1,3 1,3 1 1 1 1 1 1

154. 1,2 ,33 155. 1 156. 1 157. 1 158. 1,2

K AP AP AP AP

159. 160. 161. 162.

1 1 1 1

173. 1,2

174. 1,3

Item LO BT Item LO True-False Statements K 15. 1 K 22. 2 K 16. 1 K 23. 2 K 17. 1 K 24. 2 K 18. 1 K 25. 2 C 19. 1 K 26. 2 K 20. 1 K 27. 3 C 21. 1 K 28. 1,3 Multiple Choice Questions AP 83. 3 AP 107. 3 AP 84. 1 C *108. A1 K 85. 1 AP 109. 1 K 86. 2 C 110. 3 C 87. 2 K 111. 3 AP 88. 2 C 112. 3 AP 89. 2 K 113. 1 AP 90. 2 AP 114. 1 AP 91. 2 AP 115. 1 AP 92. 2 AP 116. 1 K 93. 2 AP 117. 1 K 94. 3 K 118. 3 K 95. 3 K 119. 1 K 96. 3 K 120. 2 K 97. 3 AP 121. 1 K 98. 1 C 122. 1 C 99. 3 C 123. 1 C 100. 3 C 124. 2 K 101. 3 AP 125. 1 K *102 A1 AP 126. 1 AP 103.. 3 AP 127. 1 AP 104. 3 AP 128. 1 AP *105 A1 K 129. 1 AP *106. A1 K 130. 1 . Matching

Exercises 163. 1,2 AP 167. 1,2 164. 1,2 AP 168. 2 165. 1,2 AP 169. 2 166. 1,2 AP 170. 1,2 Challenge Exercises AN 175. 3 AP 176. 1,3 AP AP AP AP

Item

C K K K K K C

29. 30. 31. 32. *33. *34.

3 3 3 3 A1 A1

K K C K K K

AP AP AP C C C AP AP AP AP AP AP AP K K C AP C AP C C AP AP AP

131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153.

1,2 2 3 3 3 3 3 3 3 3 3 3 3 1 1 2 3 3 1 1 2 3 3

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

AP AP AP AP

171. 1,2,3 172. 1,3

AP AP

177.

9-2

178. 179.

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

3 1

K K

180. 1 181. 1,3

Short-Answer Essays K 182. 1 K 184. C 183. 1 K 185.

2 2

K K

186. 187.

3 3

K C

TRUE-FALSE STATEMENTS 1.

One possible capital budgeting decision is the potential acquisition of a patent from a competitor.

The time value of money concept recognizes that a dollar received today is worth more than a dollar received in the future.

Present value techniques are developed to equate future dollars to current dollars.

In evaluating an investment opportunity, a company must know how much cash it receives from or pays for an investment and the timing of the cash flows because receipts and payments that occur in the future are worth more than those that occur earlier.

If your required rate of return is 6%, the present value of $1,000 to be received three years from today is $839.60.

The process of determining present value removes the cost of interest from future cash flows to determine the value of the amount today.

Both the payback period and the net present value methods take into account the timing of future cash flows.

The net present value method equates cash inflows to revenues, and cash outflows to expenses, as if occurring in the same accounting period.

If the net present value is equal to zero, the project should be accepted.

10.

In net present value analysis, the purchase of equipment today results in a cash outflow that is not discounted.

11.

The future value of all cash inflows minus the cash outflows equals the net present value of the investment.

12.

The only cash outflow that may exist in a net present value analysis is the initial investment.

13.

If the required rate of return is greater than the internal rate of return of a potential investment, the company should deem the investment acceptable.

14.

If the internal rate of return is used to calculate the net present value of a project, the net present value will be zero.

15.

The internal rate of return method ignores the time value of money.

Chapter 9 Capital Budgeting Decisions

9-3

16.

The internal rate of return is the rate of return that management desires to earn on its investments.

17.

If the internal rate of return is greater than the required rate of return, the project should be accepted.

18.

The cost of capital is the weighted average of the costs of debt and equity financing used to generate capital for investments.

19.

Riskier investments demand lower rates of return.

20.

Soft benefits are those that often have a significant nonfinancial impact on an investment decision and as such, should be included in the decision analysis.

21.

The more risky a potential investment is, the lower the company’s required rate of return will be.

22.

If an investment project generates tax-deductible expenses, cash inflows from the project will be reduced by the taxes resulting from the increase in income taxes payable.

23.

Depreciation itself is not a cash outflow, though it reduces the amount of income taxes that a company must pay.

24.

Cash flows used in calculating the net present value need not be adjusted for inflation because the interest rate used to discount the cash flows has already considered inflation.

25.

The depreciation tax shield is the amount of income taxes that the company avoids as a result of reporting depreciation expense.

26.

The net present value method can be used to determine the effect of discontinuing one of a company’s products.

27.

Neither the accounting rate of return method nor the payback period method consider the timing of all future cash flows related to a potential investment.

28.

The internal rate of return method and the payback period method will always give the same decision as to whether to accept a project, if the same inputs are used.

29.

All else being equal, a company prefers projects with long payback periods, as these benefit the company for longer time periods.

30.

The payback period method ignores cash flows that occur after the end of the payback period.

31.

A project with positive cash flows will always generate an acceptable accounting rate of return.

32.

Managers may be discouraged from using present value techniques for evaluating investments because of the way in which their own performance is evaluated.

9-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

*33.

When using the NPV function in Microsoft© Excel, the initial cash flow at time zero is omitted from the range selected for the function.

*34.

When using the internal rate of return function in Microsoft© Excel to calculate the internal rate of return, the initial cash flow at time zero is omitted from the range selected for the function because it is not discounted.

Material from the appendix to the chapter is marked with an asterisk (*).

Answers to True-False 1 T 7 F 2 T 8 T 3 T 9 T 4 F 10 T 5 T 11 F 6 T 12 F

13 14 15 16 17 18

F T F F T T

19 20 21 22 23 24

F T F F T F

25 26 27 28 29 30

T T T F F T

31 32 33 34

F T T F

Chapter 9 Capital Budgeting Decisions

9-5

MULTIPLE CHOICE 35.

Which of the following is not considered a capital budgeting project? A. Purchase of a new packaging machine B. Purchase of land on which to build a new factory C. Purchase of a new delivery truck to replace an old truck D. Purchase of inventory to be sold in the future

36.

Capital expenditure decisions A. are useful for estimating inventory acquisition costs. B. always involve the acquisition of long-lived assets. C. consist of a final list of approved projects. D. All of these answer choices are correct.

37.

Which of the following is not a component of a time value of money calculation? A. The amount of cash to be received B. The time until the cash will be received C. The opportunity costs of the alternative actions D. The required rate of return

38.

The basic concept involved in time value of money calculations is that A. it is better to receive a dollar today than to receive a dollar in the future. B. incremental revenues must exceed incremental costs. C. you get what you measure. D. revenue must be earned in order for net income to be generated

39.

Present value techniques A. determine the effects of time value of money on future net income that will be generated. B. are a way of converting future dollars into their equivalent current dollars. C. provide more conservative results than similar time value of money computations. D. treat a dollar received today to be worth the value of a dollar to be received a year from today.

40.

Which of the following pairs of techniques use the time value of money concept? A. Payback period method and the internal rate of return method B. Internal rate of return method and the accounting rate of return method C. Accounting rate of return method and the payback period method D. Internal rate of return method and the net present value method

41.

Your required rate of return is greater than zero. How much is a payment of $3,000 to be received a year from today worth? A. Less than $3,000 today B. Exactly $3,000 today C. More than $3,000 today D. Not enough information is provided to determine the answer.

9-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

42.

Which of the following would most likely be the present value of a 4-year annuity of $2,000 per year, assuming a positive discount rate? A. $8,000 B. $7,000 C. $9,500 D. $2,000

43.

Assuming a 6% rate of return, how does the present value of an amount to be received two years from today compare to the present value of the same amount to be received three years from today? A. The present value of the amount to be received in two years is greater than the present value of amount to be received three years from today. B. The present value of the amount to be received in two years is lesser than the present value of amount to be received three years from today. C. The present values of the two amounts are equal. D. It is impossible to tell unless the actual amount to be received is known.

44.

Suppose you face the prospect of receiving $800 per year for the next five years and a $200 payment at the end of six years. How much is this prospect worth today if the required rate of return is 9%? A. $4,200 B. $3,112 C. $3,242 D. $3,231

45.

In which of the following situations will an annuity table be useful? I. Calculating the net present value of an investment with equal cash flows for the first nine years, but a different flow in year 10 II. Calculating the internal rate of return of an investment with unequal cash flows each year III. Calculating the net present value of an investment with an equal cash flow in years one through four, and a different equal cash flow in years 5 through 10 A. I, II, and III B. II and III C. I and III D. I and II

46.

What is the present value factor for a $4,000 cash outflow that is made today? A. 0.00 B. Some value greater than 1.00 C. 1.00 D. It depends on the rate of return that is required.

47.

If the time value of money techniques are used correctly, the present value of cash flows far in the future will be A. lesser than the present value of the same amount of cash flows in the present. B. greater than the present value of the same amount of cash flows in the present. C. same as the future value of the same amount of cash flows in the present. D. greater than the future value of the same amount of cash flows in the present.

Chapter 9 Capital Budgeting Decisions

9-7

48.

An annuity is A. the time period in which the cash flows paid out for an investment will be recovered. B. a series of equal payments. C. necessary in order to calculate the net present value. D. used to calculate depreciation in order to provide a tax shield.

49.

If a 14% rate of return can be achieved, how much will need to be invested today in order to receive $12,000 at the end of 3 years plus $10,000 at the end of 5 years? Round to the nearest whole number. A. $33,053 B. $5,194 C. $11,426 D. $13,294

50.

To achieve exactly a 13% rate of return, how much would need to be invested today in an investment that returns $12,000 at the end of 3 years and $10,000 at the end of 5 years? Round to the nearest whole number. A. $8,239 B. $13,745 C. $12,862 D. $60,920

51.

Which of the following is not one of the steps in the net present value method? A. Identify the amount and timing of the cash flows. B. Discount the cash flows. C. Calculate the number of years required to recover the initial investment. D. Compare the discounted net cash flows to zero.

52.

What is the sum of the present values of all cash flows (inflows and outflows) called? A. Cost of capital B. Internal rate of return C. Net present value D. Required rate of return

53.

Projects A and B both have an initial outflow of $100,000. Project A will return a cash flow of $30,000 each year for the next 5 years. Project B will return $40,000 in year 1, $30,000 in year 2, $30,000 in year 3, $30,000 in year 4, and $20,000 in year 5. Which project will have the higher net present value? A. Project A B. Project B C. The answer cannot be determined without knowing the required rate of return. D. The answer cannot be determined without knowing the initial investment.

54.

Projects with a negative net present value will always have a(n) A. payback period longer than the useful life of the investment. B. internal rate of return that is less than the required rate of return. C. accounting rate of return that is negative. D. series of cash outflows that is greater than the initial cost of the project.

9-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

55.

Projects with a negative net present value will always have a(n) A. payback period shorter than the life of the project. B. accounting rate of return that is greater than zero. C. an internal rate of return greater than the cost of capital. D. None of these answer choices are correct.

56.

The required rate of return used to calculate an investment’s net present value is related to the firm’s A. contribution margin. B. cost of capital. C. depreciation methods. D. fixed costs.

57.

Maude Company’s required rate of return on capital budgeting projects is 9%. The company is considering an investment that would yield a cash flow of $12,000 per year for five years. Ignoring taxes, what is the most that the company will be willing to invest in this project? A. $46,676 B. $38,994 C. $60,000 D. $55,046

58.

An investment that costs $50,000 will return $15,000 operating cash flows per year for five years. Determine the net present value of the investment if the required rate of return is 14 percent. Should the investment be undertaken? A. Yes, the profit is $25,000. B. No, the accounting return is less than 14%. C. No, the net present value is negative at $11,045. D. Yes, the net present value is positive at $1,496.50.

59.

Santo Automotive is considering producing a new automobile product, No Text, which disengages the ability to text while driving. Marketing data indicate that the company will be able to sell 40,000 units per year at $16 each. The product will be produced in a section of an existing factory that is currently not in use. To produce No Text, Santo must buy a machine that costs $820,000. The machine has an expected life of five years and will have an ending residual value of $50,000. Santo will depreciate the machine over five years using the straight-line method. In addition to the cost of the machine, the company will incur incremental annual manufacturing costs of $390,000. The income tax rate is 30% and the company’s required rate of return is 10%. How much is net operating cash flow each year? A. $67,200 B. $221,200 C. $175,000 D. $250,000

Chapter 9 Capital Budgeting Decisions

9-9

60.

Santo Automotive is considering producing a new automobile product, No Text, which disengages the ability to text while driving. Marketing data indicate that the company will be able to sell 39,000 units per year at $16 each. The product will be produced in a section of an existing factory that is currently not in use. To produce No Text, Santo must buy a machine that costs $820,000. The machine has an expected life of five years and will have an ending residual value of $50,000. Santo expects to generate net income of $56,000 per year. The income tax rate is 30% and the company’s required rate of return is 10%. How much is the net present value? A. ($23,932) B. $7,113 C. $52,498 D. None of these answer choices are correct.

61.

What does the cost of capital represent? A. The weighted average of fixed and variable costs B. The weighted average of the incremental cash inflows and outflows C. The weighted average of debt and equity financing D. The weighted average of the cost of borrowing on a long and short-term basis

62.

The return demanded by shareholders for the risk that they bear in supplying capital to the firm is A. less for riskier firms. B. only considered when a corporation has no debt. C. measured by the internal rate of return. D. called the cost of equity.

63.

Since present value analysis is concerned with cash flows, which of the following is not true? A. Depreciation is always an incremental cash inflow. B. Revenues are inflows in the period when the cash is received. C. Expenses are outflows in the period when they are paid. D. The salvage value of equipment is considered in the analysis.

64.

Natchez, Inc. is considering the purchase of a new machine costing $200,000. The company will incur $5,000 per year in cash operating expenses but it will allow the company to earn an additional $100,000 per year in revenues. Natchez expects the machine to provide future benefits for 3 years and salvage value at the end of the 3-year period to be $10,000. The company uses straight-line depreciation method. The income tax rate is 30%. If the required rate of return is 10%, how much is the net present value of this project? A. $20,143 B. $12,629 C. $43,769 D. None of these answer choices are correct.

9-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

65.

Discount Dollar Store is considering the purchase of a new machine costing $220,000. This machine is estimated to generate an additional $88,000 per year in revenues. The machine will be depreciated using the straight-line method over its 4-year life. There is no expected salvage value at the end of its life. Expected annual net cash flows are $67,240 and expected annual net income from the new machine total $12,240. The required rate of return is 8% and the income tax rate is 28%. How much is the net present value of this project? A. $2,706 B. ($179,460) C. $71,465 D. $153,390

66.

Live Nutrition is considering the purchase of a new computer system for diagnosing health problems. The company estimates that the system will result in increased operating cash flows of $5,800 in year 1, $6,500 in year 2, and $11,400 in year 3. The company’s required rate of return is 8%. What is the maximum cost the company will be willing to pay for the computer system? A. $14,947 B. $23,700 C. $19,992 D. $43,692

67.

The following data pertain to an investment proposal: Required investment $75,000 Annual cash savings $18,000 Projected life of investment 8 years Projected salvage value $4,000 Required rate of return 16% Ignoring income taxes, how much is the net present value of the proposed investment? A. $13,527 B. $3,185 C. $14,747 D. $4,405

68.

Objective Products’ required rate of return on capital budgeting projects is 9%. The company is considering an investment that would yield net annual operating cash flows of $30,000 for 3 years. What is the maximum amount that the company will be willing to invest in this project? A. $75,939 B. $69,498 C. $90,000 D. $98,100

69.

Which of the following is the rate of return that equates the present value of future cash flows to the investment outlay? A. Hurdle rate B. Internal rate of return C. Payback return D. Accounting rate of return

Chapter 9 Capital Budgeting Decisions

9-11

70.

Which statement(s) is/are true concerning the internal rate of return? I. It takes into account the time value of money. II. It is the rate of return that equates the present value of future cash flows to the investment outlay. A I only B. II only C. Neither I nor II D. Both I and II

71.

Under which one of the following situations should a project be accepted? A. The internal rate of return is less than the cost of capital. B. The hurdle rate is greater than the required rate of return. C. The return on the project is equal to the required rate of return. D. The internal rate of return is greater than the cost of capital.

72.

The cash inflows expected during a project’s life are equal in amount. In determining the internal rate of return, how is the present value factor calculated? A. By dividing the initial outlay by the annuity amount B. By multiplying the annuity amount by the number of years it occurs C. By looking in the present value of an annuity table for the number of years and the respective discount rate D. By dividing the present value of the annuity by the initial outlay

73.

Mexicali Foods determined the net operating cash inflows during a project’s life would not be equal in amount. How can the internal rate of return be found? A. By averaging the cash flows and treating them as if they are equal B. By determining the accounting rate of return C. By determining the cost of equity D. By trial and error using present value tables, a spreadsheet program, or a financial calculator

74.

The projected rate of return on a particular project is equal to the hurdle rate. Which statement is true? A. The payback period will be longer than the period over which the return is expected to occur. B. The project should be rejected. C. A lower discount rate should be used. D. The project should be accepted.

75.

Which of the following two methods are most likely give the same decision of accepting or rejecting a particular project? A. Net present value and internal rate of return B. Accounting rate of return and payback period C. Accounting rate of return and internal rate of return D. Net present value and accounting rate of return

9-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

76.

Halloran, Inc. is planning a capital investment. The company has a 7.8% required rate of return and a 6.3% cost of capital. Results of its budgeting calculations for three possible investments, each with a 7-year expected useful life and no salvage value, follow: Project 22 Project 33 Project 77

Payback Period Method

Net Present Value

Cost

5.2 6.9 7.5

$2,000 ($2,000) $0

$125,000 62,000 71,000

Which of the reasons below is true concerning the acceptability of a particular project? A. Project 33 incurs a net loss. B. Project 33 generates a return that is less than the required rate of return. C. The cash invested in Project 77 requires an additional half year to recover when compared to Project 22. D. Project 77 will operate at breakeven. 77.

What are soft benefits? A. The reverse side of opportunity costs B. Benefits those are hard to quantify C. Projected cash flows that are expected to change D. Considerations needed when a project has a negative internal rate of return

78.

Which one of the following is a soft benefit? A. Decreased time to receive and process customers’ payments B. Enhanced reputation of the company C. Depreciation tax shield D. Reduction in the number of items spoiled during processing

79.

A project under consideration currently has a negative net present value of $11,600 using a 6% rate of return and an estimated 4-year life. What must be the minimum present value of the soft benefits of this project in order to make it acceptable? (Round the answer to nearest whole dollar.) A. $12,296 B. $40,195 C. $9,188 D. $3,348

80.

The following data pertain to an investment proposal: Required equipment investment Annual cash savings Projected life of investment Projected salvage value Required rate of return

$124,000 $52,000 4 years $0 8%

The income tax rate is 28%. To which amount is the internal rate of return on this investment closest? A. 12.5% B. Less than 6% C. 25% D. 2.38%

Chapter 9 Capital Budgeting Decisions

81.

9-13

The following data pertain to an investment proposal: Required equipment investment Annual cost savings Projected life of investment Projected salvage value Required rate of return

$120,200 $31,700 5 years $0 9%

The income tax rate is 30%. To which amount is the internal rate of return on this investment closest? A. 3.8% B. 10.0% C. 9.0% D. 38.1% 82.

An investment that costs $82,000 is expected to reduce cash operating costs by $27,000 per year for 4 years. Based on the internal rate of return of the investment, should the investment be undertaken if the required rate of return is 9 percent? A. No, the actual return of 3.04% is less than the required rate of return B. Yes, because the return of 12% is more than the hurdle rate C. Yes, because the IRR is more than 30% D. Yes, because the NPV exceeds the cost by $26,000

83.

An investment that costs $120,000 is estimated to reduce cash operating costs by $40,000 per year for 4 years. The required rate of return is 10 percent. Determine the payback period assuming an inflation rate of 8 percent on the operating costs saved. A. About 2.79 years B. About 2.92 years C. About 2.66 years D. About 3 years

84.

A company is contemplating an investment of $650,000 that is expected to yield a net present value of zero. Which of the following statements is true? A. The internal rate of return of the investment is zero. B. The investment will yield an internal rate of return equal to the required rate of return. C. The investment will yield an accounting rate of return equal to the required rate of return. D. The investment will result in zero profit.

85.

Event Supplies is evaluating a renovation of its retail store. The cost of the renovation is estimated to be $290,000 and will be depreciated over 8 years using the straight-line method. The renovation is expected to generate additional annual revenue of $86,500, annual operating cash flows are expected to increase by $50,775, and net income is expected to increase by $14,525 per year. The company’s income tax rate is 30% and its minimum required rate of return is 9%. To which of the following amounts is the internal rate of return of the renovation closest? A. 5.7% B. 8.2% C. 25% D. 16%

9-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

86.

Why does depreciation have an indirect effect on cash flows? A. It reduces the amount of income taxes a company must pay. B. It reduces the original cash outflow associated with the asset. C. It reduces the annual operating cash flows. D. It causes net income to be less than operating cash flows.

87.

Maxson, Inc.’s revenues are collected when they are earned and its operating expenses are paid when they are incurred. Which of the following summarizes the calculation of operating cash flows if the income tax rate is 30%? A. Revenues – operating expenses + income taxes = Operating cash flows B. Net income – income taxes + depreciation = Operating cash flows C. Net income – depreciation = Operating cash flows D. Revenues – operating expenses – income taxes + depreciation = Operating cash flows

88.

Why may worthwhile investment opportunities be rejected if inflation is ignored? A. Inflation effects generally increase estimated future cash flows, which increases the NPV and the likelihood of acceptance. B. The payback period for projects will be shorter than it would be if the future cash flow amounts were adjusted for inflation, which decreases the likelihood of acceptance. C. Inflation effects generally reduce future profits and operating cash flows making the NPV smaller than if inflation is ignored, which in turn decreases the likelihood of acceptance. D. Estimated future cash flows adjusted for inflation have larger NPVs, which increases the likelihood of rejection.

89.

Which one of the following is a long-run decision that is not a capital budgeting decision, for which time value of money analyses are appropriate? A. Decision to drop a product line B. Decision to repave a parking lot C. Decision to acquire a patent from a competitor D. Decision to hire additional workers

90.

Celebration Cruises wants to acquire a new tender at a cost $425,000. The tender will have an estimated salvage value at the end of its 8-year life of $50,000. It is expected that annual incremental income before taxes will be $36,000. Celebration Cruises plans to make the purchase on January 1, 2017. The company’s cost of capital is 9% and the required rate of return is 10%. The income tax rate is 32%. How much is the depreciation tax shield for 2017? A. $17,000 B. $46,875 C. $53,125 D. $15,000

Chapter 9 Capital Budgeting Decisions

9-15

91.

A company is considering investing in a piece of machinery that will cost $550,000. It will provide an additional $160,000 in sales each year and its annual cash operating expenses are expected to be $52,000. Management plans to depreciate the machine on a straight-line basis over a 10-year life with no estimated salvage value. The company has a 40% tax rate. How much is net annual operating cash flow expected if the machinery is acquired? A. $64,800 B. $96,000 C. $86,800 D. $118,000

92.

Sunny Farms is considering investing in a chicken plucker machine that will cost $300,000. The investment will provide an additional $90,000 in sales annually. Sunny Farms’ annual cash operating expenses are expected to be $22,000. The machine will be depreciated on a straight-line basis over a 10-year life with a $12,000 estimated salvage value. The company has a 30% tax rate and its required rate of return is 10%. How much is the annual depreciation tax shield? A. $9,600 B. $8,640 C. $28,800 D. $30,000

93.

A company is considering investing in a piece of machinery costing $400,000. The investment will provide an additional $142,000 in additional sales each year and its annual cash operating expenses are expected to be $51,000. The machine will be depreciated on a straight-line basis over an 8-year life with no estimated salvage value. The company has a 40% tax rate. How much are annual operating cash flows? A. $54,600 B. $24,600 C. $4,600 D. $74,600

94.

Testor Labs determined it would recover its investment of a new laboratory at 12.5 years. What did Testor Labs calculate? A. The breakeven point B. The payback period C. The net present value D. The accounting return period

95.

Why is the payback period often criticized? A. It requires trial and error to determine the quantitative amount on which to make a decision. B. It ignores the cash flows after the end of the payback period. C. It requires the estimate of a hurdle rate that is subject to uncertain economic effects. D. It is based on accounting income, which most likely differs from the actual cash flows.

9-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

96.

Which of the following statements about the payback period method is true? A. All other things being equal, a company would prefer a project with a longer payback period. B. The payback period method ignores the time value of money. C. The payback period method is more sophisticated and yields better decisions than the internal rate of return method. D. The payback period method takes into account the total stream of cash flows, which are difficult to predict.

97.

Hammer Saw Tools is considering a $7,000 investment. Which of the following alternative cash inflows has the shortest payback period? A. $8,000 in Year 5 B. $0 in Year 1, $8,000 in Year 2 C. $1,500 per year for Years 1 through 5 D. $3,000 in year 1, $2,500 per year for Years 3 and 4

98.

JT Corp. has a cost of capital of 6.2% and a required rate of return of 7.9%. The company evaluated an investment and determined the IRR to be zero. Should JT accept or reject the investment and why? A. Accept, because the investment will generate the minimum required return B. Reject, because the investment will not generate any cash flows. C. Accept, because the required rate of return is greater than the cost of capital D. Reject, because investment will generate a return that is less than the minimum required rate of return

99.

An investment project has an accounting rate of return of 10.8%. The initial outlay for the investment is $91,000. The hurdle rate is 10.2%. Which of the following indicates a proper interpretation? A. The investment earns a net income of 10.8 cents on each dollar invested. B. The investment earns a cash return of 10.8 cents on each dollar invested. C. The investment earns a net income of 10.8 cents on each dollar of sales generated. D. The investment earns a cash return of 10.8 cents on each dollar of sales generated

100.

Why might the accounting rate of return be low in the initial years of an investment? A. Because the depreciation tax shield is negative B. Because customers are not willing to spend money in the initial years C. Because the investment base will be higher in the initial years D. Because the company must pay for the investment at the beginning of the first year

101.

A company with $800,000 in operating assets is considering purchasing a machine that costs $300,000 with an estimated salvage value of $40,000. The acquisition is expected to reduce operating costs by $55,000 in year 1, with a $5,000 increase in cost savings per year for each of the remaining years of its 6-year life. How long is the payback period? A. 4.7 years B. 5.7 years C. 5.5 years D. 4.4 years

Chapter 9 Capital Budgeting Decisions

9-17

*102. Oakridge Appliances is deciding whether to purchase a machine for $84,000 that is expected to yield the following net cash flow savings: Year 1 Year 2 Year 3

$25,000 $40,000 $45,000

What is the internal rate of return on this project? A. 43.7% B. 13.4% C. 29.8% D. 23.6% 103.

Redrum Hotel is considering a project with a 5-year life and which would require a $325,000 investment in equipment with no salvage value. The project would provide income each year as follows for the life of the project: Sales Variable costs Fixed costs Income before taxes

$225,000 $80,000 95,000

175,000 $ 50,000

The income tax rate is 30%. Depreciation is included in the fixed costs amount. The company’s required rate of return is 8%. Calculate the payback period for this project. A. 3.25 years B. 6.50 years C. 2.83 years D. 9.29 years 104.

Hurlizter Pianos has just purchased a piece of equipment at a cost of $345,000. This equipment will reduce cash operating costs by $65,000 each year for the next 5 years. This equipment has a salvage value of $20,000. Ignoring income taxes, how long will it take for the company to recover its entire cash investment? A. 5.31 years B. 5.00 years C. 4.92 years D. The company will never recover its entire investment.

*105. When using Microsoft© Excel to calculate the internal rate of return, which item can you safely omit from the function wizard and still calculate the internal rate of return? A. The initial cash flow B. The annual cash flows C. A guess at the internal rate of return D. None of these answer choices are correct *106. When using Microsoft© Excel to calculate the net present value, what should you do with the initial cash outflow? A. Include it in the range of cells in the function B. Add it to the results of the net present value function C. Subtract it from the results of the net present value function D. Discount it at the required rate of return

9-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

107.

A proposed acquisition of a forklift on January 1, 2017 will cost $86,000. The company has estimated the forklift’s salvage value at the end of its estimated 5-year life to be $21,000. The following amounts have been provided by the management:

Net income Operating cash flows

2017 $7,300 $20,300

2018 $8,700 $21,700

2019 $8,000 $21,000

2020 $5,100 $18,100

2021 $1,400 $14,400

The company’s required rate of return is 7.6% and its cost of capital is 5.4%. The income tax rate is 32%. Calculate the payback period. A. 4.34 years B. 2.82 years C. 14.10 years D. 4.50 years *108. In using Microsoft© Excel to calculate NPV of a capital investment, the following data was input: A

B 1-1-10

C 2010

D 2011

E 2012

F 2013

Cash flows

−46,000

12.600

18,500

21,500

10,500

1 2

Which choice is a correct format in which to enter into the NPV wizard if the discount rate is 9.72%? Rate Value1 Value2 Value3 Value4 Value5 A. 9.72 12,600 18,500 21,500 10,500 0 B. 0.972 12,600 18,500 21,500 10,500 0 C. 9.72 −46,000 12,600 18,500 21,500 10,500 D. 0.0972 12,600 18,500 21,500 10,500 0 109.

How much will you need to invest today at 10% to have a total of $10,000 accumulated six years from today? A. $7,050 B. $17,715 C. $5,645 D. $5,584

Chapter 9 Capital Budgeting Decisions

9-19

110.

Donaldson, Inc. analyzed an investment and determined that the proposed investment will earn a return of 9.9%. Donaldson’s cost of capital is 6.5% and required rate of return is 9%. Currently, Donaldson’s other investments are earning 11%. Will Donaldson be motivated to accept the investment? A. Yes, because the expected return is greater than the cost of capital B. No, because it will cause its current return to decline C. Yes, because the expected return is less than the required rate of return D. No, because the expected return is less than the required rate of return

111.

An investment was analyzed and its NPV was determined to be $2,000. The company’s expected rate of return was 12%. The manager of the division is currently earning 12% on its other investments. This investment will generate losses for the first two years. Which of the following statements best describes what the manager will likely be motivated to do if he is evaluated based on profits? A. Accept the proposal since the rate of return expected is equal to the rate used for the analysis B. Accept the proposal since the rate of return on the investment is equal to the required rate of return C. Do not accept the proposal since the rate of return expected is less than the rate used for the analysis D. Do not accept the proposal since losses are expected for the first two years

112.

Which of the following is a partial solution to motivate managers to accept proposed investments that are projected to generate net losses for the initial years, in spite of the internal rate of return expected to be greater than the required rate of return? A. Evaluate managers based on long-term profitability B. Evaluate managers on the short-run expectations of investments C. Do not evaluate managers based on investments D. Do not allow managers to make decisions on which investments to accept

113.

How much would you have to deposit in the bank today so that you could withdraw $2,000 per year for 4 years earning 8%? A. $1,470 B. $10,560 C. $5,880 D. $6,624

114.

An investment promises a return of $8,000 per year at the end of each of the next six years. How much will you be willing to invest today to receive the $8,000 payments and earn a return of 7%? A. $31,982 B. $3,360 C. $48,000 D. $38,132

115.

You will need $12,000 at the end of each of the next four years. If an interest rate of 6% is appropriate, how much must you deposit today to receive these payments? A. $41,581 B. $2,880 C. $50,880 D. $38,021

9-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

116.

Calculate the present value of an annuity of $42,000 per year for each of the next 15 years. Use a required rate of return of 6%. A. $262,899 B. $163,449 C. $166,468 D. $407,914

117.

Sanders Company has a 15% minimum required rate of return. What is the present value of the expected operating cash flows of $300,000 per year for each of the next ten years? A. $2,608,000 B. $741,600 C. $2,281,830 D. $1,505,631

118.

On January 1, 2017, Sanford, Inc. plans to purchase a machine for $68,000 that has an estimated salvage value of $12,000, and an estimated life of 4 years. The machine is expected to generate the following cash flows and income over the next 4 years:

Net income Operating cash flows

2017 $12,500 26,500

2018 $10,300 24,300

2019 $13,000 27,000

2020_ $ 2,000 16,000

Sanford’s required rate of return is 9.5%, and the cost of capital is 7.5%. How much is the accounting rate of return? A. 94.50% B. 33.75% C. 23.63% D. 58.63% 119.

A project with an initial cost of $314,000 will generate no returns in the first two years of operations, and operating cash flows of $150,000 per year in Years 3, 4, and 5. The required rate of return is 7%. To which amount is the net present value of the project closest? A. $29,830 B. $343,830 C. $61,900 D. $393,645

120.

Which amount is never used as part of the calculation of the annual operating cash flows in a capital budgeting decision? A. Cost savings due to reduced labor with the new asset B. The salvage value of the new asset C. Additional variable overhead costs expected for the new machine D. Additional revenue due to an increased selling price

121.

What is IRR? A. The rate of return that causes the investment to exactly breakeven B. The rate of return that is the minimum acceptable by the company C. The rate of return that is equal to the company’s hurdle rate D. The rate of return that would result in zero net present value of the investment

Chapter 9 Capital Budgeting Decisions

9-21

122.

Landy Company is using the internal rate of return method to decide whether to make an investment that will cost $120,000 and which is expected to generate economic resources for 5 years. Landry determines the IRR is 3.12. What information does the IRR provide? A. Landy expects to earn 3.12% of its investment as cash flows each year the asset is used. B. Landy expects to earn a 3.12% return over the life of its investment. C. Landy expects the asset will produce profits equal to 3.12% of the asset’s cost each year. D. Landy expects to recover its cash over 3.12 years.

123.

A project that costs $100,000 yields a cash flow of $18,000 per year for 9 years. How much is the net present value of the project using a 16% cost of capital? A. $162,000 B. $62,000 C. ($17,082) D. $82,918

124.

Why is the depreciation tax shield a component of analyzing investment decisions? A. Depreciation causes a cash outflow that is added to determine net income. B. Though no cash was paid out, depreciation was included on the tax return, which caused the company to have to pay taxes on the amount of depreciation. C. Depreciation lowers income tax expense to be paid, though no cash flow occurs for the depreciation amount. D. Depreciation creates cash flows that do not appear on the income statement.

125.

An investment of $100,000 promises net operating cash inflows of $40,000 per year for each of the next three years. If the required rate of return is 14%, what is the net present value of the project? A. $92,864 B. $20,000 C. ($7,136) D. ($19,000)

126.

When the NPV is calculated, what occurs? A. The company adds the rate of return to the future incoming cash flows. B. The company factors in inflation to future cash flows. C. Interest is removed from the future cash flows to reflect the cost of money over time. D. The company factors in its cost of capital to reflect the proper rate on earnings.

127.

Double, Inc. analyzed an investment with a required rate of return of 8.2%. Because the Federal Reserve increased interest rates in the market, Double decided to change the analysis to a 8.8% discount rate. The annual net income and cash flows remained the same. What happened to the net present value? A. It increased B. It remained the same C. It decreased D. The amount of the cash flows is needed in order to determine the effect

9-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

128.

A proposed project will require an initial investment of $1,000,000 and will generate net operating cash inflows of $250,000 per year for five years. What is the internal rate of return? A. Less than 9% B. 11% C. 13% D. Over 15%

129.

An investment is expected to generate net operating cash inflows of $25,000 per year for each of the next 5 years. If the initial amount invested is $101,000, which of the following is closest to the internal rate of return? A. 24.8% B. 6.5% C. 4.0% D. 7.5%

130.

An investment of $143,000 is expected to generate net operating cash inflows of $62,000 in each of three years. What is the internal rate of return? A. Less than 1% B. Between 2% and 3% C. Between 13% and 15% D. Greater than 30%

131.

Pinkela Company reported revenues of $275,000 and expenses of $100,000 last year. The income tax rate was 40%. Depreciation expense of $25,000 was included in the expenses. How much was the net operating cash flows? A. $120,000 B. $105,000 C. $130,000 D. $145,000

132.

After deducting income taxes at 30%, the annual cash basis income is estimated at $30,000. Depreciation expense is $8,000 per year on a machine with a 6-year life. How much are annual incremental operating cash flows? A. $15,400 B. $27,600 C. $38,000 D. $32,400

133.

A project with an initial cost of $81,000 is expected to produce cash flows of $20,000 per year and net income of $9,000 for each of the next 7 years. The asset has an estimated 7-year life and a $4,000 salvage value. What is the projected payback period? A. 4.05 years B. 9.0 years C. 7.0 years D. 0.25 years

Chapter 9 Capital Budgeting Decisions

134.

9-23

Icy Treats, Inc. wants to purchase of a new ice cream truck with a cost of $51,000. Icy Treats has a cost of capital of 7.4% and a required rate of return of 10.4%. Its income tax rate is 32%. The acquisition is proposed for January 1, 2017. Icy Treats expects it can sell the truck for $7,000 at end of its useful life of 4 years. Icy Treats estimates the following incremental amounts to be generated by the truck: Year 1 Net income $4,200 Operating cash flows 15,200

Year 2 $5,600 16,600

Year 3 $6,100 17,100

Year 4 $5,800 16,800

How much is the accounting rate of return? A. 14.48% B. 56.64% C. 10.64% D. 18.71% 135.

A project with an initial cost of $450,000 is expected to generate returns of $80,000 per year for each of the next five years. What is the project’s payback period? A. 5.6 years B. 5.0 years C. 0.17 years D. The investment will never be recovered.

136.

An investment of $400,000 is expected to generate the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5

$60,000 $120,000 $50,000 $150,000 $200,000

What is the investment’s payback period? A. 4.1 years B. 3.5 years C. 4.4 years D. 5.1 years 137.

A $600,000 investment is expected to generate cash flows of $120,000 per year for each of the next six years. What is the investment’s payback period? A. 6.0 years B. 5.0 years C. 4.0 years D. 2.5 years

138.

A project that requires an investment of $42,000 is expected to generate $14,000 of net income in Year 1, $18,000 of net income in Year 2, and $21,000 of net income in Year 3. Operating cash flows expected in Year 1 are $30,000, with Year 2 as $26,000, and Year 3 as $27,000. What is the accounting rate of return for this investment? A. 11.7% B. 75.4% C. 42.1% D. 84.1%

9-24

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

139.

Haven Company is considering the construction of a new parking lot. It will cost $125,000 to construct the lot. The income tax rate is 30%. Determine the payback period if the expected net annual operating cash inflows are $18,000 per year and the expected net income is $13,400. A. 4.0 years B. 9.9 years C. 6.9 years D. 9.3 years

140.

Kahlen Upholstery is considering entering a new line of operations. Starting the business will require an initial investment in equipment of $400,000 with a salvage value of $40,000. It is expected that the new business will increase net income by $80,000 per year for five years. The equipment will be depreciated over a five-year period using straight-line depreciation with no residual value. How much is the accounting rate of return of the new business? A. 20.0% B. 40.0% C. 36.4% D. 111.1%

141.

Webster Corporation is considering producing a new automobile product, Glisten. Research has determined that the company will be able to sell 50,000 units per year at $13. The product will be produced in a section of an existing factory that is currently not in use. To produce Glisten, Webster must buy a machine that costs $380,000. The machine has an expected life of five years and will have an ending residual value of $40,000. Webster will depreciate the machine over five years using the straight-line method. In addition to the cost of the machine, the company will incur incremental cash manufacturing costs of $535,000. Webster has an income tax rate of 30 percent, and the company’s required rate of return is 7 percent. Calculate the payback period. A. 3.8 years B. 3.3 years C. 4.7 years D. None of these answer choices are correct.

142.

Webster Corp. is considering producing a new waxing product, Glisten. Research has determined that the company will be able to sell 50,000 units per year at $13. The product will be produced in a section of an existing factory that is currently not in use. To produce Glisten, Webster must buy a machine that costs $380,000. The machine has an expected life of five years and will have an ending residual value of $40,000. Webster will depreciate the machine over five years using the straight-line method. In addition to the cost of the machine, the company will incur incremental manufacturing costs of $535,000. Webster has an income tax rate of 30 percent, and the company’s required rate of return is 7 percent. How much is the accounting rate of return? A. 8.7% B. 48.0% C. 15.7% D. 19.4%

Chapter 9 Capital Budgeting Decisions

9-25

143.

A project that required a $420,000 investment generated no net income in the first year of its operations, net income of $86,000 in the second year, and net income of $100,000 in the third year. How much is the accounting rate of return for this investment? A. 88.6% B. 44.3% C. 14.8% D. 29.5%

144.

Sticky Sam buys a piece of equipment for $61,400 that has a useful life of 4 years. The equipment will generate operating cash flows of $18,550 per year and will have no salvage value at the end of its expected life. The income tax rate is 30%. Straight-line depreciation is used. What is the net present value using a 6% required rate of return? A. $44,994 B. $64,278 C. $2,878 D. ($449)

145.

Sticky Sam buys a piece of equipment for $61,400 that has a useful life of 4 years. The equipment will generate operating cash flows of $18,550 per year and will have no salvage value at the end of its life. The income tax rate is 30%. Straight-line depreciation is used. How much is the internal rate of return? A. 3.3% B. 8.0% C. 30.2% D. 5.68%

146.

Sticky Sam buys a piece of equipment for $61,400 that has a useful life of 4 years. The equipment will generate operating cash flows of $18,550 per year and will have no salvage value at the end of its life. The income tax rate is 30%. Straight-line depreciation is used. How much is the depreciation tax shield? A. $10,745 B. $15,350 C. $4,605 D. $5,565

147.

Sticky Sam buys a piece of equipment for $61,400 that has a useful life of 4 years. The equipment will generate operating cash flows of $18,550 per year and will have no salvage value at the end of its life. The income tax rate is 30%. Straight-line depreciation is used. What is the payback period? A. 3.3 years B. 4.7 years C. 1.21 years D. None of these answer choices are correct.

9-26

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

148.

Chiller Time wants to purchase a new ice cream truck which costs $56,000. The company has a cost of capital of 8%, required rate of return of 10%, and the prevailing income tax rate is 30%. The acquisition is proposed for January 1, 2017. Chiller Time expects it can sell the truck for $8,000 at end of its useful life of 4 years. Chiller Time predicts the new truck will generate net income of $5,000 and operating cash flows of $17,000 during 2017, with an increase of 5% each subsequent year. What is the accounting rate of return? A. 22.4% B. 16.8% C. 44.9% D. 17.7%

149.

Wilson Productions bought a piece of equipment for $53,400 that will last for 5 years. The equipment will generate annual net operating cash inflows of $13,600 and will have a $1,000 salvage value at the end of its life. Straight-line depreciation is used. The income tax rate is 30%. What is the net present value using a 7% required rate of return? A $2,362 B. $3,076 C. $3,362 D. None of these answer choices are correct.

150.

Wonton Productions bought a piece of equipment for $55,898 that will last for 5 years. The equipment will generate net operating cash flows of $14,000 per year and will have no salvage value at the end of its life. Straight-line depreciation is used. The income tax rate is 30%. What is the internal rate of return? A. 3.99% B. 8.00% C. 25.05% D. 32%

151.

Wonton Productions bought a piece of equipment for $55,898 that will last for 5 years. The equipment will generate net operating cash flows of $14,000 per year and will have no salvage value at the end of its life. Straight-line depreciation is used. The income tax rate is 30%. How much is net income or (loss) in year 2? A. $17,354 B. $25,180 C. $2,820 D. $10,646

152.

Ranger Enterprises bought a piece of equipment for $64,000 that will last for 5 years. The equipment will generate net operating cash flows of $14,000 per year and will have a $3,000 salvage value at the end of its life. Straight-line depreciation is used. The income tax rate is 30%. How long is the payback period? A. 4.6 years B. 6.5 years C. 3.8 years D. None of these answer choices are correct.

Chapter 9 Capital Budgeting Decisions

153.

9-27

Ranger Enterprises bought a piece of equipment for $64,000 that will last for 5 years. The equipment will generate net operating cash flows of $14,000 per year and will have a $3,000 salvage value at the end of its life. Straight-line depreciation is used. The income tax rate is 30%. What is the amount to be used in the denominator in determining the accounting rate of return? A. $12,200 B. $64,000 C. $13,400 D. $33,500

Answers to Multiple Choice 35 D 55 D 36 B 56 B 37 C 57 A 38 A 58 D 39 B 59 B 40 D 60 B 41 A 61 C 42 B 62 D 43 A 63 A 44 D 64 A 45 C 65 A 46 C 66 C 47 A 67 D 48 B 68 A 49 D 69 B 50 B 70 D 51 C 71 C 52 C 72 A 53 B 73 D 54 B 74 D

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94

A B B B D C B B A B B A D A A D C B D B

95 96 97 98 99 100 101 *102 103 104 *105 *106 107 108 109 110 111 112 113 114

B B B D A C A B A B C C A D C B D A D D

115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134

A D D C A B D A C C C C C A D C C D A D

135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153

D A B D C C A C D C B C A B B B C A D

9-28

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MATCHING 154.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once.

1. Accounting rate of return

Internal rate of return

2. Capital budget

Net present value

Payback period

4. Cost of capital

Present value analysis

5. Depreciation tax shield

10.

Required rate of return

Capital expenditure decision

A. B. C. D. E. F. G. H. I. J. K. L.

Weighted average of the costs of debt and equity financing used to generate capital for investments The rate of return that equates the present value of future cash flows to the investment outlay Decisions involving the acquisition of long-lived assets The average cost of borrowing funds for a company Average after-tax income from a project divided by the average investment in the project Hurdle rate; the minimum acceptable rate of return on an investment Tax savings resulting from depreciation The length of time it takes to recover the initial cost of an investment The sum of the present values of all cash flows A method of investment analysis that expresses future cash flows in terms of their value today The list of approved capital expenditures The remaining useful life of an asset

Answers to Matching 1. E 2. K 3. C 4. A 5. G

6. 7. 8. 9. 10.

B I H J F

Chapter 9 Capital Budgeting Decisions

9-29

EXERCISES 155.

How much is the present value of $6,500 to be received at the end of six years, if the required rate of return is 15%?

Answer $6,500 × 0.4323 = $2,809.95 156.

Maxwell Industries has a required rate of return of 8%. How much is the present value of a. $15,000 to be received at the end of 8 years? b. $12,000 to be received per year for 5 years?

Answer a. b.

157.

$15,000 × 0.5403 = $8,104.50 $12,000 × 3.9927 = $47,912.40

How much is the present value of $5,000 per year for four years. The required rate of return is 10%?

Answer $5,000 × 3.1699 = $15,849.50 158.

Bouquet Florist is considering replacing an old refrigeration unit with a larger unit to store flowers. Because the new refrigeration unit has a larger capacity, the company estimates that it can sell an additional $14,000 of flowers a year at a cost of $5,000. Although it will cost an extra $2,400 per year for maintenance, the new unit is energy efficient and will save $1,400 in electricity cost each year. The new refrigeration unit costs $35,000 and has an expected life of 10 years. At the end of 10 years, the new unit has an expected residual value of $6,000. Determine the net present value of the investment after taxes if the required rate of return is 8 percent. Income taxes are 30%. Should the investment be undertaken?

Answer Additional annual revenue ($14,000 – $5,000) Annual electricity savings Additional annual maintenance costs Depreciation Income before taxes Income taxes expense Net income Add depreciation Operating cash flows Net Present Value Cost of new refrigeration unit Operating cash flows Salvage value Net present value

Cash Flow ($35,000) 6,470 6,000

$9,000 1,400 (2,400) (2,900) 5,100 (1,530) 3,570 2,900 $6,470 PV Factor Present Value 1.0000 ($35,000) 6.7101 43,414 0.4632 2,779 $11,193

The investment should be made as it generates a return that exceeds the required rate of return.

9-30

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

159.

Brown Shoe Company is considering investing in one of two machines that cut leather for shoes. Machine A costs $55,000 and is expected to save the company $13,000 annual operating cash flows for six years. Machine B costs $89,000 and is expected to save the company $22,000 annual cash flows for six years. Determine the net present value for each machine and decide which machine should be purchased if the required rate of return is 10 percent.

Answer Machine A Cost of machine Annual savings Net present value

Cash Flow ($55,000) 13,000

PV Factor 1.0000 4.3553

PV Amounts ($55,000) 56,619 $ 1,619

Machine B Cost of machine Annual savings Net present value

Cash Flow ($89,000) 22,000

PV Factor 1.0000 4.3553

PV Amounts ($89,000) 95,817 $ 6,817

Machine B should be purchased since it generates a higher return than the required rate of return generated by Machine A, and a return higher than the company’ required rate of return.

160.

Sports & More is considering the development of an e-commerce business. The company estimates that development will require an initial outlay of $350,000. Other cash flows are estimated as follows: Year 1 Year 2 Year 3 Year 4

($60,000) $140,000 $210,000 $130,000

Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the e-commerce business. Should the company develop the e-commerce business if the required rate of return is 6 percent? Answer The e-commerce business should not be developed as the investment’s return will generate less than the 6% required rate of return. Cash Flow Factor ($350,000) 1.0000 (60,000) 0.9434 140,000 0.8900 210,000 0.8396 130,000 0.7921 Present value at 6%

Total ($350,000) (56,604) 124,600 176,316 102,973 ($ 2,715)

Chapter 9 Capital Budgeting Decisions

161.

9-31

An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years. What is the investment’s internal rate of return?

Answer $185,575 ÷ $65,000 = 2.855 at 4 years = 15% 162.

A project will require an initial investment of $620,000 and will return $165,000 of operating cash flows each year for five years. The required rate of return is 9%. How much is the project’s net present value? Based on this analysis, should the company proceed with the project?

Answer ($165,000 × 3.8897) – $620,000 = $21,801 The net present value is greater than zero, which indicates the investment will generate a return greater than the company’s required rate of return. Yes, the company should proceed with the project. 163.

The accountant of Fixer Depot prepared the following annual analysis of a $65,000 investment in equipment that has a life of 4 years: Cost savings Taxes on savings Depreciation tax shield Operating cash flows

$21,000 (6,300) 4,875 19,575

After reviewing the calculation, the operations manager made the following observation: “You’ve assumed that there won’t be inflation. I think it is reasonable to assume that labor and costs other than depreciation will increase by 3% per year. Why don’t you redo the analysis with that assumption?” The accountant replied: “Inflation is built into our 8% required rate of return.” a. b. Answer a.

What does the accountant mean by “inflation is built into our 8% required rate of return?” Redo the analysis assuming an inflation rate of 3%. Should the company make the investment in the equipment? The required rate of return includes an allowance for expected inflation. In periods where expected inflation is high, the required rate of return will be high, and firms will demand a high return on their investments.

b. Year 1 Cost savings Taxes on savings Depreciation tax shield Operating cash flows

$21,000 (6,300) 4,875 $19,575

Year 2

$21,630 (6,489) 4,875 $20,016

Year 3

$22,279 (6,684) 4,875 $20,470

Year 4

$22,947 (6,884) 4,875 $20,938

9-32

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Year

Cash Flows

Initial investment 1 2 3 4

$(65,000) 19,575 20,016 20,470 20,938

Factor

NPV

1.0000 0.9259 0.8573 0.7938 0.7350

$(65,000) 18,124 17,160 16,249 15,389

NVP

$ 1,923

Since the investment is expected to generate a higher return than the required rate of return, the company should invest in the equipment. 164.

Saren Millworks is contemplating the purchase of a new casting oven. The oven will cost $40,000 but will generate additional revenue of $30,000 per year for ten years. Additional costs, other than depreciation, will equal $15,000 per year. The oven has an expected life of ten years, at which time it will have no residual value. Saren uses the straight-line method of depreciation. Determine the net present value of the investment if the required rate of return is 14% and the tax rate is 40%. Should Saren Millworks make the investment in the boiler?

Answer Revenue Costs other than depreciation Depreciation Income before taxes Less taxes at 40% Net income Add depreciation Operating cash flows

$30,000 $15,000 4,000

19,000 11,000 4,400 6,600 4,000 $10,600

The oven should be purchased since it generates a higher return than the required rate of return. Cash Flows $10,600 (40,000) Net present value

Factor 5.2161 1.0000

Total $55,291 (40,000) $15,291

Chapter 9 Capital Budgeting Decisions

165.

9-33

3-D Studios is evaluating a film project. The president estimates the film will cost $7,200,000 to produce. In its first year, 2017, the film is expected to generate $5,800,000 in net revenue, after which the film will be released to video. The video is expected to generate $900,000 in net revenue 2017, $1,200,000 in 2015, and $400,000 in 2016. Amortization of the film cost will be $5,500,000 in 2017 and $1,700,000 in 2015. The company’s tax rate is 30% and it requires an 8% rate of return on its films. All outlays to produce the film occur at the beginning of January 2017. How much is the net present value of the film project? Should the company produce the film?

Answer Revenue Amortization Income before taxes Income tax expense Net income Add amortization Operating cash flows Year Initial Investment 1 2 3

2017 $6,700,000 (5,500,000) 1,200,000 (360,000) 840,000 5,500,000 $6,340,000 Cash Flows ($7,200,000) 6,340,000 1,350,000 280,000

2018 $1,200,000 (1,700,000) (500,000) 150,000 (350,000) 1,700,000 $1,350,000

Factor 1.0000 0.9259 0.8573 0.7938 NPV

2019 $400,000 0 400,000 (120,000) 280,000 0 $280,000

NPV ($7,200,000) 5,870,206 1,157,355 222,264 $ 49,825

The company should produce the film since it generates a higher return than the required rate of return.

9-34

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

166.

Sweet Thing Limo is considering an acquisition of an additional vehicle for its limo chauffeur service. The model under consideration will cost $140,000, have a 5-year life, and a $25,000 residual value. The company anticipates that the effect on annual net income will be as follows: Revenue Expenses Driver Fuel Maintenance Insurance Depreciation Miscellaneous Income before taxes Income tax expense Net income

$138,000 $49,000 9,000 2,000 1,800 23,000 2,000

86,800 51,200 20,480 $ 30,720

The company has a required rate of return of 14%. Calculate the net present value of the investment. Should the company invest in the new limo? Answer Net income Add depreciation Annual cash flows Cash Flow $ 53,720 25,000 (140,000) Net present value

$30,720 23,000 $53,720 PV Factor at 14% Total 3.4331 $184,426 0.5194 12,985 1.0000 (140,000) $ 57,411

The company should invest in the new limo since it is expected to generate a higher return than the required rate of return.

167.

Recording Tunes is planning a $120,000 investment in microphones for its recording business. The microphones has an expected 4-year life with a salvage value of $12,000. The company uses the straight-line method of depreciation, has an income tax rate of 30%, and a required rate of return of 9%. How much is the present value of the tax savings related to depreciation of the equipment?

Answer Annual depreciation: ($120,000 – $12,000) ÷ 4 years = $27,000 Annual tax savings: $27,000  30% = $8,100 Present value: $8,100  3.2397 = $26,242 168.

Chap Creations reported revenues of $540,000 and expenses of $480,000 last year, which included depreciation expense totaling $62,000. The company pays income taxes at a 35% rate. How much is the company’s annual operating cash flows?

Answer $540,000 – $480,000 – [35% × ($540,000 – $480,000)] + $62,000 = $101,000

Chapter 9 Capital Budgeting Decisions

169.

9-35

U-Vision is deciding whether to buy a machine that packages products so that it can reduce labor costs. The machine has an initial cost of $580,000. The company estimates the new machine will speed up production and be able to generate annual revenues totaling $716,000 up from the current revenue of $660,000. U-Vision estimates the machine can be sold at the end of its estimated 8-year life for $60,000. Labor saved per year as a result of acquiring the machine is expected to be $26,000. Additional maintenance and operating expenses as a result of the pending acquisition are expected to be $12,000 per year. U-Vision’s required rate of return is 8% and its income tax rate is 35%. Calculate annual operating cash flows for U-Vision.

Answer Revenue ($716,000 – $660,000) Labor savings Maintenance and operating costs Depreciation expense ($580,000 – $60,000) ÷ 8 Income before taxes Income taxes expense Net income Add depreciation Annual cash flows

170.

$56,000 26,000 (12,000) (65,000) 5,000 (1,750) 3,250 65,000 $68,250

Deli Pizza is considering an investment that will generate cash revenues of $91,000 per year for 8 years, and have cash expenses of $80,000 per year for 8 years. The cost of the asset is $60,000, and it will be depreciated using straight-line depreciation over its 8year life. The company pays income taxes at a rate of 30%. The required rate of return is 6%. a. Prepare a schedule showing the annual cash flows associated with this asset. b. Compute the net present value of this investment.

Answer a. Cash revenues Cash expenses $80,000 Depreciation expense 7,500 Income before taxes Income tax expense Net income Add depreciation Annual cash flows

$91,000

Year Initial investment Years 1-8

Factor 1.0000 6.2098 NPV

87,500 3,500 1,050 2,450 7,500 $9,950

b. Cash Flows ($60,000) 9,950

NPV ($60,000) 61,788 $ 1,788

9-36

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

171.

Harry’s Seafood is considering the addition of a fish hatchery. Construction of the facility is estimated to cost $1,100,000 and will be depreciated over 10 years using the straightline method. The hatchery is expected to have no estimated residual value. Harry’s Seafood has a required rate of return of 12%. Incremental net income related to each year of the investment is as follows: Revenue Expenses: Material cost $ 60,000 Labor 100,000 Depreciation 110,000 Other 10,000 Income before taxes Income tax expense at 40% Net income a. b. c. d.

Answer a.

$450,000

280,000 170,000 68,000 $102,000

Determine the net present value of the investment. Should Harry’s Seafood invest in the hatchery? Calculate the internal rate of return of the investment to the nearest ½ percent. Calculate the payback period of the investment. Calculate the accounting rate of return.

The company should invest in the hatchery because the investment will generate a return greater than the company’s required minimum of 12%. Net income $102,000 Add depreciation 110,000 Annual cash flow $212,000 Cash Flow $212,000 (1,100,000)

Factor 5.6502 1.0000

Total $1,197,842 (1,100,000) $ 97,842

PV of annuity factor = $1,100,000 ÷ 212,000 = 5.189 PVA factor of 5.189 implies an internal rate of return of approximately 14.5%.

$1,100,000 ÷ $212,000 = 5.189 years

$102,000 ÷ [($1,100,000 – $0) ÷ 2] = 18.55%

Chapter 9 Capital Budgeting Decisions

172.

9-37

A project will require an initial investment of $580,000 and is expected to generate the following cash flows: Year 1 $ 60,000 Year 2 250,000 Year 3 250,000 Year 4 200,000 Year 5 100,000 a. b.

Answer a.

What is the project’s payback period? If the required rate of return is 20% and taxes are ignored, what is the project’s net present value?

$60,000 + $250,000 + $250,000 = $560,000 Portion of year 4: $20,000 ÷ $200,000 = 0.10 Payback period = 3.1 years ($580,000) × 1.000 $60,000 × 0.8333 $250,000 × 0.6944 $250,000 × 0.5787 $200,000 × 0.4823 $100,000 × 0.4019 Net present value

($580,000) 49,998 173,600 144,675 96,460 40,190 ($75,077)

9-38

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

CHALLENGE EXERCISES 173.

Tow’em Away is considering the purchase of a tow truck with a cost of $54,400 to be acquired on January 1, 2017. Tow’em estimates the truck can be sold for $10,400 at the end of its 5-year estimated life. Tow’em has a cost of capital of 6% and a required rate of return of 8%. This purchase would allow Tow’em to make 2,200 more tows per year. Annual cash basis net income relating to the tow truck is estimated at $20,200. Income taxes are 32%. a. Calculate the depreciation tax shield for 2017. b. What is the nature of the depreciation tax shield? Why is the depreciation tax shield a component of analyzing investment decisions? c. Calculate Tow’em’s annual operating cash flows relating to the tow truck purchase.

Answer a.

174.

(($54,400 – $10,400) ÷ 5) × 32% = $2,816

The tax shield represents the amount of cash saved from depreciation. Depreciation expense lowers income tax expense to be paid, even though no cash flow occurs for the depreciation amount.

$20,200 + $2,816 = $23,016

For each capital budgeting project below, indicate whether management should Accept or Reject by placing an A or R, respectively, in the space provided next to each project. Select the best reason for the respective action from the list of reasons by printing a legible uppercase letter in the space provided. Possible Reasons A. The investment’s return is less than the cost of capital. B. The investment earns a return rate equal to the company’s hurdle rate. C. The cash outflows equal the cash inflows. D. The investment’s internal rate of return is greater than the required rate of return. E. The investment generates a return on profit less than the required rate of return. G. The investment generates a cash return greater than the required rate of return. H. The investment generates a cash return less than the required rate of return. J. The hurdle rate is greater than the required rate of return. K. The hurdle rate is less than the required rate of return. M. The total cash paid out is less than the total cash received.

Chapter 9 Capital Budgeting Decisions

Capital budgeting projects

9-39

Accept (A) or Reject (R)?

Reason

Accept (A) or Reject (R)?

Reason

C and H

1. JT Corp. has a cost of capital at 6.2% and a required rate of return at 7.9%. The company evaluated an investment and determined the IRR was zero. 2. Save Company evaluated a potential investment and determined the NPV to be zero. Save Company’s required rate of return is 9.1% and its cost of capital is 6.4%. 3. An investment project has an internal rate of return of 10.8%. The initial outlay for the investment is $91,000. The hurdle rate is 10.2%. 4. An investment project has an NPV of ($5,200). The hurdle rate is 10%. Answer Capital budgeting projects 1. The zero IRR indicates the investment will generate a return of zero cents of cash per dollar of assets invested. 2. An NPV of zero means the investment’s present value of cash inflows equal present value of cash outflows. 3. The investment’s IRR is higher than the required rate of return. 4. The investment earns a cash return that is less than the required rate of return of 10%. 175.

A proposed acquisition of a forklift on January 1, 2017 will cost $86,000, and have an estimated salvage value at the end of its estimated 5-year estimated life of $21,000. Net income Operating cash flows

2017 $ 7,300 20,300

2018 $ 8,700 21,700

2019 $ 8,000 21,000

2020 $ 5,100 18,100

2021 $ 1,400 14,400

The company’s required rate of return is 7% and its cost of capital is 6%. The income tax rate is 32%. a. Determine the payback period of the proposed acquisition. b. Interpret the meaning of your answer in part A. c. Suppose that the amounts for 2018 are a loss of $9,000 and cash flows of $4,000 instead of the amounts given. How will the payback period differ? d. What are the criticisms against the payback period?

9-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answer a.

Cost to recover 2017 2018 2019 2020 Amount to recover during 2018 Portion of 2018: $4,900 ÷ $14,400 Payback period = 4.34 years

$ 86,000 (20,300) (21,700) (21,000) (18,100) $ 4,900 0.3403

In 4.34 years, the company will have recovered all of its cash investment it used to purchase the forklift.

c. The $4,900 not recovered as of the end of 2017 will be recovered in two parts: To be recovered through 2018 cash flows $4,000 To be recovered through salvage value 900 The payback period will be 5 years. d.

176.

The payback period does not consider the time value of money, as money received today is worth more than amounts received in the future. In addition, it does not consider all of the cash flows that occur after the end of the payback period. It also does not consider the time value of the cash flows within the payback period.

Markly, Inc. is planning a new capital investment. The company has a 7.8% required rate of return and a 6.3% cost of capital. Markly currently has a return of 8% on its other investments. The proposed new investment has equal annual cash inflows expected. Management calculated the payback period using the computation of the investment and annual cash flows, and the IRR for 6 investments that are displayed below. Each investment has a 7-year expected useful life and no salvage value.

Project A2 Project B4 Project C6 Project D7 Project E9 Project F8 Project G3 a. b. c.

Payback Period 5.2 6.9 6.0 5.8 4.2 5.0 7.3

IRR 8.5% 3.1% 11.4% 5.4% 10.1% 7.9% 7.8%

Investment Cost $125,000 62,000 78,000 56,000 110,000 60,000 71,000

Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. Markly has $334,000 available to spend. List the project(s) in which Markly should invest, in the order the investments should be undertaken. Will Markly be motivated to invest in all of the projects you selected in Part b if Markly is evaluated using return on investment?

Chapter 9 Capital Budgeting Decisions

Answer a.

9-41

Project B4 and D7 → The returns of B4 and of D7 are less than the required rate of return of 7.8%. Project G3 → The cash investment will never be recovered. C6, E9, A2 Remaining cash: $334,000 – $78,000 – $110,000 – $125,000 = $21,000 There is not enough cash to acquire F8.

c. 177.

Markly would not be motivated to invest in project F8 because its return is less than Markly’s current return of 8%. JayTree, Inc. is considering a purchase of a patent with a cost of $47,000 and an estimated revenue producing life for JayTree of 4 years. JayTree has a required rate of return is 8% and a cost of capital of 7%. The patent is expected to generate the following amounts of annual income and cash flows: Net income Operating cash flows

Year 1 $ 5,300 17,050

Year 2 $ 6,700 18,450

Year 3 $ 6,500 18,250

Year 4 $ 3,100 14,850

a. Calculate the NPV of the investment. b. What does the NPV calculation do, i.e., what is the nature of the NPV amount? c. If the required rate of return increases, will the NPV increase or decrease? Explain why. Answer a. Year Initial investment 1 2 3 4

Cash Flows ($47,000) 17,050 18,450 18,250 14,850

Factor 1.0000 0.9259 0.8573 0.7938 0.7350 NPV

NPV ($47,000) 15,787 15,817 14,487 10,915 $10,006

Interest is removed from the future cash flows to reflect the cost of money over time. The NPV is the amount of the cash flows that could be invested at the required rate of return to generate the future cash amounts the investment is expected to generate.

If the required rate of return increases, more interest is removed from the future cash flows causing the NPV to be smaller.

9-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

SHORT-ANSWER ESSAYS 178.

Division managers at Swearingen Investments are evaluated and rewarded based on returns on investments it accepts. In the current year, Bill Christ, the president of the commercial products division, has an required rate of return target of 12%. If the division has an required rate of return of 12% or greater, Christ will receive 250,000 options on Swearingen stock in addition to a base salary of $500,000. The Commercial Products Division is considering a major investment in product development, which has a net present value of $25,000,000. However, the investment will have a negative effect on reported profit over the next two years, after which the investment will begin to have a significant positive effect on firm profitability for the next eight years. Suppose Christ currently holds stock in Swearingen Investments with a market value of $1,250,000 and has options on 500,000 shares (awarded in previous years). Is this likely to aggravate or mitigate the conflict?

Answer It will mitigate the problem. If Christ owns a great deal of stock and/or options, he will have a strong incentive to work to increase the firm’s stock price. Stock prices are likely to be positively impacted when the firm takes on projects with positive net present values.

179.

What are capital budgeting decisions?

Answer Investment decisions involving the acquisition of long-lived assets that require a company or organization to expend significant amounts of capital (company funds) are considered capital budgeting decisions.

180.

What is meant by “the time value of money” concept?

Answer The time value of money concept recognizes that it is better to receive a dollar today than it is to receive a dollar at any time in the future. The dollar that is received today can be invested so that it is worth more than a dollar to be received in the future.

181.

What is the most significant difference between the net present value and internal rate of return methods and the payback period and accounting rate of return methods?

Answer The net present value and internal rate of return methods use the time value of money concept and are therefore superior to the payback period and accounting rate of return methods, which ignore the time value of money.

Chapter 9 Capital Budgeting Decisions

182.

9-43

How does a firm determine its required rate of return?

Answer Management must estimate the firm’s required rate of return, remembering that riskier investments demand higher rates of return. Under certain conditions, the required rate of return should be equal to the cost of capital for the firm. The required rate of return is based on the firm’s cost of capital, the weighted average of the firm’s cost of debt and cost of equity. 183.

What are “soft” benefits? What are the effects of ignoring “soft” benefits in capital budgeting decisions?

Answer Soft benefits are the benefits that are difficult to quantify. Soft benefits include a number of benefits such as reduced number of customer complaints, improved customer satisfaction, improved customer retention, early identification of market trends, improved reputation of firm, etc. Often, soft benefits are ignored when capital budgeting decisions are made as it is difficult and expensive to quantify them. This leads firms or companies to pass up investments that are of strategic importance, especially investments in advanced manufacturing technology. 184.

Explain the importance of depreciation in a capital budgeting analysis.

Answer Capital budgeting focuses on cash flows., Although depreciation reduces taxable income and thereby taxes paid, it is not a cash outflow. This reduction in taxes is referred to as the depreciation tax shield. Since it represents a reduction in cash outflows, it should be included in the analysis. If there are no taxes present, depreciation is not relevant. 185.

Why is it important to adjust future cash flows for inflation? What is the impact of failing to do so?

Answer The cost of capital includes a factor for inflation to the extent that the rates used reflect market rates. If the cash flows are not inflated, investment returns will be understated and the required rate of return will be relatively high, resulting in profitable opportunities being forgone. 186.

The payback period method of evaluating capital budgeting alternatives has two significant drawbacks. What are they?

Answer The payback period ignores any cash flows that occur after the end of the payback period. It also does not make use of the time value of money concept. 187.

Why is the impact of accepting a sound capital project often negative in terms of shortterm profits?

Answer The inflows are often lower in the initial stages of a project, and there may be substantial start-up expenses. Additionally, accelerated depreciation can cause low initial net income amounts.

CHAPTER 10 Budgetary Planning and Control Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

K C K D\C K K

7. 8. 9. 10. 11. 12.

2 1 2 2 2 2

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.

1 1 1 1 1 1,3 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2

K K C K C C K K K K K K K K K K K K K K K K K K K K C

58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

163.

1-3

164. 165. 166. 167.

2 2 2 2

AP AP AP AP

168. 169. 170. 171.

2 2 2 2

BT Item LO BT Item LO True-False Statements K 13. 2 C 19. 2 C 14. 2 C 20. 3 K 15. 2 C 21. 3 C 16. 2 K 22. 3 K 17. 2 K 23. 2, 3 K 18. 3 C 24. 3 Multiple Choice Questions C 85. 2 AP 112. 2 K 86. 2 AP 113. 2 C 87. 2 AP 114. 2 C 88. 2 AP 115. 2 C 89. 3 K 116. 2 C 90. 3 C 117. 2 K 91. 3 C 118. 2 AN 92. 3 K 119. 2 K 93. 3 AN 120. 2 K 94. 3 AN 121. 2 C 95. 3 AN 122. 2 C 96. 3 AN 123. 2 C 97. 3 C 124. 2 C 98. 3 K 125. 2 C 99. 3 C 126. 2 AP 100. 3 K 127. 2 AP 101. 3 C 128. 2 AP 102. 2 AP 129. 2 AP 103. 2 AP 130. 2 AP 104. 2 AP 131. 2 AP 105. 2 AP 132. 2 AP 106. 2 AP 133. 2 AP 107. 2 AP 134. 2 AP 108. 2 AP 135. 2 AP 109. 2 AP 136. 2 AP 110. 2 AP 137. 2 AP 111. 2 AP 138. 2 Matching

AP AP AP AP

Exercises 172. 2 AP 173. 2 AP 174. 2 AP 175. 2 AP

176. 177. 178. 179.

2 3 2 2

Item

K K K K K K

25. 26. 27. 28. 29. 30.

3 3 3 3 3 1

C C K K K K

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162.

2 2 2 2 2 2 2 2 2 3 2,3 2,3 2,3 2,3 2,3 2,3 2,3 2,3 2,3 3 3 3 3 3

AP AP AP AP AP AP AP AP AP C AP AP AP AP AP AP AN AP AN AP AN AN C C

AP AP AP AP

180. 181. 182.

2 3 3

AP AP AP

10-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

183. 184.

2 2

AP AP

185. 186.

2 2

189. 190.

1 2

C C

191. 192.

2 3

Challenge Exercises AP 187. 2 AP AP 188. 2 AP Short-Answer Essays K 193. 1 C 195. K 194. 3 C 196.

3 3

C EV

TRUE-FALSE STATEMENTS 1.

A budget is a formal document that quantifies a company’s plans for achieving its goals.

Budgets are useful in the control process because they provide a basis for evaluating performance.

A bottom-up approach to budgeting involves substantial input from lower-level managers.

Most managers believe that budgeting is more successful when a bottom-up approach rather than a top-down approach is used.

Generally, budgets that span longer time periods provide less detail than those spanning shorter time periods.

A zero-based budgeting is easier to prepare because it is based on prior period’s activity levels.

Only manufacturing firms need to prepare a production budget.

Changes in economic conditions can be one of the causes for significant deviations from the planned performance.

The first step in the budget process is preparing the sales forecast.

10.

If the number of units produced equals the number of units sold, the number of units in ending inventory will equal the number of units in beginning inventory on the production budget.

11.

The sales budget is constructed after the production budget is finalized based on a company’s capacity.

12.

All of the dollar amounts in the cash receipts budget represent revenues earned in the current period.

13.

The costs of acquisitions in the material purchases budget appear on the budgeted income statement as part of cost of goods sold.

14.

The amount and timing of cash flows is the focus of the cash receipts and disbursements budget.

Chapter 10 Budgetary Planning and Control

10-3

15.

A company will often have cash flow problems ahead of a period of increasing sales.

16.

A company that utilizes just-in-time inventory eliminates the need for budgeting.

17.

The budgeted balance sheet is also called a pro-forma balance sheet.

18.

One way a company can perform “what if” budget analysis is by preparing a flexible budget.

19.

The selling and administrative expense budget is based on the numbers in the production budget.

20.

Differences between budgeted and actual amounts are referred to as flexible budgets.

21.

A static budget is prepared for a single anticipated level of production.

22.

If the actual activity level differs from the budgeted activity level on the flexible budget, it is unfair to evaluate cost performance against that budget.

23.

A master budget is a set of budget relationships that can be adjusted to various activity levels.

24.

In a management by exception approach, only large, unfavorable variances are investigated.

25.

Managers may be tempted to pad the budget to meet performance targets.

26.

Generally, it is best to evaluate managers against a static budget since the volume used on a static budget is used to generate expected results for the period.

27.

Waiting until January 1 to ship an order and recognizing its revenue that was ready on December 29 is an example of income shifting.

28.

When a static budget is used for planning and control, managers may be tempted to build slack into their budgets.

29.

There is an inherent conflict when budgets are used for both planning and control.

30.

Budgeting often involves both monetary and nonmonetary measures of performance.

Answers to True-False 1 T 7 2 T 8 3 T 9 4 T 10 5 T 11 6 F 12

T T T T F F

13 14 15 16 17 18

F T F F T T

19 20 21 22 23 24

F F T T F F

25 26 27 28 29 30

T F T T T T

10-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MULTIPLE CHOICE 31.

Which of the following is correct concerning a budget? A. It is a formal document that quantifies a company’s plans for achieving its goals. B. It is prepared by the budget committee. C. It identifies the causes of significant deviations from expected performance. D. All of the answer choices are correct.

32.

The formal documents that quantify a company’s plans for achieving its goals are called A. variance reports. B. budgets. C. cost sheets. D. production reports.

33.

A budget is useful in the planning process because it A. determines who is to blame for poor operations. B. forces managers to think about goals and objectives and means of achieving them. C. identifies budget padding. D. creates budget slack.

34.

Which statement is not true concerning the development of a budget? A. It is a means of planning for management. B. It often involves communication with and input from department managers. C. It enhances communication and coordination among managers. D. It is created by the budget committee.

35.

Which of the following is not a reason that actual results may deviate from planned performance? A. A bottom-up approach to budgeting was used. B. Managers have done a particularly good or particularly poor job of managing operations. C. Conditions have changed since the budget was developed. D. The budget was poorly conceived and constructed.

36.

The person evaluating a manager should consider A. any deviation from budgeted amounts as an item that should be investigated. B. all favorable variances as indications of good performance. C. that managers will focus their attention on those measures that they know will be part of their evaluation. D. that all unfavorable variances indicate poor performance.

37.

Who is responsible for the approval of the master budget? A. The budget committee B. The company’s cost accountant C. The company’s auditors D. The company’s board of directors

Chapter 10 Budgetary Planning and Control

10-5

38.

The budget committee consists of A. senior managers, including the CEO and CFO. B. representatives from the stockholders and suppliers. C. a company’s stockholders. D. all employees interested in providing input to the budgeting process.

39.

In a top-down approach to budgeting, what occurs? A. The upper-level managers impose a budget without soliciting input from department managers. B. Lower-level managers are the primary source of information used in setting the budget. C. The production budget is developed before the sales budget. D. Each budget amount projected by upper-level managers is approved or disapproved by lower-level managers.

40.

In a bottom-up approach to budgeting, the primary source of information used in setting the budget is A. based on forecasted economic conditions. B. based on industry forecasts. C. provided by the controller. D. provided by lower-level managers.

41.

Which of the following statements regarding approaches to budgeting is(are) true? I. Most managers believe that successful budgeting requires a bottom-up approach. II. A top-down approach involves substantial input from lower-level managers. A. Only I B. Only II C. Both I and II D. Neither I nor II

42.

Less detailed budgets are associated with A. production costs. B. governmental agencies. C. longer time periods. D. zero-based budgeting.

43.

A method of budget preparation that requires all budgeted amounts to be justified, even if the amounts were supported in prior periods, is called A. variance budgeting. B. flexible budgeting. C. justified budgeting. D. zero-based budgeting.

44.

Which of the following is a characteristic of zero-based budgeting? A. It uses the same level of activity as the prior budget period. B. It is relatively inexpensive to implement. C. It is used mostly by manufacturing companies. D. It results in a fresh consideration of the validity of budget amounts.

10-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

45.

Which of the following is the comprehensive planning document that incorporates a number of individual budgets? A. Static budget B. Master budget C. Flexible budget D. Collective budget

46.

Which of the following is not typically a part of the master budget? A. Direct material purchases budget B. Performance report budget C. Projected cash receipts and disbursements D. Budgeted balance sheet

47.

The master budget incorporates individual budgets including those for A. direct materials, direct labor, and selling and administrative expenses. B. multiple levels of sales volume. C. past and future accounting periods. D. each employee in the company.

48.

Which of the following is the correct order for the preparation of the listed budgets? A. Budgeted income statement, sales budget, cash budget B. Cash budget, capital acquisitions budget, direct labor budget C. Sales budget, production budget, direct material purchases budget D. Direct labor budget, sales budget, budgeted income statement

49.

Which of the following budgets is prepared last? A. Sales budget B. Capital acquisitions budget C. Budgeted income statement D. Budgeted balance sheet

50.

Which of the following budgets is prepared first? A. Cash budget B. Sales budget C. Production budget D. Budgeted balance sheet

51.

Which of the following contains at least one item that is not a common method companies use to estimate sales? A. Economic models, and estimates from a company’s own sales force B. Trends in a company’s own sales data, and estimates from a company’s own sales force C. Estimates from a company’s own sales force, and expected production levels D. Economic models, and trends in a company’s own sales data

52.

Which of the following is not a method that can reasonably be used to forecast sales? A. Trends in the company’s sales data B. Production capacity C. Estimates from the company’s salespersons D. Mathematical models adjusted by an experienced manager using professional judgment

Chapter 10 Budgetary Planning and Control

10-7

53.

Which of the following assumptions is made while preparing a sales budget? A. The number of units to be sold and selling price per unit B. The cash to be received from units sold C. The contribution margin per unit and the number of units to be sold D. The number of units the manufacturing facility is able to produce

54.

Why is setting the sales budget very important? A. The rest of the master budget is driven by the sales budget. B. It is based on the production targets set by the production department. C. It establishes the actual profits that will be earned by a company. D. None of the answer choices are correct.

55.

Which of the following is not used in deciding how many units to produce in a period? A. The desired number of units in ending finished goods inventory B. The expected sales in units C. The number of units in beginning finished goods inventory D. The number of units of raw material needed for production

56.

Concerning relationship between beginning finished goods inventory, ending finished goods inventory, production, and sales, which of the following is true? A. Production = Beginning Inventory + Sales – Ending Inventory B. Production = Sales + Ending Inventory – Beginning Inventory C. Production = Beginning Inventory + Ending Inventory – Sales D. Production = Beginning Inventory – Ending Inventory + Sales

57.

Ace Ladders has fewer units in beginning finished goods inventory than in ending finished goods inventory. The number of units sold is A. less than the number of units produced. B. greater than the number of units produced. C. less than the number of units in beginning finished goods inventory. D. greater than the number of units in ending finished goods inventory.

58.

While preparing the production budget, the desired ending finished goods inventory for the first period is A. the same as the beginning inventory for the second period. B. often expressed as a percentage of the first period’s sales. C. generally more than the beginning finished goods inventory for the first period. D. always zero.

59.

Which of the following items affect the amount of direct material that must be purchased during a period? I. The amount of raw material in beginning inventory II. The amount of raw material in ending inventory A. Only I B. Only II C. Both I and II D. Neither I nor II

10-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

60.

A significant difference between the direct material purchases budget and the direct labor budget is that the direct material purchases budget A. is based on units sold, while the direct labor budget is based on units produced. B. considers beginning and ending inventory amounts, which are not part of the direct labor budget. C. is constructed for each quarter, while the direct labor budget is constructed for each pay period. D. is constructed from the top down, while the direct labor budget uses a bottom-up approach.

61.

Which of the following is likely to increase the amount budgeted for depreciation in the manufacturing overhead budget? A. Sale of production equipment at a loss B. Increased variable costs related to estimated increases in sales C. Planned acquisitions of new equipment D. A decrease in the number of units to be produced

62.

Which of the following is a reason the amount of cash paid out for manufacturing overhead each period does not equal the total overhead incurred? A. Depreciation is an overhead expense that does not require the use of cash. B. Overhead expenses are only estimates, and they do not require cash. C. Cash is only paid out for variable manufacturing overhead expenses. D. The amount of cash paid out is adjusted for the number of units sold.

63.

A significant difference between the direct material purchases budget and the production budget is that the production budget considers A. units to be produced, while the direct material purchases budget is based on units to be sold. B. beginning and ending finished goods inventory amounts, which are not part of a direct material purchases budget. C. finished goods inventory levels, while the material purchases budget considers raw material inventory levels. D. the capacity of the factory, while the direct material purchases budget does not.

64.

Which of the following is not required to calculate cost of goods sold in the budgeted income statement? A. Number of units to be sold B. Direct material costs to be used and direct labor costs to be incurred C. Manufacturing overhead costs incurred D. Direct material purchases expected during the period

65.

If budgeted net income is projected to be less than the company’s goal, the company should try to A. increase revenues and decrease expenses. B. incur more fixed costs and less variable costs. C. increase the collection of cash receipts. D. finance operations with a loan.

Chapter 10 Budgetary Planning and Control

10-9

66.

Which of the following statements is true concerning the capital acquisitions budget? A. It consists of a plan to acquire long-lived assets. B. It is constructed directly from the values in the sales budget. C. It is the same as the capital budgeting process. D. It is dependent upon plant capacity.

67.

Which of the following does not appear on the cash budget? A. Beginning cash balance B. Purchase of long-lived assets C. Cost of goods sold D. Collection of credit sales

68.

Which of the following transactions will affect the cash budget for a particular month in which each transaction occurs? A. Sale of a product when payment will be received in 60 days B. Payment for direct labor C. Amortization of prepaid insurance D. Depreciation of a piece of equipment that was purchased last year

69.

A cash budget fails to alert the management for: A. low projected cash balance. B. low profit levels. C. availability of excess cash for investment purposes. D. availability of sufficient cash for loan repayments.

70.

Which of the following is least likely to produce a need for temporary financing to bridge a cash shortfall? A. Building up inventory in anticipation of increased sales in the months ahead B. Allowing customers to purchase on credit C. Paying insurance policies in advance of the period insured D. Purchasing materials on a just-in-time inventory basis

71.

Winslow Inc. determined it had sold products during the month but not collected all of the amounts owed. Where will this amount owed be reflected in the master budget for the month? A. On the budgeted balance sheet in the assets section B. On the budgeted income statement C. As part of the cash receipts section of the cash budget D. As a reduction of inventory to be produced in the production budget

72.

When using a computer program to do budgeting, which one of the following is not true? A. A company can easily run “what if” analysis if the spreadsheet is well designed. B. Cash flow problems generally erupt since cash is difficult to track and predict. C. Worksheets should be formula driven so that a change in sales will update all schedules. D. A change in the sales budget should carry throughout all the individual budgets.

10-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

73.

SalaRita’s sales are 32% cash and 68% credit. Of the credit sales, 40% of credit sales are collected in the month of sale, 45% in the month following the sale, and 15% is collected two months after. Budgeted sales data is as follows: June July August

$200,000 120,000 150,000

How much is total ‘Accounts Receivable’ at the end of August? A. $61,200 B. $73,440 C. $99,600 D. $108,000 74.

Budgeted sales (in units) for the Rockwall Energy Drink Company are as follows: September October November December

45,000 units 60,000 units 40,000 units 75,000 units

The company wishes to have 10% of the next month’s sales on hand at the end of each month. How much is budgeted production for November? A. 43,500 units B. 40,000 units C. 47,500 units D. 36,000 units 75.

$200,000 120,000 150,000

How much is total cash collected during August? A. $145,920 B. $105,120 C. $88,800 D. $144,000

Chapter 10 Budgetary Planning and Control

76.

10-11

Wisdom Toys has budgeted sales and production over the next quarter as follows: September October November

Unit Sales 43,000 50,000 64,000

Production 44,400 52,800 61,200

The company requires that 20% of the next month’s sales in units are on hand at the end of each month. December sales are expected to be 50,000 units. How many video games are in inventory at October 31? A. 12,800 units B. 34,400 units C. 4,000 units D. 10,000 units 77.

Washam Company must maintain a minimum cash balance of $25,000. At the beginning of June the company’s cash balance was $17,000. Budgeted cash receipts for June are $150,000 and budgeted cash disbursements are $201,000. Budgeted net income for July totals $11,000. How much will Washam Company need to borrow by the end of June? A. $43,000 B. $34,000 C. $9,000 D. $59,000

78.

Alpha Caps Company has budgeted production of 14,000 units and sales of 16,500 units in January. Each unit requires 12 minutes of labor. The standard labor rate is $13.00 per hour. How much are total budgeted direct labor costs for January? A. $36,400 B. $21,840 C. $42,900 D. $2,184,000

79.

Each unit produced by Terra Electronics requires 4 pounds of raw materials. The raw materials inventory must be equal to 10% of the next month’s production. Each pound of raw materials costs $2.00. Budgeted production information follows. April May June

28,000 units 30,000 units 25,000 units

How much are budgeted purchases of raw materials for May? A. $118,000 B. $236,000 C. $221,000 D. None of the answer choices are correct.

10-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

80.

Shorstein Manufacturing Company purchases raw materials on account each month. Purchases are paid for according to the following schedule: 30% is paid in the month of the purchase 60% is paid in the month following the purchase 10% is paid in the second month following the purchase Budgeted purchases are as follows: March April May

$75,000 $90,000 $85,000

How much will be reported for Accounts Payable for material purchases as of the end of May? A. $59,500 B. $68,500 C. $87,000 D. $95,500 81.

Sultan Sundries must maintain a minimum cash balance of $34,000. At the beginning of February the company’s cash balance was $60,000. The budget for February is as follows: Total cash receipts $250,000 Total cash disbursements $245,000 Net income $50,000 Purchase machinery by signing a note $35,000 During February, how much will Sultan need to borrow? A. $50,000 B. $0 C. $25,000 D. $4,000

82.

DynaCare Products’ sales are all on account. History indicates that sales will be collected as follows: Month of sale Month following the sale Second month following the sale Never collected

25% 65% 8% 2%

Budgeted sales data follows: March April May June July

$300,000 $250,000 $260,000 $230,000 $200,000

How much are total budgeted cash collections during May? A. $230,500 B. $258,300 C. $65,000 D. $251,500

Chapter 10 Budgetary Planning and Control

83.

10-13

Paradise Gifts has budgeted sales for the quarter as follows: January February March

11,000 units 13,000 units 17,000 units

The ending inventory of finished goods each month should equal 25% of the next month’s budgeted sales in units. How much is scheduled production for February? A. 17,250 units B. 14,000 units C. 9,750 units D. 12,000 units 84.

Hanover Inc. sells buckets for $15 each. Budgeted unit sales for 4 months of 2017 are: March April May June

26,000 buckets 28,000 buckets 22,000 buckets 25,000 buckets

Hanover desires to have buckets on hand at the end of each month equal to 16 percent of the following month’s budgeted unit sales. Each bucket requires 3.9 pounds of plastic. At the end of each month, Hanover desires to have 12 percent of production material needs for the next month on hand. The plastic costs $0.40 per pound. How many buckets should Hanover produce during May? A. 27,040 buckets B. 31,520 buckets C. 27,280 buckets D. None of the answer choices are correct. 85.

Samson Company has budgeted production for the next two months as follows: July August

16,000 units 22,000 units

Each unit requires 5 pounds of material. Raw materials at the end of each month should equal 10% of the next month’s production requirements. How many pounds will be budgeted for purchases of raw materials for July? A. 83,000 pounds B. 66,200 pounds C. 80,600 pounds D. 79,400 pounds

10-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

86.

Green Company’s sales are 20% cash and 80% credit. Of the credit sales, 60% are collected in the month of sale and 30% in the month following the sale. The balance is collected during the following month. Budgeted sales data is as follows: June July August September

$300,000 $250,000 $280,000 $310,000

How much is total Accounts Receivable at the end of August? A. $224,400 B. $89,600 C. $137,000 D. $109,600 87.

Kitchen Stuff produces spatulas made out of acrylic. The company has estimated sales for June at 12,000, July at 12,800, August at 15,000, and September at 16,000 spatulas. The company plans to have 15% of the next month’s anticipated unit spatula sales and 22% of the next month’s acrylic needed for production on hand at the end of each month. Each spatula uses 7 ounces of acrylic, which is purchased at a cost of $0.22 per ounce. How much is budgeted production for July? A. 12,470 units B. 13,130 units C. 15,050 units D. None of the answer choices are correct.

88.

Teva Sandals’ sales for the next three months are as follows: February March April

$130,000 $170,000 $200,000

Collection history for the company indicates that 60% of sales are collected in the month of the sale, 36% is collected in the following month, and 4% of sales are uncollectible. How much are budgeted cash receipts for April? A. $181,200 B. $186,400 C. $120,000 D. $222,000 89.

When budgets are used for evaluation, what is the difference between budgeted and actual amounts called? A. Exceptions B. Budget variances C. Performance results D. Flexible budgets

Chapter 10 Budgetary Planning and Control

10-15

90.

The main difference between a static budget and a flexible budget is that the static budget is A. constructed using a top-down approach, while the flexible budget uses a bottomup approach. B. based on units produced, while a flexible budget is based on units sold. C. for a single level of activity, while a flexible budget can be adjusted for different activity levels. D. used only for selling and administrative costs, while the flexible budget is used for manufacturing costs.

91.

Wilson, Inc. created a spreadsheet that utilized a set of budget relationships that could be adjusted for various activity levels. What did Wilson create? A. A capital budget B. A static budget C. A standard budget D. A flexible budget

92.

Which of the following assumptions is made while preparing a flexible manufacturing overhead budget, when production levels change? A. Total fixed costs remain the same. B. The variable cost per unit changes. C. Fixed costs per unit remain the same. D. Total overhead costs remain the same when sales remain the same.

93.

Exclusive Decor’s budgeted income statement for 2017 follows: Sales (10,000 units) Less: Direct materials $27,600 Direct labor 6,000 Variable factory overhead 16,800 Fixed factory overhead 15,000 Fixed selling & admin expenses 30,000 Income before taxes

$128,000

95,400 $ 32,600

How much income before taxes will appear on a flexible budget for 11,000 units? A. $35,860 B. $40,140 C. $85,140 D. $40,360

10-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

94.

Yemesi, Inc.’s budgeted income statement for 2017 follows: Sales (80,000 units) Less: Direct materials $128,000 Direct labor 36,000 Variable overhead 32,000 Fixed overhead 10,000 Fixed selling & admin expenses 12,000 Income before taxes

$360,000

218,000 $142,000

How much income before taxes would appear on a flexible budget for 84,000 units? A. $150,200 B. $149,100 C. $140,900 D. $132,200 95.

Carrier Company’s budgeted income statement for 2017 follows: Sales (4,000 units) Less: Variable costs Fixed costs Income before taxes

$84,000 $44,000 26,000

70,000 $14,000

How much would be reported as income before taxes on a flexible budget for 5,000 units? A. $24,000 B. $50,000 C. $38,750 D. $52,000 96.

KirbyCor’s budgeted income statement for 2017 follows: Sales (80,000 units) Less: Direct materials Direct labor Variable overhead Fixed costs Income before taxes

$400,000 $120,000 80,000 40,000 80,000

320,000 $ 80,000

How much would be reported for total variable costs on a flexible budget at 75,000 units? A. $75,000 B. $300,000 C. $225,000 D. None of the answer choices are correct.

Chapter 10 Budgetary Planning and Control

10-17

97.

Managers can create budget slack by A. understating their actual level of sales. B. reducing their sales forecasts. C. understating expected expenses. D. shifting income into another accounting period.

98.

Which of the following are problem behaviors that may occur when budgets are used for both planning and control? I. Padding of budgets II. Shifting of income between periods III. Understatement of budgeted expenses A. I, II, and III B. I and II C. II and III D. I and III

99.

Which of the following is not a method that managers may use to achieve a budget income target in a given period? A. Shift discretionary expenses to the next period B. Encourage customers to take shipments at the end of the period even though they do not want the products until the next period C. Fraudulently recognize the next period’s sales in the current period D. Understate budgeted expenses

100.

Management by exception refers to the practice of only investigating variances A. in product costs. B. in which the actual cost exceeds the budget. C. that are material in dollar amounts relative to budgeted amounts. D. in areas of the company that have been performing poorly.

101.

Under what circumstances may a manager be motivated to defer a shipment until the next period? A. When budgeted costs have been overstated for the current year B. When revenue for the current year is less than expected C. When this year’s budgeted income is less than expected D. When the budgeted income for the current year has already been attained

102.

Workman Company had sales of 15,000 units of its only product in the first quarter of 2017. In the first quarter of 2018, Workman anticipates selling 20% more units than it sold in the first quarter of 2017, with a selling price of $68 per unit. What is the amount of sales revenue that will appear in the budgeted income statement for the first quarter of 2018? A. $1,224,000 B. $1,020,000 C. $1,468,800 D. $816,000

10-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

103.

Hanson Meters had sales of 4,000, 4,500, 6,000, and 5,000 water meters during each of the four quarters of 2017. Hanson expects sales in each quarter of 2017 to be 10% more than the respective quarter of 2017. Each meter sells for $150. What amount will appear as budgeted total sales revenue for 2018? A. $3,217,500 B. $21,450 C. $2,925,000 D. None of the answer choices are correct.

104.

Bombay Cabinet Store’s policy is to keep 25% of the next month’s sales in ending inventory. If sales are expected to be 5,000 units in March, 5,800 units in April, and 6,000 units in May, how many units should be produced in April? A. 7,300 units B. 5,750 units C. 6,050 units D. 5,850 units

105.

Cross Country Apparel plans to sell 22,000 ladders in May and 34,000 ladders in June. Cross Country keeps 10% of the next month’s sales as ending inventory. If April’s ending inventory reflects this policy, how many ladders should be produced in May? A. 23,200 ladders B. 20,800 ladders C. 25,400 ladders D. 19,800 ladders

106.

Marks Company produces staplers. Its sales are projected to be 26,000 in June, 28,000 in July, and 30,000 in August. The company plans to have 15% of the next month’s sales in inventory at the end of each month. How many staplers must Marks produce in July? A. 28,300 units B. 28,600 units C. 28,000 units D. 32,500 units

107.

RasDyne Chemicals has 40,000 pounds of krypton in inventory at the beginning of August. The company plans to produce 6,000 rack joints made out of krypton in August. If each rack joint requires 30 pounds of krypton and RasDyne wants 50,000 pounds of krypton in inventory at the end of August, how many pounds of krypton should the company plan to purchase during August? A. 170,000 pounds B. 180,000 pounds C. 190,000 pounds D. 210,000 pounds

Chapter 10 Budgetary Planning and Control

10-19

108.

Budget Electronics is planning to sell 2,200 and produce 2,000 wicker baskets during June. Each unit requires 120 linear feet of wicker and 0.70 hours of direct labor. Wicker costs $0.35 per linear foot and employees of the company are paid $13.00 per hour. Manufacturing overhead is applied at a rate of 140% of direct labor costs. The company wants to have 10% of the wicker needed for the next month’s production available at the end of each month. The expected production in July is 1,800 baskets. How many linear feet of wicker should the company plan to buy during June? A. 807,840 feet B. 237,600 feet C. 239,980 feet D. 242,400 feet

109.

Budget Electronics is planning to sell 2,200 and produce 2,000 wicker baskets during June. Each unit requires 120 linear feet of wicker and 0.70 hours of direct labor. Wicker costs $0.35 per linear foot and employees of the company are paid $13.00 per hour. Manufacturing overhead is applied at a rate of 140% of direct labor costs. The company wants to have 10% of the wicker needed for the next month’s production available at the end of each month. The expected production in July is 1,800 baskets. What is the total amount that will be budgeted for direct labor for June? A. $18,200 B. $26,000 C. $20,020 D. $28,600

110.

Budget Electronics is planning to sell 2,200 and produce 2,000 wicker baskets during June. Each unit requires 120 linear feet of wicker and 0.70 hours of direct labor. Wicker costs $0.35 per linear foot and employees of the company are paid $13.00 per hour. Manufacturing overhead is applied at a rate of 140% of direct labor costs. The company wants to have 10% of the wicker needed for the next month’s production available at the end of each month. The expected production in July is 1,800 baskets. How much manufacturing overhead will be charged to each basket sold during June? A. $12.74 B. $9.10 C. $18.20 D. $11.58

111.

Budget Electronics is planning to sell 2,200 and produce 2,000 wicker baskets during June. Each unit requires 120 linear feet of wicker and 0.70 hours of direct labor. Wicker costs $0.35 per linear foot and employees of the company are paid $13.00 per hour. Manufacturing overhead is applied at a rate of 140% of direct labor costs. The company wants to have 10% of the wicker needed for the next month’s production available at the end of each month. The expected production in July is 1,800 baskets. What is the unit cost of each basket produced in June? A. $51.66 B. $47.34 C. $52.08 D. None of the answer choices are correct.

10-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

112.

Walker Entertainment is a distributor of video games and expects its video game sales to be as follows for the first 4 months of 2017: January February March April

$100,000 $150,000 $180,000 $200,000

Walker’s cost of goods sold is 70% of sales. Ending inventory is expected to equal 40% of the next month's cost of goods sold. How much are budgeted inventory purchases for February? A. $105,000 B. $113,400 C. $117,000 D. $50,400 113.

Walker Entertainment is a distributor of video games and expects its video game sales to be as follows for the first 4 months of 2017: January February March April

$100,000 $150,000 $180,000 $200,000

Walker’s cost of goods sold is 70% of sales. Ending inventory is expected to equal 40% of the next month's cost of goods sold. How much are budgeted inventory purchases for March? A. $84,000 B. $131,600 C. $126,000 D. $112,000 114.

Baby Boo Boutique had sales of $78,000 in December, 2017. Sales for the first three months of 2018 are: January February March

$84,000 80,000 68,000

In the past, Baby Boo has found that 25% of the sales revenue is collected in the month of the sale and 75% is collected in the following month. If this pattern continues, what will be the amount of Baby Boo’s cash receipts in February? A. $20,000 B. $83,000 C. $71,000 D. $81,000 115.

Forever 39 has found that 30% of its sales are collected in the month of the sale and the remainder of the sales is collected in the next month. If sales are expected to be $100,000 in April, $120,000 in May, and $80,000 in June, what is the estimated amount of cash receipts for May? A. $114,000 B. $106,000 C. $92,000 D. $108,000

Chapter 10 Budgetary Planning and Control

10-21

116.

In recent years, Sands Retro Clothing has collected 45% of its sales in the month of the sale, 53% in the month that follows the sale. The other 2% is not collected. During the first five months of 2017, Sands is anticipating sales of $330,000, $415,000, $540,000, $260,000, and $370,000, respectively. What is the amount of cash receipts budgeted for March? A. $472,950 B. $380,800 C. $473,750 D. $462,950

117.

Haverti Auto Mart has budgeted the following amounts for auto part sales in 2017: April May June July

$ 98,000 67,000 108,000 82,000

An analysis of past patterns of receipts shows that 60% of the sales dollars are received in the month of the sale and 40% are received in the following month. Assuming this pattern continues, how much cash does Haverti expect to receive during May? A. $85,600 B. $97,600 C. $91,600 D. $79,400 118.

Cringle Company expects sales as follows: January February March April

$150,000 180,000 210,000 170,000

Sales are made 30% for cash, and 70% on credit. Credit sales are collected 40% in the month of sale and 60% in the next month. How much are cash collections expected to be in March? A. $138,600 B. $255,000 C. $197,400 D. None of the answer choices are correct.

10-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

119.

Jazzy Janitors has found that only 10% of its invoiced amounts are paid in the same month that the work is completed. 60% are paid in the month after the work is completed and 30% are paid in the second month after the work is completed. During December, 2017, Jazzy Janitors’ invoiced $200,000 to clients. Projected revenues for the first six months of 2018 are given below: Month January February March April May June

Revenue $180,000 215,000 220,000 218,000 240,000 255,000

What are the expected cash receipts for March 2018? A. $224,800 B. $151,000 C. $265,000 D. $205,000 120.

Jazzy Janitors has found that only 10% of its invoiced amounts are paid in the same month that the work is completed. Sixty percent are paid in the month after the work is completed and 30% are paid in the second month after the work is completed. During December 2017, Jazzy Janitors’ invoiced $200,000 to clients. Projected revenues for the first six months of 2018 are given below: Month Revenue January $180,000 February 215,000 March 220,000 April 218,000 May 240,000 June 255,000 What are the expected cash receipts for April 2018? A. $218,300 B. $242,300 C. $153,800 D. $21,800

Chapter 10 Budgetary Planning and Control

121.

10-23

Jazzy Janitors has found that only 10% of its invoiced amounts are paid in the same month that the work is completed. Sixty percent are paid in the month after the work is completed and 30% are paid in the second month after the work is completed. During December 2017, Jazzy Janitors’ invoiced $200,000 to clients. Projected revenues for the first six months of 2018 are given below: Month Revenue January $180,000 February 215,000 March 220,000 April 218,000 May 240,000 June 255,000 What is the expected Accounts Receivable balance at March 31, 2018? A. $198,000 B. $280,500 C. $262,500 D. $205,000

122.

Bandaloon Foods expects to make the following inventory purchases during the last three months of the year: Month October November December

Purchases $80,000 100,000 160,000

During September, Bandaloon purchased $72,000 of inventory. The restaurant typically pays for 25% of the inventory purchases within the month of the purchase and 75% in the following month. How much are estimated cash disbursements in November for inventory purchases? A. $95,000 B. $100,000 C. $85,000 D. $115,000 123.

DuraBlend First Aid started operations on January 1, 2017. On that date, the only assets were cash of $13,000, and inventory of $600 consisting of direct materials. The company sells first aid kits for $18 each. Additional information concerning the company’s operations follows: • Variable costs of production are $5 for each kit consisting of direct materials of $2.00, direct labor totaling $1.80, and $1.20 per unit in variable overhead. • Other expenses include $1 per first aid kit in variable selling expenses, $22,000 per month in fixed production costs, and $14,000 per month in fixed selling and administration costs. • Sales are collected 40% in the month of sales and 60% in the month after the sale. • All expenses are paid in the month they are incurred except materials that are paid in the month following purchase. • The company plans its ending inventory of first aid kits to be 20% of the units to be sold during the next month. Direct material inventory is budgeted to be equal to 10% of the next month’s production requirements.

10-24

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

•

Sales in units are forecasted as follows: January February March April

6,000 8,000 7,000 9,000

What is the budgeted net income using the contribution format for February? A. $66,000 B. $60,000 C. $68,000 D. None of the answer choices are correct. 124.

6,000 8,000 7,000 9,000

How much are budgeted cash collections for February? A. $57,600 B. $6,800 C. $122,400 D. $133,200

Chapter 10 Budgetary Planning and Control

125.

10-25

6,000 8,000 7,000 9,000

How many first aid kits will the company produce in February? A. 7,800 units B. 7,400 units C. 9,400 units D. 8,200 units 126.

6,000 8,000 7,000 9,000

10-26

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

How much will be reported for Accounts Receivable on the company’s balance sheet at the end of February? A. $122,400 B. $86,400 C. $43,200 D. $57,600 127.

Bake Time makes and sells baking pans. Each pan uses 0.70 pounds of aluminum. Budgeted production and sales of pans in units for the next five months is as follows: Budgeted production Budgeted sales

June 22,180 22,400

July 21,940 21,300

August 24,940 24,500

September 26,240 26,700

October 23,720 24,400

The company wants to maintain monthly ending inventories of aluminum equal to 15% of the following month's budgeted production needs, and monthly inventories of pans equal to 20% of the number needed for next month’s sales. The cost of aluminum is $0.85 per pound. How much is the cost of budgeted material purchases for August? A. $14,693 B. $17,595 C. $14,955 D. None of the answer choices are correct. 128.

Bake Time makes and sells baking pans. Each pan uses 0.70 pounds of aluminum. Budgeted production and sales of pans in units for the next five months is as follows: Budgeted production Budgeted sales

June 22,180 22,400

July 21,940 21,300

August 24,940 24,500

September 26,240 26,700

October 23,720 24,400

The company wants to maintain monthly ending inventories of aluminum equal to 15% of the following month's budgeted production needs, and monthly inventories of pans equal to 20% of the number needed for next month’s sales. The cost of aluminum is $0.85 per pound. How much is budgeted raw materials to be reported on the company’s balance sheet at August 31? A. $2,342 B. $3,936 C. $2,755 D. $3,346 129.

Harkin Products expects to make purchases of $65,000 in January; $80,000 in February; $50,000 in March; and $90,000 in April. Purchases are paid 30% in the month of purchase and 70% in the month after purchase. How much is budgeted accounts payable at March 31? A. $35,000 B. $71,000 C. $59,000 D. None of the answer choices are correct.

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10-27

130.

Sharone Janitorial Supplies expects to make purchases of $100,000 in January; $240,000 in February; $350,000 in March; and $230,000 in April. Purchases are paid 30% in the month of purchase and 70% in the month after purchase. How much is budgeted accounts payable at the end of February? A. $70,000 B. $168,000 C. $142,000 D. $72,000

131.

Milkway Dairy Blend buys and resells 5 gallons containers of Greek yogurt for $38 per container. Milkway pays $20 per container to buy the yogurt. Additionally, Milkway has the following information: • Operating fixed costs are $95,000 per month and office furniture depreciation is $7,000 per month • Inventory at the end of each month is maintained at 30% of the next month's projected cost of sales • All sales are on credit. Collections are made 40% in the month of sale and 60% in the month after sale • All selling and administrative expenses are paid in the month after they are incurred • Inventory purchases are paid 30% in the month of purchase and 70% in the month after purchase • Budgeted monthly unit sales for the first five months of 2017 are as follows: January February March April May

11,000 containers 13,000 containers 15,000 containers 14,000 containers 18,000 containers

How much Accounts Receivable will be reported on Milkway’s balance sheet at March 31? A. $342,000 B. $539,600 C. $296,400 D. $524,400

10-28

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

132.

Milkway Dairy Blend buys and resells 5 gallons containers of Greek yogurt for $38 per container. Milkway pays $20 per container to buy the yogurt. Additionally, Milkway has the following information: • Operating fixed costs are $95,000 per month and office furniture depreciation is $7,000 per month • Inventory at the end of each month is maintained at 30% of the next month's projected sales • All sales are on credit. Collections are made 40% in the month of sale and 60% in the month after sale • All selling and administrative expenses are paid in the month after they are incurred • Inventory purchases are paid 30% in the month of purchase and 70% in the month after purchase • Budgeted monthly unit sales for the first five months of 2017 are as follows: January February March April May

11,000 containers 13,000 containers 15,000 containers 14,000 containers 18,000 containers

In the month of March, how many containers of yogurt will be purchased? A. 14,700 units B. 19,200 units C. 15,000 units D. 15,300 units 133.

Milkway Dairy Blend buys and resells 5 gallons containers of Greek yogurt for $38 per container. Milkway pays $20 per container to buy the yogurt. Additionally, Milkway has the following information: • Operating fixed costs are $95,000 per month and office furniture depreciation is $7,000 per month • Inventory at the end of each month is maintained at 30% of the next month's projected sales • All sales are on credit. Collections are made 40% in the month of sale and 60% in the month after sale • All selling and administrative expenses are paid in the month after they are incurred • Inventory purchases are paid 30% in the month of purchase and 70% in the month after purchase • Budgeted monthly unit sales for the first five months of 2017 are as follows: January February March April May

11,000 containers 13,000 containers 15,000 containers 14,000 containers 18,000 containers

What much will the company budget for March purchases? A. $306,000 B. $384,000 C. $300,000 D. $294,000

Chapter 10 Budgetary Planning and Control

134.

10-29

Milkway Dairy Blend buys and resells 5 gallons containers of Greek yogurt for $38 per container. Milkway pays $20 per container to buy the yogurt. Additionally, Milkway has the following information: • Operating fixed costs are $95,000 per month and office furniture depreciation is $7,000 per month • Inventory at the end of each month is maintained at 30% of the next month's projected sales • All sales are on credit. Collections are made 40% in the month of sale and 60% in the month after sale • All selling and administrative expenses are paid in the month after they are incurred • Inventory purchases are paid 30% in the month of purchase and 70% in the month after purchase • Budgeted monthly unit sales for the first five months of 2017 are as follows: January February March April May

11,000 containers 13,000 containers 15,000 containers 14,000 containers 18,000 containers

How much is budgeted net income for March using variable costing? A. $175,000 B. $168,000 C. $150,400 D. None of the answer choices are correct. 135.

Tiny Toons distributes cartoon DVDs that sell for $12 each. Tiny Toons pays $7 per DVD to buy the product. Selling costs of $1 per unit are incurred to deliver the DVDs to the customer. This is paid in cash when the product is sold. Tiny Toons has $50,000 per month in fixed selling and administrative expenses (including $3,000 in depreciation), which are paid half in the month incurred and half in the next month. It is Tiny’s policy to maintain an inventory at the end of each month equal to 30% of the next month’s projected unit sales. Tiny Toons makes 30% of sales in cash, and the remainder are on credit. Credit sales are collected in the month after sale. Budgeted monthly sales for the first five months of 2017 are: January February March April May

20,000 units 22,000 units 26,000 units 28,000 units 40,000 units

How much are budgeted inventory purchases during February? A. $154,000 B. $23,200 C. $162,400 D. $54,600

10-30

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

136.

20,000 units 22,000 units 26,000 units 28,000 units 40,000 units

How much is budgeted income for March using variable costing? A. $312,000 B. $54,000 C. $57,000 D. $104,000 137.

20,000 units 22,000 units 26,000 units 28,000 units 40,000 units

How much are budgeted cash receipts for February? A. $22,000 B. $79,200 C. $264,000 D. $247,200

Chapter 10 Budgetary Planning and Control

138.

10-31

20,000 units 22,000 units 26,000 units 28,000 units 40,000 units

How much will Tiny Toons report as budgeted Accounts Receivable at March 31 on its balance sheet? A. $218,400 B. $93,600 C. $278,400 D. $312,000 139.

History Entertainment distributes a DVD that sells for $12 per unit. History pays $7 per unit to buy the product. Selling cost of $1 per unit is incurred to deliver the product to the customer. This is paid in cash when the product is sold. History has $50,000 per month in fixed selling and administrative expenses (including $3,000 in depreciation), which are paid half in the month incurred and half in the next month. It is History’s policy to maintain an inventory at the end of each month equal to 30% of the next month’s projected cost of sales. History makes 30% of sales in cash, and the rest are on credit. Credit sales are collected in the month after sale. Budgeted monthly sales for the first five months of 2017 are as follows: January February March April May

20,000 units 22,000 units 26,000 units 28,000 units 40,000 units

How much is the budgeted cash payment for selling and administrative expenses in April? A. $78,000 B. $81,000 C. $75,000 D. $50,000

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

140.

Maxim Fasteners distributes giant binder clips that sell for $3 each. Maxim pays $1.20 to buy each clip. The company has $4,000 per month in fixed costs. Policies and other information follow: • Inventory is maintained at the end of each month equal to 10% of the next month's projected sales in units. • Purchases are paid 40% in the month acquired and the balance in the month after. • All sales are on credit, and 30% are collect in the month of sale and 70% in the month after sale. • Budgeted monthly sales in units for the first five months of 2017 are as follows:

•

o January 6,000 units o February 5,000 units o March 7,000 units o April 9,000 units o May 8,000 units Variable selling and administrative costs are $0.50 per clip.

How much is the budgeted purchase cost of inventory during March? A. $7,200 B. $8,640 C. $8,400 D. $9,480 141.

Maxim Fasteners distributes giant binder clips that sell for $3 each. Maxim pays $1.20 each to buy the clips. The company has $4,000 per month in fixed costs. Policies and other information follow: • Inventory is maintained at the end of each month equal to 10% of the next month's projected sales in units. • Purchases are paid 40% in the month acquired and the balance in the month after. • All sales are on credit, and 30% are collect in the month of sale and 70% in the month after sale. • Budgeted monthly sales in units for the first five months of 2017 are as follows:

•

o January 6,000 units o February 5,000 units o March 7,000 units o April 9,000 units o May 8,000 units Variable selling and administrative costs are $0.50 per clip and are paid in the month of incurred.

How much is budgeted net income for March using variable costing? A. $9,100 B. $5,100 C. $12,600 D. $13,500

Chapter 10 Budgetary Planning and Control

142.

10-33

•

How much are budgeted cash collections during April? A. $8,100 B. $22,800 C. $25,200 D. $27,000 143.

•

What amount will be reported for budgeted Accounts Receivable at the end of April? A. $8,100 B. $25,200 C. $6,300 D. $18,900

10-34

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

144.

•

How much will budgeted contribution margin be for April? A. $11,700 B. $21,000 C. $12,600 D. $9,100 145.

Tee Time manufactures wireless USB ports and sells them for $9 each. The company recently began marketing and selling the USB ports on the Web, and based on economic predictions, the company expects sales to increase dramatically. Unit sales in December, 2017 totaled 18,000 units. Sales for 2018 are expected to increase by 10% each month for the near future. How much is the sales budget for February? A. $178,200 B. $21,780 C. $196,020 D. $194,400

146.

Hallmart expects to make inventory purchases in the next three months as follows: April May June

$56,000 80,000 90,000

Prior experience has shown that 35% of a month’s purchases are paid in the month of purchase and 65% in the month following purchase. March purchases were $65,000. How much are cash disbursements for purchases during May? A. $28,000 B. $86,500 C. $71,600 D. $64,400

Chapter 10 Budgetary Planning and Control

147.

10-35

Market Leasing budgeted credit sales in the first quarter of 2018 to be as follows: January February March

$210,000 190,000 170,000

The budgeted beginning cash balance at February 1 is expected to be $14,000 and budgeted monthly cash disbursements are expected to be $198,000. Credit sales in December, 2017 are expected to be $204,000. The company expects to collect 20% of a month’s sales in the month of sale and 80% in the following month. How much is the budgeted cash balance at the end of February? A. $22,000 B. $206,000 C. $8,000 D. $10,000 148.

Hanson Retailers planned to make 280,000 cans of pasta sauce and spend $140,000 on tomatoes during November. However, demand was weak due to increased competition, and only 260,000 cans of pasta sauce were produced. The actual cost incurred was $132,000. Tomato prices were as expected during the period. Which of the following statements would be a fair statement regarding Hanson’s performance on tomato usage? A. Hanson was under budget by $2,000 and did well controlling costs. B. Hanson was over budget by $2,000. C. Hanson’s flexible budget for tomatoes for performance evaluation was $132,000. D. Hanson saved $8,000 in material costs for the period.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

149.

The results of operations for the Budget Pesticides, for the fourth quarter of 2017 were as follows: Sales of bug spray Variable cost of goods sold Contribution margin Fixed production costs Fixed selling and administrative expenses Income before taxes Income taxes Net income

$600,000 280,000 320,000 $70,000 30,000

100,000 220,000 88,000 $132,000

Budget Pesticide uses the variable costing method. The company’s balance sheet reported the following amounts as of the end of the fourth quarter of 2017: Cash Accounts receivable Fixtures and equipment Accumulated depreciation

$ 30,000 300,000 130,000 80,000

Accounts payable Common stock Retained earnings

$ 44,800 140,200 195,000

Additional information: 1. Sales and variable costs of sales are expected to increase by 5% in the next quarter. 2. All sales are on credit with 50% collected in the quarter of sale and 50% collected in the following quarter. 3. Variable cost of sales consists of 40% materials, 40% direct labor, and 20% variable overhead. 4. All materials are purchased on credit and 60% are paid for in the quarter of purchase and the remaining amount is paid for in the quarter after purchase. There is no beginning or ending inventory. 5. Direct labor and variable overhead are paid in the quarter the expenses are incurred. 6. Fixed production costs include $3,000 of depreciation. Fixed production costs are paid in the quarter they are incurred. 7. Fixed selling and administrative costs, other than $4,000 of depreciation expense, are expected to increase by 2% per quarter. Fixed selling and administrative costs are paid in the quarter they are incurred. 8. The tax rate is expected to be 40%. All taxes are paid in the quarter they are incurred. How much is the budgeted contribution margin for the first quarter of 2018? A. $266,000 B. $336,000 C. $406,000 D. $250,000

Chapter 10 Budgetary Planning and Control

150.

10-37

$600,000 280,000 320,000 $70,000 30,000

100,000 220,000 88,000 $132,000

$ 30,000 300,000 130,000 80,000

Accounts payable Common stock Retained earnings

$ 44,800 140,200 195,000

Additional information: 1. Sales and variable costs of sales are expected to increase by 5% in the next quarter. 2. All sales are on credit with 50% collected in the quarter of sale and 50% collected in the following quarter. 3. Variable cost of sales consists of 40% materials, 40% direct labor, and 20% variable overhead. 4. All materials are purchased on credit and 60% are paid for in the quarter of purchase and the remaining amount is paid for in the quarter after purchase. There is no beginning or ending inventory. 5. Direct labor and variable overhead are paid in the quarter the expenses are incurred. 6. Fixed production costs include $3,000 of depreciation. Fixed production costs are paid in the quarter they are incurred. 7. Fixed selling and administrative costs, other than $4,000 of depreciation expense, are expected to increase by 2% per quarter. Fixed selling and administrative costs are paid in the quarter they are incurred. 8. The tax rate is expected to be 40%. All taxes are paid in the quarter they are incurred. How much are the total budgeted cash receipts for the first quarter of 2018? A. $315,000 B. $600,000 C. $615,000 D. $645,750

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

151.

$600,000 280,000 320,000 $70,000 30,000

100,000 220,000 88,000 $132,000

$ 30,000 300,000 130,000 80,000

Accounts payable Common stock Retained earnings

$ 44,800 140,200 195,000

Additional information: 1. Sales and variable costs of sales are expected to increase by 5% in the next quarter. 2. All sales are on credit with 50% collected in the quarter of sale and 50% collected in the following quarter. 3. Variable cost of sales consists of 40% materials, 40% direct labor, and 20% variable overhead. 4. All materials are purchased on credit and 60% are paid for in the quarter of purchase and the remaining amount is paid for in the quarter after purchase. There is no beginning or ending inventory. 5. Direct labor and variable overhead are paid in the quarter the expenses are incurred. 6. Fixed production costs include $3,000 of depreciation. Fixed production costs are paid in the quarter they are incurred. 7. Fixed selling and administrative costs, other than $4,000 of depreciation expense, are expected to increase by 2% per quarter. Fixed selling and administrative costs are paid in the quarter they are incurred. 8. The tax rate is expected to be 40%. All taxes are paid in the quarter they are incurred. How much is the budgeted cash disbursements for materials in the first quarter of 2018? A. $176,400 B. $288,400 C. $70,560 D. $115,360

Chapter 10 Budgetary Planning and Control

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10-39

$600,000 280,000 320,000 $70,000 30,000

100,000 220,000 88,000 $132,000

$ 30,000 300,000 130,000 80,000

Accounts payable Common stock Retained earnings

$ 44,800 140,200 195,000

Additional information: 1. Sales and variable costs of sales are expected to increase by 5% in the next quarter. 2. All sales are on credit with 50% collected in the quarter of sale and 50% collected in the following quarter. 3. Variable cost of sales consists of 40% materials, 40% direct labor, and 20% variable overhead. 4. All materials are purchased on credit and 60% are paid for in the quarter of purchase and the remaining amount is paid for in the quarter after purchase. There is no beginning or ending inventory. 5. Direct labor and variable overhead are paid in the quarter the expenses are incurred. 6. Fixed production costs include $3,000 of depreciation. Fixed production costs are paid in the quarter they are incurred. 7. Fixed selling and administrative costs, other than $4,000 of depreciation expense, are expected to increase by 2% per quarter. Fixed selling and administrative costs are paid in the quarter they are incurred. 8. The tax rate is expected to be 40%. All taxes are paid in the quarter they are incurred. If total cash disbursements are budgeted at $479,472, how much is the budgeted cash at the end of the first quarter of 2018? A. $615,000 B. $135,600 C. $150,600 D. $165,528

10-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

153.

$600,000 280,000 320,000 $70,000 30,000

100,000 220,000 88,000 $132,000

$ 30,000 300,000 130,000 80,000

Accounts payable Common stock Retained earnings

$ 44,800 140,200 195,000

Additional information: 1. Sales and variable costs of sales are expected to increase by 5% in the next quarter. 2. All sales are on credit with 50% collected in the quarter of sale and 50% collected in the following quarter. 3. Variable cost of sales consists of 40% materials, 40% direct labor, and 20% variable overhead. 4. All materials are purchased on credit and 60% are paid for in the quarter of purchase and the remaining amount is paid for in the quarter after purchase. There is no beginning or ending inventory. 5. Direct labor and variable overhead are paid in the quarter the expenses are incurred. 6. Fixed production costs include $3,000 of depreciation. Fixed production costs are paid in the quarter they are incurred. 7. Fixed selling and administrative costs, other than $4,000 of depreciation expense, are expected to increase by 2% per quarter. Fixed selling and administrative costs are paid in the quarter they are incurred. 8. The tax rate is expected to be 40%. All taxes are paid in the quarter they are incurred. How much is the budgeted Accounts Receivable at the end of the first quarter of 2018? A. $600,000 B. $615,000 C. $315,000 D. $300,000

Chapter 10 Budgetary Planning and Control

154.

10-41

$600,000 280,000 320,000 $70,000 30,000

100,000 220,000 88,000 $132,000

$ 30,000 300,000 130,000 80,000

Accounts payable Common stock Retained earnings

$ 44,800 140,200 195,000

Additional information: 1. Sales and variable costs of sales are expected to increase by 5% in the next quarter. 2. All sales are on credit with 50% collected in the quarter of sale and 50% collected in the following quarter. 3. Variable cost of sales consists of 40% materials, 40% direct labor, and 20% variable overhead. 4. All materials are purchased on credit and 60% are paid for in the quarter of purchase and the remaining amount is paid for in the quarter after purchase. There is no beginning or ending inventory. 5. Direct labor and variable overhead are paid in the quarter the expenses are incurred. 6. Fixed production costs include $3,000 of depreciation. Fixed production costs are paid in the quarter they are incurred. 7. Fixed selling and administrative costs, other than $4,000 of depreciation expense, are expected to increase by 2% per quarter. Fixed selling and administrative costs are paid in the quarter they are incurred. 8. The tax rate is expected to be 40%. All taxes are paid in the quarter they are incurred. How much is the budgeted Accounts Payable for materials at the end of the first quarter of 2018? A. $47,040 B. $117,600 C. $70,500 D. $291,760

10-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

155.

$600,000 280,000 320,000 $70,000 30,000

100,000 220,000 88,000 $132,000

$ 30,000 300,000 130,000 80,000

Accounts payable Common stock Retained earnings

$ 44,800 140,200 195,000

Additional information: 1. Sales and variable costs of sales are expected to increase by 5% in the next quarter. 2. All sales are on credit with 50% collected in the quarter of sale and 50% collected in the following quarter. 3. Variable cost of sales consists of 40% materials, 40% direct labor, and 20% variable overhead. 4. All materials are purchased on credit and 60% are paid for in the quarter of purchase and the remaining amount is paid for in the quarter after purchase. There is no beginning or ending inventory. 5. Direct labor and variable overhead are paid in the quarter the expenses are incurred. 6. Fixed production costs include $3,000 of depreciation. Fixed production costs are paid in the quarter they are incurred. 7. Fixed selling and administrative costs, other than $4,000 of depreciation expense, are expected to increase by 2% per quarter. Fixed selling and administrative costs are paid in the quarter they are incurred. 8. The tax rate is expected to be 40%. All taxes are paid in the quarter they are incurred. No new plant assets were acquired. How much is the budgeted book value of the plant assets at the end of the first quarter of 2018? A. $46,000 B. $47,000 C. $43,000 D. $53,000

Chapter 10 Budgetary Planning and Control

156.

10-43

$600,000 280,000 320,000 $70,000 30,000

100,000 220,000 88,000 $132,000

$ 30,000 300,000 130,000 80,000

Accounts payable Common stock Retained earnings

$ 44,800 140,200 195,000

Additional information: 1. Sales and variable costs of sales are expected to increase by 5% in the next quarter. 2. All sales are on credit with 50% collected in the quarter of sale and 50% collected in the following quarter. 3. Variable cost of sales consists of 40% materials, 40% direct labor, and 20% variable overhead. 4. All materials are purchased on credit and 60% are paid for in the quarter of purchase and the remaining amount is paid for in the quarter after purchase. There is no beginning or ending inventory. 5. Direct labor and variable overhead are paid in the quarter the expenses are incurred. 6. Fixed production costs include $3,000 of depreciation. Fixed production costs are paid in the quarter they are incurred. 7. Fixed selling and administrative costs, other than $4,000 of depreciation expense, are expected to increase by 2% per quarter. Fixed selling and administrative costs are paid in the quarter they are incurred. 8. The tax rate is expected to be 40%. All taxes are paid in the quarter they are incurred. How much is budgeted total assets at March 31, 2018? A. $523,528 B. $658,000 C. $350,000 D. None of these answer choices are correct.

10-44

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

157.

E-Book Trading Company budgets $100,000 in fixed overhead and $11.00 per book in variable overhead each month. For May, E-Book expected to license and sell 14,000 ebooks but because of unexpected demand actually sold 16,000 units. The actual overhead cost was $256,000. What will a flexible budget performance report for May likely indicate? A. E-Book Trading had a $2,000 unfavorable variance for overhead for the month B. E-Book Trading had a $20,000 favorable variance for overhead for the month C. E-Book Trading had a $20,000 unfavorable variance for overhead for the month D. E-Book Trading had a $2,000 favorable variance for overhead for the month

158.

Prodigy Products’ expected manufacturing costs for trash cans for the month when 3,000 cans are produced are summarized below: Direct material Direct labor Variable overhead Factory depreciation Supervisory salaries Other fixed factory costs

$2.40 per unit $1.60 per unit $ 6,000 10,500 4,800 1,500

What is the flexible budget amount for a month when 3,200 units are produced? A. $36,000 B. $37,120 C. $34,800 D. $35,600 159.

$2.40 per unit $1.60 per unit $ 6,000 10,500 4,800 1,500

What is the flexible budget amount for a month when 4,000 units are produced? A. $34,800 B. $38,800 C. $46,400 D. $40,800

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$2.40 per unit $1.60 per unit $ 6,000 10,500 4,800 1,500

Which of the following is the flexible budget equation for Prodigy Products? A. $4.00 × number of units produced B. $16,800 + ($6.00 × number of units produced) C. $11.60 × number of units produced D. $22,800 + ($4.00 × number of units produced) 161.

Belk Shoes planned to make 8,000 pairs of shoes using $40,000 on leather during February. Due to higher than anticipated demand for shoes, Belk produced 9,000 pairs of shoes and spent $44,500 on leather. Leather prices during the period were as expected in the budget. Which of the following statements is a fair statement regarding Belk’s performance on leather use? A. Belk’s flexible budget for comparative purposes for February is $45,000. B. Belk used more leather per shoe than was allowed in the budget. C. Belk paid more for each yard of leather than allowed in the budget. D. Belk spent $500 more for leather than allowed under the flexible budget.

162.

Xanine Company budgets $200,000 in fixed overhead and $6.00 per unit in variable overhead. For June, Xanine expected to produce 11,000 units but because of unexpected demand actually produced 13,000 units. The actual overhead cost was $280,000. A flexible budget performance report for May would indicate that A. Xanine generated a $2,000 favorable overhead variance for the month. B. Xanine was $12,000 under budget for overhead for the month. C. Xanine was $2,000 over budget for overhead for the month. D. Xanine generated a $12,000 unfavorable overhead variance for the month.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answers to Multiple Choice 31 A 53 A 32 B 54 A 33 B 55 D 34 D 56 B 35 A 57 A 36 C 58 A 37 A 59 C 38 A 60 B 39 A 61 C 40 D 62 A 41 A 63 C 42 C 64 D 43 D 65 A 44 D 66 A 45 B 67 C 46 B 68 B 47 A 69 B 48 C 70 D 49 D 71 A 50 B 72 B 51 C 73 B 52 B 74 A

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96

A A D A B B B D B D A D B A B C D A D A A C

97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118

B B D C D A A D A A C B A A D B B B B D D C

119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140

D A C C B C A B C A A B A A D B C B D A C B

141 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162.

B B D A C D A B B C D D C A C A B A D B A C

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MATCHING 163.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once.

_____ 1.

Budgeted income statement

_____ 2.

Budgets

_____ 3.

Budget variances

_____ 4.

Capital acquisitions budget

_____ 5.

Flexible budget

_____ 6.

Budget slack

_____ 7.

Master budget

_____ 8.

Sales budget

_____ 9.

Static budget

_____ 10.

Income shifting

_____ 11.

Management by exception

_____ 12.

Zero-based budgeting

A. B. C. D. E. F. G. H. I. J. K. L.

Differences between actual and budgeted amounts A comprehensive planning document that incorporates a number of individual budgets Approach in which managers only investigate exceptional variances Set of budget relationships that can be adjusted to various activity levels Setting budget targets that are easy to achieve Moving income from one period to another to achieve budget targets Method of budget preparation that requires each amount to be justified, even if it was supported in previous periods Budget showing plans to purchase property, plant, and equipment Formal documents that quantify a company’s plans for achieving its goals A budget that is only valid for a single level of activity Summarizes sales, cost of goods sold, and other expenses to project net income First budget that is prepared since other budgets depend upon it

Answers to Matching 1 K 2 I 3 A 4 H

5 6 7 8

D E B L

9 10 11 12

J F C G

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

EXERCISES 164.

Galvin Production is beginning the budgeting process for 2017. The sales forecast for the first three months of 2017 in units follows: January 10,000 February 14,000 March 12,000 The company desires to have 10% of the next month’s anticipated unit sales in inventory at the end of a month. December’s ending inventory reflects this policy. April’s sales are budgeted at 15,000 units. Prepare a production budget in good form for February. Omit the heading.

Answer

165.

Sales Plus desired ending inventory (10% × 12,000)

14,000 1,200

Total units needed Less beginning inventory (10% × 14,000) Units to be produced

15,200 (1,400) 13,800

Swisher Toys is preparing its budget for 2017. Production for the first quarter is expected to be 600,000 toy dump trucks. Production for the subsequent quarters will be 625,000 trucks, 700,000 trucks, and 850,000 trucks. Each truck requires 3.0 pounds of resin, which is used to produce the trucks. Each pound of resin costs $0.50. Swisher will have 325,000 pounds of resin on hand at the end of 2017 and wants to have 500,000 pounds of resin in inventory at the end of 2018. Ending inventory for resin for the first, second, and third quarters will be 340,000 pounds, 360,000 pounds, and 450,000 pounds. Prepare the direct materials budget by quarter and in total for 2018.

Answer First Quarter Production 600,000 Pounds required per unit 3 Pounds used in production 1,800,000 Plus desired ending inventory 340,000 Total amount needed 2,140,000 Less beginning inventory 325,000 Amount to be purchased 1,815,000 Cost per pound $ 0.50 Budgeted purchases $ 907,500

Second Quarter 625,000 3 1,875,000 360,000 2,235,000 340,000 1,895,000 $ 0.50 $ 947,500

Third Quarter 700,000 3 2,100,000 450,000 2,550,000 360,000 2,190,000 $ 0.50 $1,095,000

Fourth Quarter 850,000 3 2,550,000 500,000 3,050,000 450,000 2,600,000 $ 0.50 $1,300,000

Total Year 2,775,000 3 8,325,000 500,000 8,825,000 325,000 8,500,000 $ 0.50 $4,250,000

Chapter 10 Budgetary Planning and Control

166.

10-49

Captain Fizzy plans to produce 800,000 fizzy drinks during 2017, with 120,000 of them during the first quarter, 250,000 during the second quarter, 220,000 during the third quarter, and 210,000 during the fourth quarter. Employees are paid $13.50 per hour and can produce 200 fizzy drinks each hour. Determine Captain Fizzy’s direct labor budget for the third quarter of 2017.

Answer Direct labor budget = (220,000 ÷ 200) × $13.50 = $14,850 167.

Martinez Corporation's sales of gizmos are 25% for cash and 75% on credit. Past collection history indicates that credit sales are collected as follows: Month of Sale

Month After Sale

Second Month After Sale

Uncollectible

30%

50%

15%

In January, sales were $80,000 and February sales were $70,000. Projected sales for March are 3,000 gizmos at $13 each. Projected sales for April are 4,000 gizmos at $14 each. Calculate the budgeted cash collections for April. Answer Sales during March: 3,000 × $13 = $39,000 Sales during April: 4,000 × $14 = $56,000 Collections from April Sales: Cash sales (25% × $56,000) Credit sales (75% × $56,000 × 30%) Collections from March Sales: Credit sales (75% × $39,000 × 50%) Collections from February Sales: Credit sales (75% × $70,000 × 15%) Cash collections during April

$14,000 12,600 14,625

7,875 $49,100

10-50

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

168.

All of Gaylord Boutique’s sales are on account. In the past, 15% of the amounts charged have been paid in the same month as the sale, 60% were paid in the following month, and the rest were paid in the second month following the sale. Sales for selected months are given below: November 2017 $580,000 December 2017 600,000 January 2018 550,000 February 2018 650,000 March 2018 750,000 April 2018 725,000 May 2018 700,000 Prepare the cash receipts budget for the first three months of 2018.

Answer November sales December sales January sales February sales March sales Total receipts 169.

January $145,000 360,000 82,500

$587,500

February $150,000 330,000 97,500 $577,500

March

$137,500 390,000 112,500 $640,000

Billy Bob Tacos pays for 40% of its inventory purchases in the month of the purchase and the remainder in the following month. The company’s inventory purchases totaled $850,000 in October, $980,000 in November, and $720,000 in December. The company also paid for new equipment with a total cost of $520,000 in November and made an income tax payment of $130,000 in December. Salaries and wages were paid as follows: $310,000 in October, $300,000 in November and $295,000 in December. Determine the company’s cash disbursements for November and December.

Answer October purchases November purchases December purchases Equipment Income tax payment Salaries and wages Total cash disbursements

November $ 510,000 392,000

December $ 588,000 288,000

520,000 300,000 $1,722,000

130,000 295,000 $1,301,000

Chapter 10 Budgetary Planning and Control

170.

10-51

At January 1, 2017, Wallace, Inc. has beginning inventory of 4,000 widgets. Wallace estimates it will sell 35,000 units during the first quarter of 2017 with a 10% increase in unit sales each quarter. Wallace’s policy is to maintain an ending inventory equal to 25% of the next quarter’s sales. Each widget costs $1 to purchase and is sold for $1.50. How much is budgeted sales revenue for the third quarter of 2017?

Answer 1st quarter units = 35,000 2nd quarter units = 35,000 × 110% = 38,500 3rd quarter units = 35,000 × 110% × 110% = 42,350 Sales revenue for 3rd quarter = 42,350 × $1.50 = $63,525

171.

Clips, Inc. budgets on an annual basis for its fiscal year. The company produces widgets using the raw material, oximate. The following beginning and ending inventory levels are planned for the fiscal year ending June 30, 2017:

Oximate Widgets

July 1, 2017 40,000 pounds 80,000 units

June 30, 2018 36,000 pounds 50,000 units

Three pounds of oximate are needed to produce each widget. If Clips plans to sell 480,000 widgets during the year ending June 30, 2018, how many widgets will it need to produce during the year? Answer Expected sales Add desired ending inventory Less beginning inventory on hand Units to be produced

172.

480,000 50,000 (80,000) 450,000

East Lansing Mall expects to make purchases in the first quarter of 2018 as follows: January February March

$ 80,000 122,000 74,000

Purchases in December of 2017 are expected to be $93,000. The company expects that 35% of a month’s purchases will be paid in the month of purchase and the balance will be paid in the following month. Calculate budgeted cash disbursements related to purchases for February of 2018. Answer Payment of January purchases ($80,000 × 65%) Payment of February purchases ($122,000 × 35%) Budgeted cash receipts

$52,000 42,700 $94,700

10-52

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

173.

ProSlade expects credit sales in the next quarter as follows: April May June

$ 90,000 110,000 113,000

Prior experience has shown that 30% of a month’s sales are collected in the month of sale, 40% in the month following sale, and 28% in the second month following sale. February and March sales were $90,000 and $100,000, respectively. Uncollectible accounts are written off under the allowance method at 80 days after the end of the month in which the sale was made. a. b. Answer a.

Calculate budgeted cash receipts for May. How much is Accounts Receivable on ProSlade’s May 31 balance sheet?

Cash receipts for May purchases ($110,000 × 30%) Cash receipt for April purchases ($90,000 × 40%) Cash receipts for March purchases ($100,000 × 28%) Budgeted cash receipts for May

$33,000 36,000 28,000 $97,000

($110,000 × 70%) + ($90,000 × 30%) + ($100,000 × 2%) = $106,000

Chapter 10 Budgetary Planning and Control

174.

10-53

In the fourth quarter of 2017, Winston Wheels had the following net income: Sales Less cost of sales Gross margin Selling and administration costs Income before taxes Income taxes Net income

$400,000 150,000 250,000 110,000 140,000 42,000 $ 98,000

Purchases in the fourth quarter of 2017 amounted to $170,000. Estimated data for 2018 follow: First Quarter Sales $300,000 Cost of sales 170,000 Purchases 200,000 Selling and admin. 110,000 • • • • • •

Second Quarter $350,000 200,000 230,000 110,000

Third Quarter $400,000 230,000 250,000 110,000

Fourth Quarter $450,000 150,000 280,000 110,000

Taxes are 30% of pretax income and are paid in the month of accrual. All sales are on credit and 30% are collected in the quarter of sale and 70% are collected in the next quarter. 40% of purchases are paid in the quarter of purchase and 60% in the next quarter. Selling and administrative expenses are paid in the quarter incurred. There is $11,000 of depreciation included in selling and administrative expense. A capital expenditure for $40,000 is planned for the fourth quarter of 2018.

Calculate total cash receipts for the second quarter of 2018. Answer Collection of sales: Collection of second quarter sales (30% × $350,000) Collection of first quarter sales (70% × $300,000) Total cash receipts

$ 105,000 210,000 $315,000

10-54

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

175.

In the fourth quarter of 2017, Winston Wheels had the following net income: Sales Less cost of sales Gross margin Selling and administration costs Income before taxes Income taxes Net income

$400,000 150,000 250,000 110,000 140,000 42,000 $ 98,000

Second Quarter $350,000 200,000 230,000 110,000

Third Quarter $400,000 230,000 250,000 110,000

Fourth Quarter $450,000 150,000 280,000 110,000

Prepare a cash disbursements budget for the second quarter of 2018. Answer Winston Wheels Cash Disbursements Budget, Second Quarter 2018 Payment for purchases: Payment of second quarter purchases (40% × $230,000) $ 92,000 Payment of first quarter purchases (60% × $200,000) 120,000 Payment for selling and administrative expenses 99,000 Payment of taxes ($350,000 – $200,000 – $110,000) × 30% 12,000 Total cash disbursements $323,000

Chapter 10 Budgetary Planning and Control

176.

10-55

Green & Clean produces and sells organic concentrated detergent. Information about the budget for 2017 is as follows: 1. The company expects to sell 50,000 bottles of detergent in the first quarter, 70,000 in the second quarter, 95,000 in the third quarter, and 46,000 in the fourth quarter. 2. A bottle of detergent requires 5 ounces of Chemical A and 12 ounces of Chemical B. 3. The desired ending inventory of finished goods is equal to 15% of next quarter’s sales, whereas the desired ending inventory for material is 10% of next quarter’s production requirements. 4. There are 7,500 bottles of detergent, 25,000 ounces of Chemical A, and 60,000 ounces of Chemical B on hand at the beginning of the first quarter. 5. At the end of the fourth quarter, the company must have 10,000 bottles of detergent, 24,000 ounces of Chemical A, and 90,000 ounces of Chemical B to meet its needs in the first quarter of 2018. 6. The cost of Chemical A is $0.12 per ounce, the cost of Chemical B is $0.08 per ounce, and the selling price of the detergent is $11.50 per bottle. 7. The cost of direct labor is $0.80 per bottle, and the cost of variable overhead is $1.20 per bottle. Fixed manufacturing overhead is $50,000 per quarter. 8. Variable selling and administrative expense is 5% of sales, and fixed selling and administrative expenses are $60,000 per quarter. Prepare a production budget for each quarter of 2017.

Answer

Unit sales Desired ending inventory Total needed Beginning inventory Units to be produced

177.

First Quarter 50,000 10,500 60,500 7,500 53,000

Second Quarter 70,000 14,250 84,250 10,500 73,750

Third Quarter 95,000 6,900 101,900 14,250 87,650

Fourth Quarter 46,000 10,000 56,000 6,900 49,100

Pappas Products manufactures a single product. Expected manufacturing costs are as follows: Variable unit costs Direct materials $2.10 per unit Direct labor $1.50 per unit Manufacturing overhead $0.50 per unit Fixed costs per month Depreciation $4,000 per month Supervisory salaries $3,500 per month Other fixed costs $2,400 per month How much are budgeted manufacturing costs for a production levels of 8,000 units?

Answer [($2.10 + $1.50 + $0.50) × 8,000] + ($4,000 + $3,500 + $2,400) = $42,700

10-56

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

178.

Answer Units to be produced Ounces of chemical A per unit Ounces of chemical A required for production Plus desired ending inventory of chemical A Total needed Less beginning inventory of chemical A Ounces to be purchased Cost per ounce Cost of purchases of chemical A *95,000 + (15% × 46,000) – (15% × 95,000) = 87,650

87,650* 5 438,250 24,550 462,800 43,825 418,975 $ 0.12 $ 50,277

Chapter 10 Budgetary Planning and Control

179.

10-57

Answer Units to be produced* Labor cost per bottle Budgeted direct labor cost

First Quarter 53,000 $ 0.80 $42,400

Second Quarter 73,750 $ 0.80 $59,000

First quarter = 50,000 + (0.15 × 70,000) – 7,500 = 53,000 Second quarter = 70,000 + (0.15 × 95,000) – (0.15 × 70,000) = 73,750

10-58

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

180.

Answer Sales ($11.50 × 95,000) Less variable costs: Cost of goods sold ($3.56 × 95,000) Selling and administrative costs (5% × $1,092,500) Contribution margin Less fixed costs: Production costs Selling and administrative costs Income before taxes Variable cost of sales per bottle: Chemical A Chemical B Direct labor Variable overhead Total

$1,092,500 $338,200 54,625

50,000 60,000

$0.60 0.96 0.80 1.20 $3.56

392,825 699,675

110,000 $589,675

Chapter 10 Budgetary Planning and Control

181.

10-59

Expected manufacturing costs for Beaver Street Manufacturing are as follows: Variable Costs per Unit Direct material $7.00 Direct labor 3.50 Variable overhead 1.80

Fixed Costs per Month Supervisory salaries $17,000 Factory depreciation 4,500 Other factory costs 3,100

Determine the budgeted manufacturing costs for a production level of 14,000 units. Answer Variable costs per unit = $7.00 + $3.50 + $1.80 = $12.30 per unit Fixed costs per month = $17,000 + $4,500 + $3,100 = $24,600 Manufacturing costs for 14,000 units = ($12.30 × 14,000) + $24,600 = $196,800

182.

Expected manufacturing costs for Beaver Street Manufacturing for June are as follows: Variable Costs per Unit Direct material $7.00 Direct labor 3.50 Variable overhead 1.80

Fixed Costs per Month Supervisory salaries $17,000 Factory depreciation 4,500 Other factory costs 3,100

During June, the company produced 13,000 units and incurred the following costs: Total Variable Costs Direct material $112,500 Direct labor 36,000 Variable overhead 23,000

Total Fixed Costs For The Month Supervisory salaries $16,100 Factory depreciation 4,700 Other factory costs 3,200

Prepare a performance report for Beaver Street Manufacturing for June. Answer Number of units Variable costs: Direct material Direct labor Variable overhead Total variable costs Fixed costs: Supervisory salaries Depreciation Other fixed costs Total fixed costs Total overhead

Flexible Budget 13,000

Actual 13,000

Variance

$ 91,000 45,500 23,400 159,900

$112,500 36,000 23,000 171,500

($21,500) U 9,500 F 400 F ($11,600) U

17,000 4,500 3,100 24,600 $184,500

16,100 4,700 3,200 24,000 $195,500

900 F (200) U (100) U 600 F ($11,000) U

10-60

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

CHALLENGE EXERCISES 183.

Werth’s Widgets pays for 30% of its inventory purchases in the month of the purchase and the remainder in the following month. The company’s inventory purchases totaled $65,000 in October, $87,000 in November, and $52,000 in December. During November, Werth acquired new equipment costing $100,000 by signing a note for $80,000 and paid the balance in cash. Werth made one payment for $5,000 toward the note during December that included $600 of interest. Income taxes totaling $30,000 were paid in December. General and admin expenses totaled $30,000 during October, $35,000 during November, and $40,000 during December, of which $5,000 per month is for depreciation. Werth pays 80% of the general and administrative costs during the month incurred and the balance the following month. Cash at the beginning of November was $40,000. Prepare a cash disbursements budget for November for Werth’s Widgets. Omit the budget heading.

Answer Inventory purchases – November (30% × $87,000) Inventory purchases – October (70% × $65,000) Total inventory purchases Cash down payment on equipment Cash paid for general and admin – November [($35,000 –$5,000) × 80%] Cash paid for general and admin – October [($30,000 – $5,000) × 20%]

Budgeted cash disbursements

184.

$ 26,100 45,500 71,600 20,000 24,000 5,000 $120,600

Gessel Co.’s projected sales are as follows:

August $160,000 September $180,000 October $220,000 November $200,000 Gessel estimates that it will collect 30% of sales in the month of sale, 50% in the month after the sale, and 18% in the second month following the sale. Two percent of all sales are estimated to be bad debts. Gessel purchases inventories on account totaling $130,000 during August, $140,000 during September, and $100,000 during October. Gessel pays 25% of purchases in the month purchased and 75% in the following month. a. b. Answer a.

How much is Gessel Co.’s budgeted cash receipts for October? How much is the net increase or decrease in cash for Gessel for October?

Collections from October sales: $220,000 × 30% Collections from September sales: $180,000 × 50% Collections from August sales: $160,000 × 18% Total budgeted cash receipts for October

$ 66,000 90,000 28,800 $184,800

Collections during October (from part a)

$184,800

Disbursements from October purchases: $100,000 × 25% (25,000) Disbursements from September purchases: $140,000 × 75% (105,000)

Total disbursements during October Net increase in cash during October

(130,000) $ 54,800

Chapter 10 Budgetary Planning and Control

185.

10-61

Tree Haven makes and sells silk palm trees. Each tree uses 0.80 yards of silk fabric. Budgeted production of trees in units for the next five months is as follows: Budgeted production Budgeted sales

April 24,160 24,500

May 23,490 22,800

June 26,570 26,250

July 26,880 27,850

August 22,900 23,000

The company wants to maintain monthly ending inventories of fabric equal to 15% of the following month's budgeted production needs, and monthly inventories of trees equal to 20% of the number needed for next month’s sales. The cost of silk is $2.00 per yard. Direct labor cost is $14.00 per hour and it takes 66 minutes to complete each tree. Factory overhead is applied at the rate of $1.25 per direct labor dollar. a. Prepare a direct materials purchases budget for June. b. Calculate the amount of Raw Materials and Finished Goods Inventory to be reported on Tree Haven’s June 30 balance sheet. Answer a.

Units to be produced 26,570 Yards of silk per tree 0.80 Yards of silk need for production 21,256 Ending raw materials inventory (15% × 26,880 × 0.80) 3,226 Beginning raw material inventory (15% × 26,570 × 0.80) (3,188) Yards of silk need to purchase 21,294 Cost of silk per yard $ 2.00 Budgeted cost of materials purchases $42,588 Ending raw materials inventory: 15% × 26,880 × 0.80 × $2 = $6,452 Cost per unit of the trees produced: Direct materials per unit (0.80 × $2) Direct labor (66/60) × $14 Factory overhead ($15.40 × $1.25) Total cost per unit

$ 1.60 15.40 19.25 $36.25

Finished goods units at June 30 = 20% × 27,850 = 5,570 Ending finished goods inventory: $36.25 × 5,570 = $201,913

10-62

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

186.

Trescot, Inc. provided the following information: June July Projected sales $120,000 $110,000 Projected merchandise purchases $76,000 $65,000 • • • • •

August $130,000 $70,000

September $100,000 $58,000

Trescot estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the sale, and 23% in the second month following the sale. Two percent of all sales are estimated to be bad debts. The cash balance on June 1 is $6,000. Trescot pays 30% of merchandise purchases in the month purchased and 70% in the following month. General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000 of this amount. Trescot pays operating expenses in the month incurred. Trescot make loan payments of $3,000 per month of which $400 is interest and the remainder is principal.

Calculate Trescot’s budgeted cash disbursements for August. Answer Cash paid for merchandise purchases: August purchases ($70,000 × 30%) $21,000 July purchases ($65,000 × 70%) 45,500 Cash paid for operating expenses ($20,000 – $2,000) 18,000 Cash paid for loan ($3,000 – $400) 2,600 Cash paid for interest 400 Budgeted cash disbursements for August $87,500

Chapter 10 Budgetary Planning and Control

187.

Livanos, Inc. reports all its sales on credit, and pays operating costs in the month incurred. Amounts for 2017 are: Budgeted sales Budgeted purchases

• • • • • a. b. c. Answer a. b. c. 188.

10-63

March $300,000 $144,000

April $290,000 $120,000

May $320,000 $128,000

June $280,000 $132,000

July $210,000 $90,000

Amounts due from customers are collected 70% in the month of sale and 30% in the following month. Cost of goods sold is 60% of sales. Livanos purchases and pays for merchandise 40% in the month of acquisition and 60% in the following month. Operating expenses are: Salaries, $50,000; Depreciation, $12,000; Rent, $15,000; and Utilities, $14,000. Accounts payable is used only for inventory acquisitions. How much cash will Livanos receive during May from customers? How much is the May 30, 2017 budgeted Accounts Receivable? How much is the budgeted balance for Accounts Payable at May 30, 2017?

(70% × $320,000) + ($290,000 × 30%) = $311,000 30%× $320,000 = $96,000 60% × $128,000 = $76,800

Contron, Inc. projected the following for 2017: Credit sales Collections from customers Cost of goods sold Loan repayments: $1,000 is interest, $15,000 is principal Current period cash operating expenses Depreciation expense Loss on disposal of plant asset Merchandise purchases (90% to be paid in cash) Accrued wages closing balance Beginning cash balance

$240,000 246,000 92,000 16,000 80,000 20,000 5,000 95,000 12,000 36,000

How much is cash to be reported on Con’s budgeted balance sheet at the end of 2017? Answer Beginning cash balance Collections from customers Loan repayments Operating expenses Merchandise purchases (90% x $95,000) Cash at end of 2017

$ 36,000 246,000 (16,000) (80,000) (85,500) $100,500

10-64

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

SHORT-ANSWER ESSAYS 189.

What is the difference between the bottom-up and top-down approach to budgeting?

Answer In a bottom-up approach to budgeting, lower-level managers are the primary source of information in setting the budget. In the top-down approach, budgets are developed at higher organizational levels without substantial input from lower-level managers.

190.

Describe at least three sources of input for the sales budget.

Answer Input for the sales budget may come from economists, trade journals and magazines, or the company’s own sales personnel, as well as last year’s sales level.

191.

What are the main purposes of preparing a cash receipts and disbursements budget?

Answer By preparing a cash receipts and disbursements budget, a company can anticipate cash shortages and arrange to borrow funds. A company may also find investment opportunities for anticipated cash surpluses. 192.

What is meant by “management by exception?”

Answer Management by exception is an approach to investigating variances that suggests that managers only investigate those variances that are a significant percentage of the budgeted or actual amount or exceed a significant dollar amount.

193.

List and briefly explain three reasons that a company may have significant deviations from budgeted performance.

Answer Deviations from budgeted performance may result from: 1. a poorly conceived plan or budget. 2. conditions that have changed since the plan was developed. 3. managers who have done a particularly good or particularly poor job of managing operations.

194.

What is the difference between a static budget and a flexible budget?

Answer A static budget is prepared for a single level of anticipated production. A flexible budget is a set of budget relationships that can be adjusted for different levels of activity.

Chapter 10 Budgetary Planning and Control

195.

10-65

“Managers may perceive a conflict between the planning and control uses of budgets.” Explain what this statement means and what a company can do to minimize this conflict.

Answer If managers are asked to provide input into the budget, they may build slack into the amounts that they budget so that it will be fairly easy for them to achieve the budgeted amounts and they will be evaluated favorably. However, these budgeted amounts may not be in the best interest of the firm. Firms can discourage this behavior by assuring managers that they will be evaluated fairly and fostering open communication among all levels of employees.

196.

Explain what budget padding and income shifting are and why managers are tempted to do them.

Answer Budget padding is projecting low sales and high expenses so that targets are easy to achieve. Income shifting is shifting revenues or expenses into periods where they are needed to reach budget goals. Managers engage in these activities in order to hit budget targets.

CHAPTER 11 Standard Costs and Variance Analysis Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6. 7.

1 1 1 1 1 1 1

K K K K K K K

8. 9. 10. 11. 12. 13. 14.

1 1 1,3 1 1 1 1

32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3 1 1 1 1 1 1 1 1,3

K K K K K C K K K K K K K C C K C K AP AP AP AP AP AP AP K

58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83.

1 1 1 1 1 1,3 1 1 1 1 1 1,3 1 1 1 1 1 1 1 2 2 2 2 2 2 2

161.

1,2

162. 163. 164. 165.

1,2 1 1 1

AP AP AP AP

166. 167. 168. 169.

1 1 1,2 1

BT Item LO BT Item True-False Statements K 15. 1 K 22. K 16. 1 C 23. K 17. 2 K 24. K 18. 2 C 25. K 19. 2 C 26. K 20. 2 C 27. K 21. 2 C *28. Multiple Choice Questions K 84. 2 K *110 K 85. 2 AP *111. C 86. 2 AP 112.. AP 87. 2 C 113. AP 88. 2 K 114. AP 89. 1,2 AP 115. AP 90. 2 AP 116. AP 91. 2 AP 117. AP 92. 2 AP 118. AP 93. 2 AP 119. AP 94. 2 AP 120. C 95. 2 AP 121. C 96. 2 AP 122. C 97. 2 C 123. AP 98. 3 C 124. AP 99. 1,3 K 125. AP 100. 3 C 126. AP 101. 3 C 127. AP *102. A1 K 128. K *103. A1 K 129. C *104. A1 K 130. K *105. A1 K 131. K *106. A1 C 132. C *107. A1 K 133. K *108. A1 K 134. K *109. A1 C 135. Matching

AP AP AP AP

Exercises 170. 2 AP 171. 1-3 AP 172. 1 AP 173. 1,3 AP

174. 175. 176. 177.

Item

3 3 3 2,3 3 3 A1

K K K C K C K

*29. *30. *31.

A1 A1 A1

K K K

A1 A1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1,2 1 1 1 1 2 2 2

K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. *160 .

2 2 1 1 1 1 2 2 2 2 2 2 2 2 2 2 1,2 2 2 2 1 1 1 1 A1

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

1,3 1 1,3 2

AN AP AP AP

11-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

*178. 179.

A1 1

EV AP

180. 181.

1 1

184. 185.

1 1

K K

186. 187.

1,3 2

Challenge Exercises AN 182. 1,2 EV AN 183. ,3 2 AP Short-Answer Essays AN 188. 3 C 190. 3 C 189. 3 C *191. A 1

C C

TRUE-FALSE STATEMENTS 1.

In a standard costing system, manufactured goods are recorded at the variable cost that should have been incurred to produce the items.

Differences between standard and budgeted costs are referred to as standard cost variances.

The use of standard costs is limited to manufacturing companies.

Budgeted costs are the same as standard costs.

Ideal standards are developed under the assumption that no obstacles to the production process will be encountered.

For planning purposes, ideal standards are more useful than attainable standards.

A variance analysis generally involves decomposing the difference between standard and actual costs into three components—direct materials, direct labor, and manufacturing overhead.

Ideal standards are synonymous with favorable variances, while attainable standards are synonymous with unfavorable variances.

A material price variance measures whether more or less material was used in producing inventory.

10.

Unfavorable variances are red flags that a manager has performed poorly.

11.

The material quantity variance compares the actual quantity of material purchased with the quantity of material used.

12.

The material price variance is equal to the standard price per unit of material times the actual quantity of material used.

13.

The labor rate variance is also known as the labor efficiency variance.

14.

The labor rate variance measures whether the rate paid to employees is more or less than the company’s standard rate.

15.

The labor rate variance is equal to the difference between the actual number of labor hours worked and the standard labor hours allowed, times the standard labor wage rate.

Chapter 11 Standard Costs and Variance Analysis

11-3

16.

A favorable labor efficiency variance indicates that employees worked more quickly than expected.

17.

The total variance for manufacturing overhead is the difference between the flexible budget for overhead and actual overhead costs.

18.

An unfavorable controllable overhead variance indicates that more cost was incurred on overhead costs than allowed in the flexible budget.

19.

A favorable overhead volume variance is a signal that the actual quantity produced was greater than the quantity anticipated.

20.

An unfavorable overhead volume variance always indicates that overhead is overapplied during the period.

21.

The controllable variable overhead variance is inappropriately named, because managers are not expected to be able to control it.

22.

If a management by exception approach is used to investigate variances, only variances that cause costs to be more than expected are investigated.

23.

Variances that are large in absolute dollar value or as a percent of budgeted amounts are generally considered exceptional in a management by exception approach.

24.

In some instances, process improvement can lead to unfavorable variances.

25.

If actual demand is greater than anticipated, an overall favorable variance will exist for each of the three production costs.

26.

The materials storeroom clerk is responsible for material price variances.

27.

A purchasing manager might be tempted to buy inferior materials because it will create favorable material quantity variance.

*28.

In a standard costing system, the cost transferred out of Work in Process inventory is equal to the standard cost per items produced time the number of completed units.

*29.

A standard costing system simplifies accounting by carrying inventory at standard cost.

*30.

All insignificant variances are closed to Cost of Goods Sold.

*31.

A favorable material quantity variance is recorded with a credit to the Material Quantity Variance account.

Material from the appendix to the chapter is marked with an asterisk (*)

11-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answers to True-False 1 F 8 2 F 9 3 F 10 4 F 11 5 T 12 6 F 13 7 T 14

F F F F F F T

15 16 17 18 19 20 21

F T F T T F F

22 23 24 25 26 27 28

F T T F F F T

29 T 30 T 31 T

MULTIPLE CHOICE 32.

Which of the following statements is true of standard cost? A. It is equal to the actual cost of one unit of product. B. It is the amount management thinks that one unit of product should cost. C. It allows companies to generate more favorable than unfavorable variances. D. It is often calculated after production for the period is complete.

33.

What are standard cost variances? A. Differences between standard and actual costs B. Amounts that exceed budgeted amounts C. Useful industry-developed amounts that can be used by companies to evaluate their performance D. Differences between budgeted and standard amounts

34.

The difference between standard and actual costs is A. considered to be an ideal standard. B. a variance by exception. C. the budgeted cost of one item of product. D. a standard cost variance.

35.

What is the cost that management believes should be incurred to produce a product under anticipated conditions called? A. Budgeted cost B. Ideal cost C. Actual cost D. Standard cost

36.

In what industries are standard costs used? A. Manufacturing companies only B. Service companies only C. Both manufacturing and service companies D. None of these answer options are correct.

37.

For which one of the following will standard costs be most useful? A. A soft drink bottling company B. A caterer C. A cabinet manufacturer D. An event planner

Chapter 11 Standard Costs and Variance Analysis

11-5

38.

What is a standard cost? A. The difference between an attainable standard and an ideal standard B. The budgeted cost of the total number of budgeted units C. The budgeted cost of a single unit D. None of these answer choices are correct.

39.

Which one of the following is true concerning standard and budgeted costs? A. Standard cost times the expected production level equals the budgeted cost. B. Standard cost times the predetermined overhead rate equals the budgeted cost. C. Total budgeted cost divided by actual units equals the standard cost. D. None of these answer choices are correct.

40.

The difference between standard costs and budgeted costs is that standard cost A. refers to a single unit while budgeted costs refer to the cost, at standard, for the total number of budgeted units. B. is calculated under ideal conditions, while budgeted costs are calculated for attainable conditions. C. is calculated for raw material while budgeted costs are calculated for direct labor. D. is part of the management accounting system, while budgets are part of the financial accounting system.

41.

For which one of the following are standard production costs not developed? A. Direct materials B. Commission per unit C. Manufacturing overhead D. Fixed costs

42.

Which one of the following is often used to determine a standard price for materials? A. Time-and-motion studies B. A union labor contract C. Price lists provided by suppliers D. Materials requisition forms

43.

Which of the following is a method of determining the standard quantity of direct labor? A. An analysis of past data regarding overhead required for various levels of production B. Labor contract negotiated with the union employees C. Time-and-motion studies conducted by industrial engineers D. Suppliers’ estimates of labor quantities to be used

44.

A company developed a standard cost for overhead. Which of the following involves standard development procedures that are similar to developing overhead standard costs? A. Standard costs for materials B. Total number of units to be produced C. Predetermined overhead rates D. Budgeted direct labor costs

11-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

45.

Management of Wilson, Inc. developed standards under the assumption that a variety of factors may lead to less than perfect performance. Which type of standard was developed? A. Ideal standards B. Actual standards C. Attainable standards D. Questionable standards

46.

Which of the following is a reason that most managers support the use of attainable standards rather than ideal standards? A. Attainable standards allow for an occasional equipment failure. B. Attainable standards recognize that suppliers must provide raw materials with no defects. C. Attainable standards are required in order to have zero variances. D. Attainable standards motivate employees to achieve perfection.

47.

Which of the following may cause an unfavorable material variance? I. More material was used than planned. II. A company paid a higher price for materials than expected. III. More materials were used than purchased. A. I and II B. II and III C. I and III D. I, II, and III

48.

What are the two most likely reasons an unfavorable total materials variance may exist? A. Inflation caused an increase in the cost to acquire materials of the same quality, and due to this inflation, the company purchased fewer materials than used. B. The company used less material than it purchased, and the amount paid for the material was more than the standard price. C. The price paid was more than the standard price, and the quantity budgeted was less than quantity used. D. The price paid was more than the standard price, and the quantity used was less than the quantity budgeted

49.

Lander Foods applied management by exception. Which of the following would have occurred? A. The company’s managers prepared a flexible budget. B. Management created a poorly conceived budget. C. Management forecasted its sales for the budget period. D. Management investigated all significant variances.

Chapter 11 Standard Costs and Variance Analysis

50.

11-7

Scotto Designs has the following standards for the production of scarves: Standard Quantity Direct materials 1.2 yards per scarf Direct labor 0.15 hours per scarf

Standard Price $4.70 per yard $11.00 per hour

The company used 985 yards of material in order to make 800 scarves in April. The company purchased 1,100 yards at $4.60 per yard. How much is the direct materials quantity variance? A. $110 favorable B. $118 unfavorable C. $8 unfavorable D. $705 unfavorable 51.

Scotto Designs has the following standards to make one scarf: Standard Quantity Direct materials 1.2 yards per scarf Direct labor 0.15 hours per scarf

Standard Price $4.70 per yard $11.00 per hour

The company used 985 yards of material in order to make 800 scarves in April. The company purchased 1,100 yards at $4.60 per yard. How much is the direct materials price variance? A. $110 favorable B. $118 unfavorable C. $8 unfavorable D. $98.50 favorable 52.

An automobile parts company has a standard material price of $2 per pound. In October the company produced 4,500 units using 6,000 pounds of material. The company experienced a favorable materials quantity variance of $1,200. How much is the standard quantity of materials per unit? A. 1.20 pounds B. 1 pound C. 2.4 pounds D. 1.47 pounds

53.

A manufacturing company has a standard quantity of direct materials of 7 pounds per unit at a standard price of $2.20 per pound. In April the actual material price was $2.40 per pound and the company produced 5,500 units. If the company experienced a favorable material quantity variance of $6,600 during the month, how much was the actual quantity of material used? A. 35,500 pounds B. 32,542 pounds C. 38,500 pounds D. 41,500 pounds

11-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

54.

Blue Box Beach Chairs has the following standards to make beach chairs: Direct materials Direct labor

Standard Quantity Standard Price 2.2 pounds of polywood per chair $3.50 per pound 0.65 hours per chair $13.00 per hour

The static budget was based on the production of 6,200 beach chairs. The company used 13,000 pounds of polywood in order to make 6,000 chairs in April. The company purchased 7,000 pounds of polywood at a total cost of $24,150. How much is the direct materials quantity variance? A. $700 favorable B. $2,240 favorable C. $350 favorable D. $1,050 favorable 55.

Blue Box Beach Chairs has the following standards to make beach chairs: Direct materials Direct labor

Standard Quantity Standard Price 2.2 pounds of polywood per chair $3.50 per pound 0.65 hours per chair $13.00 per hour

The static budget was based on the production of 6,200 beach chairs. The company used 13,000 pounds of polywood in order to make 6,000 chairs in April. The company purchased 7,000 pounds of polywood at a total cost of $24,150. How much is the direct materials price variance? A. $700 favorable B. $2,240 favorable C. $350 favorable D. $1,050 favorable 56.

Last month, Investly Widgets purchased 16,400 pounds of material and used 16,600 pounds in the production of 4,200 widgets. The actual cost per pound of the material was $7.80 and the standard price was $7.75 per pound. The company budgeted 4,500 widgets for production. How much is the material quantity variance? A. $820 unfavorable B. $730 favorable C. $1,550 favorable D. More information is needed to determine the answer.

57.

Which variances are most important to investigate? A. Variable costs variances, because they are controllable B. Those that are material in amount C. Those that are immaterial in amount D. Those that are unfavorable

58.

Which one of the following determines the material price variance? A. The difference between actual price per unit and standard price per unit times the quantity of material purchased from suppliers B. The difference between actual price per unit and standard price per unit times standard quantity of material used for the achieved level of production C. The difference between actual quantity of material purchased and the actual quantity of material used times the standard price of material per unit D. The difference between actual quantity of material purchased and the actual quantity of material used times the actual price of material per unit purchased

Chapter 11 Standard Costs and Variance Analysis

11-9

59.

What will result if the actual price per unit of material is greater than the standard price? A. A favorable material price variance B. An unfavorable material quantity variance C. An unfavorable material price variance D. A favorable material quantity variance

60.

If the material quantity variance is favorable, the A. material price variance will be unfavorable. B. material price variance must also be favorable. C. quantity purchased is less than the quantity used. D. actual quantity used is less than the standard quantity allowed.

61.

Electric Zero produces relay units for generators. Each relay has a standard material cost of $67. Standards call for two relays per generator. In July, the company purchased 120 relays for $7,560. The company used 104 relays in the production of 50 generators, with 4 relays damaged in the installation process. The standard quantity of labor is 20 hours per generator, with a standard wage rate of $23. The company incurred 1,020 labor hours at a cost of $22,950. How much is the material price variance? A. $480 favorable B. $268 unfavorable C. $1,340 unfavorable D. $592 unfavorable

62.

Electric Zero produces relay units for generators. Each relay has a standard material cost of $67. Standards call for two relays per generator. In July, the company purchased 120 relays for $7,560. The company used 104 relays in the production of 50 generators, with 4 relays damaged in the installation process. The standard quantity of labor is 20 hours per generator, with a standard wage rate of $23. The company incurred 1,020 labor hours at a cost of $22,950. How much is the material quantity variance? A. $480 favorable B. $268 unfavorable C. $1,340 unfavorable D. $592 unfavorable

63.

Siggy Inc. budgeted 12,000 and produced 11,000 tape dispensers during June. Resin used to make the dispensers is purchased by the pound. Manufacturing overhead is applied based on units produced. Manufacturing standards and actual costs follow:

Materials Labor Variable overhead Fixed overhead

Standards 2 pounds @ $5.00 a pound 0.25 hours @ $15.00 per hour $39,000 $1.50 per dispenser

Actual 20,900 pounds @ $4.90 per pound 2,700 hours @ $15.30 per hour $36,500 $17,250

How much is the standard cost of a tape dispenser? A. $18.50 B. $13.75 C. $24.75 D. $18.80

11-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

64.

Master Auto Parts has a standard labor rate of $10.50 per hour. In September, the company produced 10,000 gears using 24,000 labor hours. The company experienced a favorable labor rate variance of $18,000 during September. How much is Master Auto Parts’ actual labor rate per hour? A. $9.75 B. $11.25 C. $13.50 D. $7.50

65.

Blue Box Beach Chairs has the following standards to make beach chairs: Direct materials Direct labor

Standard Quantity 2.2 pounds of polywood per chair 0.65 hours per chair

Standard Price $3.50 per pound $13.00 per hour

The static budget was based on the production of 6,200 beach chairs. The company used 13,000 pounds of polywood in order to make 6,000 chairs in April. The company purchased 7,000 pounds of polywood at a total cost of $24,150. It also used 3,840 labor hours at a cost of $12.70 per hour. How much is the direct labor efficiency variance? A. $1,932 unfavorable B. $1,152 favorable C. $780 favorable D. $2,470 favorable 66.

Blue Box Beach Chairs has the following standards to make beach chairs: Direct materials Direct labor

Standard Quantity Standard Price 2.2 pounds of polywood per chair $3.50 per pound 0.65 hours per chair $13.00 per hour

The static budget was based on the production of 6,200 beach chairs. The company used 13,000 pounds of polywood in order to make 6,000 chairs in April. The company purchased 7,000 pounds of polywood at a total cost of $24,150. It also used 3,840 labor hours at a cost of $12.70 per hour. How much is the direct labor rate variance? A. $1,932 unfavorable B. $1,152 favorable C. $780 favorable D. $2,470 favorable 67.

Standard Faucets uses standard costing and recorded the following data for the month of August: Standard direct labor rate Standard hours allowed for actual production Actual direct labor rate Labor efficiency variance How much is the labor rate variance for August? A. $9,750 unfavorable B. $14,750 unfavorable C. $4,750 unfavorable D. $0

$10.00 per hour 20,000 hours $10.50 per hour $5,000 favorable

Chapter 11 Standard Costs and Variance Analysis

11-11

68.

Paradise Energy Company produces a product with a direct labor standard of 4.5 hours per unit at a rate of $13.50 per hour. During July 2,200 units were produced using 9,825 labor hours at an actual cost of $135,094. How much is the total direct labor variance for July? A. $2,456 unfavorable B. $1,013 favorable C. $1,444 unfavorable D. $3,469 favorable

69.

Which of the following would cause a variance to be unfavorable? A. The actual price is less than the standard price. B. The standard hours allowed are less than the actual hours worked. C. The overhead costs incurred are less than the flexible budget amount. D. All of these answer choices are correct.

70.

Why is the point of purchase the best time to compute material price variances? A. This is when the company is able to determine the total cost of production. B. This is when the cost of material will be known. C. This is when the company knows the amount of materials used in production. D. This is the only point when the company is able to determine a standard material price.

71.

Which one of the following is a possible cause of an unfavorable labor rate variance? A. The company used attainable standards rather than ideal standards. B. The company hired new, inexperienced employees. C. The company produced fewer units than had been planned. D. The company used more experienced workers than planned.

72.

Paradise Energy Company produces a product with a direct labor standard of 4.5 hours per unit at a rate of $13.50 per hour. During July 2,200 units were produced using 9,825 labor hours at an actual cost of $135,094. How much is the direct labor efficiency variance for July? A. $2,456 unfavorable B. $1,013 favorable C. $1,444 favorable D. $3,469 unfavorable

73.

Electric Zero produces relay units for generators. Each relay has a standard cost of $67. Standards call for two relays per generator. In July, the company purchased 120 relays for $7,560. The company used 104 relays in the production of 50 generators, with four relays damaged in the installation process. The standard quantity of labor is 20 hours per generator, with a standard wage rate of $23. In July, the company incurred 1,020 labor hours at a cost of $22,950. How much is the labor rate variance? A. $460 unfavorable B. $50 favorable C. $510 favorable D. $460 favorable

11-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

74.

Electric Zero produces relay units for generators. Each relay has a standard cost of $67. Standards call for two relays per generator. In July, the company purchased 120 relays for $7,560. The company used 104 relays in the production of 50 generators, with four relays damaged in the installation process. The standard quantity of labor is 20 hours per generator, with a standard wage rate of $23. In July, the company incurred 1,020 labor hours at a cost of $22,950. How much is the labor efficiency variance? A. $460 unfavorable B. $50 favorable C. $510 favorable D. $460 favorable

75.

Steep, Inc. budgeted 6,000 cup holders for March. Each holder is sold for $12. Actual production for March was 6,300 cup holders. Standards and actual costs follow for March: Standards Materials

1.1 pounds @ $2.40 a pound

Labor Variable overhead Fixed overhead

0.10 hours @ $14.00 per hour $16,800 $9,600

Actual 6,400 pounds purchased for $15,040; 6,450 pounds used 620 hours @ $14.30 per hour $18,400 $10,300

How much is the labor rate variance? A. $140 favorable B. $186 unfavorable C. $46 unfavorable D. $280 favorable 76.

Steep, Inc. budgeted 6,000 cup holders for March. Each holder is sold for $12. Actual production for March was 6,300 cup holders. Standards and actual costs follow for March: Standards Materials

1.1 pounds @ $2.40 a pound

Labor Variable overhead Fixed overhead

0.10 hours @ $14.00 per hour $16,800 $9,600

Actual 6,400 pounds purchased for $15,040; 6,450 pounds used 620 hours @ $14.30 per hour $18,400 $10,300

How much is the labor efficiency variance? A. $140 favorable B. $186 unfavorable C. $46 unfavorable D. $280 favorable 77.

Which of the following will determine the total variance for manufacturing overhead? A. The difference between the overhead applied to inventory at standard and the actual overhead costs B. The difference between fixed overhead and variable overhead C. The difference between the efficiency variance and the rate variance D. The difference between the controllable overhead variance and the overhead volume variance

Chapter 11 Standard Costs and Variance Analysis

11-13

78.

If the controllable overhead variance is favorable, the overhead volume variance A. will be favorable. B. may be favorable or unfavorable. C. will not be significant and may be omitted from the analysis. D. will be zero.

79.

What is the difference between the actual amount of overhead and the amount of overhead that would be included in a flexible budget called? A. Total overhead variance B. Actual overhead variance C. Controllable overhead variance D. Overhead volume variance

80.

What will result if the actual overhead costs incurred are greater than the amount in the flexible budget? A. The controllable overhead variance will be unfavorable. B. The overhead volume variance will be favorable. C. The overhead volume variance will be unfavorable. D. The controllable overhead variance will be favorable.

81.

For which of the following reasons does the volume variance arise? A. Overhead costs incurred were greater or less than the amount budgeted. B. The company operated at more or less units of production activity than expected during the period. C. Actual activity equaled the volume used to establish the overhead cost per unit. D. The company purchased more or less materials for production than the amount used.

82.

What does an unfavorable overhead volume variance indicate? A. The quantity of production was less than what was anticipated. B. The company spent more costs on overhead than expected. C. Production took longer than expected. D. The company produced more units than it budgeted.

83.

In which of the following situations will the overhead volume variance be favorable? A. When more units are produced than were originally planned B. When actual overhead costs are less than the flexible budget C. When the predetermined overhead rate was set too low D. When there are units remaining in ending inventory

84.

Which of the following values is used in the calculations for both the controllable overhead variance and the overhead volume variance? A. Overhead applied to production using the predetermined overhead rate B. Flexible budget level of overhead for the actual level of production C. Actual overhead incurred D. None of these answer choices are used in both calculations.

11-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

85.

Steep, Inc. budgeted 6,000 cup holders for March. Each holder is sold for $12. Actual production for March was 6,300 cup holders. Manufacturing overhead is applied based on units produced. Standards and actual costs follow for March: Standards Materials

1.1 pounds @ $2.40 a pound

Labor Variable overhead Fixed overhead

0.10 hours @ $14.00 per hour

Actual 6,400 pounds purchased for $15,040; 6,450 pounds used 620 hours @ $14.30 per hour

$16,800

$18,400

$9,600

$10,300

How much is the overhead controllable variance? A. $1,460 unfavorable B. $480 favorable C. $2,300 unfavorable D. $980 favorable 86.

Steep, Inc. budgeted 6,000 cup holders for March. Each holder is sold for $12. Manufacturing overhead is applied based on units produced. Actual production for March was 6,300 cup holders. Standards and actual costs follow for March: Standards Materials Labor Variable overhead Fixed overhead

1.1 pounds @ $2.40 a pound 0.10 hours @ $14.00 per hour $16,800 $9,600

Actual 6,400 pounds purchased for $15,040; 6,450 pounds used 620 hours @ $14.30 per hour $18,400 $10,300

How much is the overhead volume variance? A. $1,460 unfavorable B. $480 favorable C. $2,300 unfavorable D. $980 favorable 87.

For what reason(s) might the overhead volume variance occur? I. Overhead cost control is poor. II. The actual activity level was less than estimated. III. The expected production level was greater than budgeted. A. I and II B. II and III C. I and III D. I, II, and III

88.

Into what components is the manufacturing overhead variance decomposed when it is analyzed? A. Overhead volume variance and controllable overhead variance B. Overhead rate variance and overhead efficiency variance C. Fixed overhead variance and variable overhead variance D. Controllable overhead variance and uncontrollable overhead variance

Chapter 11 Standard Costs and Variance Analysis

89.

11-15

Cuevas Company produces magic swords. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2017:

Standard/Budgeted Data Material ½ lb. @ $15.00 per lb. Labor

1.2 hrs. @ $12 per hr.

Fixed overhead $62,000 Variable overhead $11 per unit Production 2,000 units

Produced Materials purchased Materials used Labor worked Overhead

Actual Data 2,100 units 1,050 lbs. for $14,700 1,080 lbs. 2,500 hrs. costing $29,375 $82,000

How much is the standard cost per unit? A. $21.90 B. $63.90 C. $69.00 D. $62.42 90.

Rodchester Company uses standard costing. Overhead is applied at $12 per unit produced. Data for the month of March follows: Actual overhead costs Actual units produced Flexible budget overhead for units produced

$194,000 17,400 $210,000

How much is the overhead volume variance? A. $16,000 favorable B. $17,200 favorable C. $1,200 unfavorable D. $14,800 unfavorable 91.

RTC Supply Co. produces cleaning equipment for professional cleaners. At the start of the year, RTC estimated variable overhead costs to be $13 per unit and total fixed overhead costs at $300,000 based on a volume of 60,000 units. The detail for the overhead estimates follows: Variable Overhead Budget @ 60,000 units Indirect materials $ 480,000 Utilities 120,000 Maintenance 180,000 Total variable overhead 780,000

Actual Costs $ 469,500 93,000 224,000 786,500

Fixed Overhead Supervisor salaries 125,000 127,000 Depreciation 150,000 145,000 Other fixed overhead 25,000 26,000 Total fixed overhead 300,000 298,000 Total overhead costs $1,080,000 $1,084,500 Actual production for the year totaled 62,000 units. How much is the variable overhead flexible budget variance? A. $4,500 unfavorable B. $10,000 favorable C. $21,500 favorable D. $19,500 favorable

11-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

92.

At the start of 2017, Capital Cemetery determined its standard labor cost to be 2.5 hours for each cemetery plot prepared at $14.00 per hour. The budget for variable overhead was $8 per plot and budgeted fixed overhead was $15,000 for the year. Overhead is applied based on the number of plots prepared. The company expects to prepare 5,000 plots during 2017. During 2017, the actual cost of labor was $14.30 per hour. Capital prepared 4,900 cemetery plots requiring 11,700 direct labor hours. Actual overhead for the year was $52,100. How much is the controllable overhead variance? A. $1,800 favorable B. $300 unfavorable C. $2,100 favorable D. $800 favorable

93.

At the start of 2017, Capital Cemetery determined its standard labor cost to be 2.5 hours for each cemetery plot prepared at $14.00 per hour. The budget for variable overhead was $8 per plot and budgeted fixed overhead was $15,000 for the year. Overhead is applied based on the number of plots prepared. The company expects to prepare 5,000 plots during 2017. During 2017, the actual cost of labor was $14.30 per hour. Capital prepared 4,900 cemetery plots requiring 11,700 direct labor hours. Actual overhead for the year was $52,100. How much is the overhead volume variance? A. $1,800 favorable B. $300 unfavorable C. $2,100 favorable D. $800 favorable

94.

Hanson produces pressure washers. The detail for the overhead estimates follows: Variable Overhead Budget @ 50,000 units Indirect materials $ 480,000 Utilities 120,000 Maintenance 180,000 Total variable overhead 780,000

Actual Costs $ 469,500 93,000 224,000 786,500

Fixed Overhead Supervisor salaries Depreciation Other fixed overhead Total fixed overhead Total overhead costs

127,000 145,000 26,000 298,000 $1,084,500

125,000 150,000 25,000 300,000 $1,080,000

Actual production for the year totaled 62,000 units. How much is the overhead volume variance? A. $72,000 favorable B. $77,580 favorable C. $63,940 favorable D. $74,000 favorable

Chapter 11 Standard Costs and Variance Analysis

95.

11-17

Sigorny Company uses standard costing and applies overhead on the basis of units produced. The company provided the following for July: Predetermined overhead rate per unit produced Budgeted fixed overhead Variable overhead budgeted per unit Actual units produced

$6.20 $12,600 $2.00 3,100

If the controllable overhead variance was $920 favorable in July, how much were total actual overhead costs? A. $17,880 B. $18,800 C. $19,220 D. $19,720 96.

$6.20 $12,600 $2.00 3,100

How much is the budgeted variable overhead in July? A. $18,600 B. $6,200 C. $19,220 D. $6,000 97.

What does the overhead controllable variance indicate? A. The company produced more or less than the quantity planned. B. Material quantity standards were more or less than the actual quantity used. C. Material price standards were more or less than the actual price. D. Actual overhead cost was more or less than the amount indicated in the flexible budget.

98.

Which of the following is not a criterion that a company might use to determine whether or not a variance is exceptional? A. The variance is based on a significant percentage of the standard cost. B. The variance is unfavorable. C. The variance is for a large dollar amount. D. The variance is for a significant percentage of the flexible budget amount.

99.

Which of the following variances is most likely the responsibility of the purchasing manager? A. Material quantity variance B. Labor efficiency variance C. Material price variance D. Overhead volume variance

11-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

100.

Under what condition(s) might a favorable variance be considered unfavorable? I. When a manager overproduces to fully utilize labor in a non-bottleneck department II. When a manager buys a better quality materials at a cheaper price A. I only B. II only C. Both I and II D. Neither I nor II

101.

How might an emphasis on variances as performance measures lead to overproduction? A. Managers may produce more units than a bottleneck can handle. B. Managers may fully utilize the existing labor force. C. Managers may produce fewer units than needed. D. Managers may buy more raw materials than needed for production.

*102. Which statement is true concerning a standard costing system? A. Unfavorable variances are recorded; favorable variances are not recorded in the accounting records. B. Only unfavorable variances that are large enough to be investigated under the company’s management by exception policy are recorded in the accounting records. C. The costs added to the inventory accounts are recorded at standard costs rather than actual costs. D. No Work in Process Inventory account is used. *103. Which statement is true concerning unfavorable variances in a standard costing system? A. They are recorded only if they are significant. B. They are offset by favorable variances for the same amounts. C. They are recorded in the cost of goods sold account when incurred. D. They are recorded with debits. *104. Which statement is true concerning an insignificant material quantity variance in a standard costing system? A. It is recorded in the accounting records as a credit when the material is ordered. B. It is closed to the manufacturing overhead account at the end of the period. C. It is recorded at the actual cost of materials used times the standard quantity of materials allowed. D. It is closed to the cost of goods sold account at yearend. *105. Ace Manufacturing uses a standard costing system. What amount is debited to the Work in Process Inventory when labor is incurred in production? A. Actual labor hours used times the standard rate per hour B. Actual labor hours used times the actual rate per hour C. Standard labor hours used times the actual rate per hour D. Standard labor hours used times the standard rate per hour *106. Which statement is true concerning the variance accounts in a standard costing system? A. They cause the general ledger to be out of balance. B. They appear on the balance sheet as adjustments to Work in Process Inventory. C. They are temporary accounts and are closed before financial statements are prepared. D. They have debit balances prior to closing.

Chapter 11 Standard Costs and Variance Analysis

11-19

*107. Which statement is true concerning insignificant favorable variance accounts in a standard costing system? A. They have a debit balance. B. They reduce a company’s total expenses. C. They are closed to Work in Process. D. They are recorded with a credit to the related inventory accounts. *108. Which of the following variances is not recorded with a journal entry that involves a debit to Work in Process in a standard costing system? A. Material price variance B. Material quantity variance C. Labor rate variance D. Labor efficiency variance *109. When is a labor rate variance recorded in a standard costing system? A. At the time the labor costs are incurred B. At the time employees given rate increases C. After units of product are completed D. As part of the closing process *110. Wilson Manufacturing uses a standard costing system. When Wilson sells its inventory units, by how much is the Finished Goods Inventory account reduced? A. The actual cost of the units sold plus the total of the unfavorable variances B. The standard cost of the units sold C. The actual direct materials, direct labor, and standard manufacturing overhead D. The actual cost of the units sold *111. As a practical matter, to which account are variance accounts with insignificant balances usually closed? A. Manufacturing Overhead B. Work in Process Inventory C. Finished Goods Inventory D. Cost of Goods Sold 112.

Ultimate Production manufactures radon detectors. The standard for materials for each detector is 2 pounds of acrylic at a standard cost of $4.30 per pound. During May, the company purchased 890 pounds and used 830 pounds of acrylic and made 410 radon detectors. The company paid $4.45 per pound for the acrylic. There were 400 detectors budgeted for May. How much is the material price variance? A. $134 unfavorable B. $43 unfavorable C. $177 unfavorable D. $263 unfavorable

113.

Ultimate Production manufactures radon detectors. The standard for materials for each detector is 2 pounds of acrylic at a standard cost of $4.30 per pound. During May, the company purchased 890 pounds and used 830 pounds of acrylic and made 410 radon detectors. The company paid $4.45 per pound for the acrylic. There were 400 detectors budgeted for May. How much is the material quantity variance? A. $134 unfavorable B. $43 unfavorable C. $177 unfavorable D. $263 unfavorable

11-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

114.

Straton Company produces one product, the H2001. Each unit of H2001 requires 6.5 pounds of raw material with a standard cost of $12.00 per pound. During July, Straton purchased 3,500 pounds of this raw material at a price of $12.25 per pound and used 3,280 pounds to produce 500 units of the H2001. How much is the material price variance? A. $3,000 unfavorable B. $360 unfavorable C. $875 unfavorable D. $820 unfavorable

115.

Thomas Company produces one product, the E4501. The standards for E4501 include the use of 25 yards of raw material at a standard price of $4.42 per yard. During a recent month, the company used 65,000 yards of raw material to produce 2,580 units of E4501. Thomas purchased this material at a cost of $4.37 per yard. How much is the material quantity variance? A. $2,185 unfavorable B. $2,185 favorable C. $2,210 unfavorable D. $3,225 favorable

116.

Glue For All has developed the following material standard to produce one container of Glue-It: 96 ounces of Chemical A at $0.15 per ounce. Glue For All planned to produce 2,000 containers of Glue-It during July. The company purchased 1,500 gallons (192,000 ounces) of Chemical A at a cost of $0.14 per ounce in July. The company used 1,480 gallons of materials to produce 1,950 containers of Glue-It. How much is the material quantity variance? A. $1,920 favorable B. $1,894 favorable C. $336 unfavorable D. $1,584 unfavorable

117.

Glue For All has developed the following material standard to produce one container of Glue-It: 96 ounces of Chemical A at $0.15 per ounce. Glue For All planned to produce 2,000 containers of Glue-It during July. The company purchased 1,500 gallons (192,000 ounces) of Chemical A at a cost of $0.14 per ounce in July. The company used 1,480 gallons to produce 1,950 containers of Glue-It. How much is the material price variance? A. $1,920 favorable B. $1,894 favorable C. $336 unfavorable D. $1,584 unfavorable

Chapter 11 Standard Costs and Variance Analysis

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Mohammed Company employs a standard cost system. Mohammed has established the following standards for one unit of product: Standard Quantity Direct materials Direct labor

12.0 pounds 2.6 hours

Standard Price $ 7.00/pound $22.00/hour

Standard Cost $ 84.00 57.20

During June, Mohammed planned to produce 24,000 units of product. It purchased 330,000 pounds of direct material at a total cost of $2,343,000. The total factory wages for June were $1,440,000. Mohammed manufactured 25,000 units of product during June using 302,000 pounds of direct material and 64,000 direct labor hours. How much is the labor rate variance? A. $32,000 unfavorable B. $22,000 favorable C. $10,000 favorable D. $35,200 unfavorable 119.

Mohammed Company employs a standard cost system. Mohammed has established the following standards for one unit of product: Standard Quantity Direct materials Direct labor

12.0 pounds 2.6 hours

Standard Price $ 7.00/pound $22.00/hour

Standard Cost $ 84.00 57.20

During June, Mohammed planned to produce 24,000 units of product. It purchased 330,000 pounds of direct material at a total cost of $2,343,000. The total factory wages for June were $1,440,000. Mohammed manufactured 25,000 units of product during June using 302,000 pounds of direct material and 64,000 direct labor hours. How much is the labor efficiency variance? A. $32,000 unfavorable B. $22,000 favorable C. $10,000 favorable D. $35,200 unfavorable 120.

Radical Company produces versascopes. It has a standard wage rate of $9.50 per hour. It has determined that the standard time to assemble one versascope is 2.75 hours. During August, the company’s employees assembled 600 versascopes, and they were paid $15,974 for 1,630 hours of work. What is Radical’s labor efficiency variance? A. $489 favorable B. $299 favorable C. $271 favorable D. $190 favorable

121.

Standard Tires’ labor standard for the production of one bicycle tire is 4.5 hours at $8.50 per hour. During October, the company’s employees produced 140,000 tires, using 610,000 hours at a total cost of $5,328,400. How much is Standard Tire’s labor efficiency variance? A. $143,400 unfavorable B. $26,600 favorable C. $170,000 favorable D. $313,400 favorable

11-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

122.

Barnes Company produces men’s ties. The following budgeted amounts were provided by management for the current year: Category Direct materials Direct labor

Standard Inputs 1.1 yards per tie 0.32 hours per tie

Standard Cost $4.00 per yard $9.00 per hour

Barnes produced and sold 4,000 ties during 2017. Actual performance for the year is: Direct Materials Yards used in production Yards purchased Actual cost per yard

4,100 3,900 $3.75

Direct Labor Labor hours incurred Actual cost per hour

1,240 $9.25

How much is the labor rate variance? A. $310 unfavorable B. $360 favorable C. $50 favorable D. $1,000 unfavorable 123.

Barnes Company produces men’s ties. The following budgeted amounts were provided by management for the current year: Category Direct materials Direct labor

Standard Inputs 1.1 yards per tie 0.32 hours per tie

Standard Cost $4.00 per yard $9.00 per hour

Barnes produced and sold 4,000 ties during 2017. Actual performance for the year is: Direct Materials Yards used in production Yards purchased Actual cost per yard

4,100 3,900 $3.75

Direct Labor Labor hours incurred Actual cost per hour

1,240 $9.25

How much is the labor efficiency variance? A. $310 unfavorable B. $360 favorable C. $50 favorable D. $1,000 unfavorable 124.

Capital Leather Company produces leather footballs. The standard cost for each football is: Direct material Direct labor

2 feet of leather at $4.00 per foot 1.5 hours at $12.00 per hour

During February, 1,200 footballs were produced and 2,600 feet of leather were purchased at $4.25 per foot. Production usage was 2,300 feet. Direct labor cost incurred was $20,930 for 1,820 hours. How much is the direct material price variance? A. $650 favorable B. $650 unfavorable C. $575 favorable D. $575 unfavorable

Chapter 11 Standard Costs and Variance Analysis

125.

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Capital Leather Company produces leather footballs. The standard cost for each football is: Direct material Direct labor

2 feet of leather at $4.00 per foot 1.5 hours at $12.00 per hour

During February, 1,200 footballs were produced and 2,600 feet of leather were purchased at $4.25 per foot. Production usage was 2,300 feet. Direct labor cost incurred was $20,930 for 1,820 hours. How much is the direct material quantity variance? A. $100 unfavorable B. $400 favorable C. $800 favorable D. $800 unfavorable 126.

Capital Leather Company produces leather footballs. The standard cost for each football is: Direct material Direct labor

2 feet of leather at $4.00 per foot 1.5 hours at $12.00 per hour

During February, 1,200 footballs were produced and 2,600 feet of leather were purchased at $4.25 per foot. Production usage was 2,300 feet. Direct labor cost incurred was $20,930 for 1,820 hours. How much is the direct labor rate variance? A. $900 favorable B. $900 unfavorable C. $910 favorable D. $910 unfavorable 127.

Capital Leather Company produces leather footballs. The standard cost for each football is: Direct material Direct labor

2 feet of leather at $4.00 per foot 1.5 hours at $12.00 per hour

During February, 1,200 footballs were produced and 2,600 feet of leather were purchased at $4.25 per foot. Production usage was 2,300 feet. Direct labor cost incurred was $20,930 for 1,820 hours. How much is the direct labor efficiency variance? A. $20 unfavorable B. $240 unfavorable C. $360 unfavorable D. $360 favorable

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

128.

Standard Gears produces lawn mower gears. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system: Actual Data

Produced

12,400 units

Materials purchased

4,650 lbs. for a total cost of $32,550

Budgeted and Standard Data Budgeted units

12,500 units

Budgeted materials

0.40 lb. @ $7.10 per lb.

Materials used

4,700 lbs.

Budgeted labor

36 minutes @ $11.00 per hour

Labor worked

7,460 hrs. costing $79,822

Budgeted variable overhead

$35,625

Actual overhead

Fixed: $84,800 Variable $36,100

Budgeted fixed overhead

$85,500

How much is the standard cost of each lawn mower gear? A. $25.59 B. $19.13 C. $9.44 D. $19.28 129.

Standard Gears produces lawn mower gears. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system: Actual Data

Produced

12,400 units

Materials purchased

4,650 lbs. for a total cost of $32,550

Budgeted and Standard Data Budgeted units

12,500 units

Budgeted materials

0.40 lb. @ $7.10 per lb.

Materials used

4,700 lbs.

Budgeted labor

36 minutes @ $11.00 per hour

Labor worked

7,460 hrs. costing $79,822

Budgeted variable overhead

$35,625

Actual overhead

Fixed: $84,800 Variable $36,100

Budgeted fixed overhead

$85,500

How much is the direct material price variance? A. $465 favorable B. $1,846 favorable C. $470 favorable D. $2,201 favorable

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Standard Gears produces lawn mower gears. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system: Actual Data

Produced Materials purchased

Budgeted and Standard Data

12,400 units 4,650 lbs.; total cost $32,550

Budgeted units

Materials used

4,700 lbs.

Budgeted labor

36 minutes @ $11.00/hour

Labor worked

7,460 hrs. costing $79,822

Budgeted variable overhead

$35,625

Actual overhead

Fixed: $84,800 Variable $36,100

Budgeted fixed overhead

$85,500

Budgeted materials

12,500 units 0.40 lb. @ $7.10 per lb.

What is the direct material quantity variance? A. $465 favorable B. $1,846 favorable C. $470 favorable D. $2,201 favorable 131.

Billy Bob Subs has the following standard cost to produce a king size party sub sandwich. Direct materials = 4 pounds @ $3.00 per pound = $12.00 per sub Direct labor = 1/2 hour @ $8.00 per hour = $4.00 per sub During December, the company produced 1,000 party subs, bought 4,300 pounds and used 4,100 pounds of meat at $3.20 per pound, and used 490 hours of labor at a total cost of $4,018. How much is the direct labor rate variance? A. $98 unfavorable B. $18 unfavorable C. $80 favorable D. $178 unfavorable

132.

Billy Bob Subs has the following standard cost to produce a king size party sub sandwich. Direct materials = 4 pounds @ $3.00 per pound = $12.00 per sub Direct labor = 1/2 hour @ $8.00 per hour = $4.00 per sub During December, the company produced 1,000 party subs, bought 4,300 pounds and used 4,100 pounds of meat at $3.20 per pound, and used 490 hours of labor at a total cost of $4,018. How much is the direct labor efficiency variance? A. $80 favorable B. $18 unfavorable C. $98 unfavorable D. $178 unfavorable

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

133.

When Walston Corporation prepared its budget for 2017, it estimated fixed overhead of $540,000 ($45,000 per month) and variable overhead at $3.00 per unit produced. The company planned to produce 48,000 units during the year at a rate of 4,000 units each month. During April, the company produced 3,800 units and total overhead costs were $59,000. How much is the amount of overhead in the flexible budget for April’s level of production? A. $57,000 B. $45,000 C. $46,000 D. $56,400

134.

When Walston Corporation prepared its budget for 2017, it estimated fixed overhead of $540,000 ($45,000 per month) and variable overhead at $3.00 per unit produced. The company planned to produce 48,000 units during the year at a rate of 4,000 units each month. During April, the company produced 3,800 units and total overhead costs were $59,000. How much is the controllable overhead variance for April? A. $2,000 unfavorable B. $2,600 unfavorable C. $600 favorable D. $2,250 unfavorable

135.

When Walston Corporation prepared its budget for 2017, it estimated fixed overhead of $540,000 ($45,000 per month) and variable overhead at $3.00 per unit produced. The company planned to produce 48,000 units during the year at a rate of 4,000 units each month. During April, the company produced 3,800 units and total overhead costs were $59,000. How much is the overhead volume variance for April? A. $2,250 unfavorable B. $2,850 unfavorable C. $1,000 unfavorable D. $1,600 unfavorable

136.

Haley Fans manufactures and distributes circulators. The standard and actual costs for the manufacture of circulators are as follows: Standard Costs Variable cost, $24 per unit Fixed cost, $40 per unit

Actual Costs Total variable cost, $12,300 Total fixed cost, $19,250

Budgeted factory overhead was $32,000. Overhead applied is based on the number of circulator units produced. The company estimated that 500 circulators would be produced, however only 480 were produced. How much is budgeted fixed overhead for the year? A. $30,720 B. $19,200 C. $20,000 D. $12,000

Chapter 11 Standard Costs and Variance Analysis

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Actual Costs Total variable cost, $12,300 Total fixed cost, $19,250

Budgeted factory overhead was $32,000. Overhead applied is based on the number of circulator units produced. The company estimated that 500 circulators would be produced, however only 480 were produced. How much is Haley’s controllable overhead variance? A. $800 unfavorable B. $830 favorable C. $450 favorable D. $30 unfavorable 138.

Scotch Brand Products produces packaging tape and has determined the following to be its standard cost of producing one case of budget packaging tape: Material (3.50 ounces at $1.30 per ounce) Labor (0.30 hour at $12.00 per hour) Overhead Total

$4.55 3.60 2.20 $10.35

At the start of 2017, Scotch Brand planned to produce 80,000 cases of tape during the year. Overhead is allocated based on the number of cases of tape produced. Annual fixed overhead is budgeted at $56,000 and the standard for variable overhead is $1.50 per case. The following information summarizes the results for 2017: • • • • •

Actual production, 75,000 cases Purchased 275,000 ounces of material at a total cost of $343,750 Used 266,250 ounces of material in production Employees worked 22,000 hours, total labor cost $275,000 Actual overhead incurred, $175,000

What is the material price variance for 2017? A. $4,875 unfavorable B. $13,750 favorable C. $13,313 favorable D. $8,875 favorable

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

139.

$4.55 3.60 2.20 $10.35

At the start of 2017, Scotch Brand planned to produce 80,000 cases of tape during the year. Overhead is allocated based on the number of cases of tape produced. Annual fixed overhead is budgeted at $56,000 and variable overhead costs are budgeted at $1.50 per case. The following information summarizes the results for 2017: • • • • •

How much is the material quantity variance for 2017? A. $4,875 unfavorable B. $8,875 favorable C. $$14,750 favorable D. $13,750 favorable 140.

$4.55 3.60 2.20 $10.35

At the start of 2017, Scotch Brand planned to produce 80,000 cases of tape during the year. Overhead is allocated based on the number of cases of tape produced. Annual fixed overhead is budgeted at $56,000 and variable overhead costs are budgeted at $1.50 per case. The following information summarizes the results for 2017: • • • • •

How much is the labor rate variance for 2017? A. $6,000 favorable B. $5,000 unfavorable C. $24,000 favorable D. $11,000 unfavorable

Chapter 11 Standard Costs and Variance Analysis

141.

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$4.55 3.60 2.20 $10.35

At the start of 2017, Scotch Brand planned to produce 80,000 cases of tape during the year. Overhead is allocated based on the number of cases of tape produced. Annual fixed overhead is budgeted at $56,000 and variable overhead costs are budgeted at $1.50 per case. The following information summarizes the results for 2017: • • • • •

How much is the labor efficiency variance for 2017? A. $11,000 unfavorable B. $5,000 unfavorable C. $6,000 favorable D. $24,000 favorable 142.

$4.55 3.60 2.20 $10.35

At the start of 2017, Scotch Brand planned to produce 80,000 cases of tape during the year. Overhead is allocated based on the number of cases of tape produced. Annual fixed overhead is budgeted at $56,000 and the variable overhead costs are budgeted at $1.50 per case. The following information summarizes the results for 2017: • • • • •

How much is the controllable overhead variance for 2017? A. $3,000 unfavorable B. $10,000 unfavorable C. $6,500 unfavorable D. $3,500 unfavorable

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

143.

$4.55 3.60 2.20 $10.35

At the start of 2017, Scotch Brand planned to produce 80,000 cases of tape during the year. Overhead is allocated based on the number of cases of tape produced. Annual fixed overhead is budgeted at $56,000 and the variable overhead costs are budgeted at $1.50 per case. The following information summarizes the results for 2017: • • • • •

How much is the overhead volume variance for 2017? A. $6,500 unfavorable B. $3,500 unfavorable C. $10,000 unfavorable D. $3,000 unfavorable 144.

Haley Fans manufactures and distributes circulators. The standard and actual costs for the manufacture of circulators follows: Standard Costs Variable cost, $24 per unit Fixed cost, $40 per unit

Actual Costs Total variable cost, $12,300 Total fixed cost, $19,250

Budgeted factory overhead was $32,000. Overhead applied is based on the number of circulator units produced. The company estimated that 500 circulators would be produced, however only 480 were produced. How much is Haley’s overhead volume variance for 2017? A. $800 unfavorable B. $830 favorable C. $450 favorable D. $50 unfavorable

Chapter 11 Standard Costs and Variance Analysis

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$1.50 1.20 1.40 $4.10

Overhead is allocated based on the number of units produced. Eminem isolates material purchase variances at the point of purchase. The following information summarizes Eminem’s results for 2017: Actual production Actual variable overhead Actual fixed overhead

110,000 CDs $65,000 $83,000

How much is the budgeted fixed overhead for 2017? A. $86,400 B. $83,000 C. $88,000 D. $66,400 146.

Eminem, Inc. manufactures music CDs. At the start of 2017, Eminem planned to produce 108,000 CDs for which the standard cost for each CD is: Plastic (0.25 pounds at $6.00 per pound) $1.50 Labor (0.10 hour at $12.00 per hour) 1.20 Overhead ($0.80 fixed and $0.60 variable) 1.40 Total $4.10 Overhead is allocated based on the number of units produced. Eminem isolates material purchase variances at the point of purchase. The following information summarizes Eminem’s results for 2017: Actual production Actual variable overhead Actual fixed overhead

110,000 CDs $65,000 $83,000

How much is the controllable overhead variance for 2017? A. $4,400 favorable B. $1,600 favorable C. $6,000 favorable D. $5,000 favorable

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

147.

$1.50 1.20 1.40 $4.10

110,000 CDs $65,000 $83,000

How much is the overhead volume variance for 2017? A. $4,400 favorable B. $1,600 favorable C. $1,200 unfavorable D. $3,200 favorable 148.

110,000 CDs $65,000 $83,000

How much is under or overapplied overhead for 2017? A. $6,000 overapplied B. $4,400 overapplied C. $1,600 overapplied D. $3,200 underapplied 149.

Rumington Popcorn uses a standard cost system and applies overhead on a per unit basis. The company estimated that 30,000 units would be produced in 2017 and uses this quantity to establish its standard overhead cost per unit. The cost formula for overhead costs used to develop the standard overhead cost per unit was: Overhead = $120,000 + $6 per unit During the year, actual overhead cost was $340,000. Actual units produced were 32,000. How much is the controllable overhead variance for 2017? A. $20,000 favorable B. $20,000 unfavorable C. $28,000 favorable D. $28,000 unfavorable

Chapter 11 Standard Costs and Variance Analysis

11-33

150.

Rumington Popcorn uses a standard cost system and applies overhead on a per unit basis. The company estimated that 30,000 units would be produced in 2017 and uses this quantity to establish its standard overhead cost per unit. The cost formula for overhead costs used to develop the standard overhead cost per unit was: Overhead = $120,000 + $6 per unit During the year, actual overhead cost was $340,000. Actual units produced were 32,000. How much is the amount of under or over applied overhead for 2017? A. $20,000 overapplied B. $20,000 underapplied C. $28,000 overapplied D. $28,000 underapplied

151.

Rumington Popcorn uses a standard cost system and applies overhead on a per unit basis. The company estimated that 30,000 units would be produced in 2017 and uses this quantity to establish its standard overhead cost per unit. The cost formula for overhead costs used to develop the standard overhead cost per unit was: Overhead = $120,000 + $6 per unit During the year, actual overhead cost was $340,000. Actual units produced were 32,000. How much is the overhead volume variance for 2017? A. $2,000 favorable B. $28,000 unfavorable C. $8,000 favorable D. $28,000 favorable

152.

Harris Manufacturing produces white sauce. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2017:

Material

Budgeted and Standard Data 1/4 lb. @ $14 per pound

Labor

1.4 hrs. @ $16 per hour

Total fixed overhead Variable overhead Production

$84,000 $6.50 per unit 6,000 units

Produced Materials purchased Materials used Labor worked Total overhead

How much is the standard cost of white sauce? A. $50.50 B. $25.90 C. $45.95 D. $46.40

Actual Data 6,200 units 1,600 lbs. for $13.70/ pound 1,520 lbs. 8,740 hrs. at $15.90/hour $122,000

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

153.

Harris Manufacturing produces white sauce. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2017:

Budgeted and Standard Data Material 1/4 lb. @ $14 per pound Labor

1.4 hrs. @ $16 per hour

Total fixed overhead Variable overhead Production

$84,000 $6.50 per unit 6,000 units

Produced Materials purchased Materials used Labor worked Total overhead

Actual Data 6,200 units 1,600 lbs. for $13.70/pound 1,520 lbs. 8,740 hrs. at $15.90/hour $122,000

How much is the flexible budget for overhead for 2017? A. $122,000 B. $123,000 C. $127,100 D. $124,300 154.

Material

Labor

1.4 hrs. @ $16 per hour

Total fixed overhead Variable overhead Production

$84,000 $6.50 per unit 6,000 units

Produced Materials purchased Materials used Labor worked Total overhead

Actual Data 6,200 units 1,600 lbs. for $13.70/pound 1,520 lbs. 8,740 hrs. at $15.90/hour $122,000

How much is the overhead volume variance for 2017? A. $2,300 favorable B. $2,800 favorable C. $0 D. $5,100 favorable 155.

Harris Manufacturing produces white sauce. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2017:

Budgeted and Standard Data Material 1/4 lb. @ $14 per pound Labor

1.4 hrs. @ $16 per hour

Total fixed overhead Variable overhead Production

$84,000 $6.50 per unit 6,000 units

Produced Materials purchased Materials used Labor worked Total overhead

How much is the overhead controllable variance for 2017? A. $2,300 favorable B. $2,800 favorable C. $500 favorable D. $5,100 favorable

Actual Data 6,200 units 1,600 lbs. for $13.70/pound 1,520 lbs. 8,740 hrs. at $15.90/hour $122,000

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Material

11-35

Labor

1.4 hrs. @ $16 per hour

Total fixed overhead Variable overhead Production

$84,000 $6.50 per unit 6,000 units

Produced Materials purchased Materials used Labor worked Total overhead

Actual Data 6,200 units 1,600 lbs. for $13.70/pound 1,520 lbs. 8,740 hrs. at $15.90/hour $122,000

How much is the direct labor rate variance for 2017? A. $874 favorable B. $86 unfavorable C. $960 unfavorable D. $5,440 unfavorable 157.

Harris Manufacturing produces white sauce. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2017: Budgeted and Standard Data Actual Data Material 1/4 lb. @ $14 per pound Produced 6,200 units Materials Labor 1.4 hrs. @ $16 per hour 1,600 lbs. for $13.70/pound purchased Total fixed overhead $84,000 Materials used 1,520 lbs. 8,740 hrs. costing Variable overhead $6.50 per unit Labor worked $15.90/hour Production 6,000 units Total overhead $122,000 How much the direct labor efficiency variance for 2017? A. $874 favorable B. $86 unfavorable C. $960 unfavorable D. $5,440 unfavorable 158.

Harris Manufacturing produces white sauce. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2017: Budgeted and Standard Data Actual Data Material 1/4 lb. @ $14 per pound Produced 6,200 units Materials Labor 1.4 hrs. @ $16 per hour 1,600 lbs. for $13.70/pound purchased Total fixed overhead $84,000 Materials used 1,520 lbs. 8,740 hrs. costing Variable overhead $6.50 per unit Labor worked $15.90/hour Production 6,000 units Total overhead $122,000 How much the direct material price variance for 2017? A. $456 favorable B. $480 favorable C. $900 favorable D. $420 favorable

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

159.

Harris Manufacturing produces white sauce. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2017: Budgeted and Standard Data Actual Data Material 1/4 lb. @ $14 per pound Produced 6,200 units Materials Labor 1.4 hrs. @ $16 per hour 1,600 lbs. for $13.70/pound purchased Total fixed overhead $84,000 Materials used 1,520 lbs. 8,740 hrs. costing Variable overhead $6.50 per unit Labor worked $15.90/hour Production 6,000 units Total overhead $122,000 How much the direct material quantity variance for 2017? A. $456 favorable B. $480 favorable C. $900 favorable D. $420 favorable *160. Eli uses a standard costing system. At the end of the fiscal year, only the following variance accounts had balances: Material Price Variance Material Quantity Variance Labor Efficiency Variance

$260 (debit) $35 (credit) $65 (credit)

Assuming these amounts are not considered significant, which one of the following will be part of the journal entry to close these accounts? A. Credit to Cost of Goods Sold for $160 B. Debit to Manufacturing Overhead Variances for $260 C. Debit to Cost of Goods Sold for $160 D. Credit to Manufacturing Overhead Control for $160 Material from the appendix to the chapter is marked with an asterisk (*).

Chapter 11 Standard Costs and Variance Analysis

Answers to Multiple Choice 32 B 54 A 33 A 55 C 34 D 56 D 35 D 57 B 36 C 58 A 37 A 59 C 38 C 60 D 39 A 61 A 40 A 62 B 41 B 63 A 42 C 64 A 43 C 65 C 44 C 66 B 45 C 67 A 46 A 68 C 47 A 69 B 48 C 70 B 49 D 71 D 50 B 72 B 51 A 73 C 52 D 74 A 53 A 75 B

76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

A A B C A B A A B A B B A B C D C B A A B D

98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119

B C A A C D D D C B A A B D A B C C C A A B

120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141

D C A B B B C B B A B A A D B A C D B A D C

142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160

C B A A A B A D B C D D B A A C B D C

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MATCHING 161.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once. _____ 1. Attainable standard _____ 2. Budgeted cost _____ 3. Overhead controllable variance _____ 4. Favorable variances _____ 5. Ideal standard _____ 6. Labor efficiency variance _____ 7. Labor rate variance _____ 8. Overhead volume variance _____ 9. Standard cost _____ 10. Unfavorable variances A. B. C. D. E. F. G. H. I. J.

Difference between the actual amount of overhead and the amount of overhead that would be included in the flexible budget for the actual level of production The cost that should be incurred to produce a good under anticipated conditions Standards developed under the assumption that no obstacles will be encountered Difference between the actual hours worked and the standard hours allowed for the number of units produced times the standard labor wage rate Difference between the amount of overhead in the flexible budget and the amount of overhead applied to production using the standard overhead rate Variances where the actual prices or quantities are less than the standard The cost, at standard, for the total number of units scheduled to be produced Difference between the actual wage rate and the standard wage rate times the actual number of hours worked Variance where the actual prices or quantities are greater than standard Standards which allow for expected deviations

Answers to Matching 1. J 4. 2. G 5. 3. A 6.

F C D

7. 8. 9.

H E B

10.

Chapter 11 Standard Costs and Variance Analysis

11-39

EXERCISES 162.

Beale Acid Company produces muriatic acid in ½ gallon containers. Its accounting system uses standard costs. The standards per half gallon can of acid call for 0.70 gallons of material and 2.0 hours of labor. The material needed to produce a 0.5 gallon can of product due to evaporation is 0.70 gallons of material. The standard cost per gallon of material is $5.35. The standard cost per hour for labor is $12.00. Overhead is applied at the rate of $8.95 per can. Expected production is 18,000 cans with fixed overhead per year of $35,100, and variable overhead of $7.00 per half gallon can. During 2017, 19,000 cans were produced; 15,000 gallons of material were purchased at a cost of $87,750; 14,000 gallons of material were used in production. The cost of direct labor incurred in 2017 was $465,300 based on an average actual wage rate of $11.75 per hour. Actual overhead for 2017 was $170,000. Determine the standard cost of each ½ gallon of muriatic acid.

Answer Material (0.70 gallon  $5.35) Labor (2 hours  $12.00) Variable overhead Fixed overhead ($35,100 ÷ 18,000) Total unit cost

163.

$ 3.75 24.00 7.00 1.95 $36.70

Best Chocolates uses standard costing. During 2017, the company estimated the following standard costs for one of its major products, cocoa bars. Direct materials Direct labor

Standard quantity 0.10 pounds 0.05 hours

Standard price $30 per pound $15 per hour

Best purchased 500 pounds of cocoa at a cost of $32 per pound. It produced and sold 5,000 chocolate bars using 490 pounds of cocoa and 250 direct manufacturing labor hours at an average wage of $15.25 per hour. Calculate the material price variance and material quantity variance, and indicate whether each variance is favorable or unfavorable. Answer Material price variance = ($32.00 – $30.00) × 500 = $1,000 unfavorable Material quantity variance = [($30 × 5,000) × 0.10] – [490 × $30.00] = $300 favorable

164.

Reconly Company’s standards for the production of one handbag include 7 hours of direct labor at a cost of $15.00 per hour. Last month, Reconly produced 24,200 handbags. Employees were paid $2,553,600 for working a total of 168,000 hours. Calculate Reconly’s labor rate variance and labor efficiency variance and indicate whether each variance is favorable or unfavorable.

Answer Actual rate = $2,553,600 ÷ 168,000 = $15.20 per hour Labor rate variance = ($15.20 – $15.00) × 168,000 = $33,600 unfavorable Labor efficiency variance = [168,000 – (24,200 × 7)] × $15.00 = $21,000 favorable

11-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

165.

Eval Industries employs a standard cost system and uses the following standards for the production of one vase: Direct materials: 5 pounds @ $3.60/pound Direct labor: 1¼ hour @ $12.00/hour Eval budgeted 21,600 vases for May. In addition, it purchased 125,000 pounds of direct material at a total cost of $475,000. The total factory wages for May were $327,600. The company manufactured 22,000 units of product during May using 108,000 pounds of direct material and 28,000 direct labor hours. Estimated fixed manufacturing overhead for May was $54,000. Actual total overhead was $70,000. The variable overhead rate is $0.80 per unit, and the fixed overhead rate is $2.50 per unit. Determine the material price variance and the material quantity variance for May. Indicate whether each variance is favorable or unfavorable.

Answer Actual price = $475,000 ÷ 125,000 = $3.80 per pound Material price variance = ($3.80 – $3.60) × 125,000 = $25,000 unfavorable Material quantity variance = (108,000 – (5 × 22,000) × $3.60 = $7,200 favorable

166.

Watson Chemical Company produces a chemical used in dry cleaning. Its accounting system uses standard costs. The standards per half gallon can of chemical call for 0.70 gallons of material and 2.0 hours of labor. The material needed to produce a 0.5 gallon can of product due to evaporation is 0.70 gallons of material. The standard cost per gallon of material is $5.35. The standard cost per hour for labor is $12.00. Overhead is applied at the rate of $8.95 per can. Expected production is 18,000 cans with fixed overhead per year of $35,100, and variable overhead of $7.00 per unit (a half gallon can). During 2017, 19,000 cans were produced; 15,000 gallons of material were purchased at a cost of $87,750; 14,000 gallons of material were used in production. The cost of direct labor incurred in 2017 was $465,300 based on an average actual wage rate of $11.75 per hour. Actual overhead for 2017 was $170,000. Calculate the material variances.

Answer Actual price = $87,750 ÷ 15,000 gallons = $5.85 per gallon Standard quantity = 19,000  .70 gallons = 13,300 gallons Material price variance = ($5.85 − $5.35)  15,000 = $7,500 unfavorable Material quantity variance = (14,000 – 13,300)  $5.35 = $3,745 unfavorable

Chapter 11 Standard Costs and Variance Analysis

167.

11-41

Palm Time Inc. budgeted 6,000 step stools for June under its standard costing system. Each stool is sold for $22. Actual production for June was 6,300 stools. The company uses units of product as the cost driver for overhead. Standards and actual costs follow for June: Budgeted and Standard Direct materials

1.1 linear feet @ $2.40 a foot

Direct labor Variable overhead Fixed overhead

0.10 hours @ $14.00 per hour $16,800 total $15.00 per DLH

Actual 6,400 feet purchased for $15,040; 6,450 feet used 620 hours @$14.30 per hour $18,400 $9,200

Calculate the material price variance, material quantity variance, labor rate variance and labor efficiency variance. Indicate if each of the variances is favorable or unfavorable. Answer Material price per linear foot = $15,040 ÷ 6,400 = $2.35 per linear foot Material price variance = ($2.35 – $2.40) × 6,400 = $320 favorable Material quantity variance = [6,450 – (6,300 × 1.1)] × $2.40 = $1,152 favorable Labor rate variance = ($14.30 – $14.00) × 620 = $186 unfavorable Labor efficiency variance = [620 – (6,300 × 0.10 hrs.)] × $14.00 = $140 favorable

168.

Palm Time, Inc. budgeted 6,000 step stools for June under its standard costing system. Each stool is sold for $22. Actual production for June was 6,300 stools. The company uses units of product as the cost driver for overhead. Standards and actual costs follow for June: Budgeted and Standard Direct materials

1.1 linear feet @ $2.40 a foot

Direct labor Variable overhead Fixed overhead

0.10 hours @ $14.00 per hour $16,800 total $15.00 per stool

Actual 6,400 feet purchased for $15,040; 6,450 feet used 620 hours @$14.30 per hour $18,400 $9,200

Show the calculation of the standard cost of one step stool. Answer Direct materials (1.1 × $2.40) Direct labor (0.10 hr. × $14) Variable overhead ($16,800 ÷ 6,000) Fixed overhead Standard cost

$ 2.64 1.40 2.80 15.00 $21.84

11-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

169.

Germ Free produces hand sanitizer. It uses units as the cost driver for overhead and employs a standard costing system. The following information was provided by the company’s controller: Actual Data 14,400 units 4,600 lbs. for a total of $32,660

Produced Materials purchased

Materials used Labor worked Actual overhead a. b.

Answer a.

170.

4,560 lbs. 7,520 hrs. costing $91,368 Fixed $51,800; Variable $38,100

Standard and Budgeted Data Budgeted units 14,200 units Budgeted 0.35 lb. @ $7.00 per lb. materials 0.5 hours @ $12.10 per Budgeted labor hour Budgeted variable $39,050 overhead Budgeted fixed $51,120 overhead

Calculate the material price and quantity variances and indicate if each is favorable or unfavorable. Calculate the labor rate and efficiency variances and indicate if each is favorable or unfavorable. Material price = 4,600 × ($7.10 – $7.00) = $460 unfavorable Material quantity = $7.00 × (4,560 – (14,400 × 0.35)) = $3,360 favorable Labor rate variance = 7,520 × ($12.15 – $12.10) = $376 unfavorable Labor efficiency variance = $12.10 × (7,520 – (14,400 × 0.50 hr.) = $3,872 unfavorable

Germ Free produces hand sanitizer. It uses units as the cost driver for overhead and employs a standard costing system. The following information was provided by the company’s controller:

Produced Materials purchased

Actual Data 14,400 units 4,600 lbs. for a total of $32,660

Materials used

4,560 lbs.

Labor worked

7,520 hrs. costing $91,368

Actual overhead

$89,900

Calculate the controllable overhead variance and the overhead volume variances and indicate if each is favorable or unfavorable.

Chapter 11 Standard Costs and Variance Analysis

11-43

Answer Applied variable overhead = ($39,050 ÷ 14,200) × 14,400 = $39,600 Applied fixed overhead = ($51,120 ÷ 14,200) × 14,400 = $51,840 Total overhead applied = $39,600 + $51,840 = $91,440 Controllable overhead variance = $89,900 – [($2.75 ×14,400) + $51,120] = $820 favorable Overhead volume variance = [($2.75 ×14,400) + $51,120] – $91,440 = $720 favorable

171.

At the start of the year, ChillerIce estimated that the company would produce 480 portable ice makers during the year (40 per month). Annual fixed overhead costs were estimated to be $600,000 ($50,000 per month), and estimated variable overhead costs were estimated to be $500 per unit. Standard cost per unit was set at $3,450: Standard material cost Standard labor cost Standard overhead rate per unit Total

$1,200 500 1,750 $3,450

During the year, the company experienced stiff competition and ended up producing and selling only 400 ice makers. Budgeted annual total production costs were $1,656,000, and actual production costs were $1,616,400. The standard cost variances were as follows: Material price variance Material quantity variance Labor rate variance Labor efficiency variance Controllable overhead variance Overhead volume variance Total

$ 2,200 unfavorable 11,500 unfavorable (2,300) favorable 4,800 unfavorable 2,000 unfavorable 100,000 unfavorable $118,200 unfavorable

Suppose you are the CFO of ChillerIce and you have decided to investigate variances which exceed a threshold of 1/2 percent of the total budgeted production cost. Which variance(s) will you investigate? Explain the basis for your answer. Answer

Percent of Budgeted Variance Amount Production Cost Material price variance $ 2,200 0.13% Material quantity variance 11,500 0.69 Labor rate variance 2,300 0.14 Labor efficiency variance 4,800 0.29 Controllable overhead variance 2,000 0.12 Overhead volume variance 100,000 6.04 The overhead volume variance does not need to be investigated. There is an obvious explanation—the company produced only 400 units instead of the planned 480 units. The only other variance that exceeds 1/2 percent is the material quantity variance, which should be investigated.

11-44

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

172.

The standard labor cost in the production of a pair of Crocs is 0.40 hours at $15 per hour. During the month of June, 13,000 pairs were produced. Actual labor costs were $76,735 for 5,150 hours. Compute the labor rate and labor efficiency variances for the month of June.

Answer Actual wage rate = $76,735 ÷ 5,150 hours = $14.90 per hour Standard hours = 13,000 × 0.40 hours per pair = 5,200 hours Labor rate variance = ($14.90 – $15.00) × 5,150 = $515 favorable Labor efficiency variance = (5,150 – 5,200) × $15.00 = $750 favorable

173.

Caffeine Depot is a chain of coffee shops. The standard amount of ground coffee per cup is 0.80 ounces. During the month of September, the company sold 350,000 cups of coffee and used 18,600 pounds of coffee. Also during September, the company purchased 19,000 pounds of coffee at a cost of $290,700. The standard price per pound is $15. The company views variances greater than 0.8% of the flexible budget amount to be considered significant. a. b.

Answer a.

174.

Compute the material variances. Do either or both of the variances warrant investigation? Explain why or why not.

Actual price = $290,700 ÷ 19,000 pounds = $15.30 per pound Material price variance = ($15.30 – $15.00) ×19,000 = $5,700 unfavorable Standard quantity = 350,000  0.80 ounce ÷ 16 ounces = 17,500 pounds Material quantity variance = (18,600 – 17,500) × $15 = $16,500 unfavorable The amount paid per pound was 2% higher than the standard price ($15.00 compared to $15.30). It may be that the standard price reflects an estimate of the annual average price and seasonal fluctuations are expected. Coffee used was approximately 6.3% more than standard. This should be investigated for possible causes (e.g., pilferage, waste, or use of more coffee per cup than the company’s recipe requires).

Shining Car Wash is a mobile car washing services that provides car washes wherever a customer desires. On average it takes 1.8 hours for travel and washing each vehicle. During November, employees spent 1,064 labor hours to wash 560 cars at a total labor cost of $13,300. During December, 960 labor hours were used to wash 480 cars at a total labor cost of $11,520. The wage rate standard is $12.40 per hour. a.

Calculate the labor rate and efficiency variances for each month and indicate if each is favorable or unfavorable.

What trends can you spot regarding the variances over November and December? What might be a cause for the labor rate variance? What might be a cause for the labor efficiency variance?

Chapter 11 Standard Costs and Variance Analysis

Answer a.

175.

11-45

November: Labor rate variance = ($12.50 – $12.40) × 1,064 = $106 unfavorable Labor efficiency variance = [1,064 – (560 × 1.8)] × $12.40 = $694 unfavorable December: Labor rate variance = ($12.00 – $12.40) × 960 = $384 favorable Labor efficiency variance = [960 – (480 × 1.8)] × $12.40 = $1,190 unfavorable The actual labor rate declined from $12.50 to $12.00 which may be caused by hiring new, unskilled employees. This is supported by the fact that in December, there was a significant unfavorable labor efficiency variance implying the employees worked more slowly than in November.

Watson Chemical Company produces a chemical used in dry cleaning. Its accounting system uses standard costs. The standards per half gallon can of chemical call for 0.70 gallons of material and 2.0 hours of labor. (0.70 gallons of material are needed to produce a 0.5 gallon can of product due to evaporation.) The standard cost per gallon of material is $5.35. The standard cost per hour for labor is $12.00. Overhead is applied at the rate of $8.95 per can. Expected production is 18,000 cans with fixed overhead per year of $35,100, and variable overhead of $7.00 per unit (a half gallon can). During 2017, 19,000 cans were produced; 15,000 gallons of material were purchased at a cost of $87,750; 14,000 gallons of material were used in production. The cost of direct labor incurred in 2017 was $465,300 based on an average actual wage rate of $11.75 per hour. Actual overhead for 2017 was $170,000. Calculate the labor variances.

Answer Actual hours = $465,300 ÷ $11.75 per hour = 39,600 hours Standard hours = 19,000 cans  2 hours per can = 38,000 hours Labor rate variance = ($11.75 – $12.00) × 39,600 = $9,900 favorable Labor efficiency variance = (39,600 – 38,000) × $12 = $19,200 unfavorable

176.

Orlando East Hospital is interested in analyzing overhead related to laundry services. The hospital administrator estimated that monthly fixed costs would be $68,000 and variable costs would be $2.50 per patient day. During the month of September, the hospital had 15,800 patient days. Total overhead laundry costs were $108,400. Calculate the controllable overhead variance. Analyze laundry costs for the month of September.

Answers Controllable Overhead Variance = $108,400 – [$68,000 + ($2.50  15,800)] = $900 unfavorable The hospital spent $900 more on overhead costs than allowed in the budget, which is about 0.84% of the budgeted amount. This amount should not be investigated as it is insignificant.

11-46

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

177.

Watson Chemical Company produces a chemical used in dry cleaning. Its accounting system uses standard costs. The standards per half gallon can of chemical call for 0.70 gallons of material and 2.0 hours of labor. (0.70 gallons of material are needed to produce a 0.5 gallon can of product due to evaporation.) The standard cost per gallon of material is $5.35. The standard cost per hour for labor is $12.00. Overhead is applied at the rate of $8.95 per can. Expected production is 18,000 cans with fixed overhead per year of $35,100, and variable overhead of $7.00 per unit (a half gallon can). During 2017, 19,000 cans were produced; 15,000 gallons of material were purchased at a cost of $87,750; 14,000 gallons of material were used in production. The cost of direct labor incurred in 2017 was $465,300 based on an average actual wage rate of $11.75 per hour. Actual overhead for 2017 was $170,000. Calculate the overhead variances and indicate if each is favorable or unfavorable.

Answer Overhead controllable variance = $170,000 – $168,100 = $1,900 unfavorable Overhead volume variance = $168,100 – $170,050 = $1,950 favorable

Chapter 11 Standard Costs and Variance Analysis

11-47

CHALLENGE EXERCISES 178.

Winston Woolies provided the following summary of variances for the year ended December 31, 2017: Material price variance $4,200 Favorable Material quantity variance (3,300) Unfavorable Labor rate variance 400 Favorable Labor efficiency variance (2,220) Unfavorable Controllable overhead variance (1,400) Unfavorable Overhead volume variance 900 Favorable Total ($1,420) Unfavorable At Winston Woolies, the ending balance in Finished Goods inventory is $80,000; the ending balance in Work in Process inventory is $20,000, and the balance in Cost of Goods Sold is $700,000. Winston Woolies considers the total variance to be material and as such, should apportion it among Finished Goods inventory, Work in Process inventory, and Cost of Goods Sold. Prepare a journal entry to close the variance accounts at Winston Woolies.

Answer Finished Goods Work in Process Cost of Goods Sold Total

$ 80,000 20,000 700,000 $800,000

Apportionment of Variances Finished Goods Work in Process Cost of Goods Sold Total

$ 142.00 35.50 1,242.50 $1,420.00

Finished Goods Work in Process Cost of Goods Sold Material Price Variance Labor Rate Variance Overhead Volume Variance Material Quantity Variance Labor Efficiency Variance Controllable Overhead Variance

10.0% 2.5% 87.5% 100.0%

10.0% × $1,420 = $142.00 2.5% × $1,420 = $35.50 87.5% × $1,420 = $1,242.50 100% 142.00 35.50 1,242.50 4,200.00 400.00 900.00 3,300.00 2,220.00 1,400.00

11-48

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

179.

Gifts Galore, Inc. reported the following amounts for 2017: Actual labor cost Budgeted labor cost

$265,100 $268,500

Labor rate variance Labor efficiency variance

$3,210 U $3,250 F

The company employs management by exception and has a 1.2% materiality threshold based on the budgeted allowance. Should the labor variances be investigated? Support your answer with calculations, and briefly justify why or why not. Answer 1.2% × $268,500 = $3,222 The labor efficiency variance should be investigated because the variance exceeds the materiality threshold of $3,222 by $28. The labor rate variance should not be investigated because the variance is less than the materiality threshold of $3,222 by $12. 180.

Martinez Bakery has prepared the following flexible budget analysis for October: Cost Materials Labor

Flexible Budget $11,000 45,000

Price Variance $430 U 470 F

Quantity Variance $780 F 150 U

Martinez Bakery purchased the same amount of units of materials as it used in production. The number of pounds of materials used totaled 1,858. Each unit of product requires a ½ pound of material. The standard cost per unit was $5.50 per pound. a. How much is the actual cost of materials used? b. How much did the company spend per pound of material? c. How many pounds of material were allowed in the flexible budget? d. How many units of product did the company produce? Answer a. b. c. d. 181.

$11,000 – $780 + $430 = $10,650 $10,650 ÷ 1,858 pounds = $5.73 per pound $11,000 ÷ $5.50 = 2,000 pounds allowed $2,000 ÷ 0.50 pounds = 4,000 units

Martinez Bakery has prepared the following flexible budget analysis for October: Cost Materials Labor

Flexible Budget $11,000 45,000

Price Variance $430 U 300 F

Quantity Variance $780 F 150 U

The actual labor rate per hour was $13.00. The standard labor time is 6 minutes per unit. a. How much is the actual cost of labor incurred? b. How much is the actual number of hours used? c. How much is the standard labor rate allowed in the flexible budget? d. How many units of product did the company produce? Answer a. b. c. d.

$45,000 + $150 – $300 = $44,850 $44,850 ÷ $13 = 3,450 hours ($44,850 + $300) ÷ 3,450 = $13.09 $45,000 ÷ $13.09 = 3,438 units

Chapter 11 Standard Costs and Variance Analysis

182.

11-49

Select the one variance that would most likely result from each of the cases presented by printing the letter of your choice in the answer space provided. If no variance would likely result directly from any case listed, print ‘None’ in the answer space. Variances A. favorable materials price variance G. favorable labor efficiency variance B. unfavorable materials price variance H. unfavorable labor efficiency variance C. favorable materials quantity variance I. favorable overhead controllable variance D. unfavorable materials quantity J. unfavorable overhead controllable variance variance E. favorable labor rate variance K. favorable overhead volume variance F. unfavorable labor rate variance L. unfavorable overhead volume variance Case 1. The company purchased more materials than it used during the period. 2. Employees used more indirect materials than expected. 3. Employees worked more slowly than expected. 4. The purchasing manager skillfully negotiated a better price for higher quality materials. 5. The company produced fewer units than budgeted.

Answer 1. 2. 3. 4. 5.

None J H A L

Answer

11-50

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

183.

Andros Company produces ladders. It uses direct labor hours as the cost driver for overhead. The following information was provided concerning its standard cost system for 2017:

Budgeted and Standard Data 0.8 lbs. @ $6.40 per lb. Direct material Direct labor 0.9 hrs. @ $15 per hr. Fixed overhead

$8.20 per labor hour

Variable overhead $11,700 Production 2,000 ladders

Actual Data Produced 2,130 ladders Materials purchased 1,700 lbs. for $11,135 Direct materials 1,740 lbs. used 2,010 hrs. costing $16,093 Direct labor worked Variable overhead $11,620 Fixed overhead $16,620

Calculate all the overhead variances and indicate if each is favorable or unfavorable.

Answer Variable overhead rate = $11,700 ÷ (0.90 × 2,000) = $6.50 per direct labor hour Total budgeted fixed overhead = (0.90 × 2,000) × $8.20 = $14,760 Total applied overhead = ($8.20 + $6.50) × 2,130 × 0.9 = $28,180 Overhead controllable variance = ($11,620 + $16,620) − [$14,760 + ($6.50 × 2,130 × 0.9)] = $1,019.50 unfavorable Overhead volume variance = – [$14,760 + ($6.50 × 2,130 × 0.9)] – $28,180 = $959 favorable

Chapter 11 Standard Costs and Variance Analysis

11-51

SHORT-ANSWER ESSAYS 184.

How are the standards for direct materials, direct labor, and manufacturing overhead determined?

Answer The standard quantity for materials is set by engineering plans, recipes, or formulas. The standard price is often determined from price lists from suppliers. The standard quantity for labor can be determined by time-and-motion studies or analyzing past data. The labor rate is set by management or by union contract. Standard costs for overhead are determined by estimating the amount of overhead that will be incurred and the anticipated overhead base.

185.

What is the difference between ideal standards and attainable standards?

Answer Ideal standards are developed under the assumption that no obstacles to the production process will be encountered. They are the standards that would occur in a perfect environment. Attainable standards allow for an occasional equipment failure, inexperienced workers, and other conditions that are not ideal.

186.

A purchasing agent has found a new supplier for one of the company’s raw materials. This supplier charges more for the raw material, but the material is of higher quality and less will be wasted in the manufacturing process. If raw materials are purchased from this supplier, what is likely to happen to the material price variance and the material quantity variance?

Answer It is likely that the material price variance will be unfavorable because the supplier is charging more for each unit of the raw material. It is likely that the material quantity variance will be favorable because less raw material will be required since less will be wasted.

187.

What signal is provided by the overhead volume variance?

Answer The overhead volume variance signals that the quantity of production was greater or less than what was anticipated when the standard overhead rate was determined. 188.

Frank Enterprises management claims, “We investigate all variances!” Is this a good management policy? Why or why not?

Answer Frank’s policy is probably not a good one. It is wasting resources by investigating variances that are not significant. It would be better to use a management by exception policy, where only those variances that are exceptional in terms of amount or percentage are investigated. However, both favorable and unfavorable variances should be investigated.

11-52

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

189.

Give an example of a favorable variance that might be indicative of a poor management decision.

Answer A company may buy raw materials at a price that is lower than standard, creating a favorable price variance. However, if the material has more defects than normal, or if it causes problems with equipment, or is otherwise difficult to work with, it may cause unfavorable variances for material quantity or for labor.

190.

Explain how a focus on variances for performance analysis might lead to overproduction in a non-bottleneck production department.

Answer The department should slow production to the level of the bottlenecked department. However, if direct labor cannot be immediately eliminated, slowing production will result in unfavorable direct labor variances. Thus, managers might be tempted to produce faster than the bottleneck can to avoid the unfavorable labor efficiency variance.

*191. JT Engines uses a standard costing system. When are each of the variances recorded and how are the variance accounts closed at the end of the period? Answer The material price variance is recorded when the purchase of the raw materials is recorded. The material quantity variance is recorded when the raw materials are issued into production. The labor rate variance and labor efficiency variance are recorded when the labor costs are added to Work in Process. The overhead volume variance and the controllable overhead variance are identified and recorded when the entry to close out Manufacturing Overhead is recorded. Unless the variances are significant, and the balances in Work in Process and Finished Goods are large in comparison with Cost of Goods Sold, the variance accounts are closed directly to Cost of Goods Sold. Favorable variances are closed with debits and unfavorable variances are closed with credits. Material from the appendix to the chapter is marked with an asterisk (*).

CHAPTER 12 Decentralization and Performance Evaluation Summary of Questions by Objectivses and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

K K K K K K

7. 8. 9. 10. 11. 12.

1 1 1 1 1 1

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2

K C K K K K K C K C K K K K K K K C C K K K C C K K K

58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

162.

1-3

163. 164. 165. 166.

2 2 2 2

AP AP AN AN

167. 168. 169. 170.

2 2 2 2

Item

True-False Statements K 13. 2 K 19. K 14. 2 C 20. K 15. 2 K 21. K 16. 2 K 22. K 17. 2 C 23. K 18. 2 K 24. Multiple Choice Questions K 85. 2 AP *112 C 86. 2 AP *113. C 87. 2 AP *114. C 88. 2 AP 115.. AP 89. 2 AP 116. AP 90. 2 AP 117. AP 91. 2 AP 118. AP 92. 2 AP 119. AP 93. 2 AP 120. AP 94. 2 AP 121. AP 95. 2 AP 122. AP 96. 2 AP 123. AP 97. 2 AP 124. AP 98. 3 K 125. AP 99. 3 K 126. AP 100. 3 K 127. AP 101. 3 K 128. AP 102. 3 K 129. AP *103. A1 K 130. K *104. A1 K 131. C *105. A1 K 132. C *106. A1 AP 133. K *107. A1 C 134. C *108. A1 C 135. K *109. A1 K 136. K *110. A1 K 137. AP *111. A1 AP 138. Matching

AN AP AP AP

Exercises 171. 2 AP 172. 2 AN 173. 2 AN 174. 2 AP

175. 176. 177. *178 .

Item

2 2 2 2 2 2

C K K C C C

25. 26. 27. 28. *29. *30.

2 3 3 3 A1 A1

K K K K K K

A1 A1 A1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. *153. *154. *155. *156. 157. 158. 159. 160. 161.

2 2 2 2 3 1 2 2 2 2 2 2 2 2 A1 A1 A1 A1 2 2 2 2 2

AP AP AP K K K AN AN AN =N AP AP AP AP AP AP AP AP AN AP AP AP AP AP

2 2 2 A1

AP AN AP AN

179. 180.

2 2

AN AP

12-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

181.

182.

186. 187.

1 1

C C

188. 189.

2 2

Challenge Exercises AN 183. 2 AN 184. Short-Answer Essays C 190. 2 C *192 C 191. 3 K .

185.

TRUE-FALSE STATEMENTS 1.

In decentralized organizations, upper level corporate managers provide substantial authority to subunits because they have the most expertise.

An advantage of decentralization is that subunit managers can respond more quickly to changing circumstances.

Lack of goal incongruence is a problem in decentralized organizations.

In a decentralized organization, performance evaluations encourage managers to behave as if their own personal goals are congruent with the goals of the company as a whole.

Increased motivation of managers is an advantage of decentralization.

Evaluating the performance of a subunit is the same as evaluating the performance of the subunit manager.

Responsibility accounting holds managers responsible for all direct and allocated costs charged to their operational unit.

Managers of cost centers are evaluated in order to decide if a division should be expanded, contracted, or changed.

A profit center is a subunit that has responsibility for controlling costs and revenues and generating a return on assets invested in the subunit.

10.

Most service departments, such as machine maintenance and computer services, are considered cost centers.

11.

An investment center manager is responsible for controllable revenues and costs, and controllable investments.

12.

Cost centers, profit centers, and investment centers are all responsible for controlling costs in the respective subunit.

13.

One of the primary tools for evaluating the performance of profit centers is residual income.

14.

A profit margin of 12 percent indicates that each dollar of assets invested generated 12 cents of profit.

Chapter 12 Decentralization and Performance Evaluation

12-3

15.

Return on investment can be improved by increasing net income or increasing the assets invested.

16.

One disadvantage of evaluating performance using return on investment is that assets are measured at their market value.

17.

If managers are evaluated using return on investment, they are often over aggressive of accepting new investments because the investment will provide an increase in net income.

18.

One of the primary tools for evaluating the performance of investment centers is residual income.

19.

Managers who are evaluated favorably when profit is used as the performance measure will most likely be evaluated favorably when return on investment is used as the performance measure.

20.

Managers tend to over invest when profit is used to evaluate them.

21.

Managers tend to under invest when return on investment is used to evaluate them.

22.

When residual income is calculated, an amount is subtracted to cover the profit that the company believes should be earned by the assets invested in the subunit.

23.

When performance evaluation is based on return on investment, managers will usually accept projects that yield less than the required rate of return.

24.

Using NOPAT as ‘income’ in the residual income model is appropriate because managers do not control the choice of using debt versus equity financing for the assets invested in their division.

25.

Economic value added is calculated as the return on investment adjusted for accounting distortions.

26.

The four dimensions of performance that are considered in a balanced scorecard are financial, customer, internal processes, and strategy.

27.

A balanced scorecard is used to evaluate investment centers.

28.

A strategy map is a diagram of relationships across the four dimensions of a balanced scorecard.

*29.

When an efficient market exists, the variable cost will generally be the best transfer price.

*30.

Transfer prices should represent the opportunity costs of the transferred item.

Material from the appendix to the chapter is marked with an asterisk (*).

12-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answers to True-False 1 F 6 F 2 T 7 F 3 F 8 F 4 T 9 F 5 T 10 T

11 12 13 14 15

T T F F F

16 17 18 19 20

F F T F T

21 22 23 24 25

T T F T F

26 27 28 *29 *30

F T T F T

MULTIPLE CHOICE 31.

Firms that grant substantial decision-making authority to the managers of subunits are referred to as A. residual organizations. B. profit centers. C. responsibility organizations. D. decentralized organizations.

32.

Which of the following determines the level of decentralization in a company? A. The diversity of the company’s products B. The number of levels of employees and management in the company C. The extent of decision-making authority given to the subunit managers D. The globalization of the company’s sales

33.

Which of the following is not an advantage of decentralization of a company? A. Subunit managers have better information. B. Subunit managers will act to benefit the organization as a whole. C. Subunit managers can respond quicker to changing circumstances. D. Subunit managers receive training helpful to future transition into top-level management positions.

34.

Which of the following is an advantage of a decentralized organization? A. Allows for duplication of activities B. Enables managers to enhance goal incongruence C. Provides excellent training for potential top-level executives D. Allows only top-level managers to make all decisions

35.

Which of the following is a disadvantage of a decentralized organization? A. Managers’ goals are congruent with the goals of the company as a whole. B. Some activities may be duplicated and incur unnecessary costs. C. Managers with the highest authority may take inappropriate decisions. D. Managers may take more time to respond to changing circumstances.

36.

Goal congruence refers to the match between A. locations of manufacturing plants and customers. B. goals based on profits and those based on return on investment. C. number of units produced and number of units sold. D. goals of the individual managers and those of the company as a whole.

Chapter 12 Decentralization and Performance Evaluation

12-5

37.

Companies evaluate performance of subunits and subunit managers in order to A. identify successful operations. B. influence the behavior of managers. C. determine areas that need improvement. D. All of these answer choices are correct.

38.

The evaluation of a subunit should be separated from the evaluation of the subunit’s manager because A. a subunit always shows better performance. B. an excellent manager may be doing the best job possible in a poor subunit. C. poor performance by managers may cause subunits to perform poorly. D. GAAP requires separate evaluations of managers and the respective subunits.

39.

For what does responsibility accounting hold managers responsible? A. All costs charged to a manager’s subunit B. All costs charged to a manager’s subunit plus a share of company-wide fixed costs C. Only the costs that a manager can control D. Only the costs that a manager have personally approved

40.

If a company uses responsibility accounting, a shift supervisor in the Austin production plant should be held responsible for A. all costs associated with the Austin plant. B. direct costs incurred on the supervisor’s shift. C. a share of all of the company’s costs. D. direct material, direct labor, and all manufacturing overhead incurred on the supervisor’s shift.

41.

A cost center A. is responsible for generating profit. B. should be evaluated using return on investment to best motivate managers. C. places its managers responsible for all costs under their control. D. requires a set of performance measures that are more complex than those for an investment center.

42.

A subunit that has responsibility for controlling costs, but does not have responsibility for generating revenue is a(n) A. investment center. B. cost center. C. profit center. D. value added center.

43.

Which of the following units of Walmart will most likely be a cost center? A. A Walmart store in Dallas, Texas B. The corporate payroll department C. The pharmacy department D. The optical department

12-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

44.

Most service departments, such as machine maintenance and janitorial services, are examples of A. investment centers. B. profit centers. C. cost centers. D. transfer centers.

45.

If responsibility centers are ranked in order of increasing responsibility, the ranking is A. investment centers, cost centers, profit centers. B. cost centers, investment centers, profit centers. C. cost centers, profit centers, investment centers. D. investment centers, profit centers, cost centers.

46.

Which of the following is a characteristic of a profit center? A. The center’s manager has control over revenues and costs. B. The subunit has responsibility for generating revenues, controlling costs, and generating a return on assets. C. The subunit can be evaluated using residual income. D. The subunit can be evaluated by comparing it to other investment centers.

47.

A manager who has the ability to replace assets within his division, is in control of what type of center? A. Business center B. Profit center C. Cost center D. Investment center

48.

The Cadillac division of General Motors is considered A. a profit center. B. an investment center. C. a cost center. D. a center that will be evaluated on profit margin.

49.

Which of the following is a responsibility that distinguishes an investment center manager from a profit center manager? A. Setting prices for products B. Controlling costs C. Generating revenues while controlling costs D. Significantly influencing investment decisions

50.

What does ROI measure? A. The amount of profit generated out of each sales dollar B. The amount of sales generated out of each dollar of assets invested C. The amount of profit generated out of each dollar of assets invested D. The amount of revenue generated out of each sales dollar

51.

Return on investment is the ratio of A. investment center income to invested capital. B. sales to net income. C. profit center revenues to assets invested. D. profit center revenues to profit center expenses.

Chapter 12 Decentralization and Performance Evaluation

12-7

52.

Return on investment is used to evaluate A. profit centers. B. cost centers. C. investment centers. D. revenue centers.

53.

Why is return on investment better than income as a measure of performance for an investment center? A. The calculation for income is determined by GAAP, while return on investment is adjusted to meet the needs of the company. B. Return on investment is easier to calculate than income. C. Return on investment considers the amount invested as well as the income. D. Return on investment is forward looking, while income is backward looking.

54.

Which of the following can improve a company’s return on investment? I. Increase the profit margin II. Decrease total assets III. Decrease the contribution margin A. I, II, and III B. I and III C. II and III D. I and II

55.

Profit margin is A. the ratio of sales to income. B. multiplied by investment turnover to calculate return on investment. C. the amount of income earned on each dollar of assets invested. D. All of these answer choices are correct.

56.

The income amount that is used in the calculation of return on investment is usually A. earnings before interest and taxes. B. net income as defined by GAAP. C. operating cash flows. D. net operating profit after taxes.

57.

NOPAT is A. net income with costs removed that managers at the divisional level are unable to control. B. net income plus noncash flow amounts. C. net income less the cost of financing. D. net income minus noninterest-bearing current liabilities.

58.

NOPAT does not hold the investment center manager responsible for A. interest expense. B. interest expense and noninterest-bearing current liabilities. C. noninterest-bearing current liabilities. D. assets invested in the division.

12-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

59.

NOPAT is used for ‘income’ in the return on investment formula because A. investment center managers should not be evaluated based on long-term financing decisions since they do not have responsibility for making those decisions. B. NOPAT represents the return to stockholders, and divisions are free to issue stock. C. NOPAT represents the return to debt capital, and division managers generally are free to issue debt needed to acquire new investments. D. All of these answer choices are correct.

60.

Which of the following consists of noninterest-bearing current liabilities? A. Accrued income taxes and income taxes payable B. Accounts receivable and accounts payable C. Accounts payable and dividends declared D. Wages payable and notes payable

61.

It is difficult to compare investment centers using return on investment when there is a significant difference in the _________ between the investment centers. A. age of the assets B. net operating profit after taxes C. amount of noninterest-bearing current liabilities D. market share

62.

The 2017 income statement for the East Division of Procter Wells Company is as follows: Sales $1,800,000 Operating expenses 1,380,000 Net operating income 420,000 Interest expense 120,000 Earnings before taxes 300,000 Income tax expense (40%) 120,000 Net income $ 180,000 This division’s invested capital is $4,000,000. How much is the East Division’s return on investment? A. 6.3% B. 5.7% C. 10.5% D. 7.5%

Chapter 12 Decentralization and Performance Evaluation

63.

12-9

The income statement for the Commercial Construction Division of the Kenyon Company is as follows: Sales $272,000 Operating expenses 132,000 Net operating income 140,000 Interest expense 20,000 Earnings before taxes 120,000 Income tax expense (30%) 36,000 Net income $ 84,000 If this division’s invested capital is $500,000, how much is its return on investment? A. 19.6% B. 16.8% C. 20.8% D. 14.0%

64.

South Division of Renato Enterprises reported net income of $480,000 in March on sales of $7,900,000. If this division has no interest expense, an income tax rate of 30 percent, and reported a return on investment of 12 percent, how much is invested capital? A. $948,000 B. $4,000,000 C. $2,800,000 D. More information is needed to determine the answer.

65.

West Division of PoolGuard has invested capital of $900,000. This division incurred $80,000 in interest expense and $20,000 in income tax expense related to interest in July. If this division reported a return on investment of 15 percent, how much is NOPAT? A. $60,000 B. $75,000 C. $135,000 D. $195,000

66.

Rail Star Company reported the following results for 2017: Sales Investment turnover Return on investment

$6,000,000 2.4 10%

Given this information, how much is the company’s invested capital? A. $2,500,000 B. $1,440,000 C. $600,000 D. $6,000,000

12-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

67.

The Florida Division of Garner Furniture reported the following results for 2017: Invested capital Profit margin Return on investment

$800,000 5% 8%

Given this information, how much was sales? A. $1,280,000 B. $500,000 C. $1,600,000 D. $64,000 68.

The 2017 income statement for the Clothing Division of Tom Ron Surf Company is as follows: Sales $445,000 Operating expenses 270,000 Net operating income 175,000 Interest expense 35,000 Earnings before taxes 140,000 Income tax expense (30%) 42,000 Net income $ 98,000 How much is net operating profit after taxes? A. $108,500 B. $133,000 C. $73,500 D. $122,500

69.

The Jersey Division of Yankee Products has invested capital of $1,400,000. This division incurred $80,000 in interest expense and $140,000 in income tax expense in 2017. If this division reported a return on investment of 14 percent, how much is net operating profit after taxes? A. $416,000 B. $196,000 C. $116,000 D. $276,000

70.

Western Electric reported the following results for 2017: Sales Investment turnover Return on investment

$8,400,000 2.5 12%

Given this information, how much is the company’s NOPAT? A. $1,008,000 B. $2,520,000 C. $403,200 D. $3,360,000

Chapter 12 Decentralization and Performance Evaluation

12-11

71.

Canal Tower is a division of Sounder Products. For the most recent year, Canal Tower had net income of $16,000,000. Included in income was interest expense of $1,200,000. The operation’s tax rate is 40 percent. Total assets of Canal Tower are $225,000,000, current liabilities are $40,000,000, of which $35,000,000 are noninterest-bearing. How much is return on investment for Canal Tower? A. 8.0% B. 8.8% C. 9.1% D. 7.4%

72.

Consider the following information for Haley and Morris, Inc.

Total assets Noninterest-bearing current liabilities Net income Interest expense Tax rate

December 31 2017 2018 $40,000,000 $50,000,000 800,000 1,400,000 2,600,000 3,400,000 300,000 400,000 30% 30%

How much is the return on investment for 2018? A. 7.57% B. 7.24% C. 6.42% D. 7.82% 73.

The manager of the Beach Division of Treat Time is evaluating the acquisition of a new mobile ice cream server. The budgeted operating income of the Beach Division is currently $2,940,000 with total assets of $28,600,000 and noninterest-bearing current liabilities of $600,000. The proposed investment would add $18,000 to operating income and would require an additional investment of $120,000. The targeted rate of return for the Beach Division is 9 percent. Ignoring taxes, how much is the return on investment of the Beach Division if the ice cream server is not purchased? A. 15.0% B. 10.5% C. 10.2% D. 9.73%

74.

12-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

75.

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine is not purchased? A. $202,000 B. $1,930,000 C. $2,110,000 D. $1,060,000

76.

The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine. The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000. The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000. The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent. Ignoring taxes, how much is the residual income of the West division if the embroidery machine is purchased? A. $2,545,000 B. $1,320,000 C. $2,860,000 D. $4,456,000

77.

If a manager is evaluated using the return on investment, the manager may be reluctant to invest in new equipment because the additional investment A. may reduce profit by the cost of the investment. B. will decrease the level of assets. C. may decrease the return on investment. D. may increase investment turnover.

78.

Which of the following statements is true? I. Managers have a tendency to overinvest when return on investment is used as a performance measure. II. Managers have a tendency to underinvest when profit is used as a performance measure. A. I only B. II only C. Both I and II D. Neither I nor II

Chapter 12 Decentralization and Performance Evaluation

12-13

79.

A manager is evaluated based on return on investment. The corporate minimum required return is 11 percent and the manager runs a division that has attained a 14 percent return on investment. Which of the following statements is true? A. The manager will most likely not invest in a project that has a return on investment of 13 percent. B. The manager will invest in all projects that increase operating income. C. The manager will not consider projects that exceed 14 percent. D. The manager may prefer to invest in projects that have a return on investment that is very close 11 percent to stay in line with corporate expectations.

80.

An adjustment is made to net income when calculating residual income to remove A. noninterest-bearing current liabilities. B. interest and the related tax effect. C. financing costs that the manager is able to control. D. accounting distortions.

81.

Evaluating segments based on the segment’s return on investment will A. encourage each segment’s manager to select only projects that are above the company’s current return on investment. B. encourage each segment’s manager to only select projects that are above the individual segment’s current return on investment. C. encourage each segment’s manager to select only projects below the company’s required rate of return. D. encourage managers to select only projects below the segment’s cost of capital.

82.

Economic value added is A. essentially the same as residual income except that adjustments are made to liabilities and assets to eliminate “accounting distortions” caused by interest expense. B. essentially the same as residual income except that adjustments are made to income and assets to eliminate “accounting distortions” that arise from following generally accepted accounting principles. C. the use of qualitative and quantitative measures to evaluate performance. D. essentially the same as residual income except that adjustments are made to income and assets to eliminate “accounting distortions” caused by noninterestbearing current liabilities.

83.

Economic value added is residual income adjusted for A. noninterest-bearing current liabilities. B. interest and the related tax effect. C. financing costs that the manager is unable to control. D. accounting distortions.

12-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

84.

The following data pertains to the Retail Division of Motor Express: Sales $700,000 Invested capital 200,000 Net operating profit after taxes 49,000 Noninterest-bearing current liabilities 20,000 The minimum rate of return specified by Motor Express is 12 percent and the cost of capital is 8 percent. How much is residual income? A. $33,000 B. $25,000 C. $27,400 D. $34,600

85.

The Produce Division of Saveway Shop had invested capital of $520,000 last year with $20,000 of noninterest-bearing current liabilities. If the minimum required rate of return is 9 percent, the cost of capital is 7 percent, and last year’s residual income was $52,000, how much was last year’s NOPAT? A. $98,800 B. $15,600 C. $88,400 D. $5,200

86.

The Global Division of Station Depot has invested capital of $920,000. If residual income is $4,600 and net operating profit after taxes is $69,000, how much is the cost of capital? A. 7.00% B. 6.67% C. 7.50% D. 8.00%

87.

Doral Division of Resorts International reported net operating profit after taxes totaling $120,000 in 2017. The cost of capital is 10.5 percent and the invested capital is $560,000. R&D incurred in 2017 was $100,000. The company’s policy is to amortize intangible assets over 4 years. The income tax rate is 30 percent. How much is the company’s economic value added for 2017? A. $105,825 B. $825 C. $70,825 D. $75,825

88.

Marine Division of Sando Company reported net operating profit after taxes of $27,000 in 2017. The cost of capital was 14 percent and the invested capital was $150,000. Current year R&D expense is $80,000. If R&D had been capitalized, amortization would have been $20,000 for 2017. The income tax rate is 30 percent. How much is adjusted NOPAT to be used in calculating EVA for 2017? A. $45,000 B. $41,000 C. ($15,000) D. $69,000

Chapter 12 Decentralization and Performance Evaluation

12-15

89.

Global Division of Food National Distribution’s economic value added for 2017 was $1,600. The company’s cost of capital for the year was 16 percent and the company’s adjusted net operating profit after taxes (NOPAT) was $3,500. How much is the amount of the Global Division’s invested capital after adjustment for accounting distortions when calculating EVA? A. $31,875 B. $21,875 C. $11,875 D. $41,875

90.

The following data pertains to the Electronics Division of the Maxwell & Ashley Company: Sales Invested capital Noninterest-bearing current liabilities Net operating profit after taxes Minimum required rate of return Cost of capital

$1,000,000 $700,000 $80,000 $82,000 9% 7%

How much is residual income for the Electronics Division? A. $19,000 B. $33,000 C. $26,200 D. $38,600 91.

The Produce Division of Nature Green has invested capital of $940,000 and noninterestbearing current liabilities totaling $20,000. If the minimum required return is 11 percent, cost of capital is 9 percent, and residual income is $12,000, how much is NOPAT? A. $113,200 B. $115,400 C. $94,800 D. $96,600

92.

Consider the following information for the Executive Division of Buy Electronics:

Total assets Noninterest-bearing current liabilities Net income Interest expense Income tax rate Cost of capital Required rate of return How much is residual income for 2018? A. $45,500 B. ($180,500) C. $119,000 D. ($227,500)

December 31 2018 2017 $11,800,000 $11,000,000 500,000 520,000 700,000 800,000 210,000 300,000 35% 35% 7% 8% 9% 11%

12-16

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

93.

The following income statements for the year ending December 31 and other information are available for the Langston Division of Act Company:

Sales Cost of goods sold Gross margin Selling and administrative costs Research and development Income from operations Less taxes on income Net income

For the Year Ending December 31 2018 2017 $250,000,000 $220,000,000 105,000,000 96,000,000 145,000,000 124,000,000 25,000,000 22,500,000 15,600,000 12,400,000 104,400,000 89,100,000 31,320,000 26,730,000 $ 73,080,000 $ 62,370,000

Total assets $650,000,000 Noninterest-bearing current liabilities $15,000,000 Required rate of return 12% Cost of capital 10%

$605,000,000 $12,300,000 12% 10%

Interest expense is $0 and the tax rate is 30 percent. Langston Division amortizes intangible costs over 4 years. By how much is invested capital adjusted as it relates to computing EVA for 2018? A. $17,900,000 B. $11,700,000 C. $6,020,000 D. $8,600,000 94.

The following income statements for the year ending December 31 and other information are available for the Langston Division of Act Company:

Sales Cost of goods sold Gross margin Selling and administrative costs Research and development Income from operations Less taxes on income Net income

Total assets $650,000,000 Noninterest-bearing current liabilities $15,000,000 Required rate of return 12% Cost of capital 10%

$605,000,000 $12,300,000 12% 10%

Interest expense is $0 and the tax rate is 30 percent. Langston Division amortizes intangible costs over 4 years. By how much is NOPAT adjusted as it relates to computing EVA for 2018? A. $8,190,000 B. $11,700,000 C. $8,600,000 D. $6,020,000

Chapter 12 Decentralization and Performance Evaluation

95.

12-17

Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles paper. Information related to the two subsidiaries follows. Total assets Noninterest-bearing current liabilities Net income Interest expense Required rate of return Cost of capital Tax rate

Yard Recycling Paper Recycling $8,000,000 $15,000,000 500,000 1,000,000 1,500,000 2,600,000 600,000 800,000 8% 11% 7% 9% 30% 32%

How much is the return on investment for the Paper Recycling Division? A. 19.65% B. 20.40% C. 22.46% D. 14.69% 96.

Yard Recycling Paper Recycling $8,000,000 $15,000,000 500,000 1,000,000 1,500,000 2,600,000 600,000 800,000 8% 11% 7% 9% 30% 32%

Which subsidiary has added the most to shareholder value in the last year? A. Yard recycling, because it has a higher return on investment B. Paper recycling, because it has a higher residual income C. Both contributed equally in different ways D. More information is needed to determine the answer 97.

Yard Recycling Paper Recycling $8,000,000 $15,000,000 500,000 1,000,000 1,500,000 2,600,000 600,000 800,000 8% 11% 7% 9% 30% 32%

Based on the limited information, which subsidiary is the best candidate for expansion? A. Yard recycling, because it has a higher return on investment B. Paper recycling, because it has a higher residual income C. Both contributed equally in different ways D. More information is needed to determine the answer

12-18

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

98.

Which dimension of a balanced scorecard is a measure of the increase in employee training? A. Learning and growth dimension B. Internal processes dimension C. The customer dimension D. The financial dimension

99.

In which dimension of a balanced scorecard is the measure of the number of new patents developed through research and development? A. Learning and growth dimension B. Internal processes dimension C. The customer dimension D. The financial dimension

100.

Which of the following is not one of the set of dimensions considered in the balanced scorecard? A. Customer B. Internal processes C. Competition D. Learning and growth

101.

Which of the following performance measures is considered the most sophisticated and is felt to give top management the most comprehensive method of evaluating subunits? A. Balanced scorecard B. Return on investment C. Economic value added D. Net income

102.

In what manner does the balanced scorecard challenge managers? I. To focus on the single most important measure to the company II. To perform on a variety of dimensions simultaneously III. To look forward as well as backward A. I and II B. II and III C. I and III D. I, II, and III

*103. A transfer price is the price that is used to value transfers of goods and services A. from one subunit of a company to another subunit in the company. B. from a subunit of a company to another company in the same industry. C. from a subunit of the company to a wholesaler or retailer. D. back to one of the company’s suppliers. *104. Which one of the following is not an acceptable base for determining the transfer price? A. Market prices B. Variable costs C. Full cost plus profit D. Fixed cost

Chapter 12 Decentralization and Performance Evaluation

12-19

*105. Which of the following transfer prices will likely be closest to the opportunity cost of the product? A. Variable costs less costs avoided on an internal transfer B. Market price less costs avoided on an internal transfer C. Variable cost D. Full cost plus profit *106. Sorenson Products has two divisions: a kitchen wares division that manufactures ceramic dishes and a ceramic resin division that manufactures the resin used in creating ceramic products. All ceramic used by the kitchen wares division is supplied by the ceramic resin division, which also supplies resin to outside companies. What is the best transfer price for the resin, assuming that the resin division is operating at only 70 percent of capacity? A. An amount that equates to the variable costs plus the contribution margin of the resin B. An amount that equates to the market price of the resin C. An amount that equates to the incremental cost of the resin D. An amount that equates to the full cost of the resin *107. When making a decision that involves a product transferred from another subunit of the company, the manager of the selling division should choose the alternative that A. maximizes the profit of his subunit. B. requires a negotiated transfer price. C. minimizes the goods needed from another subunit of the company. D. maximizes profit for the company as a whole. *108. Which of the following is an incentive for managers who must deal with different tax rates in international markets? A. Choose high transfer prices when goods are transferred to profit centers in a country with a low tax rate. B. Choose high transfer prices when goods are transferred to profit centers in a country with a high tax rate. C. Choose low transfer prices when goods are transferred to profit centers in a country with a high tax rate. D. Avoid transferring goods to foreign countries to avoid tariffs. *109. Which of the following methods of setting a transfer price most closely reflects an arm’slength, independent transaction? A. Full-cost price B. Variable cost C. Market price D. Full-cost plus profit *110. Which of the following is a disadvantage of using a negotiated transfer price instead of a cost-based transfer price? A. It reflects underlying opportunity costs associated with producing goods. B. It encourages managers to sell products for less than variable costs. C. It will allow one division to generate a large contribution margin and the other to generate no contribution margin. D. The transfer price may reflect negotiating skills of subunit managers.

12-20

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

*111. Merlin Component’s Hillside Division is currently operating at 100 percent capacity (capacity is 100,000 units). The normal selling price for its wrap film is $12 per case. At current operating levels, fixed costs are $3 per case and variable costs are $7 per case. Another division of Merlin Components would like to buy from the Hillside Division. If this sale is made, $1.20 per case in variable selling and administrative costs can be saved. Calculate the most acceptable transfer price per unit. A. $10.80 B. $12.00 C. $7.00 D. $5.80 *112. The Grain Division of Goodness Grains produces oat grain with the following characteristics: Capacity in bushels Selling price per bushel Variable cost per bushel Fixed cost per bushel

90,000 $22 $10 $4

The Cereal Division within the same company would like to buy the oat grain from the Grain Division. It is now purchasing its oat grain from an outside supplier for $20 per bushel. If the Grain Division sells to the Cereal Division, $3 in variable costs can be avoided. The Grain Division is currently operating at capacity and selling all production outside the company. If the Grain Division decides to sell to the Cereal Division, what is the minimum transfer price per bushel? A. $20 B. $19 C. $15 D. $22 *113. The West Division produces a part with the following characteristics: Capacity (units) Selling price per unit Variable cost per unit Fixed cost per unit

20,000 $33 $18 $4

East Division within the same company would like to buy this part from the West Division. The East Division is currently purchasing the part from an outside supplier for $40 per unit. If the West Division sells to the East Division, $5 in variable costs can be avoided. Suppose that the West Division has enough capacity to handle the demand from the East division with no change in fixed costs. From the West Division’s perspective, what is the minimum sales transfer price that West division should charge to the East Division? A. $14 B. $28 C. $18 D. $13

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*114. The Component Division of Sharp Ware Products produces blades for knives with the following characteristics: Annual capacity– number of knives Selling price per unit Variable cost per unit Fixed cost per unit

60,000 $7.00 $3.80 $1.60

The Hunting Division within the same company would like to buy its required supply of blades from the Component Division. Currently, the Hunting Division purchases the blades it uses to manufacture hunting knives from an outside supplier for $5.80 each. If the Component Division sells to the Hunting Division, it can save $0.70 per blade. The Component Division is currently operating at capacity and selling all its production outside the company. If the Component Division decides to sell to the Hunting Division, what is the transfer price? A. $6.30 B. $7.00 C. $3.80 D. $3.10 115.

Division 3 of Baritune Enterprises reported sales of $820,000, NOPAT totaling $61,500, interest expense of $8,000, and invested capital totaling $512,500. Its income tax rate is 30 percent. As it pertains to evaluating investment centers, how much is Division 3’s profit margin? A. 12.0% B. 7.5% C. 8.2% D. 1.6%

116.

Hardin Division of WestCo has sales of $300,000 and NOPAT of $15,000. The company’s invested capital is $240,000 and its non-interest-bearing current liabilities are $20,000. What is Hardin Division’s profit margin as it relates to investment center performance evaluation? A. 8.0% B. 6.25% C. 5.0% D. 6.8%

117.

Division 3 of Baritune Enterprises reported sales of $820,000, NOPAT totaling $61,500, interest expense of $8,000, and invested capital totaling $512,500. Its income tax rate is 30%. As it pertains to evaluating investment centers, how much is Division 3’s investment turnover? A. 1.60 B. 7.50 C. 12.00 D. 0.625

12-22

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

118.

Hardin Division of WestCo. has sales of $300,000 and NOPAT of $15,000. The company’s invested capital is $240,000 and its noninterest-bearing current liabilities are $20,000. What is Hardin Division’s investment turnover as it relates to investment center performance evaluation? A. 5.00 B. 6.25 C. 1.25 D. 0.80

119.

The Media Division of Winslow Company has invested capital of $1,250,000, sales of $590,000, net income of $44,250, and interest expense of $7,000. Winslow’s income tax rate is 40 percent. What is the Media Division’s return on investment? A. 3.54% B. 3.88% C. 0.47% D. 3.76%

120.

Last year, Processor Division of Mathews PC Company earned NOPAT of $200,000 on sales of $2,600,000. The division had invested capital of $1,600,000 with $62,000 of noninterest-bearing current liabilities. How much is the division’s return on investment? A. 12.5% B. 13.0% C. 7.7% D. 61.5%

121.

Align Division is one of the divisions of DynaCore. Align’s invested capital is $420,000. Last year, Align generated NOPAT of $64,260 on sales of $756,000. Which one of the following correctly calculates Align Division’s return on investment using the two components of return on investment? A. $64,260 ÷ $756,000 B. 11.76% × 0.56 C. $4,260 ÷ $756,000 D. 8.5% × 1.80

122.

Bottling Division of Fizzies Drink Company bottles soft drink produced by other divisions of Fizzies Drink Company. The Bottling Division had sales last year of $1,200,000, and earned $300,000 in income (NOPAT). Its invested capital was $1,000,000. How much are the Bottling Division’s profit margin, investment turnover, and return on investment? A. 30%, 0.75, and 20% B. 30%, 0.87, and 25% C. 25%, 1.20, and 30% D. 120%, 0.25, and 30%

123.

The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past year, the Pastry Division reported sales of $1,200,000 and earned $400,000 of NOPAT. How much return did the Pastry Division generate on each dollar of assets invested in the division? A. 8.5% B. 3.25% C. 27.63% D. 30.77%

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124.

The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past year, the Pastry Division reported sales of $1,200,000 and earned $400,000 of NOPAT. How much profit did the Pastry Division generate on each revenue dollar earned by the division? A. 92.3% B. 16.0% C. 33.3% D. 30.8%

125.

The Pastry Division of Dream Bread has invested capital of $1,300,000. During the past year, the Pastry Division reported sales of $5,590,000 and earned $400,000 of NOPAT. By how many times did revenue exceed the Pastry Division’s investment? A. 4.30 times B. 23.30 times C. 3.25 times D. 13.98 times

126.

Leon Division had interest expense of $94,400. Its income tax rate was 32%. Leon Division generated net income totaling $784,400. With $2,400,000 of assets invested in Leon Division, for how much profit is the Leon Division manager responsible? A. $631,192 B. $819,608 C. $848,592 D. $725,208

127.

Tomlinson Tech has a cost of capital of 8 percent, a required rate of return of 9.5%, and an income tax rate of 30 percent. The Consumer Division of Tomlinson Tech has assets totaling $2,800,000 and current liabilities at $180,000 with $40,000 of this amount being interest-bearing. Sales for the year totaled $1,900,000 and interest expense totaled $20,000. Net income was $166,500 for the year. How much is the Consumer Division’s invested capital? A. $2,560,000 B. $2,660,000 C. $2,940,000 D. $2,620,000

128.

Tomlinson Tech has a cost of capital of 8 percent, a required rate of return of 9.5 percent, and an income tax rate of 30 percent. The Consumer Division of Tomlinson Tech has assets totaling $2,800,000 and current liabilities at $180,000 with $40,000 of this amount being interest-bearing. Sales for the year totaled $1,900,000 and interest expense totaled $20,000. Net income was $166,500 for the year. How much is the Consumer Division’s NOPAT? A. $180,500 B. $172,500 C. $186,500 D. $152,500

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

129.

Tomlinson Tech has a cost of capital of 8 percent, a required rate of return of 9.5 percent, and an income tax rate of 30 percent. The Consumer Division of Tomlinson Tech has assets totaling $2,800,000 and current liabilities at $180,000 with $40,000 of this amount being interest-bearing. Sales for the year totaled $1,900,000 and interest expense totaled $20,000. Net income was $166,500 for the year. How much is the Consumer Division’s residual income/(loss)? A. ($32,300) B. ($72,200) C. ($46,300) D. None of these answer choices are correct.

130.

The following information is reported for the current year for North Atlantic Division of XT Enterprises: Sales Interest expense Net income Total assets Noninterest-bearing current liabilities Cost of capital Required rate of return Tax rate

$3,800,000 $250,000 $500,000 $5,000,000 $400,000 8% 14% 30%

How much is the division’s NOPAT? A. $575,000 B. $500,000 C. $750,000 D. $675,000 131.

$3,800,000 $250,000 $500,000 $5,000,000 $400,000 8% 14% 30%

As it relates to investment center evaluation, how much is the division’s profit margin, rounded to the nearest whole percentage? A. 18% B. 13% C. 10% D. 11%

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132.

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$3,800,000 $250,000 $500,000 $5,000,000 $400,000 8% 14% 30%

How much is the division’s invested capital? A. $5,000,000 B. $5,400,000 C. $5,500,000 D. $4,600,000 133.

$3,800,000 $250,000 $500,000 $5,000,000 $400,000 8% 14% 30%

As it relates to investment center evaluation, how much is the division’s investment turnover? A. 0.76 B. 0.71 C. 0.83 D. 0.15 134.

$3,800,000 $250,000 $500,000 $5,000,000 $400,000 8% 14% 30%

12-26

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

135.

$3,800,000 $250,000 $500,000 $5,000,000 $400,000 8% 14% 30%

How much is the division’s return on investment rounded to one decimal? A. 16.3% B. 7.1% C. 14.7% D. 12.5% 136.

Winton Company has three divisions. The Florida Division has a 30 percent tax rate, a 4.5 percent cost of capital, and a 7.5 percent required rate of return. During the fiscal year, the division reported sales of $3,920,000. Interest expense was $120,000 and net income was $122,800. The Florida Division has total assets of $2,950,000 and noninterest-bearing liabilities of $150,000. How much is the Florida Division’s NOPAT? A. $242,800 B. $158,800 C. $206,800 D. None of these answer choices are correct.

137.

Winton Company has three divisions. The Florida Division has a 30 percent tax rate, a 4.5 percent cost of capital, and a 7.5 percent required rate of return. During the fiscal year, the division reported sales of $3,920,000. Interest expense was $120,000 and net income was $122,800. The Florida Division has total assets of $2,950,000 and noninterest-bearing liabilities of $150,000. How much is the Florida Division’s invested capital? A. $2,800,000 B. $3,100,000 C. $2,950,000 D. None of these answer choices are correct.

138.

Winton Company has three divisions. The Florida Division has a 30 percent tax rate, a 4.5 percent cost of capital, and a 7.5 percent required rate of return. During the fiscal year, the division reported sales of $3,920,000. Interest expense was $120,000 and net income was $122,800. The Florida Division has total assets of $2,950,000 and noninterest-bearing liabilities of $150,000. How much is the Florida Division’s residual income? A. $80,800 B. ($3,200) C. $32,800 D. None of these answer choices are correct.

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139.

Last year, Green Thumb’s Residential Division reported sales of $950,000, interest expense of $100,000, and net income of $126,000. The company’s tax rate is 30 percent, and it has an 8 percent cost of capital and a 9 percent required rate of return. Residential Division has noninterest-bearing current liabilities that total $75,000 and it has total assets of $820,000. How much is the Residential Division’s NOPAT? A. $156,000 B. $56,000 C. $196,000 D. $96,000

140.

Last year, Green Thumb’s Residential Division reported sales of $950,000, interest expense of $100,000, and net income of $126,000. The company’s tax rate is 30 percent, and it has an 8 percent cost of capital and a 9 percent required rate of return. Residential Division has noninterest-bearing current liabilities that total $75,000 and it has total assets of $820,000. How much is the Residential Division’s invested capital? A. $820,000 B. $875,000 C. $895,000 D. $745,000

141.

Last year, Green Thumb’s Residential Division reported sales of $950,000, interest expense of $100,000, and net income of $126,000. The company’s tax rate is 30 percent, and it has an 8 percent cost of capital and a 9 percent required rate of return. Residential Division has noninterest-bearing current liabilities that total $75,000 and it has total assets of $820,000. How much is the Residential Division’s residual income/(loss)? A. $136,400 B. $128,950 C. $96,400 D. ($3,600)

142.

Under which one of the following performance evaluation methods will a manager most likely ‘overinvest’? A. ROI B. Residual income C. EVA D. Profit

143.

Which of the following components are evaluated when using the Balanced Scorecard approach? A. Innovation, financial, expansion, and internal processes B. Value added, innovation/growth, expansion, and customer C. Financial, development, expansion and research D. Learning and growth, financial, customer, and internal processes

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

144.

Which one of the following is not an advantage of decentralization for an organization? A. Enhanced goal congruence, because the subunits managers are more focused to improve the performance of the company as a whole. B. Faster response to changing circumstances, because decisions are not made by higher-level managers who need to be advised of all the facts C. Increased motivation of managers, because they are responsible for their own decisions and the results of their respective divisions D. Better training for future executives, because lower level managers get involved in more diverse business decisions

145.

Why are accounting distortions removed when evaluating performance using EVA? A. To remove amounts that are a free source of financing B. To remove amounts that divisional managers are unable to control C. To remove the costs of assets that must be capitalized under GAAP D. To encourage managers to spend money on elements that will benefit the company in the long run

146.

Why is an adjustment made to net income when calculating NOPAT? A. It is an amount on which income taxes are not considered. B. This adjustment amount has no cost of capital associated with it. C. Only assets that incur no interest costs are included with NOPAT. D. Divisional managers have no ability to control costs such as these.

147.

Why is an adjustment made to assets when determining residual income? A. The assets to which these relate have no financing cost associated with them. B. The company incurs financing costs, which is not within divisional managers’ control. C. This amount is not controllable by the managers being evaluated. D. Only assets that incur no interest costs are included as part of invested capital.

148.

Standard Media has a required rate of return of 5 percent, a cost of capital of 4 percent, and an income tax rate of 30 percent. The following information about its two divisions has been provided by management: NOPAT Sales Invested capital

Audio Division $1,400,000 $10,000,000 $15,000,000

Video Division $2,000,000 $12,500,000 $17,500,000

How much is the residual income of the Audio Division? A. $600,000 B. $650,000 C. $800,000 D. $2,000,000

Chapter 12 Decentralization and Performance Evaluation

149.

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Audio Division $1,400,000 $10,000,000 $15,000,000

Video Division $2,000,000 $12,500,000 $17,500,000

As it relates to investment center evaluation, how much is the profit margin of the Video Division? A. 11.4% B. 71.43% C. 60.00% D. 16.00% 150.

Audio Division $1,400,000 $10,000,000 $15,000,000

Video Division $2,000,000 $12,500,000 $17,500,000

How much is the ROI of the Audio Division? A. 9.33% B. 66.67% C. 14.00% D. 16.00% 151.

Audio Division $1,400,000 $10,000,000 $15,000,000

Video Division $2,000,000 $12,500,000 $17,500,000

An opportunity is available that yields an expected income of $45,900 on an investment of $450,000. If the divisions are evaluated based on return on investment, which division(s) will accept the opportunity? A. Both will accept. B. Neither will accept. C. Only the Video Division will accept. D. Only the Audio division will accept.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

152.

Audio Division $1,400,000 $10,000,000 $15,000,000

Video Division $2,000,000 $12,500,000 $17,500,000

An opportunity is available that yields an expected income of $45,900 on an investment of $450,000. If the divisions are evaluated based on residual income, which division(s) will accept the opportunity? A. Both will accept. B. Neither will accept. C. Only the Video Division will accept. D. Only the Audio division will accept. *153. RedEx Transport’s Rail Division has an annual capacity to process 800,000 tons of gravel used as a base under railroad tracks by railroads. The normal selling price is $62 per ton. At current operating levels, fixed costs are $10 per ton and variable costs are $32 per ton. The Air Division of RedEx Transport would like to buy 200,000 tons of gravel from the Rail Division to use in producing quality aggregate to be used for runways. The Rail Division is operating at 100 percent of capacity. The Air Division currently buys the gravel for $55 per ton from an outside source. The Rail Division can save $5 per ton in variable costs on the transfer. What is the lowest price the Rail Division should consider if it wishes to see no decline in profits? A. $62.00 B. $27.00 C. $57.00 D. $67.00 *154. RedEx Transport’s Rail Division has an annual capacity to process 800,000 tons of gravel used as a base under railroad tracks by railroads. The normal selling price is $62 per ton. At current operating levels, fixed costs are $10 per ton and variable costs are $32 per ton. The Air Division of RedEx Transport would like to buy 200,000 tons of gravel from the Rail Division to use in producing quality aggregate to be used for runways. The Rail Division is operating at 100 percent of capacity. The Air Division currently buys the gravel for $55 per ton from an outside source. What is the lowest price the Rail Division should accept if it wishes to see no decline in profits? A. $62 B. $32 C. $42 D. $55

Chapter 12 Decentralization and Performance Evaluation

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*155. RedEx Transport’s Rail Division has an annual capacity to process 800,000 tons of gravel used as a base under railroad tracks by railroads. The normal selling price is $62 per ton. At current operating levels, fixed costs are $10 per ton and variable costs are $32 per ton. The Air Division of RedEx Transport would like to buy 200,000 tons of gravel from the Rail Division to use in producing quality aggregate to be used for runways. The Rail Division is operating at 80 percent of capacity. The Air Division currently buys the gravel for $55 per ton from an outside source. How much is the lowest transfer price the Rail Division should accept to maintain current profitability? A. $55 B. $32 C. $62 D. $30 *156. Electronic Division makes a part that sells externally for $50.00 per unit. It has a variable production cost of $22.00 per unit, a variable selling and administrative cost of $7.00 per unit, a fixed production cost of $1,000,000 per year, and a fixed selling and administrative cost of $500,000 per year. Production capacity is 250,000 units per year. Electronic Division is selling all it can produce externally at $50.00 per unit. One-half of the variable selling and administrative cost can be eliminated on units transferred to the Digital Division. Digital Division can buy the part externally at $48.00 per unit and uses 30,000 parts annually. Should a transfer take place, and if so what are the rational limits on the range of transfer prices? A. No transfer should take place. B. A transfer should take place at $46.50. C. A transfer should take place at $48. D. A transfer should take place between $46.50 and $48. 157. Bajalia Company compiled the following information for the year ending December 31, 2017: Research and development costs $ 800,000 Sales 6,400,000 Net income 1,200,000 Interest expense 400,000 Income tax rate 30% At the end of 2017, total assets totaled $6,900,000. Bajalia’s total current liabilities were $1,400,000, of which $600,000 were interest-bearing obligations. Bajalia’s cost of capital is 12 percent and it amortizes intangibles over 4 years. What adjustment must Bajalia make to income for accounting distortions if EVA is to be calculated for 2017? A. $420,000 B. $600,000 C. $180,000 D. $140,000

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

158. Bajalia Company compiled the following information for the year ending December 31, 2017: Research and development costs $ 800,000 Sales 6,400,000 Net income 1,200,000 Interest expense 400,000 Income tax rate 30% At the end of 201, total assets totaled $6,900,000. Bajalia’s total current liabilities were $1,400,000, of which $600,000 were interest-bearing obligations. Bajalia’s cost of capital is 12 percent and it amortizes intangibles over 4 years. What adjustment must Bajalia make to invested capital for accounting distortions if EVA is to be calculated for 201? A. $420,000 B. $600,000 C. $800,000 D. $200,000 159.

The following income statements and other information are available for the Biltmore Company: Sales Cost of goods sold Gross margin Selling and administrative costs Research and development Income from operations Income taxes expense Net income Total assets Noninterest-bearing current liabilities

2018 $230,000,000 105,000,000 145,000,000 25,000,000 15,600,000 104,400,000 36,540,000 $ 67,860,000 $650,000,000 $ 15,000,000

2017 $220,000,000 96,000,000 124,000,000 22,500,000 12,400,000 89,100,000 31,185,000 $ 67,915,000 $605,000,000 $ 12,300,000

Biltmore’s interest expense is $0, its income tax rate is 35 percent, and its cost of capital is 10 percent. Biltmore amortizes R&D over 4 years. By how much is invested capital adjusted as it relates to computing EVA for 2018? A. $17,900,000 B. $7,800,000 C. $15,600,000 D. $21,000,000

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160. Thomas Company compiled the following information from its financial records for the year ending December 31, 2017: Research and development costs incurred during $1,200,000 2017 Total assets 5,200,000 Current liabilities, interest bearing 300,000 Current liabilities, noninterest-bearing 800,000 Net income 950,000 Sales 11,300,000 Interest expense 670,000 Cost of capital 10% Income tax rate 30% Thomas' amortization policy is 4 years. How much is the accounting distortion adjustment to NOPAT when calculating EVA for 2017? A. $900,000 B. $630,000 C. $840,000 D. $270,000 161. Thomas Company compiled the following information from its financial records for the year ending December 31, 2017: Research and development costs incurred during $1,200,000 2017 Total assets 5,200,000 Current liabilities, interest bearing 300,000 Current liabilities, noninterest-bearing 800,000 Net income 950,000 Sales 11,300,000 Interest expense 670,000 Cost of capital 10% Income tax rate 30% Thomas' amortization policy is 4 years. How much is the accounting distortion adjustment to invested capital when calculating EVA for 2017? A. $900,000 B. $300,000 C. $840,000 D. $630,000 Material from the appendix to the chapter is marked with an asterisk (*).

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Answers to Multiple Choice 31 D 53 C 32 C 54 D 33 B 55 B 34 C 56 D 35 B 57 A 36 D 58 A 37 D 59 A 38 B 60 A 39 C 61 A 40 B 62 A 41 C 63 A 42 B 64 B 43 B 65 C 44 C 66 A 45 C 67 A 46 A 68 D 47 D 69 B 48 B 70 C 49 D 71 B 50 C 72 A 51 A 73 B 52 C 74 A

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96

C A C D A B B B D A C A A D C B D A A D C B

97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118

A A A C A B A D B C D B C D A B D A B C A C

119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140

B A D C D C A C B A A D A D C D C C A A C D

141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161

A D D A D D A C D A D A C A B D A B A B A

Chapter 12 Decentralization and Performance Evaluation

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MATCHING 162.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once.

_____ 1.

Balanced scorecard

________ 7.

NOPAT

_____ 2.

Cost center

________ 8.

Profit center

_____ 3.

Decentralized organization

________ 9.

Profit margin

_____ 4.

Economic value added

________ 10. Residual income

_____ 5.

Goal congruence

________ 11. Return on investment

_____ 6.

Investment center

________ 12. Investment turnover

A. B. C. D. E. F. G. H. I. J. K. L.

Ratio of investment center income to invested capital Net income + interest expense – tax savings due to interest expense Firms that grant substantial decision-making authority to the managers of subunits Ratio of income to sales Compatibility between personal goals and the goals of the organization Residual income adjusted for accounting distortions Subunit that has responsibility for controlling costs but is not responsible for generating revenues Ratio of sales to invested capital Subunit that has responsibility for generating revenues as well as controlling costs Set of performance measures that consider factors other than financial results Subunit charged with earning income that is consistent with the amount of assets invested in the segment NOPAT minus profit required for the level of investment in the investment center

Answers to Matching 1. J 2. G 3. C 4. F 5. E 6. K

7. 8. 9. 10. 11. 12.

B I D L A H

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

EXERCISES 163.

Smith Division produces soap and reported sales of $540,000, which generated a net income after tax deduction of $77,900 for 2017. The division did not incur any interest expenditure during the year. Smith Division’s invested capital for the year amounted to $820,000. Smith’s parent corporation has a required rate of return equal to 10 percent and a cost of capital of 8 percent. How is the division performing if it is evaluated using return on investment?

Answer Return on investment = $77,900 ÷ $820,000 = 9.5% Smith Division earned less than the required rate of return of 10 percent indicating is it not performing as well as the parent corporation expects it to perform.

164.

Floyd Productions’ West Division reported sales of $280,000 and net income totaling $58,800. The invested capital in West Division is $336,000. Calculate West Division’s profit margin, investment turnover, and return on investment.

Answer Profit margin = $58,800 ÷ $280,000 = 21% Investment turnover = $280,000 ÷ $336,000 = 0.83 Return on investment = $58,800 ÷ $336,000 = 17.5%

165.

For fiscal year 2017, Regency Division of Florida Malls had income as follows: Sales revenue $43,000,000 Expenses: Cost of goods sold $28,400,000 Selling and administrative expense 5,600,000 Interest expense 1,100,000 35,100,000 Income before taxes 7,900,000 Income tax expense 2,765,000 Net income $ 5,135,000 The Regency Division’s total assets were $89,000,000 and its current liabilities totaled $3,200,000 with $700,000 of these being interest-bearing. The company has a required rate of return of 9 percent and a cost of capital of 7.2 percent. Calculate NOPAT, invested capital, and return on investment for Regency Division and comment on the company’s performance.

Answer Income tax rate = $2,765,000 ÷$7,900,000 = 35% NOPAT = $5,135,000 + $1,100,000 (1 – 0.35) = $5,850,000 Invested capital = $89,000,000 – ($3,200,000 – $700,000) = $86,500,000 Return on investment = $5,850,000 ÷ $86,500,000 = 6.76% The division is not performing well given that the required rate of return on invested capital is 9 percent, and the division has generated only 6.76 percent from the invested assets.

Chapter 12 Decentralization and Performance Evaluation

166.

The chief operating officer (COO) of the DeSoto Corporation is considering the effect of depreciation on the return on investment of one of its divisions. In the most recent year, the division had net operating profit after taxes totaling $1,377,000 and the invested capital was $16,200,000. The COO has determined that total assets will decline each year by 6 percent due to depreciation of plant and equipment, but NOPAT will remain relatively constant. a. b.

Calculate return on investment for each of the next three years considering the change in value of the assets. Explain why evaluation in terms of return on investment may lead managers to delay purchases of equipment that, in the long-run, will be needed to remain competitive.

Answer a. NOPAT Investment Return on investment b.

167.

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Year 1 $1,377,000 $16,200,000 8.50%

Year 2 $1,377,000 $15,228,000 9.04%

Year 3 $1,377,000 $14,314,320 9.62%

If no new investment is made, return on investment automatically improves from 8.50 percent to 9.62 percent over the three-year period. Managers have an incentive to avoid or delay investments that will increase the investment base to prevent a reduction of the return on investment.

Consider the following information for South Coast Division of the Lacy’s Department Stores for 2018 and 2017. 2018 2017 Total assets $24,000,000 $21,600,000 Noninterest-bearing current liabilities 1,600,000 2,100,000 Interest-bearing current liabilities 800,000 500,000 Sales 44,800,000 42,900,000 Interest expense 1,100,000 1,400,000 Net income 3,596,000 3,707,400 Tax rate 40% 40% a. b. c.

Compute return on investment for both years. Break the return on investment down into profit margin and investment turnover. Comment on the change in financial performance between 2017 and 2018.

Answer a.

2018: [$3,596,000 + ($1,100,000 × (1 – 40%))] ÷ ($24,000,000 – $1,600,000) = 19.0% 2017: [$3,707,400 + ($1,400,000 × (1 – 40%))] ÷ ($21,600,000 – $2,100,000) = 23.3%

Profit margin: 2018: [$3,596,000 + ($1,100,000 × (1 – 40%))] ÷ $44,800,000 = 9.5% 2017: [$3,707,400 + ($1,400,000 × (1 – 40%))] ÷ $42,900,000 = 10.6% Investment turnover: 2018: $44,800,000 ÷ ($24,000,000 – $1,600,000) = 2.00 2017: $42,900,000 ÷ ($21,600,000 – $2,100,000) = 2.20

Between 2017 and 2018, return on investment declined from 23.3% to 19.0%. This was due to the decrease in profit margin (10.6% to 9.5%) and the decrease in investment turnover (2.2 to 2.0).

12-38

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

168.

Cowell Enterprises has two divisions. Its Seaboard Division has $800,000 in invested capital. Its sales totaled $1,440,000 in a year when NOPAT was $123,120. Calculate the division’s profit margin, investment turnover, and return on investment.

Answer Profit margin = $123,120 ÷ $1,440,000 = 8.55% Investment turnover = $1,440,000 ÷ $800,000 = 1.80 Return on investment = $123,120 ÷ $800,000 = 15.39%

169.

Loyalty Company has net income of $150,000, $100,000 in interest expense, an income tax rate of 35 percent, and a cost of capital of 14 percent. It has total assets of $1,525,000, with noninterest-bearing current liabilities of $275,000. Calculate NOPAT and residual income for Loyalty.

Answer NOPAT = $150,000 + [$100,000 × (1 – 0.35)] = $215,000 Residual income = $215,000 – [($1,525,000 – $275,000) × 0.14] = $40,000

170.

Information for the Container Division of Advanced Disposal for a recent year is given below: Sales $30,000,000 Interest expense 4,000,000 Net income 2,000,000 Total assets 80,000,000 Noninterest-bearing current liabilities 20,000,000 Interest-bearing current liabilities 1,000,000 Cost of capital 11% Required rate of return 13% Income tax rate 30% Calculate the following amounts for Container Division: a. NOPAT b. Invested capital c. Return on investment d. Residual income

Answer a.

NOPAT = $2,000,000 + [$4,000,000 × (1 – 0.3)] = $4,800,000

Invested capital = $80,000,000 – $20,000,000 = $60,000,000

Return on investment = $4,800,000 ÷ $60,000,000 = 8%

Residual income = $4,800,000 – ($60,000,000 × 0.11) = ($1,800,000)

Chapter 12 Decentralization and Performance Evaluation

171.

12-39

Sanford Division of Shoebox Enterprises compiled the following information concerning its performance in a recent year: Total assets Noninterest-bearing current liabilities Sales Interest expense Net income Cost of capital Required rate of return Income tax rate

$5,200,000 240,000 4,100,000 90,000 480,000 8.5% 9.8% 30%

How much wealth did Sanford Division add to Shoebox Enterprises’ shareholder value? Answer NOPAT = $480,000 + $90,000 × (1 – 30%) = $543,000 Invested capital = $5,200,000 – $240,000 = $4,960,000 Residual income = $543,000 – ($4,960,000 × 8.5%) = $121,400

172.

Top management of the Luxor Corp. is trying to construct a performance evaluation system to use to evaluate each of its three divisions. Financial data are as follows: Granite Marble Porcelain Total assets $830,000 $3,700,000 $4,200,000 Noninterest-bearing current liabilities 40,000 650,000 200,000 NOPAT 102,700 259,250 500,000 Income tax rate 40% 40% 40% Cost of capital 7% 8% 9% Required rate of return 10% 12% 11% How will the divisions be ranked (from best to worst performance) if the evaluation is based on ‘profit’ compared to return on investment? Under which evaluation method is management more likely to overinvest? Under which method is more likely to underinvest?

Answer Based on profit: Porcelain Division, Marble Division, Granite Division Based on ROI: Granite Division, Porcelain Division, Marble Division Return on investment – Granite Division = $102,700 ÷ [$830,000 – $40,000] = 13.0% Return on investment – Marble Division= $259,250 ÷ [$3,700,000 – $650,000] = 8.50% Return on investment – Porcelain Division = $500,000 ÷ [$4,200,000 – $200,000] = 12.5% Managers evaluated using profit tend to overinvest to generate a few extra dollars of profit even if the investment does not meet the minimum required rate of return. Managers evaluated using return on investment tend to underinvest because they don’t want their divisional return on investment to decline.

12-40

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

173.

Consider the following data, which relate to the two divisions of Office Products. Total assets Noninterest-bearing current liabilities NOPAT Cost of capital

West Division $51,000,000 6,000,000 12,000,000 8%

East Division $28,000,000 3,500,000 5,020,000 10%

Compare the two divisions in terms of return on investment and residual income. In the past year, which division has created the most wealth for Office Product’s shareholders? Answer West Division: Return on investment = $12,000,000 ÷ $45,000,000 = 26.7% Residual Income = $12,000,000 – (.08  $45,000,000) = $8,400,000 East Division: Return on investment = $5,020,000 ÷ $24,500,000 = 20.5% Residual Income = $5,020,000 – (.10  $24,500,000) = $2,570,000 West Division created more wealth, $8,400,000, as compared to $2,570,000 for East Division.

174.

The Pastry Division of Cinotti’s Bakery reported NOPAT totaling $512,000 in 2019. This included $330,000 in research and development costs for 2019. Additionally, research and development in 2018 and 2017 were, respectively, $280,000 and $240,000. Invested capital at the end of 2019 totaled $5,400,000. The company is subject to a 30% income tax rate. Cinotti capitalizes and amortizes intangible assets over 4 years. The company’s cost of capital is 7 percent and its required rate of return is 8 percent. How much is EVA for 2019?

Answer Adjustment to NOPAT: For 2019 R&D expensed 2017 R&D: $240,000 ÷ 4 2018 R&D: $280,000 ÷ 4 2019 R&D: $330,000 ÷ 4 Total adjustment before income taxes Income tax effect ($117,500 × 30%) Net adjustment to NOPAT Adjustment to invested capital: 2017 R&D: $240,000 × 1/4 2018 R&D: $280,000 × 2/4 2019 R&D: $330,000 × 3/4 Total adjustment to invested capital

$330,000 (60,000) (70,000) (82,500) 117,500 35,250 $ 82,250 $ 60,000 140,000 247,500 $447,500

EVA = ($512,000 + $82,250) – 7% × ($5,400,000 + $447,500) = $184,925

Chapter 12 Decentralization and Performance Evaluation

175.

12-41

The Knob Division of Barnett Brass has NOPAT of $42,000. The company’s cost of capital is 5.5 percent, its required rate of return is 8.4 percent. The division’s invested capital totals $560,000. How much is the division’s residual income?

Answer Residual Income = $42,000 – ($560,000 × 5.5%) = $11,200

176.

For fiscal year 2017, the Pharmacy Division of Halgreen RX reported net income totaling $6,000,000. Its interest expense was $1,000,000, and the income tax rate was 40 percent. The total assets of the Pharmacy Division were $68,000,000, and total current liabilities were $7,000,000 with $3,200,000 being interest-bearing. The company’s cost of capital is 8 percent and its required rate of return is 9 percent. Calculate NOPAT, invested capital, and residual income for the Pharmacy Division and comment on the division’s contribution to the company’s performance.

Answer NOPAT = Invested capital = Residual income =

$6,000,000 + [$1,000,000 × (1 – .40)] = $6,600,000 $68,000,000 – ($7,000,000 – $3,200,000) = $64,200,000 $6,600,000 – (.08  $64,200,000) = $1,464,000

The Pharmacy Division contributed $1,464,000 to the wealth of Halgreen RX during 2017. This is the amount that exceeds the cost of financing the assets invested in the Pharmacy Division.

177.

Walk-In Care Center is a division of Shands Corporation and is organized as an investment center. In the past year, the Care Center reported an after-tax income of $760,000. Total interest expense was $70,000, and the center’s income tax rate is 35 percent. Its assets totaled $12,000,000, noninterest-bearing current liabilities were $900,000, and interest-bearing current liabilities totaled $600,000. Shands has established a required rate of return of 9 percent, while its cost of capital is 6.4 percent. Calculate the residual income generated by Walk-In Care Center.

Answer NOPAT = Invested capital = Residual income =

$760,000 + [$70,000 × (1 – .35)] = $805,500 $12,000,000 – $900,000 = $11,100,000 $805,500 – (6.4%  $11,100,000) = $95,100

12-42

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

*178. Windsor Medical Services has two outpatient clinics and a pathology laboratory, which are organized as separate profit centers. When the pathology laboratory conducts tests ordered by the clinics, the clinics are charged the basic market price of the tests. The managers of the clinics object to this practice and argue that because they are all part of the same company, they should be charged for the cost of the procedures rather than market price. Support the use of market prices or cost-based prices for charging clinics for tests performed by the pathology laboratory. Answer The lab is organized as a profit center. Therefore, it should be allowed to charge competitive market prices for tests. Charging cost-based prices may lead to inefficient use of lab tests by the outpatient clinics (since they can use the lab at a charge less than the opportunity cost associated with the use) and lab managers may lose their incentive to perform effectively. 179.

Good Buy Electronics is considering a plan by which its managers will be evaluated and rewarded based on a measure of economic value added. Before adopting the plan, management wants you to calculate the projected amount of EVA for 2019, based on financial forecasts and prior financial data, as follows: Total assets Noninterest-bearing current liabilities Sales Net income Interest expense Research and development Income tax rate Cost of capital Required rate of return

$57,000,000 20,000,000 120,000,000 5,800,000 1,200,000 2,400,000 35% 7% 9%

Research and development expenditures in 2017 and 2018 were $1,200,000 and $2,100,000, respectively. Research and development is amortized over a three-year life. a. b.

Explain why it is important to capitalize research and development if managers are rewarded based on EVA. Calculate forecasted EVA for 2019.

Chapter 12 Decentralization and Performance Evaluation

Answer a.

12-43

Under GAAP, research and development is treated as an expense even though it creates future value. Managers may be tempted to cut back on research and development in order to increase reported earnings. With EVA, research and development is capitalized and amortized over the future periods that are benefited. Since it is not immediately expensed for purposes of calculating EVA and because managers are rewarded based on their EVA performance, managers will have less incentive to cut research and development. Net income Plus interest, net of taxes ($1,200,000 × (1 – 35%)) Plus 2019 R&D $2,400,000 Less amortization of 2019 R&D ($2,400,000 ÷ 3) (800,000) Less amortization of 2018 R&D ($2,100,000 ÷ 3) (700,000) Less amortization of 2017 R&D ($1,200,000 ÷ 3) (400,000) Before taxes adjustment to NOPAT 500,000 Income tax effect ($500,000 × 35%) (175,000) Net adjusted to NOPAT NOPAT adjusted for R&D Total assets $ 57,000,000 Less noninterest-bearing current liabilities (20,000,000) Plus unamortized R&D: 2019: $2,400,000 × 2/3 1,600,000 2018: $2,100,000 × 1/3 700,000 Investment 39,300,000 Less cost of capital investment (.07 × $39,300,000) Economic value added

$5,800,000 780,000

325,000 6,905,000

2,751,000 $4,154,000

12-44

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

180.

Stand Up Comics operates comedy clubs in in several states. The following financial information is available for 2019 and 2018. 2019 2018 Income from operations $ 900,000 $ 850,000 Net income 537,420 507,000 Interest expense 6,000 5,000 Total assets 4,000,000 3,500,000 Noninterest-bearing current liabilities 290,000 280,000 Research & development costs 200,000 160,000 Income tax rate 40% 40% Required rate of return 7% 6.5% Cost of capital 5% 4% Intangibles are amortized over 4 years. Although net income has increased by 6 percent, a shareholder evaluating the company’s financial performance asserts that, financial performance has decreased in 2019. Support this assertion with appropriate calculations of economic value added.

Answer Economic value added has decreased from 2018 to 2019 by $38,380. 2019 2018 Net income $537,420 $507,000 Plus: Interest expense, net of tax 3,600 3,000 NOPAT 541,020 510,000 Adjustment for accounting distortions: ($200,000 – $40,000 – $50,000) × (1 – 40%) 66,000 ($160,000 – $40,000) × (1 – 40%) ______0 72,000 NOPAT adjusted $607,020 $582,000 Total assets Less NIBCL Add adjustment for accounting distortions: 2019: ($200,000 × ¾) + ($160,000 × 2/4) 2018: ($160,000 × ¾) Adjusted investment Cost of capital Required NOPAT Economic value added

$4,000,000 (290,000)

$3,500,000 (280,000)

230,000 3,940,000 5% 197,000 $ 410,020

120,000 3,340,000 4% 133,600 $ 448,400

Chapter 12 Decentralization and Performance Evaluation

12-45

CHALLENGE EXERCISES 181.

CocaCola has 3 divisions. It uses a 10.9 percent required rate of return. Its Dasani Division has an invested capital amounting to $998,000 and reported profits of $122,000 during the current year. The division manager is considering whether expanding the shipping docks at an estimated cost of $182,000 will enhance the division. The expansion is expected to increase annual income by an estimated $18,100. a. b.

Answer a. b.

182.

Calculate the Dasani Division’s ROI if the docks are expanded. What will the Dasani Division’s manager most likely do if he is evaluated using ROI? Briefly justify why the manager will take that action.

ROI = [$122,000 + $18,100] ÷ [$998,000 + $182,000] = 11.87% Original ROI = $122,000 ÷ $998,000 = 12.22% The expansion of the shipping docks will cause the division's ROI to decline, making the manager's performance look bad, so he is more likely to reject the project even though the project's ROI exceeds CocaCola’s required rate of return.

Outkast Division of Music, Inc. has a 5.5 percent cost of capital and a 25 percent income tax rate. The company compiled the following information for Outkast Division in 2017: Total assets $10,700,000 Net income 1,200,000 Sales 9,800,000 Current liabilities, interest bearing 540,000 Current liabilities, non-interest bearing 620,000 Interest expense 510,000 a. b. c.

Answer a.

Name and calculate the two components of ROI. Show how the components in part A can be used together to calculate ROI. Interpret your answer to part b. Profit margin = [$1,200,000 + ($510,000 × (1 – 25%)] ÷ $9,800,000 = 16.15% Investment turnover = $9,800,000 ÷ [$10,700,000 – $620,000] = 0.9722

Profit margin × Investment turnover = 16.15% × 0.9722 times = 15.70%

Outkast Division generated about 15.7 cents of profit for each dollar of assets invested in the division.

12-46

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

183.

LB Division of BulbCo had net income totaling $56,700, sales totaling $650,000, no interest cost, and a 30 percent income tax rate for 2017. Invested capital totals $540,000. BulbCo’s required rate of return is 8 percent and its cost of capital is 6 percent. The 2017 ROI of LB Division is 10.5 percent. LB Division is considering an investment in a new machine on January 1, 2018 that will generate additional annual sales of $76,000 and additional annual operating expenses (other than depreciation) totaling $39,000. The cost of the new machine is $140,000 with an estimated salvage value of $15,000 at the end of its 5-year estimated life. LB will pay cash for the machine. a. b. c.

Calculate NOPAT for 2018 if LB Division acquires the new machine. Assuming no change in original operations, determine the 2018 return on investment if LB buys the machine. If LB Division’s manager is evaluated on ROI, will he accept the project? Briefly justify your response.

Answer a.

184.

Incremental revenue $76,000 Incremental operating costs (39,000) Incremental depreciation ($140,000 – $15,000) ÷ 5 Increase in income before taxes 12,000 Income tax expense (3,600) Incremental net income from new machine 8,400 Net income from original operations 56,700 Adjusted net income = NOPAT $65,100

(25,000)

ROI = $65,100 ÷ [$540,000 + $140,000 – $25,000] = 9.94%

LB Division had an ROI of 10.5 percent without the new machine. ROI of the division decreases to 9.94 percent if the new machine is acquired. The manager would most likely not acquire the new machine since it would decrease his division's ROI and make his performance appear poor compared to his current performance.

Frigate Co. compiled the following information concerning its West Division for 2018: Sales revenue Invested capital NOPAT

$10,500,000 12,900,000 870,000

Research and development costs Current liabilities-interest bearing Current liabilities-non-interest bearing

R&D costs incurred by West Division during 2017 totaled $700,000. The company’s notes indicate its amortization policy is 5 years. Frigate has a 7.8 percent cost of capital, a 9.1 percent required rate of return, and a 32 percent income tax rate. a. How much is EVA for the West Division for 2018? b. What information is provided by Frigate’s EVA for 2018?

$940,000 210,000 320,000

Chapter 12 Decentralization and Performance Evaluation

Answer a.

185.

12-47

EVA = NOPAT + Accounting adj., net of taxes − CC [Invested capital + Accounting adj.] = $870,000 + [$612,000 × (1 – 32%)] – 7.8% [$12,900,000 + $1,172,000] = $188,544 Before tax adjustment to NOPAT: $940,000 – ($700,000 ÷ 5) – ($940,000 ÷ 5) = $612,000 Adjustment to invested capital: ($700,000 × 3/5) + ($940,000 × 4/5) = $1,172,000 Frigate's shareholders' equity increased by $188,544 as a result of the performance of West Division during 2018.

The Florida Division is being evaluated by upper management of the parent company, Assistance Corporation. The following amounts were determined for Florida Division for 2017: Residual income $333,600 Return on investment 10.6% Economic value added $464,760 Interpret each of the three amounts as it applies to Florida Division for 2017.

Answer Residual income: The Florida Division contributed $333,600 to the shareholder wealth of Assistance Corporation during 2017. Return on investment: The Florida Division generated about 10.6 cents of profit for each dollar of assets invested in the division. Economic value added: After adjusting for the accounting distortions, the Florida Division contributed $464,760 to the shareholder wealth of Assistance Corporation during 2017.

12-48

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

SHORT-ANSWER ESSAYS 186.

List and briefly describe the advantages and disadvantages of decentralization for an organization.

Answer The advantages of decentralization are: 1. Superior decisions, because decisions are made by the managers who are closest to the situation and should have the best information about the situation 2. Faster response to changing circumstances, because decisions are not made by higher-level managers who need to be advised of all the facts 3. Increased motivation of managers, because they are responsible for their own decisions and the results of those decisions 4. Excellent training for future top-level executives, because managers have decision-making experience The disadvantages of decentralization are 1. Costly duplication of services, as each subunit acts independently 2. A danger of a lack of goal congruence if managers build their own “empires” rather than doing what is best for the overall organization

187.

What are the differences between cost centers, profit centers, and investment centers?

Answer Cost centers are subunits that have responsibility for controlling costs, but are not expected to generate revenues. Profit centers have responsibility for generating revenues as well as controlling costs; in other words, they are expected to earn a profit. Investment centers are responsible for costs, revenues, and investments. An investment center must earn a profit large enough to cover a charge for the assets that have been invested in the investment center.

188.

How is return on investment (ROI) calculated? List two actions that a manager could take to increase its return on investment.

Answer Return on investment is income divided by invested capital. The income figure that is typically used is NOPAT (net operating income after taxes), is the income adjusted for interest expense and the tax implications of the interest expense. A manager can increase the return on investment by increasing the profit margin or by increasing investment turnover by generating more sales for each dollar that is invested.

Chapter 12 Decentralization and Performance Evaluation

189.

12-49

Explain why net interest is added back to net income to get NOPAT.

Answer Interest results from the decision to use debt versus equity financing. That decision is normally not made by division managers. The adding back of interest, less the related tax effect, removes the impact of the financing decision that is not controllable by division management.

190.

What is economic value added and why is it superior to other performance measures?

Answer Economic value added is residual income adjusted for accounting distortions. Like residual income, it encourages managers to make appropriate levels of investment. In addition, it treats items such as research and development costs as having a long-term benefit to the company.

191.

What are the four dimensions of the balanced scorecard?

Answer The four dimensions of the balanced scorecard are financial perspective, customer perspective, internal processes perspective, and learning and growth.

*192. There are a number of alternative methods for determining a transfer price. Which method typically motivates the best decisions? Why? Answer The transfer price that motivates the best decisions is the one that is closest to the opportunity cost of producing an item and transferring it to the buying division. Usually, this is very close to the market price of the item. Material from the appendix to the chapter is marked with an asterisk (*).

CHAPTER 1 3 Statement of Cash Flows Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

K C K K K K

7. 8. 9. 10. 11. 12.

1 1 3 1 1,2 2

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48.

1 1 1,2 1,2 1,2 3 1,2 2 2 2 3 3 1,2 1,2 3 3 2 3

K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP

49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66.

2 3 3 3 3 1,2 3 1,3 1 2 1 1 1 1 1 2 3 3

115.

116.

117. 118. 119. 120.

1,2 1 1,2 2

C C AP C

121. 122. 123. 124.

2 2 3 3

134.

2,3

135.

138.

139.

BT Item LO BT Item True-False Statements K 13. 2 K 19. K 14. 3 K 20. C 15. 2 K 21. K 16. 2 K 22. K 17. 2 K 23. K 18. 2 K 24. Multiple Choice Questions AP 67. 3 AP 85. AP 68. 3 K 86. AP 69. 3 K 87. AP 70. 3 K 88. K 71. 1,3 K 89. K 72. 1 K 90. AP 73. 3 K 91. C 74. 2 K 92. K 75. 3 C 93. AP 76. 1 K 94. K 77. 1 K 95. K 78. 2 AP 96. iane K 79. 1 K 97. Ta K 80. 1 K 98. K 81. 1 K 99. AP 82. 1 AP 100. C 83. 1 K 101. C 84. 1 K 102. Matching C Exercises AP 125. 1,2 AP 129. AP 126. 3 AP 130. AP 127. 3 AN 131. AP 128. 2 AP 132. Challenge Exercises AP 136. 2 AP 137. Short-Answer Essays K 140. 2,3 C 141.

Item

2 3 1 3 3 2,3

K K K K K K

25. 26. 27. 28. 29. 30.

3 3 3 2 3 3

K K K C K K

1 1 1 2 1 1 1 2 2 2 3 3 2 3 1,2 2 2 2

K AP K AP K K K K K C C K K AP K AP AP AP

103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114.

2 2 2 1,2 2 2 2 2 2 3 3 1,3

AP AP AP AP AP AP AP AP AP K K AP

3 3 1,3 3

AP K AP C

133.

13-2

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

TRUE-FALSE STATEMENTS 1.

For purposes of a statement of cash flows, cash is defined to include cash and investments such as those in stock of other companies.

A firm may have a significant amount of net income, as computed under the accrual basis of accounting, yet have an insignificant net inflow of cash.

A statement of cash flows provides information on cash inflows and outflows for a specified period of time.

Cash equivalents are short-term investments that are highly liquid and can be readily converted into cash.

Cash proceeds from issuing a long-term note payable is classified as an operating activity.

Cash used to retire long-term debt that was used to build a new factory is classified as an investing activity.

Cash payments for salaries to employees are classified as an operating activity.

Financing activities are presented as the first classification on a statement of cash flows because a company must first obtain financing when it begins operations before it can acquire assets to start operations.

Financial statement users focus a great deal of attention on cash flows related to operating activities, because, over the long run, a business must generate positive cash flows from its profit-oriented activities to be successful.

10.

Cash received from customers includes cash from current period sales plus cash from customer payments on account.

11.

Cash paid for interest expense is shown as an operating activity under the direct method.

12.

Under the direct method, a gain on the sale of equipment is included in net income and subtracted in the operating activities section of the statement of cash flows because it is not a cash flow.

13.

The format of a statement of cash flows prepared using the direct method is much like an income statement prepared on the cash-flow basis.

14.

When the indirect method is used, GAAP requires a separate schedule reconciling cash flows from operating activities to net income.

15.

Cost of goods sold less any increase in accounts payable equals cash paid for inventory.

16.

A loss on the sale of a building is added to net income in the operating activities section of the statement of cash flows under the direct method.

17.

Cash paid for wages and salaries is determined by adding a decrease in wages payable or subtracting an increase in wages payable to the amount of wages and salaries expense.

Chapter 13 Statement of Cash Flows

13-3

18.

When the direct method of preparing the statement of cash flows is used, the payment of dividends to stockholders appears in the operating activities section.

19.

Proceeds from the sale of equipment is reported as an investing activity when using the direct method to prepare the statement of cash flows.

20.

A decrease in inventory is added to net income when preparing the operating activities section under the indirect method.

21.

Issuing common stock is an investing activity.

22.

Depreciation expense is added to net income when determining net cash provided by operating activities under the indirect method.

23.

Under the indirect method of preparing the statement of cash flows, a loss on the sale of equipment is added to net income in the investing activities section.

24.

The presentation of each the three sections of the statement of cash flows will differ when comparing the format of the direct and indirect methods of preparing the statement of cash flows.

25.

Increases in receivables and prepaid expenses are added to net income to determine cash provided/(used) by operating activities when using the indirect method.

26.

An increase in accounts receivable is subtracted from net income to determine cash provided/(used) by operating activities when using the indirect method.

27.

An increase in accounts payable is added to net income to determine cash provided/(used) by operating activities when using the indirect method.

28.

Both the direct and indirect method yield the same total amount for net cash provided or used by operating activities.

29.

Generally, the most important section of the statement of cash flows is operating activities because a company is required to have positive cash flows according to GAAP.

30.

If cash flows provided by operating activities are a relatively small amount, a company may offset this problem on a short-term basis by cutting back on capital expenditures or by borrowing funds or issuing stock.

Answers to True-False 1 F 7 2 T 8 3 T 9 4 T 10 5 F 11 6 F 12

T F T T T F

13 14 15 16 17 18

T F F F T F

19 20 21 22 23 24

T T F T F F

25 26 27 28 29 30

F T T T F T

13-4

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

MULTIPLE CHOICE 31.

What primary information is provided in the statement of cash flows? A. The amount of profits earned during a period B. The source and uses of a company’s money C. Estimates of future cash flows D. Cash receipts and cash payments of an entity’s profitable activities during a period

32.

Which one of the following is an important reason to evaluate a company’s cash flow? A. Without positive cash flows, a company is unable to recognize a positive net income. B. Minimum cash balances must be maintained by all companies. C. Stockholders want to know that the company can generate cash consistent with earning a reasonable return on their investments. D. Creditors want to be assured that the company has significant cash inflows from financing activities.

33.

Watley Surf Shop provided the following information for the current year: Proceeds from sale of equipment Dividends paid to stockholders Purchase of inventories on account Borrowing a long-term loan Loan principal payments made Interest paid on loan payments Purchase of land for cash Payment for inventory previously acquired on account Cash collected from customers

$120,000 16,000 92,000 60,000 14,000 1,000 65,000 85,000 450,000

How much is the net cash provided/(used) by investing activities during the year? A. $55,000 B. $115,000 C. $100,000 D. $40,000 34.

$120,000 16,000 92,000 60,000 14,000 1,000 65,000 85,000 450,000

How much is the net cash provided/(used) by financing activities during the year? A. $29,000 B. ($56,000) C. ($90,000) D. $30,000

Chapter 13 Statement of Cash Flows

35.

13-5

Randolph Retail reported the following results during 2017: Cash collected from accounts receivable Cash paid to purchase office supplies Cash collected from customers for current period sales Cash paid for dividends Cash paid for inventory acquisitions Cash collected from the issuance of common stock Cash paid to purchase equipment with a 5-year life

$56,000 2,000 98,000 12,000 87,000 50,000 80,000

How much is the company’s net cash provided by operating activities? A. $23,000 B. $103,000 C. $65,000 D. $53,000 36.

Speedy Supermarket reported net income of $24,000 in 2017. No dividends were declared nor paid during the year. Changes in the selected accounts during the year are: Accounts receivable Inventory Prepaid expenses Accounts payable Salaries payable

Increase/(Decrease) $16,200 11,800 (4,000) 27,300 (3,000)

How much is the company’s net cash provided by operating activities? A. $24,300 B. $72,300 C. $300 D. $48,300 37.

Harnett Enterprises had a net loss of $14,000 in 2017. Dividends of $15,000 were declared and paid during the year and the company reported depreciation expense of $15,000. Changes in the following selected accounts occurred during the year: Increase/(Decrease) Accounts receivable ($3,000) Long-term investments 16,000 Interest payable (2,000) Notes payable 65,000 Property, plant, and equipment 42,000 No property, plant, and equipment items were sold during the year. How much is the company’s net cash provided/(used) by financing activities? A. $2,000 B. ($65,000) C. $50,000 D. ($80,000)

13-6

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

38.

Harnett Enterprises had a net loss of $14,000 in 2017. Dividends of $15,000 were declared and paid during the year and the company reported depreciation expense of $15,000. Changes in the following selected accounts occurred during the year: Increase/(Decrease) Accounts receivable ($3,000) Long-term investments 16,000 Interest payable (2,000) Notes payable 65,000 Property, plant, and equipment 42,000 No property, plant, and equipment were sold during the year. How much is the company’s net cash provided (used) by investing activities? A. $7,000 B. $60,000 C. $18,000 D. ($58,000)

39.

Marquette Décor is a merchandiser that operates a small retail store. Comparative balance sheets for the years ending December 31, 2018 and 2017 and its income statement for 2018 follow: Assets Cash Accounts receivable Merchandise inventories Equipment Accumulated depreciation Total assets

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

During the year, equipment with an original cost of $17,000, and accumulated depreciation totaling $16,800 was sold for $3,600. Dividends were declared and paid during the year. How much cash did Marquette collect from customers during the year? A. $227,100 B. $224,000 C. $235,400 D. $220,900

Chapter 13 Statement of Cash Flows

40.

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

How much cash did Marquette pay for inventory purchases during the year? A. $122,400 B. $125,400 C. $123,600 D. $118,800 41.

13-7

Bath Works had a net loss of $5,100 in 2017. During the year, a gain of $4,000 was recognized on the sale of fully depreciated equipment that had cost $14,000 and had no salvage value. Depreciation expense during the year totaled $17,400. Changes in the following selected accounts occurred during the year: Accounts receivable Inventory Interest payable Accounts payable Accumulated depreciation Notes payable Long-term investments

Increase/(Decrease) $6,500 (3,200) 1,200 (1,000) 3,400 (6,400) (9,000)

Using the indirect method, how much is the company’s net cash provided(used) by operating activities? A. $15,800 B. $9,200 C. $8,800 D. $5,200

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

42.

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

During the year, equipment with an original cost of $17,000, and accumulated depreciation totaling $16,800 was sold for $3,600. Dividends were declared and paid during the year. The company uses the indirect method. How much is cash provided/(used) by operating activities? A. $27,200 B. $30,600 C. $29,000 D. $30,800 43.

Econ Services’ statement of cash flows indicates a $73,000 increase in cash during the year. The statement also indicates that the company used $42,000 for operating activities and $89,000 was provided by financing activities. How much was net cash provided/(used) by investing activities? A. $204,000 B. ($58,000) C. $26,000 D. ($47,000)

44.

Thomas Electric’s statement of cash flows indicates a $12,000 decrease in cash during the year. The statement also indicates that $28,000 was provided by operating activities and $15,000 was used by investing activities. How much is net cash provided/(used) by financing activities? A. ($25,000) B. ($1,000) C. ($31,000) D. $42,000

Chapter 13 Statement of Cash Flows

45.

13-9

The accounting records of Snapdog Enterprises include the following information: December 31, 2018 2017 Accounts payable $12,800 $13,200 Accounts receivable 24,000 21,700 The company’s income statement for 2018 appears below. Sales $280,000 Cost of goods sold 150,000 Depreciation expense 15,000 Other operating expenses 68,000 Loss on sale of plant asset 10,200 Income taxes 24,000 Net income $ 12,800 What amount of net cash provided by operating activities will Snapdog Enterprises report for 2018 using the indirect method? A. $35,300 B. $25,900 C. $36,100 D. $39,900

46.

Kingston Jerk Factory reported the following results for 2017: Property, plant, and equipment Accumulated depreciation Net property, plant, and equipment

December 31 $420,000 (189,000) $231,000

January 1 $405,000 (180,000) $225,000

During 2017, the company sold equipment that had an original cost of $39,000 and accumulated depreciation of $31,000 for $13,000. New equipment was purchased for cash during the year. How much gain/(loss) will Kingston add or subtract from net income when preparing the operating activities section of the statement of cash flows using the indirect method for 2017? A. Subtract $5,000 B. Add $2,000 C. Subtract $26,000 D. There is not enough information provided to answer this question.

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

47.

Kingston Jerk Factory reported the following results for 2017: December 31 January 1 Property, plant, and equipment $420,000 $405,000 Accumulated depreciation (189,000) (180,000) Net property, plant, and $231,000 $225,000 equipment During 2017, the company sold equipment that had an original cost of $39,000 and accumulated depreciation of $31,000 for $13,000. New equipment was purchased for cash during the year. How much is reported for cash paid to acquire property, plant, and equipment on the statement of cash flows for 2017? A. $5,000 B. $54,000 C. $28,000 D. There is not enough information provided to answer this question.

48.

In 2017, Maxi Office Supplies sold a plant asset that had an original cost of $54,000 and accumulated depreciation of $28,000 for $15,000 in cash. Which one of the following is one item to be reported on the statement of cash flows prepared using the indirect method? A. An addition to net income in the operating activities section for $11,000 B. A subtraction from net income in the operating activities section for $11,000 C. A source of cash of $15,000 in the financing activities section D. A use of cash in the investing activities section for $26,000

49.

Limon Grill’s balance in retained earnings was $87,000 at the beginning of the year and $92,000 at the end of the year. If the company declared and paid dividends of $26,000 during the year, how much was net income/(loss) for the year? A. $5,000 B. $31,000 C. $21,000 D. ($5,000)

50.

During 2017, Lance Chips sold equipment that had an original cost of $143,000 and accumulated depreciation of $110,000, for cash totaling $25,000. Which one of the following is one effect of this transaction on the statement of cash flows if the indirect method is used? A. An addition to net income in the operating activities section for $25,000 B. An addition to net income of $8,000 in the operating activities section C. A subtraction of $33,000 in the investing activities section D. An addition of $8,000 in the investing activities section

51.

First National Eatery prepares its statement of cash flows using the indirect method. The statement reported that cash provided by operating activities for the year was $7,000. If the company experienced a $14,000 decrease in accounts receivable, a $13,000 decrease in accounts payable, and a $4,000 increase in inventory during the year, how much is the company’s net income/(loss) for the year? A. ($3,000) B. $4,000 C. ($16,000) D. $2,000

Chapter 13 Statement of Cash Flows

13-11

52.

Kermit Productions purchased $44,000 worth of stock in the Enterprise Company in 2017. In 2017, the stock was sold for $87,000. Which one of the following is one effect of this transaction on the statement of cash flows if the indirect method is used during 2017? A. An addition of $43,000 in the investing activities section B. A subtraction of $43,000 in the investing activities section C. A subtraction from net income of $43,000 in the operating activities section D. An addition to net income of $87,000 in the operating activities section

53.

Which is the most important item in a company’s statement of cash flows? A. Positive operating cash flows B. Positive operating, investing, and financing cash flows C. Positive operating and investing cash flows D. Positive operating and financing cash flows

54.

In addition to cash flows that occurred during the period, which of the following amounts listed below appear on the statement of cash flows prepared using the direct method? I. Beginning balance of cash and cash equivalents II. Ending balance of cash and cash equivalents III. Net income A. I and II B. II and III C. I and III D. I, II, and III

55.

During 2017, Thomas Windows completed the following transactions: • Purchased equipment for $41,000 cash that will be depreciated over a 10-year life • Sold equipment that had an original cost of $46,000 and accumulated depreciation of $43,000 for $7,000 cash The January 1, 2017 balance in the accumulated depreciation account was $134,000 and the December 31, 2017 balance was $145,000. How much depreciation expense will Thomas Windows report on the company’s 2017 statement of cash flows if the indirect method is used? A. $32,000 B. $54,000 C. $14,000 D. $57,000

56.

Natural Market’s statement of cash flows showed the following totals: Cash for operating activities Cash from financing activities Cash from investing activities

($45,000) 32,000 28,000

Which statement most likely explains what occurred during the year? A. Natural Market is using cash from operations and borrowing money from the bank to buy long-term assets. B. Natural Market is using its profits in order to sell plant assets and repay debt. C. Natural Market is using cash from the sale of long-term assets to fund its operations and to repay debt. D. Natural Market is selling long-term assets and borrowing cash to fund operations.

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

57.

How is cash paid for interest on a mortgage classified on a statement of cash flows? A. As an investing activity B. As an operating activity C. As a financing activity D. As a receiving activity

58.

If a company sells equipment with accumulated depreciation totaling $4,200 and an original cost of $5,100, for a loss of $400, what amount will appear in the investing activities section of the statement of cash flows? A. $500 inflow B. $400 inflow C. $900 inflow D. $4,700 inflow

59.

How is the repurchase of a company’s own stock classified on the statement of cash flows? A. As an investing activity B. As an operating activity C. As a financing activity D. As a non-cash activity

60.

How is the payment of previously accrued salaries reported on the statement of cash flows? A. As an investing activity B. As an operating activity C. As a financing activity D. As a non-cash activity

61.

Which one of the following is not a use of cash? A. The payment of a loan of which was borrowed in order to purchase a factory B. The issuance of a stock dividend C. Payments to suppliers D. A payment to reduce long-term debt

62.

Which one of the following is a cash inflow reported in the operating activities section of the statement of cash flows? A. The issuance of common stock B. The issuance of a long-term note payable C. The collection of accounts receivable D. The payment for raw materials

63.

Which section(s) of the statement of cash flows is(are) identical under both the direct and indirect methods? A. The operating activity section B. The investing and financing activity sections C. The financing and operating activity sections D. The operating, investing, and financing activity sections

Chapter 13 Statement of Cash Flows

13-13

64.

Race World reported credit sales of $445,000, ending accounts receivable of $41,500, and beginning accounts receivable of $33,500. What is the amount of cash collected from customers? A. $486,500 B. $453,000 C. $411,500 D. $437,000

65.

Under the indirect method of preparing the statement of cash flows, an increase in inventories is deducted from net income to calculate cash provided or used by operating activities because A. cash payments to customers were less than the inventory purchases made during the period. B. cash paid to acquire inventory was greater than cost of goods sold by the amount that inventories increased. C. cash payments to customers were larger than the inventory purchases made during the period. D. inventory purchases were less than the cost of goods sold by the amount that inventories increased.

66.

Why is a decrease in accounts receivable added to net income when determining cash provided by operating activities? A. Cash collections from customers were greater than the sales generated. B. Cash collections increased due to an increase in sales. C. Cash collections decreased due to a decline in sales. D. Cash collections from customers were less than the sales reported.

67.

Handley Mowers prepares its statement of cash flows using the indirect method. The following information was taken from its income statement and balance sheet for 2017: Net loss Increase in accounts receivable Depreciation expense Decrease in accounts payable Loss on sale of investments Payment of dividends

($6,000) 2,400 3,500 800 1,300 1,500

How much is cash provided/(used) by operating activities? A. $4,400 B. ($2,900) C. ($4,400) D. ($7,600) 68.

Which of the following is added to net income under the indirect method of determining cash provided/(used) by operating activities? A. Gain on the sale of equipment B. Increase in notes payable C. Increase in inventory D. Decrease in prepaid rent

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

69.

When preparing the operating activities section of a statement of cash flows using the indirect method, various adjustments are needed. Which of the following adjustments is incorrectly stated? A. Deduct any increases in inventories from net income. B. Deduct any decreases in non-cash current liabilities from net income. C. Add depreciation and amortization expense to net income. D. Add any gain on the sale of equipment.

70.

In which of the following sections of the statement of cash flows will users find cash flows that are the most important to the long-run success of a company? A. Operating activities section B. Investing activities section C. Financing activities section D. Operating, investing, and financing activities

71.

Which one of the following is a common use of the statement of cash flows by investors? A. To determine if the company can generate enough cash to acquire another company B. To determine if the company can generate enough cash to pay cash dividends to stockholders C. To determine if the company can generate enough cash to pay its employees D. To determine if the company can generate enough cash to buy equipment

72.

Which of the following is a cash equivalent? A. Accounts receivable B. A one-year note receivable C. Money market funds D. An investment in Microsoft’s stock

73.

Which of the following is a method that can often be used to offset problems related to cash flows from operating activities? A. Reduce capital expenditures B. Lay off employees C. Increase payments on short-term notes payable D. Acquire treasury stock

74.

What information is needed to determine cash paid to suppliers? I. The change in accounts receivable during the period II. Cost of goods sold for the period III. The change in inventories during the period IV. The change in accounts payable during the period A. I, II, III, and IV B. I, II, and III C. II, III, and IV D. II and III E. III and IV

Chapter 13 Statement of Cash Flows

13-15

75.

In order to be economically viable in the long run, what must a business generate? A. Negative financing activities, positive investing activities, and positive operating activities B. Positive operating activities C. Positive investing, financing, and operating activities D. Negative investing and financing activities and positive operating activities

76.

Which of the following is not a cash flow included in the investing activities section of the statement of cash flows? A. The payment of the principal balance on a long-term loan payable B. Purchase of another company C. The proceeds from the sale of a building D. The collection of a long-term note receivable

77.

Which of the following is a cash flow included in the financing activities section of the statement of cash flows? A. The payment of interest on notes payable B. The receipt of dividends from stock investments C. The making loans to other entities D. The payment of principal on notes payable

78.

Ogden Company uses its accounts payable account only for inventory purchases. The following account balances were reported on its financial statements: Accounts Merchandise inventory Accounts payable Cost of goods sold

December 31, 2018

December 31, 2017

$70,000

$66,000

68,000 889,000

65,000 856,000

How much cash did Ogden Company pay to suppliers during 2018? A. $887,000 B. $890,000 C. $896,000 D. $34,000 79.

How is the receipt of dividends from stock investments reported on the statement of cash flows? A. As an investing activity B. As an operating activity C. As a financing activity D. As a non-cash activity

80.

Which of the following is reported as an operating activity on the statement of cash flows? A. Cash payments for income taxes B. Cash received from the collection of long-term notes receivable C. Cash paid for dividends to stockholders D. Cash proceeds from issuing long-term debt

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

81.

How are changes in long-term assets that result in cash flows reported on the statement of cash flows? A. As investing activities B. As operating activities C. As financing activities D. As non-cash activities

82.

Winslow Manor Construction provided the following information during the year: Proceeds from sale of building Cash paid to purchase inventories Proceeds from issuing long-term debt Dividends paid to stockholders Purchase of land for cash Cash collected from customers

$65,000 22,000 17,000 12,000 56,000 180,000

How much is the net cash provided(/used) by investing activities during the year? A. $26,000 B. $14,000 C. $9,000 D. $12,000 83.

How are changes in long-term liabilities that result in cash flows reported on the statement of cash flows? A. As investing activities B. As operating activities C. As financing activities D. As non-cash activities

84.

How is cash received from using a line of credit reported on the statement of cash flows? A. As an investing activity B. As an operating activity C. As a financing activity D. As a non-cash activity

85.

Carriage House Cleaners purchased equipment and paid dividends during the year. Where do these amounts appear on the statement of cash flows, respectively? A. Operating activities section, financing activities section B. Financing activities section, operating activities section C. Investing activities section, operating activities section D. Investing activities section, financing activities section

Chapter 13 Statement of Cash Flows

86.

13-17

Selected information from the 2018 and 2017 accounting records of Hinley Roofing is provided below: December 31, 2018 2017 Net cash provided (used) by operations $38,000 $39,000 Net cash provided (used) by investing activities (22,000) 14,000 Net cash provided (used) by financing activities (15,000) (26,000) Cash balance at end of year ? 15,000 At the end of 2018, how much is Riddle’s cash balance? A. $16,000 B. $40,000 C. $28,000 D. $43,000

87.

Which of the following activities is not reported as a financing activity on the statement of cash flows? A. Borrowing from a bank B. Paying interest on a long-term note payable C. Repaying the principal on a loan D. Issuing common stock for cash

88.

Rodgers Chemicals sold a piece of equipment for cash and recognized a gain of $5,000. The original cost was $34,000 and the accumulated depreciation on the equipment just prior to the sale totaled $19,000. What amount will Rodgers Chemicals report in the investing activities section of its statement of cash flows? A. $20,000 B. $54,000 C. $10,000 D. $15,000

89.

Which of the following is reported as an operating activity? A. Cash payments for income taxes B. Cash payments for loan principal C. Cash payments for dividends D. Proceeds from the sale of a plant asset

90.

Which of the following is reported as an investing activity? A. Depreciation on plant assets B. Cash payments to acquire new equipment C. Cash received for the sale of stock to investors D. Interest received on a money market bank account

91.

Which of the following is considered to be a cash flow provided/(used) by financing activities? A. Dividends received from stock investments B. Cash received from customers for amounts due on account C. Proceeds from issuing common stock D. Interest paid on short-term notes payable

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

92.

To which of the following is the operating activities section of the statement of cash flows prepared using the direct method most similar? A. The balance sheet B. An income statement converted to the accrual basis of accounting C. An income statement converted to the cash basis of accounting D. A bank reconciliation

93.

Which method of preparing the statement of cash flows is similar to an income statement prepared on a cash basis? A. Single-step method B. Indirect method C. Multiple-step method D. Direct method

94.

Which of the following is the correct equation to use when calculating cash payments for income taxes under the direct method? A. Net income – Decrease in income taxes payable or + Increase in income taxes payable B. Net income + Decrease in income taxes payable or – Increase in income taxes payable C. Income tax expense – Decrease in income taxes payable or + Increase in income taxes payable D. Income tax expense – Decrease in accounts receivable or + Increase in accounts receivable

95.

Which of the following is not added to net income in the operating activities section of the statement of cash flows prepared using the indirect method? A. Depreciation expense B. Amortization expense C. Gain on sale of equipment D. Loss on sale of equipment

96.

Which of the following describes the nature of the operating activities section of the statement of cash flows prepared using the indirect method? A. A reconciliation of cash flows provided/(used) by operating activities and net income B. An accrual basis format of the income statement C. A cash basis format of the income statement D. A reconciliation of the net increase or decrease in cash and cash equivalents

97.

Which statement below is correct concerning the majority of companies’ preferences in preparing the statement of cash flows? A. Most companies use the direct method. B. Most companies use the indirect method. C. About half of public companies use the direct method and the other half use the indirect method. D. Most companies use both the direct and indirect methods.

Chapter 13 Statement of Cash Flows

13-19

98.

Wally Foods reported cost of goods sold for $100,000 and depreciation expense totaling $7,000. On January 1, Wally Foods had inventory and accounts payable of $21,000 and $24,000, respectively. On December 31, inventory and accounts payable were $28,000 and $20,000, respectively. Net income is $60,000. Beginning accounts receivable was $13,000 and ending was $12,000. How much is reported as net cash provided/(used) by operating activities? A. $57,000 B. $65,000 C. $77,000 D. $50,000

99.

Which statement is true with respect to the preparation of the ‘cash flows from operating activities’ section of the statement of cash flows? A. It is based on accrual income. B. Operating cash flows are the difference between revenues and expenses. C. It can be prepared using the direct or indirect methods. D. Cash payments for depreciation are reported in the operating activities section.

100.

The accounting records of Fine Mart Clothing include the following information for the year: Collections of accounts receivable Payments to suppliers Accrual of payables at month end Credit sales Cash sales Depreciation expense Payment for operating expenses

$124,000 76,000 17,000 115,000 35,000 12,000 43,000

What amount of net cash provided by operating activities will Fine Mart Clothing report on its statement of cash flows for the year? A. $19,000 B. $31,000 C. $40,000 D. $28,000 101.

DR Electric Supply reported interest expense of $6,300 for the year. Interest payable was $780 and $920 at the beginning and the end of the year, respectively. How much cash did DR Electric Supply pay for interest during the year? A. $6,160 B. $6,440 C. $7,080 D. $5,380

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

102.

Wellington Cabinets sells its merchandise on account. The company has provided the following information for 2018 and 2017: 2018 2017 Accounts receivable $ 125,000 $ 132,000 Sales 1,800,000 1,650,000 How much cash did Wellington Cabinets collect from customers during 2018? A. $1,925,000 B. $1,807,000 C. $1,793,000 D. $157,000

103.

The following amounts are taken from Wellington Cabinets’ financial statements: Merchandise inventory Accounts payable Cost of goods sold

2017 $ 600,000 70,000 3,100,000

2018 $ 700,000 110,000 4,200,000

The company uses accounts payable only for purchases of merchandise inventory. What amount of cash did Wellington Cabinets pay to for inventory during 2018? A. $4,060,000 B. $4,340,000 C. $1,240,000 D. $4,260,000 104.

The following amounts were provided by Brighthouse Lighting for the 2017: Beginning retained earnings Ending retained earnings Cash provided by operations Net income for 2017

$650,000 630,000 2,240,000 2,160,000

How much will Brighthouse report on it statement of cash flows for ‘dividends paid’ during 2017? A. $2,260,000 B. $2,180,000 C. $2,810,000 D. $2,140,000

Chapter 13 Statement of Cash Flows

105.

13-21

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

During the year, equipment with an original cost of $17,000, and accumulated depreciation totaling $16,800 was sold for $3,600. Dividends were declared and paid during the year. How much cash was used to acquire new equipment during 2018? A. $3,600 B. $27,600 C. $41,000 D. $24,000

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Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

106.

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

During the year, equipment with an original cost of $17,000, and accumulated depreciation totaling $16,800 was sold for $3,600. Dividends were declared and paid during the year. How much is the net increase or decrease in cash and cash equivalents during 2018? A. $63,700 increase B. $9,900 decrease C. $35,400 decrease D. $16,200 increase

Chapter 13 Statement of Cash Flows

107.

13-23

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

During the year, equipment with an original cost of $17,000, and accumulated depreciation totaling $16,800 was sold for $3,600. Dividends were declared and paid during the year. How much cash was received from the issuance of stock during 2018? A. $88,200 B. $22,900 C. $11,450 D. $25,200

13-24

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

108.

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

During the year, equipment with an original cost of $17,000, and accumulated depreciation totaling $16,800 was sold for $3,600. Dividends were declared and paid during the year. How much cash was paid for income taxes during 2018? A. $20,300 B. $11,700 C. $30,300 D. $16,000

Chapter 13 Statement of Cash Flows

109.

13-25

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

During the year, equipment with an original cost of $17,000, and accumulated depreciation totaling $16,800 was sold for $3,600. Dividends were declared and paid during the year. How much cash was provided/(used) by financing activities in 2018? A. $6,800 B. $14,100 C. $16,400 D. $300

13-26

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

110.

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

During the year, equipment with an original cost of $17,000, and accumulated depreciation totaling $16,800 was sold for $3,600. Dividends were declared and paid during the year. How much cash was paid for dividends during 2018? A. $20,700 B. $2,800 C. $2,300 D. $16,100

Chapter 13 Statement of Cash Flows

111.

13-27

December 31 2018 2017 $ 35,400 $ 45,300 11,400 14,500 36,500 34,100 90,000 66,000 (28,600) (31,400) $144,700 $128,500

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $2 par Retained earnings Total liabilities and stockholders' equity

$ 14,300 4,500 16,500 88,200 21,200 $144,700

Sales Cost of goods sold Depreciation expense Other expenses Gain on sale of equipment Income taxes Net income

$224,000 123,000 14,000 56,000 3,400 16,000 $ 18,400

$ 12,500 8,800 23,000 65,300 18,900 $128,500

During the year, equipment with an original cost of $17,000, and accumulated depreciation totaling $16,800 was sold for $3,600. Dividends were declared and paid during the year. How much is the net cash provided/(used) by investing activities during 2018? A. ($37,400) B. $3,600 C. ($20,400) D. None of the answer choices are correct. 112.

Which of the following is subtracted from net income under the indirect method to determine net cash provided/(used) by operating activities? A. Loss on sale of equipment B. Decrease in prepaid insurance C. Increase in merchandise inventory D. Increase in accounts payable

113.

Which of the following is not an addition to net income when determining the cash flows from operating activity under the indirect method? A. Depreciation B. Gain on sale of equipment C. Decrease in accounts receivable D. Increase in wages payable

13-28

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

114.

Tropical Splendor’s statement of cash flows showed the following totals: Cash provided/(used) by operating activities$ 54,000 Cash provided/(used) by financing activities 21,100 Cash provided/(used) by investing activities (49,000) Which statement most likely explains what occurred during the year? A. Tropical Splendor is using cash from operations and selling long-term assets to pay back loans. B. Tropical Splendor is using cash from operations and borrowing money from the bank to buy long-term assets. C. Tropical Splendor is using its profits and selling plant assets in order to repay debt. D. Tropical Splendor is using money from the sale of long-term assets to fund its operations and to repay debt.

Answers to Multiple Choice 31 B 48 A 32 C 49 B 33 A 50 B 34 D 51 D 35 C 52 C 36 A 53 A 37 C 54 A 38 D 55 B 39 A 56 D 40 C 57 B 41 D 58 A 42 A 59 C 43 C 60 B 44 A 61 B 45 A 62 C 46 A 63 B 47 B 64 D

65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81

B A C D D A B C A C B A D B B A A

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

C C C D A B A A B C C D C C A B A

99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114

C C A B D B C B B A D D A C B B

Chapter 13 Statement of Cash Flows

13-29

MATCHING 115.

Classify each of the following items based on the section of the statement of cash flows in which it will be reported if the direct method is used, using the respective letter for each activity below: Operating activities O Investing activities I Financing activities F If an item is not reported in any of these activity sections, place an X in the space provided. ______ 1.

Paid cash dividends to stockholders

______ 2.

Purchased of a building by issuing a mortgage payable

______ 3.

Paid interest that had been accrued in a previous period

______ 4.

Purchased another business for cash

______ 5.

Issued bonds at a discount

______ 6.

Paid suppliers for inventory

______ 7.

Received interest revenue

______ 8.

Collected cash from customers

______ 9.

Collected a principal payment on a long-term note

______ 10. Paid cash to retire long-term debt ______

11. Paid income taxes

______

12. Received cash from the sale of a machine no longer in use

Answer 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

F X O I F O O O I F O I

13-30

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

116.

Indicate how each item listed below should be reported in the operating activities section of the statement of cash flows under the indirect method using the coding that follows: A. Added to net income D. Deducted from net income X. Item does not appear in the operating activities section under the indirect method ______ 1.

Gain on sale of equipment

______ 2.

Loss on sale of building

______ 3.

Decrease in prepaid insurance

______ 4.

Increase in income taxes payable

______ 5.

Depreciation expense

______ 6.

Decrease in accounts payable

______ 7.

Increase in supplies

______ 8.

Amortization expense

______ 9.

Increase in merchandise inventory

______ 10.

Decrease in unearned revenue

______ 11.

Proceeds from the sale of equipment

Answer 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

D A A A A D D A D D X

Chapter 13 Statement of Cash Flows

13-31

EXERCISES 117.

Determine for each item below whether the transaction results in a cash inflow or outflow in the statement of cash flows using the direct method, and indicate whether the item is an operating, investing, or financing activity by placing an X in the appropriate columns. Transaction

Inflow

Receipt of interest

Payment of dividends

Purchase of building for cash

Receipt from a credit customer

Loan repayment to bank

Cash sale to customer

Payment to supplier

Payment of taxes

Cash received from sale of land

Proceeds from note payable

Answer Transaction Inflow A. Receipt of interest X B. Payment of dividends C. Purchase of building for cash D. Receipt from a credit customer X E. Loan repayment to bank F. Cash sale to customer X G. Payment to supplier H. Payment of taxes I. Cash received from sale of land J. Proceeds from note payable X

Outflow Operating Investing Financing

Outflow Operating Investing Financing X X X X X X X X X X X X X X X X

13-32

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

118.

Nature’s Dairy produces dairy products and has incurred the following transactions during the year: A. B. C. D. E. F. G. H.

Retired $62,000 of long-term bonds Sold a warehouse for $320,000 Issued a long-term note payable for $440,000 Purchased a new packaging machine for $145,000 Purchased new equipment for $80,000 Reported a loss on the disposal of old equipment of $6,500 Obtained a long-term bank loan for $120,000 Paid cash dividends of $88,000

Classify each of these transactions as an operating, investing, or a financing activity on the statement of cash flows, and indicate whether each activity is a source of cash or a use of cash. If an item is not reported in any activity section, indicate so. Answer A. B. C. D. E. F. G. H.

119.

Financing - use Investing - source Financing - source Investing - use Investing - use Not a cash flow Financing – source Financing – use

Ergonomic Enterprises reported the following transactions during 2017: 1. 2. 3. 4. 5. 5.

Purchased $120,000 of 8-year bonds issued by PM Motors Purchased common stock in Delta Enterprises, as a long-term investment, for $33,000 Acquired land valued at $98,000 in exchange for one of Ergonomic’s warehouses Sold equipment with an original cost of $43,000 for a gain of $11,000; accumulated depreciation on the equipment sold was $40,000 Paid dividends totaling $32,000 Purchased new equipment for $55,000 cash

Prepare the investing activities section of Ergonomic Enterprises’ statement of cash flows for 2017. Answer Cash payments for investments Cash payments for equipment Proceeds from sale of equipment* Net cash used in investing activities *$43,000 – $40,000 + $11,000

($153,000) (55,000) 14,000 ($194,000)

($120,000 + $33,000)

Chapter 13 Statement of Cash Flows

120.

13-33

Euclid Brewery reported the following balances in its Equipment and Accumulated Depreciation accounts during 2017: Equipment Accumulated depreciation, equipment

January 1 $115,000 30,000

December 31 $140,000 12,000

During 2017, Euclid sold equipment for $18,500 that originally cost $35,000. The book value of the equipment at the time of sale was $9,000. Net income for 2017 was $380,000. A. B. C.

Answer A.

How much depreciation expense was recorded for equipment by Euclid Brewery during 2017? What was the cost of equipment purchased during the year? Show how the effects of these transactions will be reported by preparing Euclid Brewery’s operating and investing activities sections of its statement of cash flows.

Beginning accumulated depreciation Plus depreciation expense for the year Less accumulated depreciation on the sale Ending accumulated depreciation Depreciation expense = $8,000

$ 30,000 ? (26,000) $ 12,000

Beginning equipment Plus purchases of equipment Less cost of equipment sold Ending equipment Cost = $60,000

$115,000 ? (35,000) $140,000

Operating Activities Net income $380,000 Adjustments of net income to cash basis: Depreciation 8,000 Gain on sale of equipment ($18,500 – $9,000) (9,500) Net cash provided by operating activities $378,500 Investing Activities Purchase of equipment Cash received from sale of equipment Net cash used in investing activities

($60,000) 18,500 ($41,500)

13-34

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

121.

The income statement for 2018 and comparative balance sheets of Daniel Divers for 2017 and 2018 appear below. Dividends totaling $51,200 were paid during the year. Equipment costing $21,500 with a book value of $19,200 was sold for $8,900 cash during the year. Assets Cash Accounts receivable Merchandise inventories Equipment Accumulated depreciation Total assets

December 31 2018 2017 $ 56,800 $ 58,300 14,500 12,200 22,600 30,000 112,000 98,700 (35,600) (28,400) $170,300 $170,800

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $0.50 par Retained earnings Total liabilities and stockholders' equity

$ 31,500 $ 34,700 8,900 7,400 46,700 52,300 37,600 32,100 45,600 44,300 $170,300 $170,800

Sales Cost of goods sold Depreciation expense Interest expense Other expenses Gain on sale of equipment Income taxes expense Net income

$389,000 178,000 24,000 2,700 109,700 6,600 28,700 $ 52,500

Use the direct method and prepare the operating activities section of the statement of cash flows for Daniel Divers for the year ending December 31, 2018. You may omit the statement heading. Answer Operating Activities Cash received from customers* $386,700 Purchase of merchandise** (173,800) Payments for other expenses (109,700) Payment for interest (2,700) Payments for income taxes*** (27,200) Net cash provided by operating activities $ 73,300 *$389,000 – $2,300 = $386,700 **$178,000 + $3,200 – $7,400 = $173,800 ***$28,700 – $1,500 = $27,200

Chapter 13 Statement of Cash Flows

122.

13-35

December 31 2018 2017 $ 56,800 $ 58,300 14,500 12,200 22,600 30,000 112,000 98,700 (35,600) (28,400) $170,300 $170,800

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $0.50 par Retained earnings Total liabilities and stockholders' equity

$ 31,500 $ 34,700 8,900 7,400 46,700 52,300 37,600 32,100 45,600 44,300 $170,300 $170,800

Sales Cost of goods sold Depreciation expense Interest expense Other expenses Gain on sale of equipment Income taxes expense Net income

$389,000 178,000 24,000 2,700 109,700 6,600 28,700 $ 52,500

Prepare the operating activities section of the 2018 statement of cash flows using the indirect method. You may omit the statement heading. Answer Operating Activities Net income Depreciation Gain on sale of equipment Increase in accounts receivable Decrease in merchandise inventory Decrease in accounts payable Increase in income taxes payable Net cash provided by operating activities

$52,500 24,000 (6,600) (2,300) 7,400 (3,200) 1,500 $73,300

13-36

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

123.

The income statement for 2018 and comparative balance sheets of Daniel Divers for 2017 and 2018 appear below. Dividends totaling $51,200 were paid during the year. Equipment costing $21,500 with accumulated depreciation of $16,800 was sold for $11,300 cash during the year. Assets Cash Accounts receivable Merchandise inventories Equipment Accumulated depreciation Total assets

December 31 2018 2017 $ 56,800 $ 58,300 14,500 12,200 22,600 30,000 112,000 98,700 (35,600) (28,400) $170,300 $170,800

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $0.50 par Retained earnings Total liabilities and stockholders' equity

$ 31,500 $ 34,700 8,900 7,400 46,700 52,300 37,600 32,100 45,600 44,300 $170,300 $170,800

Sales Cost of goods sold Depreciation expense Interest expense Other expenses Gain on sale of equipment Income taxes expense Net income

$389,000 178,000 24,000 2,700 109,700 6,600 28,700 $ 52,500

Prepare the investing activities section of the 2018 statement of cash flows using the indirect method. You may omit the statement heading.

Answer Investing Activities Proceeds from sale of equipment Purchase of equipment* Net cash used by investing activities *$98,700 – $21,500 – $112,000 = $34,800

$ 11,300 (34,800) ($25,500)

Chapter 13 Statement of Cash Flows

124.

13-37

December 31 2018 2017 $ 56,800 $ 58,300 14,500 12,200 22,600 30,000 112,000 98,700 (35,600) (28,400) $170,300 $170,800

Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term notes payable Common stock, $0.50 par Retained earnings Total liabilities and stockholders' equity

$ 31,500 $ 34,700 8,900 7,400 46,700 52,300 37,600 32,100 45,600 44,300 $170,300 $170,800

Sales Cost of goods sold Depreciation expense Interest expense Other expenses Gain on sale of equipment Income taxes expense Net income

$389,000 178,000 24,000 2,700 109,700 6,600 28,700 $ 52,500

Prepare the financing activities section of the 2018 statement of cash flows using the indirect method. You may omit the statement heading. Answer Financing Activities Payment of long-term note payable Dividends paid Issuance of common stock Net cash used by financing activities

($ 5,600) (51,200) 5,500 ($51,300)

13-38

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

125.

Wallerton Industries experienced the following during 2017: 1. 2. 3. 4. 5.

Issued preferred stock for $250,000 Repurchased $140,000 of its own common stock Borrowed $200,000 from a bank by issuing a 5–year note Retired bonds by paying $55,000 Declared dividends of $135,000 payable on March 1, 2018

Prepare the financing activities section of the statement of cash flows for Wallerton Industries for 2017. You may omit the statement heading. Answer Financing Activities Issue preferred stock Purchase treasury stock Proceeds from borrowing Retirement of bonds Net cash from financing activities

126.

$250,000 (140,000) 200,000 (55,000) $ 255,000

Indicate whether each of the following items will be added to or deducted from net income to arrive at net cash provided/(used) from operating activities under the indirect method. A. B. C. D. E.

Answer A. B. C. D. E.

Gain on sale of an asset Decrease in accrued wages payable Increase in accounts receivable Increase in accounts payable Depreciation expense

Subtract Subtract Subtract Add Add

Chapter 13 Statement of Cash Flows

127.

13-39

The following data were included in a recent annual report of Reward Shopping:

Net income Net cash flow from operating activities Net cash flow from investing activities Net cash flow from financing activities a. b. c.

Answer a.

Year 1 Year 2 Year 3 $ 5,200,000 $ 5,900,000 $ 11,700,000 6,300,000 11,100,000 15,400,000 (7,900,000) (37,600,000) (31,850,000) 15,200,000 19,590,000 16,090,000

Why is a company’s net income typically less than its net cash flow provided/(used) by operating activities? Why do most companies, including Reward Shopping, typically have negative cash flows from investing activities? Over the three-year period, what type of activity was the largest source of funds for Reward Shopping? For what purpose were these funds used?

Net income includes many large non-cash deductions such as depreciation and bad debt expense. While these items are reported as part of net income, they are not cash flows and must be removed from the amount of net income. Net income is typically, but certainly not always, less than cash flow from operating activities.

Cash flows from investing activities are associated with long-term assets. When a company is growing (or even remaining at a relatively constant size), it usually acquires more long-term assets than it sells producing a net investing cash outflow.

The largest source of funds appears to be from financing activities. To fund investments, a company will use either internally generated funds or funds provided by creditors or stockholders. It appears that the company is using the funds provided by the latter to finance growth as indicate by the large investments in years 2 and 3.

13-40

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

128.

The following information concerning property, plant, and equipment appeared in Quick Wash Laundry’s 2017 balance sheet:

Equipment Accumulated depreciation Net property, plant, and equipment

December 31 $228,000 (48,900) $179,100

January 1 $211,000 (42,600) $168,400

During 2017, Quick Wash sold equipment that had an original cost of $23,000 and a current book value of $3,500 for a loss of $2,100. In addition, the company purchased a new machine by making a down payment of $6,000 and financing the balance by issuing a longterm note payable. Net income for 2017 was $89,000. a. b. c.

How much depreciation expense did Quick Wash Laundry record during 2017? Prepare the investing activities section of the statement of cash flows for Quick Wash Laundry for 2017. Show how the effects of the transactions related to the accounts of the Quick Wash Laundry presented will be reported in the operating activities section of the statement of cash flows for 2017.

Answer a. $42,600 – $48,900 – $19,500 = $25,800 b.

Purchase of equipment: $211,000 – $23,000 – $228,000 = $40,000 Proceeds from sale of equipment: $2,100 + ($23,000 – $3,500) – $23,000 = $1,400 Investing Activities Proceeds from sale of equipment Purchase of equipment (down payment) Net cash used by investing activities

$ 1,400 (6,000) ($4,600)

Operating Activities Net income Depreciation expense Loss on sale of equipment Net cash provided by operating activities

$ 89,000 25,800 2,100 $116,900

Chapter 13 Statement of Cash Flows

129.

13-41

The income statement for Roofer’s Supply House for 2017 is as follows: Roofer’s Supply House Income Statement For the Year Ended December 31, 2017 Sales $1,025,000 Cost of goods sold 620,000 Gross profit 405,000 Less: Depreciation expense $70,000 Amortization of patent 6,500 Wages expense 61,000 Insurance expense 12,000 149,500 Income before taxes 255,500 Less income taxes 91,175 Net income $ 164,325 Other information is as follows: a. Accounts receivable decreased by $20,000 during the year. b. Accounts payable increased by $7,500. c. Wages payable had a balance of $0 at the beginning of the year; at the end of the year, the balance was $4,500. d. Prepaid insurance increased by $9,500 during the year. Prepare the operating activities section of the statement of cash flows for 2017 for Roofer’s Supply House using the indirect method.

Answer Net income Adjustments of net income to cash basis: Depreciation expense Amortization expense Decrease in receivables Increase in accounts payable Increase in wages payable Increase in prepaid insurance Net cash provided by operating activities

$164,325 $70,000 6,500 20,000 7,500 4,500 (9,500)

99,000 $ 263,325

13-42

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

130.

Walsh Company uses the indirect method to prepare the operating activities section of the statement of cash flows. Indicate the proper treatment of each item in the statement of cash flows by writing the respective letter of the treatment in the blank adjacent to each item appearing in A through I. A D N

Proceeds from the sale of old warehouse ______

Decrease in accounts payable ______

Increase in prepaid insurance ______

Depreciation expense

Decrease in inventory ______

Amortization of patents ______

Gain on the retirement of bonds ______

Loss on the sale of a used delivery truck ______

Bad debt expense ______

Answer A. B. C. D. E. F. G. H. I. 131.

Added to net income Deducted from net income Not reported in the operating activities section of the statement of cash flows prepared using the indirect method

______

N D D A A A D A A

The following information was selected from Save Mart’s accounting records during 2017: Cash provided by operations Long-term note payable issued to acquire land and building Common stock issued to retire preferred stock Proceeds from sale of long-term investment Cost of machinery purchased

$1,400,000 1,800,000 200,000 340,000 320,000

The machinery purchased required a 10% down payment with the balance due during 2018. How must is Save Mart’s net increase(decrease) in cash and cash equivalents for 2017? Answer $1,400,000 + $340,000 – (10% × $320,000) = $1,708,000

Chapter 13 Statement of Cash Flows

132.

13-43

Below are items from the accounting records of a national retailer. For each item, fill in the chart by indicating in which section of the statement of cash flows it would appear assuming the indirect method is used. For amounts you identified as operating, indicate whether the amount would have been added to or subtracted from net income in the operating activities section of the statement of cash flows. Any item that is not reported in any of the cash flow sections under the indirect method should be answered as ‘none’. Items

Section

Accounts payable, increase

Accounts receivable, decrease

Accrued expenses payable, decrease

Capital expenditures made for cash

Income taxes payable, increase

Depreciation expense

Dividends paid

Interest payable, decrease

Issuance of common stock

Issuance of a long-term note payable

Cash received from customers

Merchandise inventories, decrease

Cash paid to buy a patent

Proceeds from the sale of equipment

Purchase another company

Purchase of treasury stock

Repayment of long-term debt

Add/Subtract

Answer A. B. C. D. E. F. G. H. I.

Operating Operating Operating Investing Operating Operating Financing Operating Financing

Added Added Subtracted Added Added Subtracted

J. K. L. M. N. O. P. Q.

Financing None Operating Investing Investing Investing Financing Financing

Added

13-44

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

133.

During the year, Macklin Grill earned net income of $11,800 during the year. Beginning and ending balances for the year for selected accounts follow: Ending Beginning Cash $21,000 $19,400 Accounts receivable 18,900 21,100 Inventory 36,000 33,500 Prepaid insurance 4,000 1,200 Accumulated depreciation 6,500 3,200 Accounts payable 13,500 17,000 Wages payable 2,100 1,900 Prepare the operating activities section of the statement of cash flows using the indirect method for the year. No long-term assets were acquired or sold during the year.

Answer Operating Activities Net income Adjustments of net income to cash basis: Depreciation expense Decrease in receivables Increase in inventory Increase in prepaid insurance Decrease in accounts payable Increase in wages payable Net cash provided by operating activities

$11,800 3,300 2,200 (2,500) (2,800) (3,500) 200 $ 8,700

Chapter 13 Statement of Cash Flows

13-45

CHALLENGE EXERCISES 134.

The excerpts below were taken from Sonata, Inc.'s comparative balance sheet follows. December 31, 2018

December 31, 2017

$ 94,000 580,000 216,000

$116,000 576,000 219,000

Property, plant, & equipment Land Equipment Accumulated depreciation

New equipment purchased during 2018 totaled $44,000, paid for with a 20% down payment and the balance paid with a long-term note payable over 4 years. Land with an original cost of $22,000 was sold for $52,000 during 2018. Sonata’s 2018 income statement disclosed net income totaling $54,000, equipment depreciation expense of $31,000, a $2,000 loss on the sale of equipment, and a gain on the sale of land. Show how the effects of the transactions on the property, plant, and equipment classification will appear on a statement of cash flows prepared using the indirect method for 2018. Answer Cost of equipment sold: $576,000 + $44,000 – $580,000 = $40,000 Accumulated depreciation of equipment sold: $219,000 + $31,000 – $216,000 = $34,000 Cash proceeds from sale of equipment: $40,000 – $34,000 – $2,000 = $4,000 Operating Activities Net income Adjustment of net income to cash basis: Depreciation expense Gain on sale of land Loss on sale of equipment Investing Activities Down payment on equipment ($44,000 × 20%) Sale of land Sale of equipment

$54,000 31,000 (30,000) 2,000

($ 8,800) 52,000 4,000

13-46

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

135.

The following selected information is taken from the accounting records of Metro Communications for the years ending December 31, 2018 and 2017: Amounts in millions Accumulated depreciation Net income (loss) Accounts payable Building Dividends payable Retained earnings Depreciation expense Loss on sale of building

December 31, 2018

December 31, 2017

$1,110

$1,100

2,600 650 2,300 240 780 220 20

2,800 700 1,840 150 350 210 0

During 2018, Metro Communications sold a building with a book value of $990 and an original cost of $1,200. The company also purchased a new building during 2018 for cash. Prepare the investing and financing activities sections of the statement of cash flows for the year ending December 31, 2018. Answer Investing Activities Sale of building Purchase building Net cash used by investing activities

$ 970 (1,660) $ (690)

Financing Activities Dividends paid

$(2,080)

Accumulated depreciation on old building sold: $1,200– $990 = $210 Cash from the sale of building: $1,200 – $210 – $20 = $970 Cash paid for new building: $1,840 – $2,300 – $1,200 = $1,660 Dividends paid = $350 – $780 + $2,600 + $150 – $240 = $2,080

Chapter 13 Statement of Cash Flows

136.

13-47

Turner Pest Control has the following selected account balances for the beginning and end of the 2017: December January 1 31 Cash $2,000 $17,000 Accounts receivable 6,500 12,500 Inventories 8,000 3,500 Plant and equipment 2,000 1,500 Accounts payable 1,000 6,700 Salaries payable 1,800 0 Dividends payable 1,200 1,800 Income taxes payable 1,000 5,500 Common stock 2,000 3,000 Additional paid-in capital 5,500 9,000 Retained earnings 6,000 13,500 Sales Cost of goods sold Other operating expenses Interest expense Depreciation expense Income tax expense Net income

$69,500 16,000 19,000 5,000 2,000 11,000 $16,500

Use the direct method to prepare the operating activities section of Turner Pest Control’s statement of cash flows for the year. All amounts owed to creditors pertain to merchandise sold. Answer Operating Activities Cash from customers Cash paid to suppliers Cash paid for interest Cash paid for income taxes Cash paid for other expenses Net cash provided by operating activities

$ 63,500 (5,800) (5,000) (6,500) (20,800) $ 25,400

Received from customers: $69,500 – $6,000 = $63,500 Cash payments for inventory: $16,000 – $4,500 – $5,700 = $5,800 Cash payments for income taxes: $11,000 – $4,500 = $6,500 Cash payments for other operating expenses: $19,000 + $1,800 = $20,800

13-48

Test Bank to accompany Jiambalvo Managerial Accounting 6th Edition

137.

A portion of Ring Power comparative balance sheets follows:

Land Equipment Note payable Retained earnings Additional paid in capital Common stock, $1 par value • • • • •

December 31 2018 2017 $100,000 $ 40,000 564,000 500,000 92,000 0 115,000 120,000 45,000 20,000 90,000 85,000

New equipment purchased during 2018 totaled $100,000 in exchange for a $92,000, 12%, 5-year term note and the balance in cash. Old equipment with a book value of $2,000, an original cost of $36,000, and a 10-year useful life was sold for a gain of $7,000 during 2018. Land was acquired for cash. During 2018, a cash dividend was declared and paid. Net income for 2018 was $40,000.

Prepare the investing and financing sections of Ring Power’s statement of cash flows for 2018. Dividends paid: $120,000 + $40,000 – $115,000 = $40,000 Stock issuance: $$90,000 + 45,000 – $85,000 – $20,000 = $30,000 Investing Activities Sale of equipment Purchase equipment (partial payment) Purchase land Net cash used by investing activities

$ 9,000 (8,000) (60,000) ($59,000)

Financing Activities Issuance of stock Dividends paid Net cash used by financing activities

$ 30,000 (45,000) ($15,000)

Chapter 13 Statement of Cash Flows

13-49

SHORT-ANSWER ESSAYS 138.

Identify the primary cash inflows and cash outflows under the investing activities section of the statement of cash flows.

Answer Cash Outflows: Cash paid to buy property, plant, and equipment Cash paid to buy a business or an investment in a business Cash Inflows: Cash received on the sale of property, plant, and equipment Cash received to buy a business or an investment in a business 139.

Identify the primary cash inflows and cash outflows under the financing activities section of the statement of cash flows.

Answer Cash Inflows: Cash received from selling/issuing bonds or other debt obligations Cash received from using a line of credit Cash received from issuing stock Cash Outflows: Cash paid to retire long-term debt Cash paid for dividends Cash paid to acquire treasury stock

140.

Explain the difference between the direct and indirect methods of calculating the net cash flows from operating activities.

Answer The direct method is much like an income statement prepared on a cash flow basis in that it lists specific cash inflows and outflows from operating activities. The indirect method reconciles net income to cash flow from operating activities by adding and deducting adjustments to net income to arrive at net cash flow from operating activities.

141.

Identify the adjustments made to net income under the indirect method to calculate cash flows from operating activities. Indicate whether each adjustment is “added” to or “deducted” from net income.

Answer Depreciation Amortization Losses Gains Increases in current assets Decreases in current assets Increases in current liabilities Decreases in current liabilities

Added Added Added Deducted Deducted Added Added Deducted

CH APT ER 1 4 Analyzing Financial Statements: A Managerial Perspective Summary of Questions by Objectives and Bloom’s Taxonomy Item

Item

1. 2. 3. 4. 5. 6.

1 1 1 1 1 1

K K C C K C

7. 8. 9. 10. 11. 12.

1 1 1,2 1 2 1

31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52.

1 1 3 3 1 3 1 3 3 1,2 3 3 1 1 1 1 1 1 1 1 2 1

K K K K C K K K C K K K K K K K K C C AP C K

53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74.

3 3 3 3 3 3 3 3 3 3 3 1 1 3 3 3 3 3 3 3 3 3

139.

1,2, 3

140. 141. 142. 143.

1 1 1 1

AP AP AN AN

144. 145. 146. 147.

1 2 2 3

156.

157.

159. 160.

1 1

K K

161. 162.

1 3

BT Item LO BT Item True-False Statements C 13. 1 K 19. K 14. 1 K 20. K 15. 1 K 21. C 16. 1 K 22. K 17. 2 K 23. K 18. 2 K 24. Multiple Choice Questions K 75. 3 AP 97. K 76. 3 K 98. C 77. 3 K 99. K 78. 3 K 100. K 79. 3 K 101. C 80. 3 K 102. K 81. 3 K 103. K 82. 3 AP 104. K 83. 3 AP 105. C 84. 3 AP 106. C 85. 3 AP 107. AP 86. 3 AP 108. AP 87. 3 K 109. AP 88. 3 K 110. AP 89. 3 C 111. AN 90. 3 AP 112. AN 91. 3 AP 113. AP 92. 3 AP 114. AP 93. 3 K 115. AP 94. 3 K 116. AP 95. 3 C 117. AP 96. 3 C 118. Matching

Exercises 148. 3 AN 152. 149. 3 AP 153. 150. 3 AP 154. 151. 3 AN 155. Challenge Exercises AN 158. 3 AN Short-Answer Essays K 163. 2 C 165. C 164. 3 C 166. AN AN AN AN

Item

2 2 3 3 3 3

K K K K K C

25. 26. 27. 28. 29. 30.

3 3 3 3 3 3

K K K K K K

2 3 3 3 3 1 3 3 1 1 1 3 3 3 3 3 3 3 3 3 3 3

C AP AP AP AP AP AP AP AP AP C AP AP AP C AP AP AP AP AP AP AP

119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138.

3 1 3 3 1 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

AP AP AP AP C AP AP AP AP AP AP C AP AP AP AP AP AN AN AN

3 3 3 3

AN AN AN AP

3 3

C C

14-2

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

TRUE-FALSE STATEMENTS 1.

A managerial accountant may analyze his/her company’s own financial statements in order to assess the appearance of his/her firm to investors.

One reason a managerial accountant might need to analyze financial statements of other firms is to assess the viability of a vendor.

To assess control of operations, managers expect that successful implementation of their plan will be reflected in subsequent financial statements as substantially increased profits.

It is important for managers to analyze their company’s financial statements so that they can anticipate and answer questions from investors and creditors.

In general, managers should analyze financial statements primarily from the perspective of their customers.

Whenever an asset increases, the corresponding part of the transaction will always be an increase to net income.

Vertical analysis is performed on the balance sheet because it represents a point in time, while horizontal analysis is performed on the income statement because it covers a period of time.

An increase in gross margin of 7% from one period to the next implies that the company’s net income will have increased by 7% as well.

The statement of cash flows divides a company’s profitability into operating, investing, and financing activities.

10.

If sales revenue of a retail company increases by 10% because the company sells more units of product, the company’s cost of goods sold will increase by 10% as well.

11.

If a company records fictitious sales, income will increase, but operating cash flows will not be affected.

12.

Common size financial statements are an example of horizontal analysis.

13.

Horizontal analysis examines the change in financial statement amounts over time.

14.

One example of vertical analysis is the determination that long-term assets increased by 2.5% over time.

15.

One example of vertical analysis is the determination that interest expense rose from 1.2% of net sales to 1.4% of net sales from one period to the next period.

16.

When the amount of net sales is used as the base amount for all income statement items, horizontal analysis is being performed.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

14-3

17.

If net income is substantially less than operating cash flows, this is a sign of possible accounting irregularities.

18.

Recording fictitious sales will cause operating cash flows and net income to increase.

19.

The management discussion and analysis section of the annual report explains financial results that are not obvious simply from reading the basic financial statements.

20.

News articles and credit reports are valuable sources of financial information.

21.

Financial leverage relates to a company’s use of debt financing to acquire and use productive assets.

22.

Earnings per share is the amount of net income earned in a company that is paid out as cash dividends to shareholders.

23.

The gross margin percentage is a turnover ratio that measures the efficiency with which a company sells its products.

24.

If a company’s return on total assets is higher than its return on common stockholders’ equity, a company is using financial leverage effectively.

25.

An increase in inventory turnover implies that a company is selling its inventory and collecting cash from customers more quickly.

26.

Turnover ratios involve both a balance sheet and an income statement account.

27.

Debt-related ratios reveal the ability of a company to pays its obligations when they become due.

28.

A high debt-to-equity ratio implies that a company has more risk than a company with a low ratio.

29.

Times interest earned measures how many times operating income is able to pay the company’s interest expense.

30.

The acid-test ratio is a more stringent test of a company’s ability to pay its short-term debt compared to the current ratio.

Answers to True-False 1 T 7 2 T 8 3 F 9 4 T 10 5 F 11 6 F 12

F F F T T F

13 14 15 16 17 18

T F T F F F

19 20 21 22 23 24

T T T F F F

25 26 27 28 29 30

F T T T T T

14-4

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MULTIPLE CHOICE 31.

Which of the following is not a reason that managers need to analyze financial reports? A. To assess control of operations B. To assess the ability of customers to pay their bills C. To assess the viability of suppliers D. To maximize annual bonuses

32.

Which of the following is a reason that managers use financial statements? A. To assess the company’s image B. To assess the product cost of competitors C. To assess competitors’ contribution margins D. To assess the long-term viability of key customers

33.

Which of the following does accounts receivable turnover measure? A. The ability of a company to pay its short-term obligations B. The number of times receiveables are collected during the period C. The efficiency with which a company generates sales on credit D. The length of time it takes to collect receivables

34.

Which of the following indicates the amount investors are willing to pay per dollar of earnings? A. Market price per share of a company’s stock B. Earnings per share C. Price-earnings ratio D. Return on total assets

35.

Using the balance sheet equation, which of the following is not a possible transaction? A. Increase an asset and increase stockholders’ equity B. Increase a liability and decrease stockholders’ equity C. Increase an asset and decrease a liability D. Decrease an asset and decrease a liability

36.

Which of the following is the return a company is able to earn on funds invested by shareholders? A. Return on total assets B. Return on common stockholders’ equity C. Price-earning ratio D. Dividends paid

37.

Which of the following is not an operating activity on the statement of cash flows? A. Paying a dividend B. Paying for inventory purchases C. Collecting cash from the sale of merchandise D. Paying cash for income taxes

38.

Which of the following is not a profitability ratio? A. Price-earnings ratio B. Return on total assets C. Earnings per share D. Asset turnover

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

14-5

39.

Which of the following changes is the least favorable? A. An increase in inventory turnover B. A decrease in operating expenses C. An increase in the price-earnings ratio D. A decrease in the asset turnover

40.

Net cash provided by operations represents A. net income converted to a cash basis. B. the net increase in cash and cash equivalents for a period. C. the cash provided by selling inventory to customers. D. a measure of profitability.

41.

What does financial leverage measure? A. How quickly a company generates profit from its assets B. How quickly a company is turning its net income into cash C. The overall efficiency with which a company uses assets to generate revenues D. How effectively the company uses debt financing to acquire economic resources

42.

What is asset turnover? A. How quickly a company generates profit from its assets B. How quickly a company is turning its net income into cash C. The overall efficiency with which the company uses assets to generate revenues D. How quickly the company acquires economic resources

43.

Which of the following is true concerning vertical analysis? A. It is a technique for evaluating a series of financial statement data over a period of time. B. It is used to determine the increase or decrease that has taken place over a period of time. C. It is expressed as a percentage of the base year amount of the same account. D. It is also called common size analysis.

44.

Which of the following is true concerning horizontal analysis? A. It is also called common size analysis. B. It consists of analyzing changes in financial statement amounts across time. C. It consists of analyzing financial statements in terms of a base amount. D. It restates each income statement line item as a percentage of net sales.

45.

Which type of analysis would highlight the percentage increase in sales from one year to the next? A. Horizontal analysis B. Vertical analysis C. Common size analysis D. Comprehensive analysis

46.

What type of analysis will you perform to compare the gross margin percentage from one year to the next? A. Debt-related analysis B. Turnover analysis C. Horizontal analysis D. Vertical analysis

14-6

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

47.

In which of the following will the percentage increase in sales from one year to the next be most obvious? A. Profitability analysis B. Turnover analysis C. Horizontal analysis D. Vertical analysis

48.

If the rate of growth in sales is greater than the rate of growth in cost of goods sold from one year to the next, which of the following will you most likely expect? A. The gross margin percentage is increasing. B. The gross margin percentage is decreasing. C. Accounts receivable turnover is declining. D. Inventory turnover is declining.

49.

Which of the following will vertical analysis allow managers to readily identify? A. Sales are increasing at a faster rate than selling expenses B. The percentage change in sales from the prior year C. Sales are growing at a faster rate than assets D. Income taxes are a larger percentage of sales in the current year compared to a previous year

50.

Gross margin in 2017 for Beaver Enterprises totaled $1,000,000. If cost of goods sold is 60% of sales, how much is sales? A. $400,000 B. $600,000 C. $1,666,667 D. $2,500,000

51.

If management is manipulating earnings to achieve performance targets, what outcome may result? A. Net income may exceed cash from operations. B. Cash from investing activities will exceed cash from financing activities. C. Cash will experience a net decrease. D. Total assets will increase.

52.

Where can you find insight of why sales has increased by 32% from a prior period? A. Common size financial statements B. Management’s discussion and analysis C. The balance sheet D. Horizontal analysis

53.

Which of the following is a stringent measure of a company’s ability to repay obligations in a short period of time? A. Return on total assets B. Current ratio C. Acid-test ratio D. Debt turnover

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

14-7

54.

Which of the following ratios measures how many multiples of the firm’s earnings that investors are willing to pay for the company’s stock? A. Return on total assets B. Earnings per share C. Price-earnings ratio D. Time interest earned

55.

Which of the following most likely indicates that a company is making good use of financial leverage? A. The price-earnings ratio exceeds that of competitors. B. Earnings per share is higher than the dividends paid per share. C. Net income is higher than cash from operations. D. Return on common stockholders’ equity is higher than the return on total assets.

56.

What effect does financing with debt have on a company? A. It will increase financial risk. B. It will decrease the potential return for shareholders. C. It will create a requirement to pay dividends. D. It will decrease turnover.

57.

Which of the following is not a profitability ratio? A. Inventory turnover B. Gross margin percentage C. Earnings per share D. Return on total assets

58.

Which ratio measures the rate earned on a company’s total economic resources? A. Price-earnings ratio B. Earnings per share C. Return on total assets D. Return on common stockholders’ equity

59.

Which ratio is a measure of the profit available to common shareholders on each share of common stock outstanding? A. Price-earnings ratio B. Earnings per share C. Return on total assets D. Return on common stockholders’ equity

60.

Which statement is true concerning the gross margin percentage? A. It indicates how much a company earns per dollar of sales taking into account the cost of items it sells. B. It indicates how much earnings are generated on each share of common stock. C. It indicates the amount of sales generated for each dollar of assets. D. It measures the amount of net income generated for each dollar of sales.

61.

Which of the following ratios is a measure of the company’s profitability to its market price? A. Price-earnings ratio B. Earnings per share C. Return on total assets D. Return on common stockholders’ equity

14-8

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

62.

Which of the following is not used to measure the efficiency with which a firm uses its assets? A. Inventory turnover ratio B. Current ratio C. Accounts receivable turnover ratio D. Asset turnover

63.

Which of the following is a common effect when return on common stockholders’ equity is greater than return on total assets? A. Financial leverage is being used effectively. B. The company has no debt. C. The company’s profit is declining. D. Earnings per share will be extremely large.

64.

Cost of goods sold in 2017 for Reno Parts Company totaled $4,530,000. If the gross margin percentage is 56%, how much are sales ? A. $10,295,454 B. $7,066,800 C. $8,089,286 D. None of these answer choices are correct.

65.

The gross margin amount in 2017 for the Billings Corporation totaled $800,000. If cost of goods sold is 80% of sales, how much is sales? A. $960,000 B. $4,000,000 C. $3,200,000 D. $1,440,000

66.

Bonanza, Incorporated’s net income in 2017 was $378,000. The company had 75,000 shares of common stock outstanding and 35,000 shares of preferred stock outstanding. No shares were issued or repurchased during the year. The company paid dividends of $1.50 per share on the common stock and $1.80 per share on the preferred stock. How much is earnings per share for 2017? A. $3.44 B. $4.20 C. $4.34 D. $5.04

67.

Best Corporation’s net income in 2017 was $1,295,000. The company had 500,000 shares of common stock outstanding and 90,000 shares of preferred stock outstanding. No shares were issued or repurchased during the year. The company paid dividends of $0.70 per share on the common stock and $0.80 per share on the preferred stock. How much profit did Best generate for each share of outstanding common stock in 2017? A. $1.15 B. $2.45 C. $2.59 D. $2.19

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

68.

14-9

Bread Enterprises had a current ratio of 3.5 on December 31 of the current year. On that date, the company’s assets were as follows: Cash Accounts receivable, net Inventory Prepaid expenses Equipment, net Total assets

$ 200,000 600,000 960,000 25,000 2,200,000 $3,985,000

What impact will issuing common stock for cash have on the company’s earnings per share? A. It will increase earnings per share. B. It will decrease earnings per share. C. There will be no change. D. The number of common shares outstanding is needed to determine the answer. 69.

Bread Enterprises had a current ratio of 2.5 on December 31 of the current year. On that date, the company’s assets were as follows: Cash Accounts receivable, net Inventory Prepaid expenses Equipment, net Total assets

$ 100,000 600,000 960,000 25,000 2,200,000 $3,985,000

What impact will an increase in the market price of the company’s common stock from $24.50 to $37.20 have on a company’s price-earnings ratio? A. It will increase the price-earnings ratio. B. It will decrease the price-earnings ratio. C. There will be no change. D. There is not enough information to determine the answer. 70.

Lane Class Company had 50,000 shares of common stock outstanding and 10,000 shares of preferred stock outstanding. No shares were issued or repurchased during the year. The company paid a dividend of $0.80 per share of common stock and $0.60 per share of preferred stock. If the company reports earnings per common share of $0.85, how much is net income? A. $42,500 B. $56,500 C. $48,500 D. $57,000

71.

Blue Corporation reported earnings per share of common stock at $12 in 2017 and paid dividends of $3 per share. The current market price per share is $102 and the book value per share is $54. Blue Corporation has no preferred stock. How much is the company’s price-earnings ratio? A. $11.80 B. $1.90 C. $8.50 D. $11.30

14-10

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

72.

McDonald Company’s net income in 2017 was $200,000. The company paid preferred dividends of $32,000 and common stock dividends of $10,000. It average common stockholders’ equity was $850,000 during 2017. How much is the company’s return on common stockholders’ equity for 2017? A. 19.8% B. 23.5% C. 18.6% D. 4.3%

73.

The following is from Nantucket Limited’s records for 2017: Account Balances Common stock Additional paid-in-capital Retained earnings

January 1 $210,000 95,000 105,000

December 31 $250,000 110,000 195,000

During 2017, the company paid dividends of $15,000 on its common stock. The company’s net income for the year was $105,000. How much is the company’s return on common stockholders’ equity for the year ending December 31, 2017? A. 18.9% B. 16.2% C. 22.0% D. 25.6% 74.

Relish Holdings had 250,000 shares of common stock outstanding and 40,000 shares of preferred stock outstanding. No shares were issued or repurchased during the year. The company paid a dividend of $1.50 per share of common stock and $2 per share of preferred stock. If the company reported earnings per common share of $1.60, how much would net income have been? A. $480,000 B. $400,000 C. $156,250 D. $320,000

75.

Denton Limited Company reported earnings per share of common stock $2 in 2017 and paid dividends of $1.50 per share. Denton has no preferred stock issued. The current market price per share is $15 and the book value per share is $14. How much is Denton’s price-earnings ratio? A. $6.75 B. $7.50 C. $7.00 D. $30.00

76.

Asset turnover is A. net income divided by sales. B. net sales divided by total assets. C. net sales divided by current assets. D. earnings per share divided by the market price per share of stock.

77.

Asset turnover is a measure of A. how quickly a company is replacing its old plant assets with new plant assets. B. how quickly a company is turning its sales into cash. C. the overall efficiency with which the company uses assets to generate revenues. D. how rapidly the stock market believes the company will grow.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

14-11

78.

Inventory turnover A. is a measure of the profitability of selling inventory. B. is used to calculate how quickly customers pay for inventory they purchased. C. is an indicator of how quickly suppliers are being paid by the company. D. measures how efficiently a company sells it inventory.

79.

The higher the amount of a company’s accounts receivable turnover, A. the shorter time period it takes to collect a receivable. B. the more assets a company has tied up in receivables. C. the longer it takes a company to collect its receivables. D. the more likely a company will experience cash flow problems.

80.

Which statement is true concerning the current ratio? A. It is usually a larger amount than the acid-test ratio. B. It is a more stringent test of a company’s ability to pay its short-term obligations. C. It measures a company’s ability to manage its assets efficiently. D. It measures a company’s ability to make interest payments on debt.

81.

Wangley Company has an inventory turnover of 8. Which statement is true? A. Wangley has about 2 months of sales in its inventory. B. Wangley takes about 46 days from the time an item is sold until Wangley collects the cash. C. Wangley takes about one month from the time an item is purchased until the cash is collected from the sale of the inventory. D. Wangley sells it inventory 8 times faster than other companies.

82.

Redzone Corporation reported $400,000 in sales on account plus another $60,000 in cash sales last year. Cost of goods sold for the period totaled $220,000. The beginning balance in accounts receivable was $32,000 and the ending balance was $50,000. How much is the company’s accounts receivable turnover? A. 9.2 times B. 4.8 times C. 8.0 times D. 12.5 times

83.

Fenwick Holdings reported cash sales in 2017 of $220,000. Accounts receivable at the beginning of the year totaled $420,000, with a balance of $490,000 at the end of the year. If the company’s accounts receivable turnover is 3.5 for the year, how much are its total sales for the year? A. $2,250,000 B. $1,715,000 C. $1,495,000 D. $1,935,000

84.

Real Crisp Company reported cost of goods sold of $800,000 last year. The company’s beginning inventory balance was $58,000 and the ending inventory balance was $54,000. How many days will it take the company to sell its inventory as of year end? A. 13.8 days B. 14.8 days C. 24.6 days D. 26.5 days

14-12

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

85.

Benzo Limited reported an inventory turnover of 14.5 times last year. Beginning inventory was $290,000 and ending inventory was $260,000. How much was cost of goods sold? A. $3,770,000 B. $3,987,500 C. $4,205,000 D. $7,975,000

86.

Zin Company repoted cost of goods sold of $1,500,000 last year. The company’s beginning inventory balance was $110,000 and the ending inventory balance was $86,000. How many days will it take the company to sell off all of its inventory? A. 13.6 days B. 17.4 days C. 20.9 days D. 26.8 days

87.

Which of the following is the most stringent test of a company’s ability to meet its current obligations? A. Current ratio B. Quick ratio C. Debt-equity ratio D. Times interest earned

88.

Which of the following is included in the calculation of the current ratio, but not the quick ratio? A. Inventory B. Cash C. Accounts receivable D. Marketable securities

89.

Wilker Industries has a current ratio of 1.8. If Wilker collects a payment from a customer on account, what is expected to happen to the company’s current ratio? A. It will increase. B. It will decrease. C. It will stay the same. D. The effect is based on the amount of debt a company holds at the end of the period.

90.

Organic Ways is a large food and drug retailer with more than 1,700 stores in the U.S. and Canada. The following financial information relates to fiscal years, 2017 and 2018. (In Millions) Sales Cost of goods sold Accounts receivable Merchandise inventory

2018 $34,286 32,000 577 2,905

2017 $38,185 34,000 461 2,510

How much is the company’s inventory turnover for 2018? A. 9.08 times B. 11.02 times C. 11.80 times D. 33.12 times

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

91.

14-13

Waylon Appliances is a large applicance retailer with more than 800 stores in the U.S. The following financial information relates to fiscal 2017 and 2018. (In Millions) Sales Cost of goods sold Accounts receivable Merchandise inventory

2018 $42,286 33,000 820 2,900

2017 $40,185 31,000 960 2,700

How much is the company’s days’ sales in inventory for 2018 and 2017, respectively? A. 32.08, 31.79 days B. 41.52, 41.91 days C. 11.38, 11.48 days D. 2.13; 3.15 days 92.

Brick Works, Inc. had a current ratio of 1.5 to 1 on December 31 of the current year. On that date, the company’s assets were as follows: Cash Accounts receivable, net Inventory Prepaid expenses Equipment, net Total assets

$ 100,000 800,000 960,000 25,000 2,600,000 $4,485,000

What impact will collecting $56,000 due from customers have on Brick Work’s inventory turnover? A. It will increase. B. It will decrease. C. It will have no effect. D. The amount of current liabilities is needed to determine the answer. 93.

A company has a high debt-to-equity ratio. What other amount will most likely be high for the company? A. The company’s level of risk B. The company’s assets C. Earnings per share D. Net income

94.

What does times interest earned measure? A. The ability of a company to make interest payments on its debt B. The ability of a company to pay its interest-bearing debt obligations C. The increase in interest expense as a result of new debt obligations acquired during the period D. The average interest rate incurred on the company’s debt

95.

What does a quick ratio of less than one typically indicate? A. The company does not have enough quick assets to settle its current liabilities. B. The company is unprofitable. C. The company has a very high debt-to-equity ratio. D. All of the answer choices are correct.

14-14

Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

96.

RT Enterprises has a current ratio of less than one, and a very high debt-to-equity ratio. Which of the following will management of other companies most likely be reluctant to do? I. Sign an agreement with RT Enterprises to become a major supplier II. Sell RT Enterprises goods on credit III. Expand capacity to better serve the needs of RT Enterprises A. I and II B. II and III C. I and III D. I, II, and III

97.

Which of the following is not a communication by a company’s management that may help alleviate investors and creditors concerns of the company’s financial statements? A. News articles B. Notes to their financial statements C. Assessment of vendors and customers D. Press releases

98.

Cramer Cooling Company reported the following results for the year just ended: Cash Accounts receivable Prepaid insurance Inventory

$50,000 45,000 10,000 51,300

Cramer Cooling’s acid-test ratio is 1.25. How much are the company’s current liabilities? A. $76,000 B. $84,000 C. $125,040 D. $117,040 99.

Planter Zone’s working capital is $32,500 and its current assets are $85,100. How much is the company’s current ratio? A. 0.72 B. 1.62 C. 2.62 D. 1.38

100.

Seekers Limited reported the following results for the year just ended: Cash Accounts receivable Inventory

$ 30,000 90,000 150,000

The company’s quick ratio was 0.90 for the year. How much are the company’s current liabilities? A. $120,000 B. $133,333 C. $266,667 D. $108,000

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101.

Kerwin Holdings has total assets of $450,000 and shareholders’ equity of $120,000, of which $45,000 of the equity is common stock. How much is the company’s debt-toequity ratio? A. 3.75 B. 2.75 C. 6.00 D. 4.40

102.

Comparative financial statements for Bent Stew Enterprises are shown below: December 31 2018 2017 Assets Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Property, plant, and equipment, net Intangible assets, net Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Other current liabilities Total current liabilities Long-term debt Total liabilities Stockholders’ equity: Common stock Additional paid-in capital Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

Using horizontal analysis, how much is the percentage change in cash for Bent Stew Enterprises from 2017 to 2018? A. 375.00% increase B. 73.33% increase C. 26.67% increase D. 275.00% increase

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Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

How much is the company’s gross margin percentage for 2018? A. (1.98%) B. 34.40% C. 98.16% D. 7.80%

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104.

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Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

Bent Stew Enterprises had 10,000 shares of common stock outstanding during both 2017 and 2018. How much was earnings per share in 2018? A. $0.15 B. $0.67 C. $1.49 D. $19.25

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105.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

Using vertical analysis, how would you best describe the change in the company’s operating expenses from 2017 to 2018? A. Operating expenses increased from 1.63% of net earnings to 9.55% of net earnings from 2017 to 2018. B. Operating expenses increased by $10,000 from 2017 to 2018. C. Operating expenses increased from 23.5% to 25.6% of sales from 2017 to 2018. D. Operating expenses increased by 18.5% from 2017 to 2018.

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106.

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Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

Using horizontal analysis, how would you best describe the change in the company’s operating expenses from 2017 to 2018? A. Operating expenses increased from 1.63% of net earnings to 9.55% of net earnings from 2017 to 2018. B. Operating expenses increased by $10,000 from 2017 to 2018. C. Operating expenses increased from 23.5% to 25.6% of sales from 2017 to 2018. D. Operating expenses increased by 18.5% from 2017 to 2018.

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Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

What does vertical analysis for 2018 versus 2017 reveal for Bent Stew Enterprises? A. There was no change in the proportion of common stock to total assets from 2017 to 2018. B. Inventory levels have decreased from 2017 to 2018 in proportion to total assets. C. Gross margin declined to 34.4% in 2017, down from 38.19% in 2017. D. The company has a higher proportion of long-term debt in 2018 compared to 2017.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

108.

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Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

The company’s stock is selling for a market price of $31.00 per share at the end of 2018, up from $28.00 per share at the end of 2017. There are 5,000 shares of common stock outstanding at the end of 2018. How much is the company’s price-earnings ratio at the end of 2018? A. $23.13 B. $1.34 C. $4.32 D. $41.55

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3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

How much is Bent Stew’s asset turnover in 2018? A. 1.034 B. 0.027 C. 0.770 D. 1.299

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

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110.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

How much is return on common stockholders’ equity for Bent Stew for 2018? A. 15.26% B. 44.67% C. 19.14% D. 13.48%

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111.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

The income tax rate is 54%. How would you best describe the company’s use of financial leverage in 2018? A. The company is highly leveraged and is using leverage well to generate a high return for stockholders. B. The company is poorly leveraged. C. The company is highly leveraged, but the leverage has a negative impact on stockholders. D. The company has no financial leverage.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

112.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

How much is Bent Stew’s inventory turnover for 2018? A. 7.32 times B. 26.70 times C. 49.86 times D. 13.67 times

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113.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

How much is Bent Stew’s accounts receivable turnover for 2018? A. 29.41 times B. 37.31 times C. 12.31 times D. 0.03 times

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

114.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

What is the company’s days’ sales in receivables for 2018? A. 29.41 days B. 37.31 days C. 12.41 days D. 8.06 days

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115.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

How much is Bent Stew’s day’s sales in inventory for 2018? A. 7.32 days B. 26.70 days C. 49.86 days D. 13.67 days

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

116.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

How much is Bent Stew’s current ratio at the end of 2018? A. 0.92 B. 1.09 C. 1.06 D. 1.34

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117.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

How much is Bent Stew’s quick ratio at the end of 2018? A. 1.09 B. 1.03 C. 0.57 D. 0.50

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

118.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

How much is Bent Stew’s debt-to-equity ratio at the end of 2018? A. 0.35 B. 2.87 C. 2.41 D. 0.74

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119.

Sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes Net earnings

3,000 8,500 12,000 1,400 24,900 103,600 64,000 $192,500

800 6,000 8,200 900 15,900 123,300 47,000 $186,200

$ 11,000 11,800 22,800 120,000 142,800

$ 12,000 3,200 15,200 128,000 143,200

15,000 20,000 14,700 49,700 $192,500

15,000 20,000 8,000 43,000 $186,200

Year Ended December 31 2018 2017 $250,000 $ 230,000 164,000 142,300 86,000 87,700 64,000 54,000 22,000 33,700 7,500 5,900 14,500 27,800 7,800 7,140 $ 6,700 $ 20,660

How much is Bent Stew’s times interest earned for 2018? A. 2.93 times B. 37.31 times C. 0.34 times D. 0.89 times

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

120.

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Comparative financial statements for Cross, Inc. are shown below: Assets Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Property, plant and equipment, net Total assets

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 85,443 Other current liabilities 38,112 Total current liabilities 123,555 Long-term debt 302,430 Total liabilities 425,985 Stockholders’ equity: Common stock 600,000 Retained earnings 145,605 Total stockholders’ equity 745,605 Total liabilities and stockholders’ equity $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

Year Ended December 31 2018 2017 $17,005,852 $13,809,585 12,250,257 9,825,614 4,755,595 3,983,971 3,585,657 3,400,258 1,169,938 583,713 28,500 27,300 1,141,438 556,413 342,431 166,924 $ 799,007 $ 389,489

Using horizontal analysis, how much is Cross, Inc.’s percentage change in accounts receivable from 2017 to 2018? A. 4.9% increase B. 5.2% increase C. 1.1% increase D. 1.2% decrease

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121.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

How much is Cross, Inc.’s gross margin percentage for 2018? A. 19.4% B. 72.0% C. 28.8% D. 28.0%

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

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December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

There were 200,000 shares of common stock outstanding during both years. How much is earnings per share for Cross, Inc. in 2018? A. $4.00 B. $0.05 C. $85.03 D. $5.71

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123.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

Which one of the following is revealed by horizontal analysis of Cross, Inc. during the 2018 and 2017 years? A. Current assets are increasing at a faster rate than total assets. B. Sales are increasing faster than cost of goods sold. C. Sales are increasing faster than net income. D. Cash is increasing faster than accounts payable.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

124.

14-37

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

The market price per share of Cross, Inc.’s common stock is $103.00 at the end of 2018. Throughout both 2017 and 2018, there are 500,000 shares of common stock outstanding. How much is Cross, Inc.’s price-earnings ratio at the end of 2018? A. $1.60 B. $64.46 C. $0.21 D. $1.66

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125.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

How much is return on total assets for Cross, Inc. for 2017? A. 68.2% B. 69.9% C. 68.9% D. 14.5%

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

126.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

How much is return on common stockholders’ equity for Cross, Inc. for 2018? A. 107.2% B. 93.3% C. 68.2% D. 2.0%

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127.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

How much is inventory turnover for Cross, Inc. for 2018? A. 8.26 times B. 126.7 times C. 0.79 times D. 2.9 times

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

128.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

How much is days’ sales in inventory for Cross, Inc. for 2018? A. 2.9 days B. 510 days C. 34.8 days D. 126.7 days

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129.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

How much is accounts receivable turnover for Cross, Inc. for 2018? A. 3.1 times B. 28.0 times C. 119.8 times D. 5.6 times

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130.

14-43

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

What is the most likely explanation for the change in Cross’ accounts receivable turnover from 2017 to 2018? A. The company is collecting amounts due from customers more agressively. B. The company’s sales are primarily cash sales which do not result in receivables. C. The company makes primarily credit sales and has very easy credit terms. D. None of these answer choices are possible explanations.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

131.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

How much is Cross’ current ratio at the end of 2018? A. 1.9 B. 2.8 C. 0.4 D. 0.3

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

132.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,159

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

How much is Cross’ acid-test ratio at the end of 2018? A. 2.8 B. 0.7 C. 2.7 D. 1.9

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

133.

December 31 2018 2017 $

89,103 142,000 96,708 21,203 349,014 822,576 $1,171,590

Net sales Cost of goods sold Gross margin Operating expense Operating income Interest expense Earnings before tax Income taxes Net income

68,203 135,000 85,694 5,118 294,015 718,144 $1,012,15

62,394 33,507 95,901 290,324 386,225

600,000 25,934 625,934 $1,012,159

How much is the company’s debt-to-equity ratio for 2018? A. 0.571 B. 1.065 C. 0.364 D. 0.018

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

134.

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Swanson Company has a current ratio of 2.1 and the following assets on December 31, 2017: Cash Accounts receivable, net Inventory Prepaid expenses Equipment, net Total assets

$ 98,500 499,700 960,000 23,100 2,284,800 $3,866,100

How much are the company’s current liabilities on December 31, 2017? A. $285,000 B. $742,000 C. $753,000 D. $1,841,000 135.

Chua Company has current liabilities totaling $1,500,000 and the following assets on December 31 of the current year: Cash Accounts receivable, net Inventory Prepaid expenses Equipment, net Total assets

$ 300,000 600,000 960,000 25,000 2,200,000 $4,085,000

How much is the company’s acid-test ratio on December 31? A. 0.20 B. 0.60 C. 1.26 D. 1.24 136.

Chua Company has has a current ratio of 2.5 and the following assets on December 31, 2017: Cash Accounts receivable, net Inventory Prepaid expenses Equipment, net Total assets

$ 300,000 600,000 960,000 25,000 2,200,000 $4,085,000

The company paid an account payable of $175,000 immediately on January 1, 2018. What effect did this have on the current ratio? A. An increase to 2.95 B. There was no effect since both cash and accounts payable changed by the same amount. C. An increase to 2.50 D. A decrease to 2.26

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

137.

Chua Company had a current ratio of 2.5 to 1 on December 31, 2017. On that date, the company’s assets were as follows: Cash Accounts receivable, net Inventory Prepaid expenses Equipment, net Total assets

$ 100,000 600,000 960,000 25,000 2,200,000 $3,885,000

What impact will the declaration of a cash dividend by Chua have on its current ratio? A. An increase in the current ratio B. A decrease in the current ratio C. No efffect on the current ratio D. There is not enough information provided to determine the answer. 138.

$ 100,000 600,000 960,000 25,000 2,200,000 $3,885,000

What impact will the sale of inventory to customers for cash have on Chua’s debt-toequity ratio? A. An increase in the debt-to-equity ratio B. A decrease in the debt-to-equity ratio C. No efffect on the debt-to-equity ratio D. There is not enough information provided to determine the answer.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

Answers to Multiple Choice 31 D 53 C 32 D 54 C 33 B 55 D 34 C 56 A 35 C 57 A 36 B 58 C 37 A 59 B 38 D 60 A 39 D 61 A 40 A 62 B 41 D 63 A 42 C 64 A 43 D 65 B 44 B 66 B 45 A 67 B 46 D 68 B 47 C 69 A 48 A 70 C 49 D 71 C 50 D 72 A 51 A 73 A 52 D 74 A

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96

B B C D A A B C D C A C B A C B A C A A A D

97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118

C A B B B D B B C D C A D D A D A C B B D B

119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138

A B D A A B B A B A C A B D A C B A B B

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

MATCHING 139.

Match each of the following terms with the phrase that most closely describes it. Each answer may be used only once.

A. B. C. D. E. F. G. H. I. J.

Balance sheet

Financial leverage

Gross margin

Horizontal analysis

Income statement

Investing activity

Management discussion and analysis

Operating activity

Statement of cash flows

10.

Vertical analysis

Determines a the percentage change in each line item of financial statements from one year to the next Activities that impact long-term assets A report that explains changes in various financial statement items Using debt to increase returns to stockholders Sales less cost of goods sold Contains assets, liabilities, and stockholders’ equity at the end of the period Indicates the revenues and expenses for the period Indicates the sources and uses of cash and cash equivalents Restates financial statement on a percentage basis based on total assets or net sales Indicates the cash generated by the ongoing activities of the business

Answers to Matching 1 F 2 D

3 E 4 A

5 G 6 B

7 C 8 J

9 H 10 I

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

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EXERCISES 140.

The liabilities and stockholders’ equity sections of comparative balance sheets for Jenson International are presented below for 2018 and 2017: December 31 2018 2017 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Other current liabilities Total current liabilities Long term debt Total liabilities Stockholders’ equity: Common stock Additional paid in capital Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

67,500 3,488 70,988 333,777 404,765

$ 85,451 5,157 90,608 436,215 526,823

100,000 275,000 350,171 725,171 $1,129,936

100,000 275,000 78,583 453,583 $980,406

Prepare a horizontal analysis of the liabilities and stockholders’ equity sections of Jenson International’s balance sheets. Answer 2018

2017

Percent Change

67,500 3,488 70,988 333,777 404,765

$ 85,451 5,157 90,608 436,215 526,823

(21.0%) (32.4%) (21.7%) (23.5%) (23.2%)

Stockholders’ equity: Common stock 375,000 Retained earnings 350,171 Total stockholders’ equity 725,171 Total liabilities and stockholders’ equity $1,129,936

375,000 78,583 453,583 $980,406

0.0% 345.6% 59.9% 15.3%

Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Other current liabilities Total current liabilities Long-term debt Total liabilities

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

141.

Comparative income statements for Jenson International are shown below for 2018 and 2017:

Net sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Income before taxes Income taxes expense Net income

Year Ended December 31 2018 2017 $2,451,000 $2,321,000 1,650,455 1,348,330 800,545 972,670 385,000 420,408 415,545 552,262 45,600 33,181 369,945 519,081 98,357 135,600 $ 271,588 $ 383,481

Prepare a vertical analysis of the company’s income statements. Answer For the Year Ended December 31, 2018 Net sales $2,451,000 100.0% Cost of goods sold 1,650,455 67.3% Gross margin 800,545 32.7% Operating expenses 385,000 15.7% Income before interest and tax 415,545 17.0% Interest expense 45,600 1.9% Income before taxes 369,945 15.1% Income taxes expense 98,357 4.0% Net income $ 271,588 11.1%

For the Year Ended December 31, 2017 $2,321,000 100.0% 1,348,330 58.1% 972,670 41.9% 420,408 18.1% 552,262 23.8% 33,181 1.4% 519,081 22.4% 135,600 5.8% $ 383,481 16.6%

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

142.

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The following information for Redwood Junction, a retail furniture and design firm, is presented for 2018 and 2017: December 31 2018 2017 Assets Current assets Cash $ 42,000 $ 54,000 Accounts receivable 580,000 445,000 Inventory 5,010,000 4,950,000 Prepaid expenses 84,000 79,000 Total current assets 5,716,000 5,528,000 Building and equipment, net 1,097,000 1,095,000 Total assets $6,813,000 $6,623,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Bank loan payable Other accrued payables Total current liabilities Long-term debt Total liabilities Stockholders’ equity: Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

$ 605,000 679,000 215,000 1,499,000 1,729,000 3,228,000

$ 628,000 625,000 315,000 1,568,000 1,791,000 3,359,000

1,307,000 2,278,000 3,585,000 $6,813,000

1,307,000 1,957,000 3,264,000 $6,623,000

Perform a horizontal analysis of the assets section of the balance sheets for Redwood Junction. Identify the largest change. Answer December 31 Percent 2018 Assets Current assets Cash Accounts receivable Inventory Prepaid expenses Total current assets Building and equipment, net Total assets

42,000 580,000 5,010,000 84,000 5,716,000 1,097,000 $ 6,813,000

2017

Change

54,000 445,000 4,950,000 79,000 5,528,000 1,095,000 $ 6,623,000

($12,000) 135,000 60,000 5,000 188,000 2,000 $ 190,000

(22.2%) 30.3% 1.2% 6.3% 3.4% 0.2% 2.9%

The largest change is accounts receivable, which grew by 30.3%.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

143.

The following information for Woodchuck, a retail furniture and design firm, is presented for the years ending December 31, 2018 and 2017: Year Ended December 31 2018 2017 $5,628,000 $5,253,000 2,900,000 2,700,000 2,728,000 2,553,000

Net sales Cost of goods sold Gross margin Operating expenses: Selling expenses 500,000 General and administrative expenses 835,000 Total operating expenses 1,335,000 Operating income 1,393,000 Interest expense 139,000 Income before taxes 1,254,000 Income taxes 439,000 Net income $ 815,000

600,000 788,000 1,388,000 1,165,000 158,000 1,007,000 368,000 $ 639,000

Perform a horizontal analysis of the income statements for Woodchuck. Identify the largest change and list some of the causes that may have led to this change. Answer

Net sales Cost of goods sold Gross margin Operating expenses: Selling expenses Gen and admin expenses Total operating expenses Operating income Interest expense Income before taxes Income taxes Net income

Year Ending December 31 2018 2017 $ 5,628,000 $ 5,253,000 2,900,000 2,700,000 2,728,000 2,553,000

Change $375,000 200,000 175,000

Percent Change 7.1% 7.4% 6.9%

500,000 835,000 1,335,000 1,393,000 139,000 1,254,000 439,000 $ 815,000

(100,000) 47,000 (53,000) 228,000 (19,000) 247,000 71,000 $176,000

(16.7%) 6.0% (3.8%) 19.6% (12.0%) 24.5% 19.3% 27.5%

600,000 788,000 1,388,000 1,165,000 158,000 1,007,000 368,000 $ 639,000

The 16.7% decrease in selling expenses caused operating income to increase by 19.6%. The company may have reduced the number of sales personnel employed or eliminated advertising and other marketing costs.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

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The following information for Redwood Junction, a retail furniture and design firm, is presented for 2018 and 2017: December 31 Assets 2018 2017 Current assets Cash $ 42,000 $ 54,000 Accounts receivable 580,000 445,000 Inventory 5,010,000 4,950,000 Prepaid expenses 84,000 79,000 Total current assets 5,716,000 5,528,000 Building and equipment, net 1,097,000 1,095,000 Total assets $6,813,000 $6,623,000 Perform a vertical analysis of the asset section of the balance sheets for the company. Identify any major changes between 2017 and 2018. Indicate what could have led to the changes you noted in this analysis.

Answer Assets Current assets Cash Accounts receivable Inventory Prepaid expenses Total current assets Building and equipment, net Total assets

December 31, 2018 $

42,000 580,000 5,010,000 84,000 5,716,000 1,097,000 $6,813,000

0.6% 8.5% 73.5% 1.2% 83.9% 16.1% 100.0%

December 31, 2017 $

54,000 445,000 4,950,000 79,000 5,528,000 1,095,000 $6,623,000

0.8% 6.7% 74.7% 1.2% 83.5% 16.5% 100.0%

There appears to be a significant increase in accounts receivable from 6.7% of total assets to 8.5% between 2017 and 2018. This may be caused by customers not paying as quickly as they had paid in the past, which may have been triggered by a loosening of the company’s credit policy.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

145.

Will Redmon is the CEO of Allistair Holdings, a company that manufactures and sells eye care products. Will’s annual bonus depends on meeting a profit target of $7,000,000, but late in the fourth quarter, the CFO brought Will the bad news that, based on current orders, it appeared that earnings would be closer to $6,500,000. To deal with the situation, Will and the CFO decided on the following strategy: The company has firm orders for $2.5 million of merchandise to be delivered in January and February of next year (the company’s fiscal year ends on December 31). Will proposes that the goods be shipped in December to a warehouse where they will be held until required by customers. Customers will be billed in December and receive a special 15 percent discount for accepting ownership upon shipment to the warehouse. Allistair will pay for storage and insurance until the goods are actually delivered to customer locations. Explain how the strategy may constitute manipulation of earnings.

Answer The strategy appears to constitute manipulation of earnings as it has the potential to increase net income. This is often referred to as a bill and hold strategy is being undertaken purely to shift income from a future period to the current period. The customers are not being offered a discount to encourage a sale—the discount is being offered so the company can book the sale early.

146.

Will Redmon is the CEO of Allistair, a company that manufactures and sells eye care products. Will’s annual bonus depends on meeting a profit target of $7,000,000, but late in the fourth quarter the CFO brought Will the bad news that, based on current orders, it appeared that earnings would be closer to $6,500,000. To deal with the situation, Will and the CFO decided on the following strategy: The company has firm orders for $2.5 million of merchandise to be delivered in January and February of next year (the company’s fiscal year ends on December 31). Will proposes that the goods be shipped in December to a warehouse where they will be held until required by customers. Customers will be billed in December and receive a special 15 percent discount for accepting ownership upon shipment to the warehouse. Allistair will pay for storage and insurance until the goods are actually delivered to customer locations. Comment on why and how a comparison of net income versus cash flow from operations may reveal that this action was undertaken.

Answer The strategy will affect income but not cash flow. Accounts receivable will increase causing total assets to look healthy. However, there will not be a cash flow to accompany this. A comparison of net income and cash flow from operations might detect the earnings manipulation as these two amounts, as they often significantly differ from each other when manipulation occurs.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

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The following information for Kinnis, Inc., a retail furniture and design firm, is presented at December 31, 2018 and 2017: December 31 Assets 2018 2017 Current assets: Cash $ 42,000 $ 54,000 Accounts receivable 480,000 345,000 Inventory 5,010,000 4,950,000 Prepaid expenses 84,000 79,000 Total current assets 5,616,000 5,428,000 Building and equipment 1,591,000 1,193,000 Total assets $7,207,000 $6,621,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Bank loan payable Other accrued payables Total current liabilities Long-term debt Total liabilities

$ 705,000 679,000 215,000 1,599,000 1,729,000 3,328,000

$ 628,000 625,000 315,000 1,568,000 1,791,000 3,359,000

Stockholders’ equity: Common stock 1,307,000 Retained earnings 2,572,000 Total stockholders’ equity 3,879,000 Total liabilities and stockholders’ equity $7,207,000

1,305,000 1,957,000 3,262,000 $6,621,000

There were 100,000 shares of common stock outstanding at the end of both years. The income tax rate is 35%. Interest expense totaled $139,000 for 2018 and $158,000 for 2017. The market price per share was $110 at the end of 2017 and $134 at the end of 2018. Net income was $615,000 for 2018 and $739,000 in 2017. Net sales totaled $4,568,000 and $3,253,000 for 2018 and 2017, respectively. a.

Calculate the following for 2018 and 2017: 1. Earnings per share 2. Price–earnings ratio 3. Return on total assets 4. Return on common stockholders’ equity Comment on any trends apparent in the ratios.

Answer a.

1. 2. 3. 4.

2018 = $615,000 ÷ 100,000 = $6.15 2017 = $739,000 ÷ 100,000 = $7.39 2018 = $134 ÷ $6.15 = $21.79 2017 = $110 ÷ $7.39 = $14.88 2018 = [$615,000 + ($139,000 × (1 – 0.35))] ÷ $7,207,000 = 0.098 2017 = [$739,000 + ($158,000 × (1 – 0.35))] ÷ $6,621,000 = 0.127 2018 = $615,000 ÷ $3,879,000 = 0.159 2017 = $739,000 ÷ $3,262,000 = 0.227

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

148.

Earnings per share decreased due to the decrease in net income from 2017 to 2018. However, since the stock price increased, the price-earnings ratio increased. The return on total assets indicates the company is earning 9.8 cents per dollar of assets invested rather than 12.7 cents form 2017, a significant decrease. The return on common equity decreased in 2018 due to the decrease in net income and an increase in equity.

Jim Parker is interested in purchasing the stock of Hackett, a company that sells bricks to the construction industry. Before purchasing the stock, Parker would like to learn as much as possible about the company in which he is contemplating the potential investment. However, the only information that Parker has is a portion of Hackett’s annual report for the current year (Year 3), which contains no comparative data other than the summary of the ratios listed below: Year 3 Current ratio 2.8:1 Acid-test ratio 0.8:1 Accounts receivable turnover 8.9 times Inventory turnover 6.1 times Return on total assets 15.50% Return on common stockholders' equity 18.10% Price-earnings ratio 12.3 Earnings per share $1.53

Year 2 2.3:1 1.0:1 10.1 times 8.1 times 12.10% 14.70% 17.2 $1.52

Year 1 2.1:1 1.2:1 12.5 times 8.3 times 10.30% 11.90% 17.7 $1.55

Is the market price of the company’s stock increasing or decreasing? Support your answer with accounting justification citing specific information in the analysis. Answer Hackett’s market price is declining as seen in the decline of its price-earnings ratio in Year 2 and Year 3. The price-earnings ratio indicates that the market price per share compared to the earnings produced by the company is declining. Given the steady earnings per share over the three years, the factor causing the price-earnings ratio to drop is the stock price.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

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Comparative financial statements for Smart Buy are shown below for the year’s ending December 31, 2018 and 2017: Assets Current assets: Cash Accounts receivable Inventory Other Total current assets Long-term investments Property, plant and equipment, net Total assets

December 31 2018 2017 14,000 45,489 39,239 3,400 102,128 128,580 789,145 $1,019,853

$ 12,458 35,486 32,568 2,581 83,093 104,600 771,258 $958,951

98,789 3,456 102,245 456,781 559,026

$ 85,451 5,157 90,608 414,760 505,368

Stockholders’ equity: Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

375,000 85,827 460,827 $1,019,853

375,000 78,583 453,583 $958,951

Net sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income tax expense Net earnings

Year Ended December 31 2018 2017 $2,281,789 $2,074,354 1,505,981 1,348,330 775,808 726,024 458,245 420,408 317,563 305,616 36,542 33,181 281,021 272,435 98,357 95,352 $ 182,664 $ 177,083

Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Other current liabilities Total current liabilities Long-term debt Total liabilities

Smart Buy had 50,000 common shares outstanding throughout 2018. The December 31, 2018 market price is $43 per share. The income tax rate is 35%. Calculate the following profitability ratios for 2018 for Smart Buy: a. Earnings per share b. Price-earnings ratio c. Gross margin percentage d. Return on total assets e. Return on common stockholders’ equity Answer a. b. c. d. e.

$182,664 ÷ 50,000 = $3.65 $43 ÷ $3.65 = $11.78 $775,808 ÷ $2,281,789 = 34.0% ($182,664 + ($36,542 × (1– 35%)) ÷ $1,019,853) = 20.2% $182,664 ÷ $460,827 = 39.6%

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

150.

Comparative financial statements for TJ Cleaners for December 31, 2018 and 2017 follow: Assets Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Long-term investments Property, plant, and equipment, net Total assets

December 31 2018 2017 12,000 45,489 40,239 3,400 101,128 128,580 867,565 $1,097,273

$ 12,458 37,486 33,568 2,581 86,093 104,600 739,258 $929,951

98,789 5,456 104,245 486,781 591,026

$ 85,451 5,157 90,608 424,760 515,368

Stockholders’ equity: Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

375,000 131,247 506,247 $1,097,273

336,000 78,583 414,583 $929,951

Net sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income taxes expense Net earnings

Year Ended December 31 2018 2017 $2,111,789 $2,174,354 1,505,981 1,648,330 605,808 526,024 418,245 420,408 187,563 105,616 36,542 33,181 151,021 72,435 98,357 15,352 $ 52,664 $ 57,083

Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Other current liabilities Total current liabilities Long-term debt Total liabilities

TJ sells all items on account. Calculate the following for TJ Cleaners for 2018: a. Asset turnover b. Accounts receivable turnover c. Days’ sales in inventory d. Inventory turnover e. Days’ sales in inventory Answer a. b. c. d. e.

$2,111,789 ÷ $1,097,273 = 1.92 times $2,111,789 ÷ $45,489 = 46.42 times 365 ÷ 46.42 = 7.86 days $1,505,981 ÷ $40,239 = 37.42 times 365 ÷ 37.42 = 9.75 days

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The following information for BuyRite Rooms, a retail furniture and design firm, is presented for 2018 and 2017: December 31 Assets 2018 2017 Current assets: Cash $ 42,000 $ 54,000 Accounts receivable 580,000 445,000 Inventory 5,010,000 4,950,000 Prepaid expenses 84,000 79,000 Total current assets 5,716,000 5,528,000 Building and equipment, net 1,097,000 1,095,000 Total assets $6,813,000 $6,623,000 Liabilities and stockholders’ equity Current liabilities: Accounts payable Bank loan payable Other accrued payables Total current liabilities Long-term debt Total liabilities

$ 605,000 679,000 215,000 1,499,000 1,729,000 3,228,000

$ 628,000 625,000 315,000 1,568,000 1,791,000 3,359,000

Stockholders’ equity: Common stock 1,307,000 Retained earnings 2,278,000 Total stockholders’ equity 3,585,000 Total liabilities and stockholders’ equity $6,813,000

1,307,000 1,957,000 3,264,000 $6,623,000

There were 100,000 shares of common stock outstanding during both years. In addition, the following information is provided: 2018 2017 Market price per share at the end of year $ 134 $ 110 Net income for the year 815,000 639,000 Cost of goods sold for the year 2,900,000 2,700,000 Net sales for the year 5,568,000 5,253,000 a.

Answer a.

Calculate asset turnover, accounts receivable turnover, days’ sales in receivables, inventory turnover, and days’ sales in inventory for 2017 and 2018. Use three significant digits for all calculations. How well does BuyRite Rooms appear to manage its accounts receivable and inventory? What suggestions do you have for the company’s managers?

Asset turnover = Net sales ÷ Total assets 2017 = $5,253,000 ÷ $6,623,000 = 0.793 2018 = $5,568,000 ÷ $6,813,000 = 0.817 Accounts receivable turnover = Net credit sales ÷ Accounts receivable 2017 = $5,253,000 ÷ $445,000 = 11.804 2018 = $5,568,000 ÷ $580,000 = 9.600

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

Days’ sales in receivables = 365 ÷ Accounts receivable turnover 2017 = 365 ÷ 11.804 = 30.920 days 2018 = 365 ÷ 9.600 = 38.021 days Inventory turnover = Cost of goods sold ÷ Inventory 2017 = $2,700,000 ÷ $4,950,000 = 0.545 2018 = $2,900,000 ÷ $5,010,000 = 0.579 Days’ sales in inventory = 365 ÷ Inventory turnover 2017 = 365 ÷ .545 = 669.72 days 2018 = 365 ÷ .579 = 630.40 days b.

152.

There appears to be a very significant problem related to excess inventory. The company has approximately 1.7 years of inventory on hand! Quite possibly, return on total assets could be improved by decreasing inventory. Accounts receivable may need some attention as the number of days to collect its entire dollar amount of receivables is increasing.

Hank Hatley is interested in purchasing the stock of Brinker, a company that sells bricks to the construction industry. Before purchasing the stock, Hatley would like to learn as much as possible about the company in which he is contemplating a potential investment. However, the only information that Hatley has is a portion of Brinker’s annual report for the current year (Year 3), which contains no comparative data other than the summary of the ratios listed below: Year 3 Year 2 Year 1 Current ratio 2.6:1 2.3:1 2.1:1 Acid-test ratio 0.8:1 1.0:1 1.2:1 Accounts receivable turnover 10.0 times 10.1 times 10.5 times Inventory turnover 6.1 times 8.1 times 8.3 times Return on total assets 15.50% 12.10% 10.30% Return on common stockholders' equity 18.10% 14.70% 11.90% Price-earnings ratio 12.3 17.2 17.7 Earnings per share $1.53 $1.52 $1.55 Are customers paying their accounts as well as they were in Year 1? Support your answer with accounting justification citing specific information in the analysis.

Answer Yes, customers are paying their accounts almost as well in year 3 as they did in Year 1. In Year 1, Brinker’s accounts receivable turnover was 10.5, but in Year 3, it dropped to 10.0. This drop indicates that the balance of accounts receivable is increasing slightly due to lack of collection of the entire receivable balance. Hatley should consider adding the calculation and assessment of days’ sales outstanding in the company’s analysis.

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The following information for 2018 and 2017 is presented for BuyRite: Assets Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Building and equipment, net Total assets

December 31 2018 2017 $

42,000 580,000 5,010,000 84,000 5,716,000 1,097,000 $6,813,000

54,000 445,000 4,950,000 79,000 5,528,000 1,095,000 $6,623,000

Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Bank loan payable Other accrued payables Total current liabilities Long-term debt Total liabilities

$ 605,000 679,000 215,000 1,499,000 1,729,000 3,228,000

$ 628,000 625,000 315,000 1,568,000 1,791,000 3,359,000

Stockholders’ equity: Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

1,307,000 2,278,000 3,585,000 $6,813,000

1,307,000 1,957,000 3,264,000 $6,623,000

There were 100,000 shares of common stock outstanding throughout both 2017 and 2018. Additional information follows: 2018 2017 Market price per share at the end of year $ 134 $ 110 Net income for the year 815,000 639,000 Cost of goods sold for the year 2,900,000 2,700,000 Net sales for the year 5,568,000 5,253,000

a. b. Answer a.

Calculate the 1) current ratio, 2) acid-test ratio, and the 3) debt-to-equity ratio for 2017 and 2018. Calculate to three significant digits. The company intends to apply for a loan. What concerns might the loan officer have about lending to the company? 1.

2017 = $5,528,000 ÷ $1,568,000 = 3.526 2018 = $5,716,000 ÷ $1,499,000 = 3.813

2017 = ($54,000 + $445,000) ÷ $1,568,000 = 0.318 2018 = ($42,000 + $580,000) ÷ $1,499,000 = 0.414

2017 = $3,359,000 ÷ $3,264,000 = 1.029 2018 = $3,228,000 ÷ $3,565,000 = 0.905

The acid-test ratio is low, while the current ratio deceivingly appears to be adequate to pay current debts when due. The low acid-test ratio is due to a large amount of inventory, which cannot be turned into cash quickly. The debt-to-equity ratio is reasonable. The loan officer may be concerned that the company does not have enough cash to pay its current obligations when due.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

154.

Wyatt Parks is interested in purchasing the stock of Dobbins Products, a company that sells bricks to the construction industry. Before purchasing the stock, Parks would like to learn as much as possible about the company. However, all he has to go on is the current year’s (Year 3) annual report, which contains no comparative data other than the summary of the ratios given below: Year 3 Current ratio 1.7 Acid-test (quick) ratio 0.8 Accounts receivable turnover 8.9 times Inventory turnover 6.1 times Return on total assets 15.50% Return on common stockholders' equity 18.10% Price-earnings ratio 12.3 Earnings per share $1.53

Year 2 2.3 1.0 10.1 times 8.1 times 12.10% 14.70% 17.2 $1.52

Year 1 2.1 1.2 12.5 times 8.3 times 10.30% 11.90% 17.7 $1.55

Is it becoming easier for the company to pay its bills as they come due? Support your answer with accounting justification citing specific information in the analysis. Answer It is becoming more difficult for Dobbins Products to pay its bills as they come due given that its current ratio has decreased in the most recent year (Year 3) to 1.7. In addition, in the very short term, Dobbins Products may not be able to quickly turn its receivables and inventory into cash as demonstrated by its decline in the acid-test ratio.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

155.

Comparative financial statements for Smart Buy for the years ending December 31, 2018 and 2017 are shown below: December 31 Assets 2018 2017 Current assets: Cash $ 14,000 $ 12,458 Accounts receivable 45,489 35,486 Inventory 39,239 32,568 Prepaid expenses 3,400 2,581 Total current assets 102,128 83,093 Long-term investments 128,580 104,600 Property, plant and equipment, net 789,145 771,258 Total assets $1,019,853 $958,951 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Other current liabilities Total current liabilities Long-term debt Total liabilities Stockholders’ equity: Common stock Additional paid-in capital Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

Net sales Cost of goods sold Gross margin Operating expenses Operating income Interest expense Earnings before income taxes Income tax expense Net earnings

$ 85,451 5,157 90,608 414,760 505,368

100,000 275,000 85,827 460,827 $1,019,853

100,000 275,000 78,583 453,583 $ 958,951

Year Ended December 31 2018 2017 $2,281,789 $2,074,354 1,505,981 1,348,330 775,808 726,024 458,245 420,408 317,563 305,616 36,542 33,181 281,021 272,435 98,357 95,352 $ 182,664 $ 177,083

Calculate the following ratios for 2018 for Smart Buy: a. Current ratio b. Quick ratio c. Debt-to-equity ratio d. Times interest earned Answer a. $102,128 ÷ $102,245 = 0.999 b. $59,489 ÷ $102,245 = 0.58 c. $559,026 ÷ $460,827 = 1.21 d. $317,563 ÷ $36,542 = 8.69 times

98,789 3,456 102,245 456,781 559,026

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

CHALLENGE EXERCISES 156.

Comparative balance sheets for Save-A-Penny for the years ending December 31, 2018 and 2017 are shown below: December 31 2018 2017

Assets Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets Property, plant and equipment, net Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Other current liabilities Total current liabilities Long-term debt Total liabilities Stockholders’ equity: Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

$ 15,600 19,800 21,200 3,100 59,700 285,300 $345,000

$ 14,200 17,500 24,500 4,800 61,000 266,000 $327,000

$ 14,500 26,500 41,000 216,000 257,000

$ 15,900 23,100 39,000 204,000 243,000

22,000 66,000 88,000 $345,000

19,800 64,200 84,000 $327,000

Selected additional amounts for Save-A-Penny follow for the years ending December 31, 2018 and 2017: Net sales Interest expense Income tax expense Net earnings

Year Ended December 31 2018 2017 $432,000 $398,000 12,900 12,000 15,900 15,600 37,100 36,400

Calculate at least 3 debt-related ratios for Save-A-Penny for 2018 and 2017. Evaluate the risk considerations and any changes between the two years as it relates to Save-APenny’s ability to satisfy its obligations. Answer Current ratio: 2018: $59,700 ÷ $41,000 = 1.46 2017: $61,000 ÷ $39,000 = 1.56 Acid-test ratio: 2018: ($15,600 + $19,800) ÷ $41,000 = 0.86 2017: ($14,200 + $17,500) ÷ $39,000 = 0.81 Debt-to-equity ratio:

2018: $257,000 ÷ $88,000 = 2.92 2017: $243,000 ÷ $84,000 = 2.89

Times interest earned: 2018: ($12,900 + $15,900 + $37,100) ÷ $12,900 = 5.11 2017: ($12,000 + $15,600 + $36,400) ÷ $12,000 = 5.33

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

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While the current ratio has dropped slightly, there is a slight increase in the acid-test ratio indicating that the company is better prepared to pay its obligations on a very shortterm basis. The slight increase in the debt-to-equity ratio indicates the company has a higher amount of debt relative to its equity in 2018 as compared to 2017. There is also a slight drop in the company’s ability to make interest payment between the two years. All four of the ratios declined somewhat creating a slight increase in the risk of Save-APenny’s ability to satisfy its obligations.

157.

Harry’s Fresh Seafood just completed its first three years of operations. The accountant performed the following ratio analysis for the company: Accounts receivable turnover Inventory turnover a. b.

c. Answer a.

Year 3 16.9 times 144.1 times

Year 2 13.1 times 120.3 times

Year 1 11.5 times 99.3 times

Calculate day’s sale in receivables and day’s sales in inventory for all three years. Interpret the ratios. Evaluate the efficiency with which Harry’s Fresh Seafood manages its receivables and inventory. Interpret the ratios and support your answer with accounting justification citing specific information in the analysis. For what reason do the two turnovers differ so dramatically? Days’ sales in receivables: Year 3: 365 ÷ 16.9 = 21.6 days Year 2: 365 ÷ 13.1 = 27.9 days Year 1: 365 ÷ 11.5 = 31.8 days Days’ sales in inventory: Year 3: 365 ÷ 144.1= 2.5 days Year 2: 365 ÷ 120.3 = 3.0 days Year 1: 365 ÷ 99.3 = 3.7 days Harry’s has been selling the total dollar amount of its inventory about 144.1 times during year 3, compared to 120.3 times in year 2, and 99.3 times in year 1. During year 3, it took only 2.5 days to sell the inventory on hand, a decline from 3 days in year 2, and 3.7 days in year 1. Harry’s has improved its holding period for inventory and is selling its inventory more quickly during the three-year period. Harry’s Fresh Seafood is collecting the amounts due from customers more quickly each year, with a significant reduction of receivables on hand from 21.6 days in year 3 to 27.9 days in year 2, and 31.8 days in year 3. This represents an increase in the collection of amounts owed by customers from 11.5 times in year 1 to 16.9 times in year 3, a significantly favorable trend. The nature of the business operations is likely the reason that inventory turns over so much more quickly than receivables turnover, because fresh seafood has a short shelf life and must be sold in a short period of time.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

158.

Comparative balance sheets for Save-A-Penny for the years ending December 31, 2018 and 2017 are shown below: December 31 Assets 2018 2017 Current assets: Cash $ 15,600 $ 14,200 Accounts receivable 19,800 17,500 Inventory 21,200 24,500 Prepaid expenses 3,100 4,800 Total current assets 59,700 61,000 Property, plant and equipment, net 285,300 266,000 Total assets $345,000 $327,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Other current liabilities Total current liabilities Long-term debt Total liabilities Stockholders’ equity: Common stock, $2 par value Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

$ 14,500 26,500 41,000 216,000 257,000

$ 15,900 23,100 39,000 204,000 243,000

22,000 66,000 88,000 $345,000

19,800 64,200 84,000 $327,000

Additional information follows for the years ending December 31, 2018 and 2017: Year Ended December 31

Net sales Net earnings Income tax expense End of year stock price per share Dividends paid

2018 $432,000 37,100 15,900 18.00 4,000

2017 $398,000 36,400 14,200 15.00 1,800

The shares outstanding during 2018 totaled 10,200, with 9,900 outstanding during 2017. Calculate earnings per share, the price-earnings ratio, and return on common stockholders’ equity for Save-A-Penny for 2018 and 2017. Evaluate the company’s profitability and any changes between the two years. Answer Earnings per share: 2018: $37,100 ÷ 10,200 = $3.64 per share 2017: $36,400 ÷ 9,900 = $3.67 per share Price-earnings ratio: 2018: $18 ÷ $3.64 = 4.94 2017: $15 ÷ $3.67 = 4.08

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Return on common stockholder’s equity: 2018: $37,100 ÷ $88,000 = 0.422 2017: $36,400 ÷ $84,000 = 0.433 Earnings per share was relatively steady due to additional shares of stock issued during 2018 and higher net earnings in 2018. The rise in the price-earnings ratio indicates that shareholders were willing to pay $4.94 per dollar of earnings in 2018, a significant increase from $4.08 in 2017. Return on common stockholders’ equity decreased slightly due to the company earning a lower return on the funds invested by shareholders.

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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition

SHORT-ANSWER ESSAYS 159.

List three reasons why managers need to be able to analyze financial statements.

Answer Managers need to be able to use financial statements to control operations, to assess the viability of vendors, customers and other business partners, and to understand how the company appears to shareholders and creditors.

160.

What are the three major financial statements and what information does each contain?

Answer The balance sheet is a snapshot of the company’s assets, liabilities, and equities at a point in time. The income statement shows the revenues and expenses of a company for a period of time. The statement of cash flows shows the amount of cash used or generated for a period of time from operating, investing, and financing activities.

161.

Explain the nature of horizontal and vertical analysis.

Answer Horizontal analysis looks at the changes from one period to the next in the line items on the financial statements. It allows managers to see how the various items are changing relative to each other. Vertical analysis looks at how the items within a given period relate to each other. All items on the statements are expressed as a percentage of a base amount, usually assets or sales.

162.

Explain why net interest is added back to net income to calculate return on total assets.

Answer Assets are supported by both debt and equity funding. Return on total assets measures the profitability of a firm independently of how it is financed. Thus the return to debt, which is interest, needs to be added to the return to equity, which is net income. The cost of interest is reduced by the tax effect since interest reduces income taxes paid. 163.

What sources other than financial statements are used to analyze a company and what information is available from those sources?

Answer Management’s discussion and analysis is presented in the company’s annual report and gives an explanation from management as to why financial statement items have changed.

Chapter 14 Analyzing Financial Statements: A Managerial Perspective

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Credit reports will provide information about a company’s historical credit record. This will help assess a customer’s ability to meet its obligations. News articles appear frequently and can provide information on a variety of topics.

164.

Why is the accounts receivable turnover that is computed from published financial statements often misleading?

Answer The financial statements do not disclose credit sales, so it is unclear what sales figure should relate to accounts receivable in computing the ratio.

165.

What is financial leverage and how can you tell if it is being used effectively?

Answer Financial leverage is utilizing debt to increase the return to equity. It is being utilized effectively if the return on common stockholders’ equity is higher than the return on total assets.

166.

Turnover ratios measure a key business ‘efficiency’. What efficiency is measured by asset turnover? Why is efficiency important for a company?

Answer Asset turnover measures the efficiency with which a company uses its assets to generate sales revenue. Assets are economic resources and their purpose is to generate future benefits for a company. As a company’s assets are used in operations, they generate sales, which in turn are expected to increase a company’s net income, and increase shareholder value of the company by adding to a company’s equity.