TEST BANK for Management and Cost Accounting 11th Edition by Mike Tayles & Colin Drury. by digitaldownload87

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Chapter 01_11e Indicate the answer choice that best completes the statement or answers the question. 1. The planning process includes a. setting objectives. b. identifying means of achieving the objectives. c. making decisions. d. all of the above. 2. World-class companies must continuously struggle to improve performance in the dimensions of a. price/cost. b. service. c. quality. d. all of the above. 3. Total quality management emphasizes a. zero defects. b. continual improvement. c. elimination of waste. d. all of the above. 4. Management accounting is concerned with which kind of decision? a. Product costing and pricing b. Continuous operational improvement c. Financial control d. All of the above 5. The primary objective of management accounting is a. to provide shareholders and potential investors with useful information for decision-making. b. to provide banks and other creditors with information useful in making credit decisions. c. to provide management with information useful for planning and control of operations. d. to provide the relevant taxation authorities with information about taxable income. 6. Which of the following does NOT describe management accounting? a. Evaluation of segments or products within the firm b. Emphasis on the future c. Externally focused d. Detailed information 7. Setting the selling price of a company's product is an example of a. planning. b. control. c. decision-making. d. all of the above. Copyright Cengage Learning. Powered by Cognero.

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Chapter 01_11e 8. Management accounting and financial accounting differ in that management accounting information is prepared a. following prescribed rules. b. using whatever methods the company finds beneficial. c. for shareholders. d. to summarize the whole company with little detail. 9. Improvement in time performance is most likely NOT enhanced by a. redesign of products. b. adding processes in production. c. eliminating waste. d. eliminating non-value-added activities. 10. The monitoring of a plan's implementation is called a. planning. b. controlling. c. decision-making. d. budgeting. 11. Monitoring the number of defects produced is an example of the management function of a. planning. b. control. c. decision-making. d. both planning and decision-making. 12. Continuous improvement is NOT a. critical in a dynamic environment. b. important to finding and maintaining a competitive advantage. c. an effort to find ways to increase overall efficiency, improve quality and reduce costs. d. a responsibility of managers in world-class organizations. 13. Factors that have led to a global market for manufacturing and service firms are a. improved transportation and communications systems. b. improved telemarketing and communications. c. improved distribution and transportation systems. d. None of these factors have contributed. 14. Which of the following statements correctly distinguishes between financial and management accounting? a. Management accounting reports on the whole organization. b. Financial accounting is oriented toward the future. c. Financial accounting is primarily concerned with providing information for internal users. d. Management accounting is oriented more toward the planning and control aspects of management.

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Chapter 01_11e 15. In resolving an ethical conflict, which of the following would never be appropriate? a. Discussing the matter with the chief executive officer b. Discussing the matter with an external member of the board of directors c. Taking the matter to the press where there is no legal requirement d. Resigning from the position because of a conflict 16. Comparing actual quality costs with planned quality costs is an example of a. planning. b. controlling. c. performance evaluation. d. both controlling and performance evaluation. 17. Evaluating the performance of a segment of the company is an example of a. planning. b. control. c. internal auditing. d. both planning and internal auditing. 18. The development of IT has allowed management accountants to a. focus on the interpretation of information. b. become an adviser to business. c. provide business support. d. all of the above. 19. Which of the following statements most accurately describes an effect of employee empowerment? a. Employee empowerment reduces the cost of implementing decisions. b. Employee empowerment decreases the speed in which decisions are made. c. Employee empowerment leads to an increased number of corporate staff positions. d. Employee empowerment places greater emphasis on decisions made by upper management. 20. Which of the following activities is NOT associated with the financial accounting information system? a. Reporting on the cost of quality b. Reporting to the shareholders c. Preparing reports for the tax authorities d. Preparing a statement of cash flows 21. Competitive advantage is established by a. providing more customer products than competitors. b. providing better quality than competitors. c. providing greater customer value for less cost than competitors. d. providing greater efficiencies than competitors.

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Chapter 01_11e 22. ____ is devoted to providing information for external users. a. Management accounting b. Financial accounting c. Internal accounting d. Cost accounting 23. Setting the company's profit targets for the upcoming year is an example of the management function of a. planning. b. control. c. variance analysis. d. internal auditing. 24. Which of the following statements is NOT true about world-class firms? a. World-class firms are firms that are poor in customer support. b. World-class firms know their market and their products. c. World-class firms strive continually to improve product design, manufacture, and delivery. d. World-class firms can compete with the best of the best in a global environment. 25. Investigating production variances and adjusting the production process is an example of a. planning. b. control. c. internal auditing. d. both planning and internal auditing. 26. Accounting a. always has an external orientation. b. always has an internal orientation. c. information assists in planning and controlling. d. terms serve as a model of the organization. 27. An important role for management accounting in light of the development of IT is a. ensuring that information is only accessible by management accountants. b. ensuring management have all information available. c. ensuring management are reliant on management accountants. d. ensuring information for management adds value. 28. Management accounting reports are prepared a. to meet the needs of decision-makers within the firm. b. whenever shareholders request them. c. according to guidelines prepared by the shares and Financial Services Authority. d. according to financial accounting standards.

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Chapter 01_11e 29. To compete on the basis of price, the seller must carefully manage a. cost. b. service. c. quality. d. none of the above. 30. The setting of objectives and the identification of methods to achieve those objectives is called a. planning. b. controlling. c. performance evaluation. d. decision-making. 31. Principles of personal ethical behaviour that are essential to an ethical life include a. integrity. b. respect for others. c. accountability. d. all of these. 32. Developing a company strategy for responding to anticipated new markets is an example of a. planning. b. control. c. decision-making. d. all of the above. 33. Which of the following costing activities is associated with the financial accounting system? a. Determining the cost of a department b. Determining the cost of goods sold for financial statements c. Preparing budgets d. Determining the cost of a customer 34. Which of the following emerging themes in cost accounting deals with managers striving to create an environment that will enable workers to manufacture perfect (zero-defect) products? a. Advances in information technology b. Time as a competitive element c. Global competition d. Total quality management 35. Determining the bid your company should submit on a construction contract is an example of a. planning. b. control. c. decision-making. d. both planning and control.

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Chapter 01_11e 36. Which of the following characteristics does NOT pertain to management accounting? a. Provides information and estimates about future activity b. Generates specific-purpose financial statements and reports c. Provides financial and operating data multidisciplinary in scope d. Has externally imposed standards 37. The overall objective of accounting information systems is to a. provide information to users. b. manage the organization. c. prepare financial reports. d. report to the government. 38. Management accounting is primarily concerned with a. providing investors with useful information for valuing securities. b. providing creditors information on the status of their loans. c. providing managers with relevant information to help achieve organizational goals. d. providing the relevant taxation authorities with information to determine the amount of taxes owed. 39. Management accounting is the branch of accounting concerned with reporting to a. internal managers. b. shareholders. c. the government. d. bankers. 40. The potential to influence and enhance management accounting information by revealing patterns and trends is best described as a. Internet of Things. b. artificial intelligence. c. big data. d. internet commerce. 41. Which one of the following statements about ethical behaviour is true? a. Ethical behaviour is not guided by well-defined rules and is often subjective. b. Ethical behaviour is best described as doing actions that are permitted by law. c. Ethical behaviour always involves choosing between actions that are clearly right or wrong. d. Ethical behaviour is best guided by a policy of placing corporate performance above individual ends. 42. The formulation of a scheme or program for the accomplishment of a specific purpose or goal is referred to as a. controlling. b. motivating. c. organizing. d. planning.

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Chapter 01_11e 43. Financial accounting information is least useful in providing a. information for stating corporate wide goals. b. information for internal decision-makers. c. periodic reports for shareholders. d. aggregate information about an organization's assets, obligations and performance. 44. Cost accounting a. is concerned with assigning costs to various cost objects. b. attempts to satisfy the costing objectives of both financial accounting and management accounting. c. provides cost information that supports planning, controlling, and decision-making. d. All of the above descriptions are true. 45. One advantage of employee empowerment is a. it frees up some of the time of upper management for more strategic decision-making. b. workers can improve production processes in a timely manner. c. employees closest to the work can provide valuable input in increasing efficiency. d. all of the above are advantages 46. Management accounting a. provides a framework to evaluate information in light of an organization's goals. b. provides relevant information to managers. c. provides relevant information to meet specific needs of persons inside the organization. d. all of the above 47. Why has time become such an important factor in competition?

48. Give some examples of reporting feedback that will assist in continuous improvement of a dry cleaning company.

49. Describe a cost management information system, its objectives and major subsystems.

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Chapter 01_11e 50. Personal computers significantly increase a manager's capabilities to process and use accounting information. Do you agree? Explain.

51. Describe the connection between planning, controlling and feedback.

52. What is customer orientation? Why is it important in a global environment? What role does cost management play in serving customers?

53. Briefly discuss the differences between financial and management accounting.

54. Identify and discuss the emerging themes that are affecting the way cost accounting is practised.

55. Identify the trends impacting management accounting and discuss the implications for management accounting.

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Chapter 01_11e Answer Key 1. d 2. d 3. d 4. d 5. c 6. c 7. c 8. b 9. b 10. b 11. b 12. b 13. a 14. d 15. c 16. d 17. b 18. d 19. a 20. a 21. c 22. b 23. a 24. a 25. b 26. c

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Chapter 01_11e 27. d 28. a 29. a 30. a 31. d 32. a 33. b 34. d 35. c 36. d 37. a 38. c 39. a 40. c 41. a 42. d 43. b 44. d 45. d 46. d 47. Reducing the time that it takes to act means that companies are able to respond to customers and suppliers more quickly. It fosters adaptability and the ability to respond to changing demands. Reducing time is accomplished by reducing waste and non-value-added activities. Reducing activities and waste lowers cost and builds competitive advantage. 48. A dry cleaner's will be interested in monitoring all aspects of performance. It may prepare performance reports on materials and labour usage, as well as on meeting revenue targets. It will want to keep track of things important to customers, turnaround time, customer satisfaction, types of complaints and requests for auxiliary services (i.e., delivery and tailoring). It may keep records about the characteristics of customers (i.e., profession, residence, age) to better understand their market. It will be interested in efficiency and productivity of labour and equipment. It might monitor the usage of capacity. It will be interested in reporting on all aspects of performance.

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Chapter 01_11e 49. The cost management information system is an accounting information subsystem that is primarily concerned with producing outputs for internal users using inputs and processes needed to satisfy management objectives. The objectives are as follows: To provide information for costing out services, products and other objects of interest to management. 2. To provide information for planning and control. 3. To provide information for decision-making. The major subsystems of a cost management information system are the cost accounting information system and the operational control information system. 1.

50. Yes. Personal computers allow managers to access accounting data and to build their own reports and to perform many of their own analyses. 51. Planning establishes performance standards, feedback compares actual performance with planned performance, and control uses feedback to evaluate deviations from plans. 52. Organizations are concerned with the importance and value that customers have for their processes, activities, products and services. Firms want to deliver value to customers in order to keep them and to attract new customers in an increasingly competitive global environment. Managing activities and costs is a critical component of managing the value chain. 53. Management accounting differs from financial accounting in the following major ways: (1) an internal focus, (2) emphasis on the future, (3) freedom from GAAP and other mandatory rules, (4) multidisciplinary and broader in scope, (5) evaluates individual segments within the firm, and (6) provides more detailed information. 54. Seven emerging themes affecting cost element accounting are as follows: customer orientation, total quality management, time as a competitive factor, advances in information technology, advances in the manufacturing environment, service industry growth and global competition. Customer orientation, total quality management and time as a competitive factor require the accountant to create and track nonfinancial measures of customer satisfaction such as quality improvement and responsiveness. Advances in information technology have led to the creation of relationship databases that allow a variety of users to develop their own reports based on their particular needs. Advances in the manufacturing environment are characterized by activity-based costing and the emergence of the JIT philosophy. Service industry growth has led to the need for increased management accounting information to improve productivity and quality. Finally, global competition means that companies are now competing with the best of the best. Accurate, timely, and relevant accounting data are crucial in appropriately managing cost. 55. Changes in the manufacturing environment, brought about by the implementation of JIT manufacturing, increasing quality requirements, product diversity, diminishing product life cycles, automation and advances in information technology, are having a significant influence on the management accounting environment. Many traditional management accounting practices will be altered because of the revolution taking place among many manufacturing firms. Deregulation and growth in the service sector of our economy are also increasing the demand for management accounting practices.

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Chapter 02_11e Indicate the answer choice that best completes the statement or answers the question. 1. The direct material cost is £10,000 when 2,000 units are produced. What is the direct material cost for 2,500 units produced? a. £10,000 b. £8,000 c. £15,000 d. £12,500 2. Harry has just received his bachelor's degree and is considering two alternatives. (1) He could obtain an entry-level accounting position paying £30,000 per year. (2) He could obtain his master's degree with one more year of study and work part-time for £8,000 per year. The opportunity cost associated with Harry obtaining his master's degree is a. £0. b. £22,000. c. £30,000. d. £38,000. 3. All of Jill Enterprise's operations are housed in one building with the costs of occupying the building accumulated in a separate account. The total costs incurred in May amounted to £24,000. The company allocates these costs on the basis of square feet of floor space occupied. Administrative offices, sales offices, and factory operations occupy 9,000, 6,000 and 30,000 square feet, respectively. How much will be classified as a product cost for May? a. £4,800 b. £3,200 c. £16,000 d. £24,000 4. Which of the following costs is a variable cost? a. Supervisors' salaries b. Research and development c. Materials used in production d. Rent 5. Which of the following cost behaviour patterns are unrelated to unit activity? a. Fixed costs b. Variable costs c. Step costs d. Mixed costs

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Chapter 02_11e 6. Which of the following costs would be classified as fixed costs with respect to volume? a. The salary of the manager of the Research and Development Department b. The cost of a copy machine in the Human Resource Department c. The property taxes on the manufacturing facility d. All of the above 7. Fixed cost per unit is £9 when 20,000 units are produced and £6 when 30,000 units are produced. What is the total fixed cost when nothing is produced? a. £120,000 b. £270,000 c. £15 d. £180,000 8. Direct materials are an example of a a. fixed cost. b. variable cost. c. step cost. d. mixed cost. 9. Which of the following costs is a period cost for a manufacturing company? a. Accountant's salary b. Wages of machine operators c. Insurance on factory equipment d. Fringe benefits on factory employees 10. Product costs are converted from cost to expense when a. units are completed. b. materials are purchased. c. units are sold. d. materials are requisitioned. 11. Whether a cost is fixed or variable depends on the time horizon. In the long run, all costs are a. fixed. b. variable. c. mixed. d. step. 12. Which of the following costs incurred by a chair manufacturer would be traced to the product cost through direct tracing? a. The depreciation on factory equipment b. The supervisor's salary c. The insurance on the factory building d. The woodmaker's salary Copyright Cengage Learning. Powered by Cognero.

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Chapter 02_11e 13. The direct costs of operating a university computer centre would NOT include a. rent paid for computers. b. a fair share of university utilities. c. paper used by the centre. d. computer consultants' salaries. 14. Sunk costs a. are future costs that have no benefit. b. are relevant costs that have only short-run benefits. c. are target costs. d. cannot be avoided. 15. Indirect costs are usually allocated rather than traced to cost objects because a. allocation is required by external reporting requirements. b. overall accuracy is improved by allocation. c. no causal relationship exists between indirect costs and the cost object. d. allocation is more convenient than tracing. 16. Which of the following costs is an example of product costs? a. Selling commissions b. Non-factory office salaries c. Direct materials d. Advertising expense 17. TEK, Inc., is considering whether to replace a production machine with a newer model of the same machine. If TEK keeps the old machine, the trade-in value of the old equipment is an example of a(n) a. sunk cost. b. opportunity cost. c. avoidable cost. d. imputed cost. 18. Which of the following items would NOT be classified as part of factory overhead of a firm that makes sailboats? a. Factory supplies used b. Canvas used in sail c. Depreciation of factory buildings d. Indirect materials 19. Unit costs are critical for a. valuing inventory. b. determining net income. c. decisions to enter a new product line. d. all of the above. Copyright Cengage Learning. Powered by Cognero.

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Chapter 02_11e 20. Which of the following statements is TRUE about fixed and variable costs? a. Both costs are constant when considered on a per-unit basis. b. Both costs are constant when considered on a total basis. c. Fixed costs are constant in total and variable costs are constant per unit. d. Variable costs are constant in total and fixed costs are constant per unit. 21. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of the following costs would be represented by a line that starts at the origin and reaches a maximum value and beyond the point that the line becomes parallel to the horizontal axis? a. Total direct material costs b. A consultant paid £100 per hour with a maximum fee of £2,000 c. Employees who are paid £15 per hour and guaranteed a minimum weekly wage of £300 d. Rent on exhibit space at a convention 22. Which of the following is an example of a step-fixed cost? a. Cost of disposable surgical scissors, which are purchased in increments of 100 b. Cost of soaking solution to clean jewellery (each jar can soak 50 rings before losing effectiveness) c. Cost of tuition at £300 per credit hour up to 15 credit hours (hours taken in excess of 15 hours are free) d. Cost of disposable gowns used by patients in a hospital 23. Which of the following costs is an indirect product cost? a. Property taxes on plant facilities b. Wages of assembly workers c. Materials used d. President's salary 24. Which of the following is an example of a possible cost object? a. A product b. A customer c. A department d. All of these could be possible cost objects. 25. Which of the following is an example of a variable cost? a. Insurance on the production equipment b. Direct materials c. The production supervisor's salary d. Depreciation of the factory building 26. Selling and administrative costs are classified as a. product costs. b. conversion costs. c. period costs. d. factory overhead. Copyright Cengage Learning. Powered by Cognero.

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Chapter 02_11e 27. Prime product costs include a. only factory overhead. b. only direct labour. c. direct labour and factory overhead. d. direct materials and direct labour. 28. As the volume of activity increases within the relevant range, the variable cost per unit a. decreases. b. decreases at first, then increases. c. remains the same. d. increases. 29. ____ are expensed in the period in which they are incurred. a. Direct materials b. Product costs c. Factory overhead d. Non-production costs 30. Which statement describes step-cost behaviour? a. Discontinuous b. Displays a constant level of cost for a range of output and then jumps to a higher level at some point c. Must be purchased in chunks d. All of the above describe step-cost behaviour. 31. An example of a period cost is a. insurance on factory equipment. b. chief executive’s salary. c. property taxes on factory building. d. wages of factory custodians. 32. All of the following are product costs EXCEPT a. direct materials. b. direct labour. c. manufacturing overhead. d. selling and administrative costs. e. none of the above. 33. Which of the following is a period cost? a. The production supervisor's salary b. Direct labour c. Property taxes on the office building d. Property taxes on the production facilities

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Chapter 02_11e 34. Adams Ltd. rents a truck for a flat fee plus an additional charge per mile. What type of cost is the rent? a. Fixed cost b. Mixed cost c. Variable cost d. Step cost 35. Which of the following costs incurred by a bus manufacturer would NOT be directly attributable to the finished product? a. The wages paid to assembly-line production workers b. The tyres for buses c. The windshields for buses d. The depreciation on factory building 36. If total warehousing cost for the year amounts to £350,000, and 40 per cent of the warehousing activity is associated with finished goods and 60 per cent with direct materials, how much of the cost would be charged as a product cost? a. £70,000 b. £140,000 c. £210,000 d. £350,000 37. Mixed costs contain both a. product and period costs. b. fixed and variable costs. c. direct and indirect costs. d. controllable and noncontrollable costs. 38. ____ are expensed in the period in which they are incurred. a. Direct materials b. Product costs c. Non-inventoriable costs d. Inventoriable costs 39. An equipment lease that specifies a payment of £5,000 per month plus £8 per machine hour used is an example of a a. fixed cost. b. variable cost. c. step cost. d. mixed cost.

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Chapter 02_11e 40. Mulholland Company manufactures various wooden furniture products. If the cost object is a product, a chair, what costs would be considered direct? a. Manufacturing supervisor's salary b. Depreciation on the factory building c. Salary of the worker that glues the legs to the seat of the chair d. Insurance on the factory 41. Salaries paid to shift supervisors is an example of a a. step-variable cost. b. step-fixed cost. c. variable cost. d. mixed cost. 42. Which item is not an example of a sunk cost? a. Materials needed for production b. Purchase cost of machinery c. Depreciation d. All are sunk costs. 43. In a traditional manufacturing company, product costs include a. direct materials only. b. direct materials, direct labour and factory overhead. c. direct materials and direct labour only. d. direct labour only. 44. Which of the following costs is NOT recorded in the company's accounting system? a. Sunk cost b. Opportunity cost c. Direct cost d. Indirect cost 45. Which of the following costs incurred by a furniture manufacturer would be a product cost? a. Lumber b. Office salaries c. Commissions paid to sales staff d. Controller's salary 46. Which of the following costs would be classified as variable costs with respect to volume? a. Property taxes on the manufacturing facility b. The wheels on an automobile c. The cost of installing production equipment d. All of the above

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Chapter 02_11e 47. A cost used up in the production of revenues is a(n) a. unexpired cost. b. expense. c. loss. d. asset. 48. Direct costs a. can be assigned to cost objects in an economically feasible way. b. are typically assigned to cost objects using a cause-and-effect relationship. c. result in more accurate cost assignments. d. do all of the above. 49. Which of the following is a product cost? a. Advertising expenditures b. Insurance on the office buildings c. Depreciation of the salesmen's cars d. Depreciation of the production facilities 50. Which of the following is an example of a fixed cost? a. Power cost in the machining department b. Wood in the manufacture of furniture c. Labour cost paid on a piece basis d. Lease payments on machinery 51. Which of the following costs would be included as part of factory overhead? a. Depreciation of plant equipment b. Paint used for product finish c. Depreciation on the corporation's office building d. Paper used in the production of books 52. Which of the following costs is NOT a product cost? a. Rent on an office building b. Indirect labour c. Repairs on manufacturing equipment d. Steel used in inventory items produced

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Chapter 02_11e 53. Holly Ltd. has the following costs for 1,000 units: Total Cost Direct materials £ 1,500 Direct labour 7,500 Depreciation on building 30,000 What is the total amount of direct materials for 100 units? a. £1.50 b. £3.00 c. £150.00 d. £225.00

Cost per Unit £ 1.50 7.50 30.00

54. Assuming costs are represented on the vertical axis and volume of activity on the horizontal axis, which of the following costs would be represented by a line that is parallel to the horizontal axis? a. Total direct material costs b. A consultant paid £75 per hour with a maximum fee of £1,200 c. Employees who are paid £10 per hour and guaranteed a minimum weekly wage of £200 d. Rent on exhibit space at a convention 55. Which one of the following sentences about step costs is true? a. Step costs increase with each additional unit produced. b. Step costs have no relation to number of units produced. c. Step costs are constant within certain ranges of activity but differ outside those ranges of activity. d. Step costs are variable within narrowly defined ranges of activity, but constant over wider ranges of activity. 56. Variable costs, a. in total, remain constant within a relevant range. b. on a per unit basis, are constant as activity increases or decreases. c. on a per unit basis, decreases as activity decreases. d. in total, decrease when activity increases. 57. If production volume increases from 8,000 to 10,000 units, a. total costs will increase by 20 per cent. b. total costs will increase by 25 per cent. c. total variable costs will increase by 25 per cent. d. mixed and variable costs will increase by 25 per cent. 58. Direct costs a. are incurred for the benefit of the business as a whole. b. would continue even if a particular product were discontinued. c. can be assigned to product only by a process of allocation. d. are those costs that can be easily and accurately traced to a cost objective.

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Chapter 02_11e 59. Mixed costs a. are step costs. b. in total, remain constant within a relevant range. c. have a fixed and variable component. d. on a per unit basis, are constant as activity increases or decreases. 60. A supervisor's salary of £2,000 per month is an example of a a. fixed cost. b. variable cost. c. step cost. d. mixed cost. 61. The wages of a production equipment operator would be classified as a. direct materials. b. direct labour. c. manufacturing overhead. d. selling and administrative costs. 62. An equipment lease that specifies payment of £1,000 per month plus £5 per machine hour used is an example of a a. fixed cost. b. variable cost. c. mixed cost. d. step cost.

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Chapter 02_11e 63. Classify each of the following costs as variable, fixed, mixed, or step by writing an X under one of the following headings (Sales volume is the cost driver). Variable

Fixed

Mixed

Step

1.Total selling and administrative costs 2.Salaries of supervisors of five employees 3.Raw materials used in production 4.Power consumption in a restaurant 5.Cost of goods sold in a bookstore Salaries of employees who handle 20 claims 6. per month 7.Pulpwood in a paper mill Salaries of two secretaries in the corporate 8. office 9.Total current manufacturing costs The cost of an automobile rented on the basis 10. of a daily charge plus £.30 per mile

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Chapter 02_11e 64. The Penang Company has the following information available regarding costs at various levels of monthly production: Production volume Direct materials Direct labour Indirect materials Supervisors' salaries Depreciation on plant and equipment Maintenance Utilities Insurance on plant and equipment Property taxes on plant and equipment Total

7,000

10,000

£ 70,000 56,000 21,000 12,000 10,000 32,000 15,000 1,600 ___2,000 £219,600

£100,000 80,000 30,000 12,000 10,000 44,000 21,000 1,600 ___2,000 £300,600

Required: a. Identify each cost as being variable, fixed, or mixed by writing the name of each cost under one of the following headings: Variable costs, Fixed costs, and Mixed costs b. Develop an equation for total monthly production costs. c. Predict total costs for a monthly production volume of 8,000 units.

65. Classify the following costs incurred by a step railing manufacturing company as direct materials, direct labour, factory overhead, or period costs: a. b. c. d. e. f. g. h. i. j.

Wages paid to production workers Utilities in the office Depreciation on machinery in plant Steel Accountant's salary Rent on factory building Rent on office equipment Maintenance workers' wages Utilities in the plant Maintenance on office equipment

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Chapter 02_11e Answer Key 1. d 2. c 3. c 4. c 5. a 6. d 7. d 8. b 9. a 10. c 11. b 12. d 13. b 14. d 15. c 16. c 17. b 18. b 19. d 20. c 21. b 22. a 23. a 24. d 25. b 26. c

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Chapter 02_11e 27. d 28. c 29. d 30. d 31. b 32. d 33. c 34. b 35. d 36. c 37. b 38. c 39. d 40. c 41. b 42. a 43. b 44. b 45. a 46. b 47. b 48. d 49. d 50. d 51. a 52. a 53. c 54. d Copyright Cengage Learning. Powered by Cognero.

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Chapter 02_11e 55. c 56. b 57. c 58. d 59. c 60. a 61. b 62. d 63. Variable 1.Total selling and administrative costs 2.Salaries of supervisors of five employees 3.Raw materials used in production 4.Power consumption in a restaurant 5.Cost of goods sold in a bookstore Salaries of employees who handle 20 claims 6. per month 7.Pulpwood in a paper mill Salaries of two secretaries in the corporate 8. office 9.Total current manufacturing costs The cost of an automobile rented on the basis 10. of a daily charge plus £.30 per mile

Fixed

Mixed X

Step X

X X X X X X X X

64. a.

Variable Costs Direct materials Direct labour Indirect materials

Fixed Costs Supervisors' salaries Depreciation Insurance Property taxes

Variable costs = (£300,600 - £219,600)/(10,000 - 7,000) = £27.00 Fixed costs = £300,600 - (£27.00 × 10,000) = £30,600 per month Total monthly production costs = £30,600 + £27.00(# of units)

Total costs = £30,600 + (£27.00 × 8,000) = £246,600

Mixed Costs Maintenance Utilities

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Chapter 02_11e 65. a. b. c. d. e.

Direct labour Period Factory overhead Direct materials Period

f. g. h. i. j.

Factory overhead Period Factory overhead Factory overhead Period

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Chapter 03_11e Indicate the answer choice that best completes the statement or answers the question. 1. Quint Manufacturing uses an activity-based costing system. The company produces Model 1 and Model 2. Information relating to the two products is as follows:

Units produced Machine hours Direct labour hours Material handling (number of moves) Setups The following costs are reported:

Model 1 24,000 7,500 8,000 4,000 5,000

Material handling Labour-related overhead Setups

Model 2 30,000 8,500 12,000 6,000 7,000

£ 40,000 120,000 60,000

Labour-related overhead costs assigned to Model 1 are a. £60,000. b. £58,000. c. £54,400. d. £48,000. 2. The optimal level in the trade-off between measurement and error costs is when a. measurement costs are greater than error costs. b. measurement costs are less than error costs. c. measurement costs equal error costs. d. the total of measurement costs and error costs are maximized. 3. When actual overhead cost exceeds overhead applied to production, a. over-absorbed overhead is added to cost of goods sold. b. over-absorbed overhead is deducted from cost of goods sold. c. under-absorbed overhead is added to cost of goods sold. d. under-absorbed overhead is deducted from cost of goods sold. 4. Which of the following methods of assigning costs is based on convenience or some assumed linkage, and reduces the overall accuracy of the cost assignments? a. Direct tracing b. Cost driver tracing c. Allocation d. All of the above

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Chapter 03_11e 5. The calculation of unit costs is important for a. inventory valuation. b. income determination. c. pricing. d. all of the above. 6. Granite, Inc., has identified the following overhead costs and cost drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost Cost Driver £100,000Number of setups 40,000Number of orders 200,000Machine hours 20,000Kilowatt hours

Expected Quantity 500 3,200 4,000 80,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job 500 £1,500 £1,400 100 100 2 8 40 60

Job 501 £2,000 £2,400 160 160 8 10 50 100

The company's normal activity is 4,000 direct labour hours. If Granite's direct labour hours are used to assign overhead, the unit cost for Job 500 would be a. £104. b. £105. c. £114. d. £119.

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Chapter 03_11e 7. The Xiang plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance Inspection

£50,000 75,000

The plant currently applies overhead using direct labour hours and expected capacity of 50,000 direct labour hours. The following data have been assembled for use in developing a bid for a proposed job: Direct materials Direct labour Machine hours Number of inspections Direct labour hours

£500 £2,000 500 4 800

Total expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is 1,500. Using activity-based costing and the appropriate activity drivers, the total cost of the potential job would be a. £1,200. b. £1,800. c. £3,700. d. £3,875. 8. Which of the following is a key consideration in selecting an allocation base? a. The allocation base should have an indirect association with the cost objective. b. The allocation base should be difficult to measure. c. There should be logical association between the allocation base and the incidence of costs. d. The allocation base should be out of the control of management. 9. Which of the following accurately describes advantages and disadvantages of employing a system of allocation that uses a plant-wide rate? a. The plant-wide rate approach is the simplest to apply, but it is also the most costly to implement. b. The plant-wide rate approach is the simplest to apply, but most likely provides the least accurate product costs. c. The plant-wide rate may be straightforward, but it is not appropriate for small businesses that offer a single service or product. d. The plant-wide rate really offers no advantage whatsoever.

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Chapter 03_11e 10. Granite, Inc., has identified the following overhead costs and cost drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost Cost Driver £100,000Number of setups 40,000Number of orders 200,000Machine hours 20,000Kilowatt hours

Expected Quantity 500 3,200 4,000 80,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job 500 £1,500 £1,400 100 100 2 8 40 60

Job 501 £2,000 £2,400 160 160 8 10 50 100

The company's normal activity is 4,000 direct labour hours. If Granite, Inc., used activity-based cost drivers to allocate overhead costs, the total cost of Job 500 would be a. £5,715. b. £5,667. c. £5,415. d. £5,315. 11. Which of the following departments is NOT a support department? a. Food services b. Bottling c. Health services d. Security

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Chapter 03_11e 12. Granite, Inc., has identified the following overhead costs and cost drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost Cost Driver £100,000Number of setups 40,000Number of orders 200,000Machine hours 20,000Kilowatt hours

Expected Quantity 500 3,200 4,000 80,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job 500 £1,500 £1,400 100 100 2 8 40 60

Job 501 £2,000 £2,400 160 160 8 10 50 100

The company's normal activity is 4,000 direct labour hours. If Granite, Inc., used activity-based cost drivers to allocate overhead costs, the unit cost for Job 500 would be a. £53.15. b. £54.15. c. £56.67. d. £57.15.

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Chapter 03_11e 13. The Xiang plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance Inspection

£50,000 75,000

£500 £2,000 500 4 800

Total expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is 1,500. Using direct labour hours to assign overhead, the total cost of the potential job would be a. £2,500. b. £5,500. c. £4,000. d. £4,500.

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Chapter 03_11e 14. Ray Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance Materials handling Setups Inspection

£510,000 250,000 60,000 210,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 100,000 direct labour hours are budgeted. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 percent. Estimates for the proposed job are as follows: Direct materials Direct labour (8,000 hours) Number of materials moves Number of inspections Number of setups Number of machine hours

£30,000 £24,000 100 120 24 4,000

The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours Material moves Setups Quality inspections

60,000 20,000 3,000 12,000

If Ray Manufacturing used activity-based cost drivers to assign overhead and the company's bid is full cost plus 10 per cent, the company's bid would be a. £108,804. b. £105,413. c. £103,235. d. £101,013. 15. A possible causal factor to use when allocating cafeteria costs would be a. number of square feet. b. number of direct labour hours. c. number of employees. d. appraised value of square footage.

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Chapter 03_11e 16. Zipp Company manufactures two products (X and Y). The overhead costs (£84 000) have been divided into three cost pools that use the following activity cost drivers: Product X Y Cost per pool

Number of Setups 10 10 £9,000

Machine Hours 500 2,000 £60,000

Packing Orders 75 175 £15,000

What is the allocation rate per packing order using activity-based costing? a. £15,000 b. £60 c. £7,500 d. £200 17. Examples of support departments include all of the following EXCEPT a. maintenance. b. personnel. c. machining. d. data processing.

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Chapter 03_11e 18. Winter Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are listed as follows: Maintenance Materials handling Setups Inspection

£255,000 125,000 30,000 105,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. 100 000 direct labour hours are budgeted for next year. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 10 per cent. Estimates for the proposed job are as follows: Direct materials Direct labour (8,000 hours) Number of material moves Number of inspections Number of setups Number of machine hours

£15,000 £12,000 100 120 24 4,000

The plant manager has heard of a new way of applying overhead that uses cost pools and activity cost drivers. Expected activity for the four activity drivers that would be used are: Machine hours Material moves Setups Quality inspections

60,000 20,000 3,000 12,000

What is the total cost of the proposed job if Winter Manufacturing uses direct labour hours as its only activity driver? a. £72,000 b. £68,200 c. £56,200 d. £53,200

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Chapter 03_11e 19. Quint Manufacturing uses an activity-based costing system. The company produces Model 1 and Model 2. Information relating to the two products is as follows:

Units produced Machine hours Direct labour hours Material handling (number of moves) Setups The following costs are reported:

Model 1 24,000 7,500 8,000 4,000 5,000

Material handling Labour-related overhead Setups

Model 2 30,000 8,500 12,000 6,000 7,000

£ 40,000 120,000 60,000

Setup costs assigned to Model 2 are a. £36,000. b. £35,000. c. £28,000. d. £25,000. 20. Traditional-based product costing uses which of the following procedures? a. Overhead costs are traced to departments, then costs are traced to products. b. Overhead costs are traced to activities, then costs are traced to products. c. Overhead costs are traced directly to products. d. All overhead costs are expensed as incurred. 21. More accurate product costing information is produced by assigning costs using a. volume-based, plantwide rates. b. volume-based, departmental rates. c. activity-based pool rates. d. All of the above produce accurate product costing information. 22. An activity-based costing system uses which of the following procedures? a. Overhead costs are traced to departments, then costs are traced to products. b. Overhead costs are traced to activities, then costs are traced to products. c. Overhead costs are traced directly to products. d. All overhead costs are expensed as incurred. 23. ____ refers to the assignment of indirect costs to cost objects. a. Allocation b. Direct tracing c. Physical observation d. Cost management Copyright Cengage Learning. Powered by Cognero.

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Chapter 03_11e 24. Which of the following allocation methods fully recognizes services that support departments provide to each other? a. Direct method b. Sequential method c. Reciprocal method d. All of the above

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Chapter 03_11e 25. Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance Materials handling Setups Inspection

£120,000 18,000 16,000 60,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 20,000 direct labour hours are budgeted. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 15 per cent. Estimates for the proposed job are as follows: Direct materials Direct labour (600 hours) Number of materials moves Number of inspections Number of setups Number of machine hours

£2,000 £6,000 4 6 8 80

In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver-direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours Material moves Setups Quality inspections

5,000 600 200 1,000

If Wheat Manufacturing used direct labour hours as the cost driver and the company's bid is full cost plus 15 per cent, the company's bid would be a. £17,480. b. £16,583. c. £13,110. d. £12,765.

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Chapter 03_11e 26. Zang Manufacturing Company manufactures two products (A and B). The overhead costs (£58,000) have been divided into three cost pools that use the following activity cost drivers:

Product A B Cost per pool

Number of Orders 15 10

Number of Labour Transactions 50 150

Labour Hours 500 2,000

£10,000

£8,000

£40,000

What is the allocation rate per order using ABC? a. £10,000 b. £2,320 c. £400 d. £58,000 27. The Overdale plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance Inspection

£120,000 £200,000

The plant currently applies overhead using direct labour hours and expected capacity of 80,000 direct labour hours. The following data has been assembled for use in developing a bid for a proposed job: Direct materials Direct labour Machine hours Number of inspections Direct labour hours

£1,500 £5,000 400 6 750

Total expected machine hours for all jobs during the year are 40,000, and the total expected number of inspections is 2,500. Using activity-based costing and the appropriate cost drivers, the total cost of the potential job would be a. £9,230. b. £8,180. c. £2,250. d. £1,680. 28. Service departments a. are responsible for manufacturing the products sold to customers. b. work directly on the firm's products. c. provide services directly to customers. d. provide support services to the producing departments. Copyright Cengage Learning. Powered by Cognero.

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Chapter 03_11e 29. Examples of producing departments include all of the following EXCEPT a. mixing. b. molding. c. packaging. d. accounting. 30. Zipp Company manufactures two products (X and Y). The overhead costs (£84 000) have been divided into three cost pools that use the following activity cost drivers: Product X Y Cost per pool

Number of Setups 10 10 £9,000

Machine Hours 500 2,000 £60,000

Packing Orders 75 175 £15,000

What is the amount of overhead cost to be assigned to Product X using machine hours as the activity driver in an activity-based costing system? a. £12,000 b. £60,000 c. £48,000 d. £16,800 31. Which of the following principles should be applied when the step method of allocating service department costs is used? a. The sequence of allocation among departments should be randomly selected. b. The sequence of allocation among departments should proceed from the largest department as measured by total assets to the smallest. c. The sequence of allocation among departments should proceed from the largest provider of interdepartmental services to the smallest. d. All possible sequences of service department allocations should be computed. The sequence that provides the largest allocation of service costs should then be selected.

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Chapter 03_11e 32. Ray Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance Materials handling Setups Inspection

£510,000 250,000 60,000 210,000

£30,000 £24,000 100 120 24 4,000

60,000 20,000 3,000 12,000

If Ray Manufacturing used activity-based cost drivers to assign overhead, the total cost of the proposed job would be a. £98,913. b. £95,830. c. £93,850. d. £91,830.

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Chapter 03_11e 33. Staff Company allocates common Building Department costs to producing departments (P1 and P2) based on space occupied, and it allocates common Personnel Department costs based on the number of employees. Space occupancy and employee data are as follows: Building Personnel Dept. P1 Dept. P2 Space occupied 2,000 m. 10,000 m. 120,000 m. 70,000 m. Employees 6 10 80 50 If Staff Company uses the sequential allocation method and the support department with the highest percentage of interdepartmental services is allocated first, the ratio representing the portion of Personnel Department costs allocated to Department P2 is a. 50/146. b. 90/140. c. 50/140. d. 50/130.

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Chapter 03_11e 34. Ray Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance Materials handling Setups Inspection

£510,000 250,000 60,000 210,000

£30,000 £24,000 100 120 24 4,000

60,000 20,000 3,000 12,000

If Ray Manufacturing used activity-based cost drivers to assign overhead, the total amount of overhead allocated to the proposed job would be a. £37,830. b. £39,850. c. £41,830. d. £44,913. 35. Which of the following is a reason to accumulate and separately assign costs by departments? a. The company wants to reduce the complexity of its cost accounting system. b. The company is comprised of multiple departments, each of which exhibit unique cost behaviour patterns. c. The company wishes to implement an activity based costing system. d. The company has a large amount of capital invested in human resource training.

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Chapter 03_11e 36. The method of accounting for inventory that assigns all manufacturing costs to inventory is sometimes referred to as a. absorption costing. b. FIFO. c. the weighted average cost method. d. conversion costing. 37. ____ is (are) a method of allocating service department costs that give(s) partial recognition to interdepartmental services by using a methodology that allocates service department costs sequentially both to the remaining service departments and the producing departments. a. The direct method b. The step method c. The linear algebra method d. The direct and step methods 38. Which of the following characteristics is a consequence of the implementation of a plant-wide allocation rate? a. The uniqueness of individual departments is not reflected in the cost numbers. b. Allocations are first conducted among departments, and then aggregated for the plant as a whole. c. Downstream costs are not measured at all. d. Managers have absolutely no incentive to control costs. 39. Support department costs are accounted for in which one of the following ways? a. They are allocated directly to units of product. b. They are allocated to producing departments and then allocated to units of product. c. They are allocated to units of product and then allocated to the producing departments. d. They are expensed as incurred. 40. Although adding more activity cost pools to an activity-based costing system may improve the accuracy of product costing, this increase in accuracy must be judged against a. the cost of the product. b. the price of the product. c. the cost of developing and maintaining the additional cost pools. d. all of the above.

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Chapter 03_11e 41. Winter Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are listed as follows: Maintenance Materials handling Setups Inspection

£255,000 125,000 30,000 105,000

£15,000 £12,000 100 120 24 4,000

The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers/allocation bases. Expected activity for the four cost drivers that would be used are: Machine hours Material moves Setups Quality inspections

60,000 20,000 3,000 12,000

What is the amount of overhead allocated to the proposed job if Winter Manufacturing uses direct labour hours as its only cost driver? a. £41,200 b. £30,400 c. £30,000 d. £20,800

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Chapter 03_11e 42. Oaks Company has two support departments, Maintenance Department (MD) and Personnel Department (PD), and two producing departments, P1 and P2. The Maintenance Department costs of £30,000 are allocated on the basis of standard service used. The Personnel Department costs of £4,500 are allocated on the basis of number of employees. The direct costs of Departments P1 and P2 are £9,000 and £15,000, respectively. Data on standard service hours and number of employees are as follows:

Standard service hours used Number of employees

MD 100 10

PD 50 20

P1 300 90

P2 150 90

Direct labour hours 50 50 250 250 Using the sequential method, if the support department with the highest percentage of interdepartmental service is allocated first, the cost of the support departments allocated to Department P1 is a. £12,750. b. £24,000. c. £20,295. d. £21,750. 43. When applied overhead exceeds actual overhead cost, a. over-applied (absorbed) overhead is added to cost of goods sold. b. over-applied overhead is deducted from cost of goods sold. c. under-applied overhead is added to cost of goods sold. d. under-applied overhead is deducted from cost of goods sold. 44. Support departments a. are responsible for manufacturing the products sold to customers. b. work directly on the products of the firm. c. provide services directly to customers. d. provide essential services to the producing departments.

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Chapter 03_11e 45. The Overdale plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance Inspection

£120,000 £200,000

£1,500 £5,000 400 6 750

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Chapter 03_11e 46. Lyons, Inc., has identified the following overhead costs and activity drivers for next year: Overhead Item Expected Cost Activity Driver Setup costs £150,000 Number of setups Ordering costs 40,000 Number of orders Maintenance 200,000 Machine hours Power 20,000 Kilowatt hours The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours The company's normal activity is 20,000 direct labour hours.

Expected Qty. 1,200 10,000 16,000 100,000

Job XX £2,250 3,000 375 90 6 8 180 90

Job YY £2,500 1,875 300 110 8 15 150 120

Required: a. b. c.

Determine the unit cost for each job using direct labour hours to apply overhead. Determine the unit cost for each job using the four activity drivers. (Round amounts to 2 decimal places.) Which method produces the more accurate cost assignment? Why?

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Chapter 03_11e 47. Manchester Ltd. uses a job-order costing system and a predetermined overhead rate based on machine hours. At the beginning of the year, the company estimated manufacturing overhead for the year would be £135,000 and 9,000 machine hours would be used. The following information pertains to December of the current year: Job No. 380 Job No. 381 Job No. 382 Work in process, December 1 £8,000 £13,000 £19,000 December production activity: Materials requisitioned £2,000 £2,400 £3,600 Direct labour costs £1,200 £1,800 £2,000 Machine hours 400 700 900 Actual manufacturing overhead costs incurred in December were £31,000.

Totals £40,000 £8,000 £5,000 2,000

Required: a. b.

Compute the predetermined overhead application rate. Determine the total cost associated with each job.

48. The support departments typically found in manufacturing and nonmanufacturing organizations are as follows: Cafeteria Personnel Maintenance Purchasing Accounting Required: For each of the preceding support departments, indicate potential bases that could be used to allocate costs to the producing departments.

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Chapter 03_11e 49. In choosing a cost accounting system, the accountant must balance the total costs of implementing such systems. What costs must be balanced to determine total cost? How do traditional functional-based and activity-based cost systems balance the trade-offs?

50. Explain the advantage of using multiple overhead rates instead of a single plant-wide overhead rate to apply overhead.

51. Holbrook, Inc., has identified the following overhead costs and cost drivers for next year: Overhead Item Expected Cost Cost Driver Setup costs £960,000 Number of setups Ordering costs 160,000 Number of orders Maintenance 640,000 Machine hours Power 80,000 Kilowatt hours The following are two of the jobs completed during the year:

Prime costs Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours The company's normal activity is 40,000 direct labour hours.

Expected Quantity 4,800 20,000 64,000 200,000

Job 701 £25,000 650 180 12 16 360 180

Job 702 £18,000 500 220 15 30 300 650

Required: a. b. c.

Determine the unit cost for each job using direct labour hours to apply overhead. Determine the unit cost for each job using the four cost drivers. (Round amounts to two decimal places.) Which method produces the more accurate cost assignment? Why?

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Chapter 03_11e 52. Fox Company has two support departments (S1 and S2) and two producing departments (P1 and P2). Estimated direct costs and percentages of services used by these departments are as follows:

Support Dept.

S1 S1 S2

Direct costs Required: a. b.

£4,500

S2 20% £8,000

P1 10% £10,000

Used by Department P2 40% 50% 50% 30% £15,000

Prepare a schedule allocating the support department costs to the producing departments using the direct allocation method. Prepare a schedule allocating the support department costs to the producing departments using the sequential allocation method.

53. Explain the key considerations in establishing cost pools and in selecting an allocation base.

54. Describe several of the major differences between a traditional functional-based cost management system and an activity-based cost management system.

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Chapter 03_11e 55. The Jewell plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance Inspection

£360,000 750,000

The plant currently applies overhead using direct labour hours and expected capacity of 100,000 direct labour hours. The following data has been assembled for use in developing a bid for a proposed job. Bid prices are calculated as full manufacturing cost plus a 20 per cent mark-up. Direct materials Direct labour Machine hours Number of inspections Direct labour hours

£2,100 £5,625 450 4 550

Total expected machine hours for all jobs during the year is 60,000, and the total expected number of inspections is 4,000. Required: a. b.

Compute the total cost of the potential job using direct labour hours to assign overhead. Determine the bid price for the potential job. Compute the total cost of the job using activity-based costing and the appropriate activity drivers. Determine the bid price if activity-based costing is used. Prepare a memorandum to the plant manager recommending a bid price for the potential job. Support your recommendation by explaining which costing method best reflects the actual cost of the job.

56. Parkes Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance Materials handling Setups Inspection

£300,000 150,000 200,000 250,000

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Chapter 03_11e would result in new business in future years. Usually bids are based upon full manufacturing cost plus 25 per cent. Estimates for the proposed job are as follows: Direct materials Direct labour (1,500 hours) Number of materials moves Number of inspections Number of setups Number of machine hours

£20,000 £15,000 20 25 5 750

In the past, full manufacturing cost has been calculated by allocating overhead using a traditional volume-based cost driver system--direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours Material moves Setups Quality inspections

40,000 8,000 10,000 15,625

Required: a.

Determine the amount of overhead that would be allocated to the proposed job if direct labour hours are used as the cost driver. Determine the total cost of the proposed job. Determine the company's bid if the bid is based upon full manufacturing cost plus 25 per cent. Determine the amount of overhead that would be applied to the proposed project if activitybased costing is used. Determine the total cost of the proposed job if activity-based costing is used. Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 25 per cent. Which product costing method produces the more competitive bid?

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Chapter 03_11e 57. Gray Enterprises has two support departments (S1 and S2) and two producing departments (A and B). The distribution of services by the support departments is as follows: Services Provided to S2 A B S1 8% 74% 18% S2 21% 47% 32% Total department costs for the support and producing departments are as follows: Services Provided from

S1 S2 A B Required:

£58,000 124,000 712,000 568,000

Find the amount of total costs for A and B using the reciprocal method.

58. Describe the differences between support and producing departments. Give three examples of each.

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Chapter 03_11e 59. Hunter Company manufactures two products (XX and YY). The overhead costs have been divided into four cost pools that use the following activity drivers:

Product XX YY Cost per pool Required: a. b. c. d.

Number of Orders 60 20

Number of Setups 20 80

Number of Labour Transactions 50 70

Labour Hours 2 000 500

£16,000

£13,000

£2,400

£20,000

Compute the allocation rates for each of the activity drivers listed. Allocate the overhead costs to Products XX and YY using activity-based costing. Compute the overhead rate using labour hours under the traditional functional-based costing system. Allocate the overhead costs to Products XX and YY using the traditional functional-based costing system overhead rate calculated in part (c).

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Chapter 03_11e 60. Rounders Company used the following information when determining the appropriate overhead rates to use in its two production departments:

Budgeted overhead Budgeted activity: Direct labour hours (DLH) Machine hours (MH) Units projected

Fabrication £350,000

Assembly £500,000

14,000 20,000 7,000

12,500 25,000 4,000

£355,000

£505,000

13,500 19,000

13,000 27,000

Actual operating results were as follows: Actual overhead cost Actual activity: Direct labour hours (DLH) Machine hours (MH) Two of the products in the product line were as follows:

Prime costs Activity: Fabrication Assembly Units produced

Product 1 £900,000

Product 2 £1,200,000

5,000 DLH 9,000 MH 7,000

6,000 DLH 12,000 MH 4,000

Required: a. Assume that Rounders applies overhead using a plant-wide rate based on direct labour hours. Determine the unit cost of Products 1 and 2. b. Assume that Rounders uses direct labour hours to apply overhead in the Fabrication Department and machine hours to apply overhead in the Assembly Department. Determine the unit cost of Products 1 and 2.

61. Why is it important to have an accurate and reliable product costing system?

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Chapter 03_11e 62. Ernest, Inc., has identified the following overhead costs and cost drivers for next year: Overhead Item Expected Cost Cost Driver Setup costs £320,000 Number of setups Ordering costs 120,000 Number of orders Maintenance 480,000 Machine hours Power 40,000 Kilowatt hours The following are two of the jobs completed during the year:

Expected Quantity 4,000 20,000 24,000 160,000

Job 320 Job 321 Direct materials £8,000 £19,000 Direct labour £6,400 £12,000 Units completed 800 1 600 Direct labour hours 240 500 Number of setups 12 20 Number of orders 20 40 Machine hours 400 600 Kilowatt hours 280 400 The company's normal activity is 32,000 direct labour hours. (Round amounts to two decimal places.) Required: a. b. c.

Determine the unit cost for each job using direct labour hours to apply overhead. Determine the unit cost for each job using the four cost drivers. Which method produces the more accurate cost assignment? Why?

63. Explain the differences between direct assignment, driver assignments, and cost allocations.

64. Define the terms cost objectives, cost pools, and allocation bases.

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Chapter 03_11e 65. Compare/contrast cost assignment and cost allocation. Be sure to include direct assignment (tracing) and driver tracing in your discussion.

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Chapter 03_11e Answer Key 1. d 2. c 3. c 4. c 5. d 6. d 7. c 8. c 9. b 10. c 11. b 12. b 13. d 14. d 15. c 16. b 17. c 18. b 19. b 20. a 21. c 22. b 23. a 24. c 25. b 26. c

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Chapter 03_11e 27. b 28. d 29. d 30. a 31. c 32. d 33. c 34. a 35. b 36. a 37. b 38. a 39. b 40. c 41. a 42. d 43. b 44. d 45. a 46. a. Unit cost for Job XX: Unit cost for Job YY:

£18.92 £22.10

Direct materials Direct labour Overhead assigned: (£20.50* × 90) Total cost

Job XX £2,250 3,000 1,845 £7,095

Unit cost (£7,095/375)

£18.92 *(£150,000 + £40,000 + £200,000 + £20,000)/20,000 = £20.50/DLH

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Chapter 03_11e

Direct materials Direct labour Overhead assigned: (£20.50 × 110) Total cost

Job YY £2,500 1,875 2,255 £6,630

Unit cost (£6,630/300)

£22.10

b. Unit cost for Job XX: Unit cost for Job YY:

£22.13 £24.45

Setup: Ordering: Maintenance: Power:

£150,000/1,200 = £125/setup £40,000/10,000 = £4/order £200,000/16,000 = £12.50/hour £20,000/100,000 = £0.20/kilowatt hour Job XX £2,250 3,000

Direct materials Direct labour Overhead assigned: £125 × 6 £4 × 8 £12.50 × 180 £0.20 × 90 Total cost

750 32 2,250 18 £8,300

Unit cost (£8,300/375)

£22.13 Job YY £2,500 1,875

Direct material Direct labour Overhead assigned: £125 × 8 £4 × 15 £12.50 × 150 £0.20 × 120 Total cost

1,000 60 1,875 ____24 £7,334

Unit cost (£7,334/300)

£24.45

Activity-based costing produces more accurate cost information because overhead incurrence is often related to many different activities rather than a single volume-based activity driver.

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Chapter 03_11e 47. a.

£15 (£135,000/9,000)

b. Work in process, December 1 December production activity: Materials requisitioned Direct labour costs Manufacturing overhead:

Job No. 380 £8,000

Job No. 381 £13,000

Job No. 382 £19,000

2,000 1,200

2,400 1,800

3,600 2,000

£15 × 400 machine hours £15 × 700 machine hours Totals

6,000

£17,200

10,500 ___ £27,700

13,500 £38,100

48. Cafeteria:

Number of employees in each department Number of employees in each department that uses the cafeteria

Personnel:

Number of employees Number of firings or layoffs Number of new hires Direct labour costs

Maintenance:

Number of repair orders Number of machine hours Maintenance hours

Purchasing:

Number of orders placed Cost of orders

Accounting:

Number of transactions

49. Error costs and measurement costs must be considered in choosing a cost management system. Activity-based cost management has greater measurement costs due to analysing many activities but has greater accuracy and fewer error costs. Functional-based cost systems have lower measurement costs but higher error costs. Controllers must assess the need for accuracy in costing, pricing and managing profitability. 50. A plant-wide overhead rate uses the same activity driver to explain the consumption of overhead for the entire plant, whereas multiple overhead rates use different activity drivers for the different producing departments. Thus, the use of multiple overhead rates often produces a more accurate assignment of overhead costs. 51. a.

Unit cost for Job 701: £51.20 Unit cost for Job 702: £56.24 Prime costs Overhead assigned:

Job 701 £25,000 Page 36

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Chapter 03_11e £46* × 180 Total cost

8,280 £33,280

Unit cost (£33,280/650)

£51.20

*(£960,000 + £160,000 + £640,000 + £80,000)/40,000 = £46 per DLH

Prime costs Overhead assigned: £46 × 220 Total cost Unit cost (£28,120/500) b.

Job 702 £18,000 10,120 £28,120 £56.24

Unit cost for Job 701: £48.00 Unit cost for Job 702: £49.00 Setup: £960,000/4,800 = £200 per setup Ordering: £160,000/20,000 = £8 per order Maintenance: £640,000/64,000 = £10 per hour Power: £80,000/200,000 = £0.40 per kilowatt hour

Prime costs Overhead assigned: £200 × 12 £8 × 16 £10 × 360 £0.40 × 180 Total cost Unit cost (£31,200/650)

Prime costs Overhead assigned: £200 × 15 £8 × 30 £10 × 300 £0.40 × 650 Total cost Unit cost (£24,500/500) c.

Job 701 £25,000 2,400 128 3,600 72 £31,200 £ 48.00 Job 702 £18,000 3,000 240 3,000 ____260 £24,500 £49.00

Activity-based costing produces more accurate cost information because overhead incurrence is often related to many different activities rather than to a single volume-based cost driver.

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Chapter 03_11e

52. a.

Support Dept. Direct costs S1 allocation* S2 allocation**

S1 £4,500 (4,500) ______ £ -0-

S2 £8,000 (8,000) £ -0-

P1 £10,000 2,000 __5,000 £17,000

P2 £15,000 2,500 __3,000 £20,500

S1 £4,500 1,600 (6,100) £ -0-

S2 £8,000 (8,000) ______ £ -0-

P1 £10,000 4,000 2,711 £16,711

P2 £15,000 2,400 3,389 £20,789

* 4/9 to P1, 5/9 to P2 ** 5/8 to P1, 3/8 to P2 b.

Support Dept. Direct costs S2 allocation* S1 allocation**

* 0.20 to S1, 0.50 to P1, and 0.30 to P2 ** 4/9 to P1, 5/9 to P2

53. The key consideration in establishing cost pools is that the items pooled together should be relatively homogeneous and have a logical cause-and-effect relationship to the allocation base. Likewise, the most important consideration in selecting an allocation base is ensuring that a logical association exists between the base selected and the costs incurred.

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Chapter 03_11e 54. The functional-based cost accounting system assumes that all costs can be classified as fixed or variable with respect to changes in the units or volume of product produced. The activity-based cost management system's objective is to improve the quality, content, relevance and timing of information. A comparison of the two systems is shown below: Functional-based 1. 2. 3. 4. 5. 6. 7.

Unit-based drivers Allocation-intensive Narrow and rigid product costing Focus on managing costs Sparse activity information Maximization of individual unit performance Uses financial measures of performance

Activity-based 1. 2. 3. 4. 5. 6. 7.

Unit and nonunit-based drivers Tracing-intensive Broad, flexible product costing Focus on managing activities Detailed activity information Systemwide performance maximization Uses both financial and non-financial measures of performance

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Chapter 03_11e 55. a. Direct materials Direct labour Overhead: (£1,110,000/100,000) × 550

£ 2,100 5,625

Bid price (£13,830 × 120%)

£16,596

b. Direct materials Direct labour Overhead: (£360,000/60,000) × 450 (£750,000/4,000) × 4 Total cost

£2,100 5,625 2,700 ____750 £11,175

Bid price (£11,175 × 120%)

£13,410

6,105

c. The memorandum can be graded based on a number of factors, including the following: ∙ A bid price of £13,410 should be recommended. ∙ Support for the recommendation should include the reason that activity-based costing provides a more accurate product cost. ∙ Supporting calculations should be consistent with the recommendation. ∙ Memorandum format should be used. ∙ Additional items to consider include content, conciseness, spelling, grammar, punctuation, and writing style.

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Chapter 03_11e 56. a. £13,500 (£300,000 + £150,000 + £200,000 + £250,000)/100,000 = £9 per DLH £9 × 1,500 DLH = £13,500 £48,500: £20,000 + £15,000 + £13,500 £60,625: £48,500 × 125% b. £6,500 Maintenance: £300,000/40,000 = £7.50 per machine hour Materials handling: £150,000/8,000 = £18.75 per move Setups: £200,000/10,000 = £20 per setup Inspection: £250,000/15,625 = £16 per inspection Overhead assigned: £7.50 × 750 £18.75 × 20 £20 × 5 £16 × 25

£5,625 375 100 400 £6,500

£41,500: £20,000 + £15,000 + £6,500 £51,875: £41,500 × 125% c. Activity-based costing produces more accurate cost information and a more competitive bid.

57. S1 = £58,000 + 0.21S2 S1 = £58,000 + 0.21(£124,000 + 0.08S1) 0.9832S1 = £84,040 S1 = £85,476 S2 = £124,000 + 0.08S1 S2 = £124,000 + 0.08(£85,476) S2 = £130,838

Direct costs Allocate S1 Allocate S2

S1 £58,000 (85,476) 27,476 £ -0-

S2 £124,000 6,838 (130,838) £ -0-

A £712,000 63,252 61,494 £836,746

B £568,000 15,386 41,868 £625,254

58. Support departments provide essential support services for producing departments. These departments are indirectly connected with an organization's services or products. Examples: Maintenance, Grounds, Engineering, Housekeeping, Personnel and Stores. Producing departments are directly responsible for creating the products or services sold to customers. Examples: Mixing, Grinding, Assembly, Finishing and Cooking. Copyright Cengage Learning. Powered by Cognero.

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Chapter 03_11e 59. a. Cost per pool Total Allocation rate

Number of Orders £16,000 ÷ 80 £ 200

Number of orders Number of setups No. of labour trans. Labour hours

Product XX 60 × £200 = 20 × £130 = 50 × £20 = 2,000 × £8 =

c. d.

Number of Setups £13,000 ÷ 100 £ 130

£12,000 2,600 1,000 16,000 £31,600

Number of Labour Transactions £ 2,400 ÷ 120 £ 20 Product B 20 × £200 = 80 × £130 = 70 × £20 = 500 × £8 =

Labour Hours £20,000 ÷ 2 500 £ 8

£4,000 10,400 1,400 4,000 £19,800

(£16,000 + £13,000 + £2,400 + £20,000)/2,500 = £20.56 per DLH Product XX: 2,000 × £20.56 = £41,120 Product YY: 500 × £20.56 = £10,280

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Chapter 03_11e 60. Unit cost for Product 1: £151.49 per unit (rounded)

a. Unit cost for Product 2: £348.12 per unit

Prime costs Overhead applied: 5,000 DLH × £32.08* 6,000 DLH × £32.08* Total cost

Product 1 £900,000

Product 2 £1,200,000

160,400 __________ £1,060,400

192,480 £1,392,480

*£850,000/26,500 = £32.08 (rounded) Product 1: £1,060,400/7,000 units = £151.49 per unit Product 2: £1,392,480/4,000 units = £348.12 per unit b.

Unit cost for Product 1: £172.14 per unit Unit cost for Product 2: £397.50 per unit

Prime costs Overhead applied: Fabrication: 5,000 DLH × £25* 6,000 DLH × £25* Assembly: 9,000 MH × £20** 12,000 MH × £20** Total cost

Product 1 £900,000

Product 2 £1,200,000

125,000 150,000 180,000 __________ £1,205,000

___240,000 £1,590,000

*£350,000/14,000 = £25 **£500,000/25,000 = £20 Product 1: £1,205,000/7,000 units = £172.14 per unit Product 2: £1,590,000/4,000 units = £397.50 per unit 61. It is important to have an accurate product costing system to provide external users of financial statements with reliable information about earnings and net worth and to provide internal managers with the information they need for decision making. Hence, even if inventory cost information used for financial reporting is accurate, it is generally an inadequate basis for evaluating the profitability of individual products. 62. a. Unit cost for Job 320: £27.00 Unit cost for Job 321: £28.75 Job 320 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03_11e Direct materials Direct labour Overhead assigned: £30* × 240 Total cost

£8,000 6,400 7,200 £21,600

Unit cost (£21,600/800)

£27.00 *(£320,000 + £120,000 + £480,000 + £40,000)/32,000 = £30 per DLH Job 321 £19,000 12,000

Direct materials Direct labour Overhead assigned: £30 × 500 Total cost

15,000 £46,000

Unit cost (£46,000/1,600)

£28.75

b. Unit cost for Job 320: £29.44 Unit cost for Job 321: £28.09 Setup: £320,000/4,000 = £80 per setup Ordering: £120,000/20,000 = £6 per order Maintenance: £480,000/24,000 = £20 per hour Power: £40,000/160,000 = £0.25 per kilowatt hour Job 320 £8,000 6,400

Direct materials Direct labour Overhead assigned: £80 × 12 £6 × 20 £20 × 400 £0.25 × 280 Total cost

960 120 8,000 70 £23,550

Unit cost (£23,550/800)

£29.44 Job 321 £19,000 12,000

Direct materials Direct labour Overhead assigned: £80 × 20 £6 × 40 £20 × 600 £0.25 × 400 Copyright Cengage Learning. Powered by Cognero.

1,600 240 12,000 ____100 Page 44

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Chapter 03_11e Total cost

£44,940

Unit cost (£44,940/1,600)

£28.09

c. Activity-based costing produces more accurate cost information because overhead incurrence is often related to many different activities rather than a single volume-based cost driver.

63. Direct tracing is the process of identifying and assigning costs to a cost object that are specifically or physically associated with the cost object. Driver tracing is assigning costs using drivers, which are causal factors. The driver approach relies on identification of factors that allegedly capture the causal relationship. Allocation is the assignment of indirect costs to cost objects based on convenience or assumed linkages. 64. A cost objective is anything to which costs are assigned. A cost objective can be anything for which management desires cost information. A cost pool is a collection of related costs, such as manufacturing overhead, that is assigned to one or more cost objectives. An allocation base is the factor, or characteristic, common to the cost objectives that determines how much of the cost pool is assigned to each cost objective. The allocation base is the link between the cost objective and the cost pool. 65. Cost assignment refers to tracing costs to cost objects using direct tracing or driver tracing. Direct tracing is the process of identifying and assigning costs that are exclusively and physically associated with a cost object to that cost object. Driver tracing is the use of drivers to assign costs to cost objects. Drivers are factors that cause changes in resource usage and thus have a cause-and-effect relationship with the costs associated with a cost object. Allocation is the assignment of indirect costs to cost objects. Since no causal relationship exists, allocating indirect costs is based on convenience or some assumed linkage.

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Chapter 04_11e Indicate the answer choice that best completes the statement or answers the question. 1. Which entry is recorded when materials are moved from storeroom to production? a. Work in Process XX Raw Materials XX b. Raw Materials XX Work in Process XX c. Overhead Control XX Raw Materials XX d. Materials Expense XX Raw Materials XX 2. ____ is the recognition and recording of costs. a. Cost accumulation b. Cost measurement c. Cost assignment d. Job order costing 3. As goods are sold, the cost of the goods is transferred from a. Finished Goods to Cost of Goods Sold. b. Work in Process to Cost of Goods Sold. c. Overhead to Finished Goods. d. Work in Process to Finished Goods. 4. The entry to record total manufacturing overhead applied would be a. Overhead Control XX Work in Progress XX b. Finished Goods Inventory XX Work in Progress XX c. Work in Progress XX Overhead Control XX d. Overhead Control XX Accounts Payable XX

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Chapter 04_11e 5. A firm that has implemented JIT had the following transactions: 1. 2. 3. 4. 5. 6. 7. 8.

Materials were purchased on account for £40,000. Materials were placed into production. Actual direct labour costs were £6,000. Actual overhead costs were £40,000. Conversion costs applied were £42,000. All work was completed for the month. All completed work was sold. The variance is recognized.

What will be the entry to record material purchases using the backflush approach? a. Materials and In Progress 40,000 Accounts Payable 40,000 b. Materials 40,000 Accounts Payable 40,000 c. Accounts Payable 40,000 Materials and In Process 40,000 d. Accounts Payable 40,000 Materials 40,000 6. A debit to the Materials (Stores ledger account) indicates a. materials were purchased. b. materials were requisitioned. c. materials were put into production. d. materials were ordered. 7. An entry to record the sale of goods would be a. Cost of Goods Sold XX Finished Goods XX b. Finished Goods XX Cost of Goods Sold XX c. Cost of Goods Sold XX Work in Progress XX d. Work in Progress XX Cost of Goods Sold XX 8. In a job-order system, recording the use of indirect materials would include a debit to a. Overhead Control. b. Work in Progress. c. Finished Goods. d. Raw Materials.

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Chapter 04_11e 9. Assume the following information: Direct materials used Direct labour Factory overhead Beginning work-in-progress inventory Beginning finished goods inventory Ending work-in-progress inventory Selling and administrative expenses What was the cost of goods manufactured during the year? a. £370,000 b. £365,000 c. £343,000 d. £333,000

£90,000 130,000 150,000 15,000 20,000 42,000 37,500

10. A journal entry debiting Work in Progress would normally NOT be accompanied by a credit to a. Materials. b. Finished Goods. c. Overhead Control. d. Wages Payable. 11. Assume the following data for Gross, Inc., for February: Beginning finished goods inventory Beginning work-in-prgress inventory Ending work-in-progress inventory Ending finished goods inventory Actual factory overhead costs Direct materials used Direct labour What is the cost of goods manufactured for February? a. £470,000 b. £420,000 c. £460,000 d. £430,000

£60,000 40,000 80,000 50,000 200,000 160,000 100,000

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Chapter 04_11e 12. The following information is available for the current year for Sven's Brokerage Services: Sales Beginning work in progress Ending work in progress Direct labour Direct materials Overhead Selling expenses Administrative expenses What is Sven's income before taxes for the year? a. £180,000 b. £182,000 c. £380,000 d. £382,000

£661,000 7,000 6,000 100,000 30,000 150,000 80,000 120,000

13. Assume the following data for Graham Services, an architecture firm, for February: Beginning materials inventory Beginning work-in-progress inventory Ending work-in-progress inventory Ending materials inventory Actual overhead costs Direct materials used Direct labour What is the cost of services sold for February? a. £370,000 b. £350,000 c. £360,000 d. £330,000

£20,000 40,000 50,000 10,000 100,000 60,000 200,000

14. Factory depreciation would be recorded using which of the following entries? a. Overhead Control XX Accounts Payable XX b. Overhead Control XX Accumulated Depreciation XX c. Depreciation Expense XX Accumulated Depreciation XX d. Accumulated Depreciation XX Overhead Control XX

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Chapter 04_11e 15. Assume the following information for Knight Ltd. for the year ended December 31: Sales Cost of goods manufactured for the year Beginning finished goods inventory Ending finished goods inventory Selling and administrative expenses What is the cost of goods sold for the year ended December 31? a. £1,305 b. £1,605 c. £1,350 d. £1,650

£2,250 1,350 450 495 300

16. Walter Company uses a job-order costing system to account for product costs. The following information pertains for a period: Materials placed into production Indirect labour Direct labour (10,000 hours) Depreciation of factory building Other factory overhead Increase in work-in-progress inventory

£140,000 40,000 160,000 60,000 100,000 30,000

Factory overhead rate is £18 per direct labour hour. What is the total amount credited to Materials (Stores ledger account) for Walter for the period? a. £480,000 b. £170,000 c. £140,000 d. £110,000

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Chapter 04_11e 17. Allen Company has the following information for the Assembly Department for October: Materials purchased Materials used Direct labour Actual manufacturing overhead Cost of goods completed and transferred to the Finishing Dept.

£40,000 44,000 30,000 56,000 120,000

Overhead rate is 200 per cent of direct labour costs. Allen Company uses a process costing system for the Assembly Department. The journal entry to record materials purchased would include a a. debit to Materials Inventory for £40,000. b. debit to Materials Inventory for £44,000. c. credit to Accounts Payable for £44,000. d. both debit to Materials Inventory for £44,000 and credit to Accounts Payable for £44,000. 18. On April 9, Job XX4 was completed. The job cost sheet showed a total of £4,000 in direct materials and £6,000 in direct labour at a rate of £20 per direct labour hour. Factory overhead is applied at £30 per direct labour hour. The debit to Finished Goods Inventory to record the completion of Job XX4 is a. £13,000. b. £9,000. c. £4,000. d. £19,000. 19. Allen Company has the following information for the Assembly Department for October: Materials purchased Materials used Direct labour Actual manufacturing overhead Cost of goods completed and transferred to the Finishing Dept.

£40,000 44,000 30,000 56,000 120,000

Overhead rate is 200 per cent of direct labour costs. Allen Company uses a process costing system for the Assembly Department. The journal entry to record goods completed and transferred out of the Assembly Department would include a a. debit to Finished Goods Inventory for £120,000. b. credit to Materials Inventory for £120,000. c. debit to Work in Progress-Assembly Department for £120,000. d. debit to Work in Progress-Finishing Department for £120,000.

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Chapter 04_11e 20. A firm that has implemented JIT had the following transactions: 1. 2. 3. 4. 5. 6. 7. 8.

Which of the following would NOT be an entry under the backflush system, assuming the second trigger point is the completion of goods? a. Materials and In Progress 40,000 Accounts Payable 40,000 b. Work in Process 40,000 Materials 40,000 c. Conversion Cost Control 46,000 Payroll 6,000 Accounts Payable 40,000 d. Cost of Goods Sold 82,000 Finished Goods 82,000 21. Walter Company uses a job-order costing system to account for product costs. The following information pertains for a period: Materials placed into production Indirect labour Direct labour (10,000 hours) Depreciation of factory building Other factory overhead Increase in work-in-progress inventory

£140,000 40,000 160,000 60,000 100,000 30,000

Factory overhead rate is £18 per direct labour hour. What is the total amount debited to Finished Goods Inventory for the period? a. £490,000 b. £510,000 c. £450,000 d. £550,000

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Chapter 04_11e 22. Allen Company has the following information for the Assembly Department for October: Materials purchased Materials used Direct labour Actual manufacturing overhead Cost of goods completed and transferred to the Finishing Dept.

£40,000 44,000 30,000 56,000 120,000

Overhead rate is 200 per cent of direct labour costs. Allen Company uses a process costing system for the Assembly Department. What is the total amount of debits to Work in Progress-Assembly Department for October? a. £120,000 b. £126,000 c. £134,000 d. Cannot be determined 23. A firm that has implemented JIT had the following transactions: 1. 2. 3. 4. 5. 6. 7. 8.

Materials were purchased on account for £50,000. Materials were placed into production. Actual direct labour costs were £10,000. Actual overhead costs were £40,000. Conversion costs applied were £44,000. All work was completed for the month. All completed work was sold. The variance is recognized.

Required: Provide the journal entries for the above transactions assuming the traditional approach was a. used. Provide the journal entries for a backflush system assuming the second trigger point is the b. point when goods are completed.

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Chapter 04_11e 24. A firm that has implemented JIT had the following transactions: 1. 2. 3. 4. 5. 6. 7. 8.

Materials were purchased on account for £60,000. Materials were placed into production. Actual direct labour costs were £14,000. Actual overhead costs were £50,000. Conversion costs applied were £68,000. All work was completed for the month. All completed work was sold. The variance is recognized.

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Chapter 04_11e 25. The cost of goods sold for Tricky Ltd. for the month of June was £450,000. Work-in-progress inventory at the end of June was 95 per cent of the work-in-progress inventory at the beginning of the month. Overhead is 80 per cent of the direct labour cost. During the month, £110,000 of direct materials were purchased. Revenues for Tricky were £600,000, and the selling and administrative costs were £70,000. Other information about Tricky's inventories and production for June was as follows: Ending inventories-June 30 Direct materials Work in progress Finished goods

£19,000 ? 105,000

Direct materials Work in progress Finished goods

£22,200 40,000 208,500

Beginning inventories-June 1

Required: a. b. c.

Prepare a cost of goods manufactured and cost of goods sold statements. Prepare an income statement. What are the prime costs, conversion costs, and period costs?

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Chapter 04_11e 26. Home Designs Company designs decks, gazebos, and play equipment for residential homes. The following was provided for the year ended June 30: Direct labour Direct material purchases Administrative Overhead Selling Beginning direct materials inventory Beginning designs in progress Ending direct materials inventory Ending designs in progress

£600,000 40,000 130,000 75,000 265,000 20,000 14,000 10,000 39,000

The average design fee is £700. There were 2,000 designs processed during the year. Required: a. b. c.

Prepare a statement of cost of services sold. Prepare an income statement. Discuss three differences between services and tangible products.

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Chapter 04_11e 27. Moore Company completed the following transactions with respect to its manufacturing operations during December: a. b. c. d. e. f. g. h. i.

Materials costing £140,000 and indirect materials costing £16,800 were purchased on account. Assume indirect materials was debited to materials. A total of £70,000 of materials was requisitioned to the factory for manufacturing operations conducted during December. Manufacturing payroll for the month consisted of 2,000 hours of direct labour and 500 hours of indirect labour, both at £14 per hour. Indirect materials costing £7,000 were requisitioned. Depreciation on the factory building and equipment was £14,000. Miscellaneous factory overhead expenses totalled £5,600 for December. Factory overhead cost was applied to work in progress at the rate of 125 per cent of direct labour costs. Units of product with a total manufacturing cost of £84,000 were completed and transferred to the finished goods warehouse. Finished goods costing £49,000 were sold during December for £77,000.

Required: Prepare journal entries for each of the transactions that occurred during December.

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Chapter 04_11e 28. Begzy Company produces calculators on an assembly line in a single-step process. The following data pertains to November: Current manufacturing costs: Materials purchased Materials issued to production Direct labour Factory overhead Finished goods for period Beginning work in progress

£150,000 120,000 40,000 30,000 180,000 -0-

Ending work in progress: Materials Direct labour Factory overhead

3,000 ? ?

Required: a.

Prepare traditional journal entries for the following events in November: 1. Purchase of materials on account 2. Requisition of materials into production 3. Usage of direct labour 4. Application of overhead 5. Completion of finished goods What is the amount of direct labour in ending work in progress?

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Chapter 04_11e 29. The following information pertains to Davis, Inc.: Direct materials purchases Beginning direct materials Factory overhead Beginning work in progress Cost of goods manufactured Ending finished goods Gross profit Selling and administrative expenses Beginning finished goods Ending work in progress Ending direct materials Direct labour Direct materials used Net income (loss) Total manufacturing costs added Cost of goods sold Sales

£62,400 10,400 58,400 10,600 164,000 20,000 21,000 7,000 16,000 8,000 12,400 ? ? ? ? ? ?

Required: Determine the following values: a. Net income b. Total manufacturing costs added c. Cost of goods sold d. Sales e. Direct materials used f. Direct labour

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Chapter 04_11e 30. The following information was taken from the job cost sheet for Job 101 for Scott Manufacturing Company: Date started: Date completed:

Date 7-05-21 7-15-21 7-17-21 7-22-21 8-01-21 8-21-21

July 5 August 21 Direct Materials £3,000

Direct labour

Factory Overhead

£900

£450

1,350

675

600

300

Job Total

1,500 1,500

Job 101 was sold on account on August 25 for 160 per cent of its cost. Required: a. b. c. d.

Prepare the journal entries to record the costs incurred for Job 101 for the period for direct materials, direct labour, and factory overhead. Prepare the journal entry to record the completion of Job 101. What is the predetermined factory overhead rate for Scott? Prepare the journal entries to record the sale of Job 101.

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Chapter 04_11e 31. The following information has been extracted from the records of Haverhill Company: Sales Purchases of raw materials Indirect labour Indirect materials Depreciation of factory equipment Depreciation of factory buildings Depreciation of administrative building Marketing costs Direct labour Raw materials inventory, 12-31 Work in progress, 1-1 Raw materials inventory, 1-1 Work in progress, 12-31 Finished goods inventory, 1-1 Finished goods inventory, 12-31

£400,000 70,000 10,000 4,000 15,000 11,000 41,000 25,000 180,000 14,000 31,000 10,000 23,000 49,000 44,000

Required: a. b.

Prepare a statement of cost of goods manufactured. Prepare an income statement for the Haverhill Company for the year ending December 31.

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Chapter 04_11e Answer Key 1. a 2. a 3. a 4. c 5. a 6. a 7. a 8. a 9. c 10. b 11. b 12. a 13. b 14. b 15. a 16. c 17. a 18. d 19. d 20. b 21. c 22. c 23. a. 1. Materials Accounts Payable

50,000

2. Work in Progress Materials

50,000

3. Work in Progress

10,000

50,000

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Chapter 04_11e Payroll

10,000

4. Overhead Control Various accounts

40,000

5. Work in Progress Overhead Control

34,000

6. Finished Goods Work in Progress

94,000

7. Cost of Goods Sold Finished Goods

94,000

8. Cost of Goods Sold Overhead Control

6,000

b. 1. Materials and in Progress Accounts Payable

50,000

40,000

34,000

94,000

6,000

50,000

2. No entry 3. Combined with overhead: see next entry 4. Conversion Cost Control

50,000 Various accounts Payroll

40,000 10,000

5. No entry 6. Finished Goods

94,000 Materials and in Progress Conversion Cost Control

7. Cost of Goods Sold

50,000 44,000 94,000

Finished Goods

94,000

8. Cost of Goods Sold

6,000 Conversion Cost Control

6,000

24. a.

Materials Accounts Payable

60,000

Work in Progress Materials

60,000

60,000 Page 18

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Chapter 04_11e

Work in Progress Payroll

14,000

Overhead Control Various accounts

50,000

Work in Progress Overhead Control

54,000

Finished Goods Work in Progress

128,000

Cost of Goods Sold Finished Goods

128,000

50,000

54,000

128,000

Overhead Control Cost of Goods Sold

4,000

Materials and In Progress Accounts Payable

60,000

No entry

Combined with overhead: See next entry

Conversion Cost Control Various accounts Payroll

No entry

See next entry

Cost of Goods Sold Conversion Costs Control Materials

14,000

Conversion Cost Control Cost of Goods Sold

4,000

60,000

68,000 54,000 14,000

128,000 68,000 60,000 4,000 4,000

25. a.

DM used = £22,200 + £110,000 - £19,000 = £113,200 CGM = £450,000 + £105,000 - £208,500 = £346,500

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Chapter 04_11e

Direct materials: Beginning inventory* Add: Purchases* Materials available Less: Ending inventory* Direct materials used in production Direct labour below Manufacturing overhead (£128,500 × 0.80) Total manufacturing costs added Add: Beginning work-in-progress inventory* Total costs in progress Less: Ending work-in-progress inventory (£40,000 × 0.95) Cost of goods manufactured (from COGS statement)

Tricky Ltd. Statement of Cost of Goods Manufactured For June

£22,200 110,000 £132,200

19,000 £113,200 128,500 102,800 £344,500 40,000 £384,500 38,000 £346,500

Total manufacturing costs added = DM + DL + MOH £344,500 = 113,200 + DL + MOH £231,300 = DL + MOH £231,300 = DL + {MOH = 0.80 × DL} £231,300 = DL + .8DL £231,300 = 1.8DL £128,500 = DL MOH = 0.80 × DL MOH = 0.80 × 128,500 = 102 800

Cost of goods sold*: Add: Cost of goods manufactured Beginning inventory finished goods* Cost of goods available for sale Less: Ending Copyright Cengage Learning. Powered by Cognero.

Tricky Ltd. Cost of Goods Sold Statement For June

£346,500

208,500

£555,000

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Chapter 04_11e inventory finished goods* Cost of Goods Sold* *These items are provided.

105,000

£450,000

Sales* Less: Cost of goods sold*: Add: Cost of goods manufactured Beginning inventory finished goods* Cost of goods available for sale Less: Ending inventory finished goods*

Tricky Ltd. Income Statement For June £346,500

208,500

£555,000

105,000 Gross margin Less: Selling and administrative expenses* Net income *These items are provided.

Conversion costs

£600,000

450,000 £150,000 70,000 £80,000

= Direct labour and Overhead = £231,300 = £128,500 + £102,800 = £231,300 Prime costs = DM + DL = £113,200 + £128,500 = £241,700 Period costs = £70,000 Page 21

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Chapter 04_11e

26. a.

DM used = £20,000 + £40,000 - £10,000 = £50,000 CSS = £50,000 + £600,000 + £75,000 + £14,000 - £39,000 = £700,000

NI = £1,400,000 - £700,000 - £130,000 - £265,000 = £305,000

Services have three attributes that are not possessed by tangible products: intangibility, perishability, and inseparability.

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Chapter 04_11e 27. a. Materials

156,800 Accounts Payable

b. Work in Progress

156,800 70,000

Materials c. Work in Progress Factory Overhead

70,000 28,000 7,000

Wages Payable d. Factory Overhead

35,000 7,000

Materials e. Factory Overhead

7,000 14,000

Accumulated Depreciation f.

Factory Overhead

14,000 5,600

Various Accounts g. Work in Progress

5,600 35,000

Factory Overhead h. Finished Goods

35,000 84,000

Work in Progress i.

Cash

84,000 77,000

Sales Cost of Goods Sold

49,000 Finished Goods Inventory

77,000

49,000

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Chapter 04_11e 28. a. 1.

b. Ending WIP

Materials Accounts Payable

150,000

Work in Progress Materials Inventory

120,000

Work-in-Progress Inventory Wages Payable

40,000

Work in Progress Factory Overhead

30,000

Finished Goods Work in Progress

180,000

150,000

120,000

40,000

30,000

180,000

= £0 + £120,000 + £40,000 + £30,000 £180,000 = £10,000

OH rate = (£30,000/£40,000) = 75% of DLC Let X = Direct labour cost £3,000 + X + 0.75X =10,000 1.75X =£7,000 X =£4,000

29. a. b. c. d. e. f.

£21,000 - £7,000 = £14,000 £164,000 + £8,000 - £10,600 = £161,400 £16,000 + £164,000 - £20,000 = £160,000 £21,000 + £160,000* = £181,000 £10,400 + £62,400 - £12,400 = £60,400 £161,400** - £60,400*** - £58,400 = £42,600 *Found in c. **Found in b. ***Found in e.

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Chapter 04_11e 30. a. Work in Progress

6,000 Materials

Work in Progress

6,000 2,850

Wages Payable Work in Progress

2,850 1,425

Factory Overhead b. Finished Goods

1,425 10,275

Work in Progress

10,275

c. £1,425/£2,850 = 50% of direct labour costs d. Accounts Receivable

16,440 Sales

Cost of Goods Sold

10,275 Finished Goods

16,440

10,275

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Chapter 04_11e 31. HAVERHILL COMPANY STATEMENT OF COST OF GOODS MANUFACTURED FOR THE YEAR ENDED DECEMBER 31

Direct materials: Beginning inventory Add: Purchases Materials available Less: Ending inventory Direct materials used Direct labour Manufacturing overhead: Indirect materials Indirect labour Depreciation of factory equipment Depreciation of factory buildings Total manufacturing costs added Add: Beginning work in progress Total manufacturing costs Less: Ending work in progress Cost of goods manufactured

b. Sales Less cost of goods sold: Beginning finished goods inventory Add: Cost of goods manufactured Cost of goods available for sale Less: Ending finished goods inventory Gross margin Less operating expenses: Selling expenses Administrative expenses Income before taxes

£10,000 70,000 £80,000 14,000 £66,000 180,000 £4,000 10,000 15,000 11,000

40,000 £286,000 31,000 £317,000 23,000 £294,000

HAVERHILL COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31 £400,000 £49,000 294,000 £343,000 44,000

£25,000 41,000

299,000 £101,000

66,000 £35,000

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Chapter_05_11e Indicate the answer choice that best completes the statement or answers the question. 1. Gill Ltd. adds raw materials to production at the beginning of the process in the Assembly Department. Materials data for this department for March 2004 are as follows: Costs Work in progress, March 1 Started during March Work in progress, March 31

Units 25,000 100,000 10,000

Materials 68,750 300,000

Conversion £167,650 903,350

Beginning inventory was 70 per cent complete. Ending inventory was 40 per cent complete. How many equivalent units for materials would there be for Gill Ltd. in March using the FIFO method? a. 100,000 units b. 110,000 units c. 125,000 units d. 119,000 units 2. Gill Ltd. adds raw materials to production at the beginning of the process in the Assembly Department. Materials data for this department for March are as follows: Costs Work in progress, March 1 Started during March Work in progress, March 31

Units 25,000 100,000 10,000

Materials 68,750 300,000

Conversion £167,650 903,350

Beginning inventory was 70 per cent complete. Ending inventory was 40 per cent complete. How many equivalent units for conversion costs would there be for Gill Ltd. in March using the FIFO method? a. 100,000 units b. 111,500 units c. 125,000 units d. 101,500 units 3. The cost per equivalent unit using the weighted average method is calculated as: a. Total costs to account for/Equivalent units. b. Costs added during the period/Equivalent units. c. Total costs to account for/Number of partially completed units. d. Costs added during the period/Number of partially completed units.

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Chapter_05_11e 4. Beginning inventory for the month contained 2,000 units that were 45 per cent complete with respect to materials. During the month, 18,000 units were completed and transferred out. Ending inventory contained 2,500 units, 20 per cent complete with respect to materials. The weighted average equivalent units of production for materials for the month would be a. 18,000. b. 19,600. c. 19,400. d. 18,500. 5. The following information is available for Department Z for the month of July:

Work in progress, July 1 (70% complete) Direct materials Direct labour Manufacturing overhead Total work in progress, July 1 Started in production during July Costs added: Direct materials Direct labour Manufacturing overhead Total costs added during July Work in progress, July 31 (80% complete)

Units 5,000

Cost £6,000 3,000 4,000 £13,000

20,000 £18,000 8,000 10,000 £36,000 2,000

Materials are added at the beginning of the process. (Round unit costs to two decimal places.) Department Z's cost of goods transferred out using the FIFO method would be a. £45,775. b. £45,540. c. £44,500. d. £40,250.

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Chapter_05_11e 6. The following information is available for Department Z for the month of July:

Units 5,000

Cost £6,000 3,000 4,000 £13,000

20,000 £18,000 8,000 10,000 £36,000 2,000

Materials are added at the beginning of the process. (Round unit costs to two decimal places.) Department Z's cost per equivalent unit of production for conversion costs using the FIFO method would be a. £1.18. b. £1.02. c. £0.85. d. £0.73. 7. Work in progress, May 1 (10% complete) Started in May Work in progress, May 31 (20% complete)

Units 2,000 17,000 3,000

Materials and conversion are incurred uniformly throughout the progress. Equivalent units of production for conversion using the weighted average method would be a. 14,800. b. 16,400. c. 17,800. d. 16,600.

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Chapter_05_11e 8. The Flanders Ltd. produces a product that passes through two processes. During June, the first department transferred 15,000 units to the second department. Materials are added uniformly in the second process. The following information was provided about the second department's operations during June: Units, beginning work in progress Units, ending work in progress

5,000 7,000

The Flanders Ltd.'s units started in the second department during April would be a. 20,000. b. 15,000. c. 10,000. d. 8,000. e. 22,000. 9. If beginning inventory contained 2,000 units of product that were judged to be 40 per cent complete as to labour, the equivalent units of production for labour during the current period under the FIFO method for these 2,000 units are a. 2,000 units. b. 800 units. c. 1,200 units. d. 400 units. 10. The following information is provided:

Work in progress, June 1 (20% complete) Started in June Work in process, June 30 (30% complete) Materials are added at the beginning of the process.

Units 4,000 32,000 12,000

Equivalent units of production for conversion costs using the weighted average method would be a. 35,600. b. 34,800. c. 36,000. d. 27,600.

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Chapter_05_11e 11. Lee Company began making lipstick in October using a single-step process. Lee incurred £42,000 for materials and £48,640 for conversion during the month. There were 21,000 cases of lipstick started in October and 3,000 cases unfinished (40 per cent complete) at the end of the period. All materials were added at the beginning of the production process. What is the unit cost for materials for Lee using the FIFO method? a. £4.53 b. £2.00 c. £2.03 d. None of these 12. Kramer, Inc., manufactures a product that passes through two processes: mixing and molding. All manufacturing costs are added uniformly in the mixing department. Information for the mixing department for April follows: Work in progress, April 1: Units (35% complete) Direct materials Direct labour Overhead

5,000 £24,000 £30,000 £10,000

During April, 25,000 units were completed and transferred to the molding department. The following costs were incurred by the mixing department during April: Direct materials Direct labour Overhead

£90,000 120,000 30,000

Two thousand five hundred (2,500) units that were 80 per cent complete remained in mixing at April 30. Kramer's total cost per equivalent unit of production would be a. £12.16. b. £11.26. c. £9.76. d. £6.52. 13. Beginning inventory for the month contained 2,000 units that were 70 per cent complete with respect to materials. During the month, 60,000 units were completed and transferred out. Ending inventory contained 3,000 units, 20 per cent complete with respect to materials. The weighted average equivalent units of production for materials for the month would be a. 62,400. b. 63,000. c. 60,600. d. 60,000. Copyright Cengage Learning. Powered by Cognero.

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Chapter_05_11e 14. Simplicity is the main advantage of which of the following process costing methods? a. Weighted average b. LIFO c. FIFO d. Specific identification 15. The following information is available: Units in process at the beginning of the month Units in process at the end of the month Units started during the month

2,000 4,000 30,000

Materials are added at the beginning of the process. Beginning and ending units were 60 per cent complete as to conversion costs. What is the number of units started and completed? a. 30,000 units b. 26,000 units c. 36,000 units d. 28,000 units 16. The following information pertains to Jones Company:

Work-in-progress inventory, March 1 (30% complete) Units transferred in Work-in-progress inventory, March 31 (60% complete) Materials are added at the start of the progress.

Units 20,000 50,000 16,000

How many equivalent units for conversion costs would there be using the FIFO method? a. 49,600 units b. 70,000 units c. 50,000 units d. 57,600 units

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Chapter_05_11e 17. Work in progress, May 1 (10% complete) Started in May Work in progress, May 31 (20% complete)

Units 2,000 17,000 3,000

Materials and conversion are incurred uniformly throughout the progress. Units started and completed using the weighted average method would be a. 18,000. b. 16,000. c. 12,000. d. 14,000. 18. If costs of manufacturing inputs fluctuate from period to period, which of the following methods is more useful for cost control? a. FIFO b. LIFO c. Weighted average d. Equivalent units 19. If the cost of materials increased from January to February and there is beginning inventory for each month, which of the following statements would be true? (Assume all other factors are held constant.) a. Only the weighted average method would result in an increase in the unit cost for February. b. Only the FIFO method would result in an increase in the unit cost for February. c. Both the weighted average method and the FIFO method would result in an increase in the unit cost for February; however, the weighted average method would result in a greater unit cost for units in February than the FIFO method. d. Both the weighted average method and the FIFO method would result in an increase in the unit cost for February; however, the FIFO method would result in a greater unit cost for units in February than the weighted average method. 20. Dedo Company purchased £4,000 of raw materials and used £3,750. The entry to record the requisition of direct materials for the Mixing Department would be a. Raw Materials 3,750 Work in Progress--Mixing Department 3,750 b. Materials Expense 4,000 Raw Materials 4,000 c. Work in Progress--Mixing Department 3,750 Raw Materials 3,750 d. Work in Progress--Mixing Department 4,000 Raw Materials 4,000

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Chapter_05_11e 21. Work in progress, September 1 (40% complete) Started in September Work in progress, September 30 (60% complete)

Units 5,000 20,000 8,000

Materials are added at the beginning of the process. Equivalent units of production for materials using the weighted average method would be a. 29,800. b. 28,000. c. 33,000. d. 25,000. 22. Kramer, Inc., manufactures a product that passes through two processes: mixing and molding. All manufacturing costs are added uniformly in the mixing department. Information for the mixing department for April follows: Work in progress, April 1: Units (35% complete) Direct materials Direct labour Overhead

5,000 £24,000 £30,000 £10,000

During April, 25,000 units were completed and transferred to the molding department. The following costs were incurred by the mixing department during April: Direct materials Direct labour Overhead

£90,000 120,000 30,000

Two thousand five hundred (2,500) units that were 80 per cent complete remained in mixing at April 30. Kramer's total costs to account for would be a. £304,000. b. £264,000. c. £240,000. d. £176,000.

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Chapter_05_11e 23. In a process used by Kane Company, conversion cost is incurred uniformly throughout the process. Material is added at the end of the process. Which of the following statements is true? a. Kane Company cannot use process costing and must use job-order costing. b. Kane Company must calculate the unit cost of materials and the unit conversion cost separately. c. Kane Company will report the cost of materials with the cost of the ending inventory. d. Kane Company uses parallel processing. 24. The following information is available for Department X for August: Work in progress, August 1: Materials Conversion costs Costs added during August: Materials Conversion costs Equivalent units of production (weighted average): Materials Conversion

£8,000 £15,000 £28,000 £25,000 4,000 5,000

Department X's cost per equivalent unit for materials using the weighted average method would be a. £2.00. b. £7.00. c. £8.00. d. £9.00. 25. The following information is available for Department X for August: Work in progress, August 1: Materials Conversion costs Costs added during August: Materials Conversion costs Equivalent units of production (weighted average): Materials Conversion

£8,000 £15,000 £28,000 £25,000 4,000 5,000

Department X's cost per equivalent unit for conversion using the weighted average method would be a. £8.00. b. £5.00. c. £3.00. d. £9.00.

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Chapter_05_11e 26. Kramer, Inc., manufactures a product that passes through two processes: mixing and molding. All manufacturing costs are added uniformly in the mixing department. Information for the mixing department for April follows: Work in progress, April 1: Units (35% complete) Direct materials Direct labour Overhead

5,000 £24,000 £30,000 £10,000

During April, 25,000 units were completed and transferred to the molding department. The following costs were incurred by the mixing department during April: Direct materials Direct labour Overhead

£90,000 120,000 30,000

Two thousand five hundred (2,500) units that were 80 per cent complete remained in mixing at April 30. Kramer's cost of goods transferred to the molding department during April would be a. £210,000. b. £261,050. c. £281,500. d. £294,000. 27. Beginning inventory consisted of 1,000 units with costs of £21,000. All materials and 60 per cent of labour and overhead were added in the prior period. In addition, another 8,000 units were started and completed. Unit costs are materials, £6.00; labour, £15.00; overhead, £9.00. What is the total cost of goods transferred out using FIFO? a. £240,000 b. £270,000 c. £262,200 d. £270,600

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Chapter_05_11e 28. The following amounts were selected from the production report of Chandon Corporation: Actual units in production 42,000 Equivalent units (materials) 42,000 Equivalent units (conversion) 39,000 Cost per equivalent unit (materials) £1.10 Cost per equivalent unit (conversion) £0.90 Chandon uses the weighted average method in preparing its production reports. Chandon's total production cost to be accounted for must have been a. £81,300. b. £84,000. c. £89,100. d. £72,900. 29. What system would a manufacturer of unique special orders or batch processes most likely use to accumulate costs? a. Process costing b. Contract costing c. Variable costing d. Job-order costing 30. Work in progress, May 1 (10% complete) Started in May Work in progress, May 31 (20% complete)

Units 2,000 17,000 3,000

Materials and conversion are incurred uniformly throughout the progress. Equivalent units of production for materials using the weighted average method would be a. 16,600. b. 14,800. c. 17,800. d. 18,860. 31. The Packing Department receives goods produced in previous departments. The costs transferred into the Packing Department are treated as a. conversion cost incurred uniformly throughout the process. b. materials cost added at the end of the process. c. materials cost added at the beginning of the process. d. either materials cost or conversion cost, depending on whether the firm uses FIFO or weighted average.

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Chapter_05_11e 32. Nortfont Industries had 25,000 units in production during the period just ended. Equivalent units of production were calculated at 24,000; 22,000 units were completed and transferred to finished goods. Cost associated with the beginning inventory was £125,000. Manufacturing costs totaling £850,000 were added during the period. Nortfont uses the weighted average cost method. Nortfont's cost per unit was a. £34.00. b. £39.00. c. £40.63. d. £38.64. 33. Conversion costs do NOT include a. direct materials. b. direct labour. c. factory overhead. d. all of these costs 34. Work in progress, May 1 (10% complete) Started in May Work in progress, May 31 (20% complete)

Units 2,000 17,000 3,000

Materials and conversion are incurred uniformly throughout the progress. The total units of production to be accounted for would be a. 14,000. b. 17,000. c. 19,000. d. 22,000. 35. Corn Ltd. produces a product that passes through two processes. During April, the first department transferred 40,000 units to the second department. The cost of the units transferred was £60 000. Materials are added uniformly in the second process. The following information was provided about the second department's operations during April: Units, beginning work in progress Units, ending work in progress

8,000 11,000

Units completed in the second department during April for Corn Ltd. would be a. 48,000. b. 37,000. c. 19,000. d. 55,000.

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Chapter_05_11e 36. Process costing is complicated by a. the presence of significant beginning and ending inventories. b. the treatment of beginning inventory cost. c. nonuniform application of manufacturing costs. d. all of the above. 37. Conversion costs consist of a. direct materials and direct labour. b. direct materials and manufacturing overhead. c. direct labour and manufacturing overhead. d. direct labour and transferred-in costs. 38. The following information is available for Department A for the month of July: Units 5,000

Work in progress, July 1 (60% complete) Direct materials Conversion Total work in progress, July 1 Started in production during July Costs added: Direct materials Conversion Total costs added during July Work in progress, July 31, (40% complete)

Cost £12,000 18,000 £30,000

20,000 £36,000 52,000 £88,000 2,000

Materials are added at the beginning of the process. (Round to two decimal places.) Department A's cost per equivalent unit of production for conversion using the weighted average method would be a. £2.60. b. £2.94. c. £3.04. d. £3.50.

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Chapter_05_11e 39. Kramer, Inc., manufactures a product that passes through two processes: mixing and molding. All manufacturing costs are added uniformly in the mixing department. Information for the mixing department for April follows: Work in progress, April 1: Units (35% complete) Direct materials Direct labour Overhead

5,000 £24,000 £30,000 £10,000

During April, 25,000 units were completed and transferred to the molding department. The following costs were incurred by the mixing department during April: Direct materials Direct labour Overhead

£90,000 120,000 30,000

Two thousand five hundred (2,500) units that were 80 per cent complete remained in mixing at April 30. Kramer's equivalent units of production using the weighted average method would be a. 28,750. b. 20,000. c. 27,000. d. 23,000. 40. Burgundy Manufacturing uses a process cost system and computes cost using the weighted average method. During the current period, the beginning work-in-progress inventory cost was £13,525. Manufacturing cost added was £57,000. If Burgundy's ending work-in-progress inventory was valued at £15,100, then cost of goods transferred must have been a. £70,525. b. £55,425. c. £84,625. d. £58,575. 41. The two methods used to determine equivalent units of production are a. weighted average and FIFO. b. weighted average and LIFO. c. FIFO and LIFO. d. FIFO and specific identification.

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Chapter_05_11e 42. When computing equivalent units of production, the method that combines partially completed units in beginning inventory with current period production is the a. FIFO method. b. LIFO method. c. weighted average method. d. specific identification method. 43. Unit cost of materials for a department using the FIFO method of process costing is found by taking the total cost of materials issued to the department during the year divided by a. units in process. b. units started and completed. c. total units manufactured. d. equivalent units manufactured. 44. Work in progress, September 1 (40% complete) Started in September Work in progress, September 30 (60% complete)

Units 5,000 20,000 8,000

Materials are added at the beginning of the process. Equivalent units of production for conversion costs using the weighted average method would be a. 25,000. b. 27,800. c. 26,800. d. 21,800. 45. The following information is available: Units in process at the beginning of the month Units in process at the end of the month Units started during the month

2,000 4,000 30,000

Materials are added at the beginning of the process. Beginning and ending units were 60 per cent converted. How many equivalent units for materials would there be using the FIFO method? a. 36,000 units b. 34,000 units c. 30,000 units d. 29,200 units

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Chapter_05_11e 46. Equivalent production expresses all activity of the period in terms of a. direct labour hours. b. partially completed units. c. fully completed units. d. units of input. 47. The sum of direct labour and factory overhead is referred to as a. period costs. b. conversion costs. c. prime costs. d. direct product costs. 48. Equivalent units of production are a. complete units that could have been produced given the total amount of manufacturing effort expended for the period under consideration. b. the average number of units produced in a given period. c. continuously measured in a total quality environment. d. computed in both job-order and process cost systems. 49. If the cost of materials decreased from June to July, which of the following statements would be true? (Assume all other factors are held constant.) a. Only the FIFO method would result in a decrease in the unit cost for July. b. Only the weighted average method would result in a decrease in the unit cost for July. c. Both the weighted average method and the FIFO method would result in a decrease in the unit cost for July; however, the FIFO method would result in a lower unit cost for units in July than the weighted average method. d. Both the weighted average method and the FIFO method would result in a decrease in the unit cost for July; however, the weighted average method would result in a lower unit cost for units in July than the FIFO method. 50. Corn Ltd. produces a product that passes through two processes. During April, the first department transferred 40,000 units to the second department. The cost of the units transferred was £60 000. Materials are added uniformly in the second process. The following information was provided about the second department's operations during April: Units, beginning work in progress Units, ending work in progress

8,000 11,000

Units started and completed in Corn Ltd.'s second department during June would be a. 48,000. b. 37,000. c. 29,000. d. 55,000.

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Chapter_05_11e 51. Corn Ltd. produces a product that passes through two processes. During April, the first department transferred 40,000 units to the second department. The cost of the units transferred was £60 000. Materials are added uniformly in the second process. The following information was provided about the second department's operations during April: Units, beginning work in progress Units, ending work in progress

8,000 11,000

Units started in the second department during April for Corn Ltd. would be a. 40,000. b. 29,000. c. 32,000. d. 48,000.

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Chapter_05_11e 52. Barr, Inc., manufactures a product that passes through two processes: mixing and packaging. All manufacturing costs are added uniformly in the mixing department. Information for the mixing department for June follows: Work in progress, June 1 Units (60% complete) Direct materials Direct labour Overhead

5,000 £20,000 £24,000 £4,000

During June, 80,000 units were completed and transferred to packaging. The following costs were incurred by the mixing department during June: Direct materials Direct labour Overhead

£180,000 200,000 59,200

At June 30, 12,000 units that were 10 per cent complete remained in the mixing department. Use the weighted average method, and round unit costs to two decimal places. Required: a. b. c. d. e.

Determine equivalent units of production for June. Determine June's total costs to account for. Determine total cost per equivalent unit of production. Determine the cost of goods transferred to the packaging department. Determine the cost of June's ending work in progress for the mixing department.

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Chapter_05_11e 53. Davidson Company manufactures a product that passes through two processes. The following information is available for the first department for October. All materials are added at the beginning of the process. Beginning work in progress consisted of 20,000 units that were 80 per cent complete with respect to conversion. Ending work in progress consisted of 15,000 units that were 40 per cent complete with respect to conversion. During the month, 90,000 units were started in process. Required: a. b.

Prepare a physical flow schedule. Compute equivalent units using the FIFO method.

54. Royal, Inc., manufactures products that pass through two or more processes. The company uses the weighted average method to compute unit costs. During April, equivalent units were computed as follows:

Units completed Units in EWIP × Fraction complete: Materials (4,000 × 100%) Conversion (4,000 × 30%) Equivalent units of output The unit cost was computed as follows: Materials Conversion cost Total cost per unit

Materials 90,000

Conversion Cost 90,000

4,000 ______ 94,000

_1,200 91,200

£5.00 _3.00 £8.00

Required: a. b.

Determine the cost of the goods transferred out. Determine the cost of ending work in progress.

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Chapter_05_11e 55. Urban Company manufactures a product through a continuous single-step process. All materials are added at the beginning of processing. Production and cost data for the company for February are as follows: Production data: In process, beginning of month (20% converted) Started during February Completed and transferred to finished goods In process, end of month (60% converted) Manufacturing costs: Work in progress, beginning Materials Direct labour cost Factory overhead cost Required:

1,000 units 5,000 units 4,500 units 1,500 units

£14,730 £45,000 £102,960 £51,480

Prepare a cost of production report for February. Use FIFO process costing.

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Chapter_05_11e 56. Star, Inc., manufactures a product that passes through two processes: mixing and packaging. All manufacturing costs are added uniformly in the mixing department. Information for the mixing department for June follows: Work in progress, June 1: Units (30% complete) Direct materials Direct labour Overhead

15,000 £4,000 £3,000 £2,376

During June, 100,000 units were completed and transferred to packaging. The following costs were incurred by the mixing department during June: Direct materials Direct labour Overhead

£50,000 30,000 12,000

At June 30, 8,000 units that were 70 per cent complete remained in the mixing department. Use the weighted average method, and round unit costs to two decimal places. Required: a. b. c. d. e.

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Chapter_05_11e 57. Toyco manufactures a wooden toy product in a two-stage production process. Wood material is brought into the Forming Department where it is shaped. Shaped products are then moved to the Finishing Department where metal is added. The following data is given for the Forming Department for April: Units for April: Work in progress, beginning inventory April 1

300 units Direct materials (100% complete) Conversion (40% complete)

Units started in April: Work in progress, ending inventory April 30

2,200 units 500 units Direct materials (100% complete) Conversion (25%)

Costs for April: Work in progress, beginning inventory Direct materials Conversion

£7,100 £4,525

Direct materials Conversion

£70,400

Costs added during April:

Round to two decimal places. Required: a. b. c. d. e. f.

How many units were transferred to Finishing? How many units were started and completed during April? How many equivalent units of conversion does it take to complete the beginning inventory in the current period? What is the FIFO cost assigned to the ending inventory? What is the FIFO cost assigned to the units transferred out? Show the T-account for the forming process. Forming (Weighted Average)

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Chapter_05_11e Answer Key 1. a 2. d 3. a 4. d 5. a 6. c 7. d 8. b 9. c 10. d 11. b 12. b 13. c 14. a 15. b 16. d 17. d 18. a 19. d 20. c 21. d 22. a 23. b 24. d 25. a 26. c

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Chapter_05_11e 27. d 28. a 29. d 30. a 31. c 32. c 33. a 34. c 35. b 36. d 37. c 38. b 39. c 40. b 41. a 42. c 43. d 44. d 45. c 46. c 47. b 48. a 49. c 50. c 51. a

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Chapter_05_11e 52. a.

81,200 Units accounted for: Units completed Units in EWIP (10% complete) Total units accounted for

Physical Flow 80,000 12,000 92,000

Equivalent Units 80,000 1,200 81,200

£487,200 Costs to account for: Manufacturing Costs Beginning work in progress (£20,000 + £24,000 + £4,000) Incurred during the period (£180,000 + £200,000 + £59,200) Total costs to account for

£48,000 439,200 £487,000

c. £6.00 (£487,200/81,200) d. £480,000 (80,000 × £6.00) e. £7,200 (1,200 × £6.00)

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Chapter_05_11e 53. a.

Physical flow schedule: Units to account for: Units in beginning work in progress Units started Total units to account for Units accounted for: Units completed and transferred out: Started and completed From beginning work in progress Units in ending work in progress Total units accounted for

20,000 90,000 110,000

75,000 20,000

95,000 15,000 110,000

Equivalent units:

Units started and completed Units in BWIP × Fraction complete: Conversion (20,000 × 20%) Units in EWIP × Fraction complete: Materials (15,000 × 100%) Conversion (15,000 × 40%) Equivalent units of output

Materials 75,000

Conversion Cost 75,000 4,000

5,000 ______ 90,000

6,000 85,000

54. a.

Cost of goods transferred out = £8.00 × 90,000 = £720,000

Cost of ending work in progress: Materials (4,000 × £5.00) Conversion (1,200 × £3.00) Total cost

£20,000 3,600 £23,600

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Chapter_05_11e 55. Summary of units in process: Beginning Units started In process Completed Ending

1,000 5,000 6,000 (4,500) 1,500

Equivalent units in process: Units completed Add: Eq. units in end. inv. Equivalent units in process Less: Eq. units in beg. inv. Equivalent units manufactured Total costs to be accounted for: Beginning WIP Current costs Total costs in process Costs per equivalent unit

Materials

Materials 4,500 1,500 6,000 1,000 5,000

Conversion 4,500 900 5,400 200 5,200

Conversion

Total £14,730 199,440 £214,170 £38.70

£45,000

£154,440

£9.00

£29.70

Accounting for total costs: Transferred out: Beginning WIP: Beginning balance Add: Conversion (800 × 29.70) Started and finished (3,500 × 38.70) Total transferred out Ending WIP: Materials (1,500 × £9.00) Conversion (900 × £29.70) Ending WIP Total cost accounted for

£14,730 23,760 £38,490 135,450 £173,940 £13,500 26,730 40,230 £214,170

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Chapter_05_11e 56. a.

105,600 Units accounted for: Units completed Units in EWIP (70% complete) Total units accounted for

Physical Flow 100,000 8,000 108,000

Equivalent Units 100,000 5,600 105,600

£101,376 Costs to account for: Manufacturing Costs Beginning work in progress (£4,000 + £3,000 + £2,376) Costs added (£50,000 + £30,000 + £12,000) Total costs to account for

£9,376 92,000 £101,376

c. £0.96 (£101,376/105,600) d. £96,000 (100,000 × £0.96) e. £5,376 (5,600 × £0.96)

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Chapter_05_11e 57. a.

2,500 - 500 = 2,000 Units started and completed = Units transferred out Beginning inventory Transferred out = 300 + 2,200 - 500 = 2,000 Started and completed = 2000 - 300 = 1,700

300 - 120 = 180 (60%)

(500 × 32*) + (125 × 20*) = 18,500 * Calculation of cost per unit Equivalent units in process: Units completed Add: Eq. units in end. inv. Equivalent units in process Less: Eq. units in beg. inv. Equivalent units manufactured

Materials 2,000 500 2,500 300 2,200

Conversion 2,000 125 2,125 120 2,005

Total costs to be accounted for: Beginning WIP Current costs Total costs in process Costs per equivalent unit

Materials

Conversion

£70,400

£40,100

£32.00

£20.00

11,625 + (180 × 20) + (1,700 × 52) = £103,625

f. Beg. 11,625 DM 70,400 Conv 40,100 End 18,500

Total £11,625 110,500 £122,125 £52.00

Forming 103,625

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Chapter_06_11e Indicate the answer choice that best completes the statement or answers the question. 1. Information about three joint products follows:

Anticipated production Selling price/kg at split-off Additional processing costs/kg after split-off (all variable) Selling price/kg after further processing

X 12,000kg £16

Y 8,000kg £26

Z 7,000kg £48

£8

£20

£40

£70

The cost of the joint process is £140 000. Assuming all of the sell now or process further decisions were correctly made, what will be the firm's income? a. £736,000 b. £654,000 c. £596,000 d. £610,000 2. Manning Company uses a joint process to produce products W, X, Y and Z. Each product may be sold at its splitoff point or processed further. Additional processing costs of specific products are entirely variable. Joint processing costs for a single batch of joint products are £120,000. Other relevant data are as follows:

Product Y Z W X

Sales Value at Split-Off £20,000 28,000 40,000 12,000 £100,000

Additional Processing Costs £32,000 20,000 60,000 4,000 £116,000

Sales Value of Final Product £120,000 32,000 80,000 20,000 £252,000

Processing Y further will cause profits to a. increase by £120,000. b. increase by £52,000. c. increase by £68,000. d. decrease by £32,000. 3. A joint product should be processed beyond split-off if additional revenue from further processing exceeds a. joint costs. b. allocated joint costs. c. allocated joint costs and additional costs of further processing. d. additional costs of further processing.

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Chapter_06_11e 4. Bond Ltd., which manufactures products W, X, Y, and Z through a joint process costing £18,000, has the following data for the period:

Product W X Y Z

Units Produced 10,000 6,000 16,000 8,000

Sales Value at Split-Off £5,000 2,500 3,000 4,500

What is the amount of joint costs assigned to Product X using the sales value at split-off method? a. £18,000 b. £10,000 c. £3,000 d. £2,700 5. Moore Manufacturing Company makes two products from a common input. Joint processing costs up to the splitoff point total £23,400. The company allocates the joint costs to the products on the basis of their total sales values at split-off. The total sales value at split-off for both products is the same. Each product may be sold at the split-off point or processed further. Data concerning one of these products are as follows: Sales value at split-off Cost of further processing Sales value after further processing

£15,000 10,000 30,000

What is the minimum amount the company would accept for this product if it is to be sold at the split-off point? a. £10,000 b. £21,700 c. £20,000 d. £26,700 6. Joint products are a. indistinguishable before the split-off point. b. distinguishable before the split-off point. c. indistinguishable after the split-off point. d. distinguishable throughout the entire manufacturing process.

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Chapter_06_11e 7. Eden Company manufactures two products, Brights and Dulls, from a joint process. A production run costs £50,000 and results in 250 units of Brights and 1,000 units of Dulls. Both products must be processed past the split-off point, incurring separable costs for Brights of £60 per unit and £40 per unit for Dulls. The market price is £250 for Brights and £200 for Dulls. What is the gross profit for Brights assuming the physical units method is used? a. £62,500 b. £12,500 c. £47,500 d. £37,500 8. Ottawa Ltd. produces two products from a joint process. Information about the two joint products is as follows:

Anticipated production (in kgs) Selling price per kg at split-off Additional processing costs per kg after split-off (all variable) Selling price per kg after further processing

Product X 2,000 £30

Product Y 4,000 £16

£15

£30

£40

£50

The cost of the joint process is £85,000. Which of Ottawa's joint products should be processed further? a. Product X only b. Product Y only c. Both Product X and Product Y d. Neither Product X nor Product Y

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Chapter_06_11e 9. James Ltd. produces three products in a joint process: A, B and C. The joint costs are as follows: Direct materials Direct labour Overhead

£50,000 20,000 40,000

The split-off values for A, B and C are £80,000, £100,000 and £60,000, respectively. If management processes the three products beyond the split-off point, sales values for A, B and C would increase to £150,000, £130,000 and £120,000, respectively. In order to process the products further, the company must incur separable costs of £14,000, £12,000 and £10,000 for products A, B and C, respectively. James uses the sales value at split-off method to allocate joint costs. Should James Ltd. process B further? a. Process further; profits will increase £30,000. b. Process further; profits will increase £98,000. c. Process further; profits will increase £18,000. d. Sell now. 10. Manning Company uses a joint process to produce products W, X, Y and Z. Each product may be sold at its splitoff point or processed further. Additional processing costs of specific products are entirely variable. Joint processing costs for a single batch of joint products are £120,000. Other relevant data are as follows:

Product Y Z W X

Sales Value at Split-Off £20,000 28,000 40,000 12,000 £100,000

Additional Processing Costs £32,000 20,000 60,000 4,000 £116,000

Sales Value of Final Product £120,000 32,000 80,000 20,000 £252,000

Which products should Manning process further? a. All b. All except Z c. Y and X d. None 11. Which joint cost allocation method is described by the following statement? Joint cost is backed into. First, overall sales revenue minus overall costs (joint plus further processing costs) is calculated to yield gross profit and the gross profit percentage. Then, each product is assigned the same cost of goods sold percentage. a. Constant gross margin method b. Weighted average method c. Sales value at split-off method d. Net realizable method Copyright Cengage Learning. Powered by Cognero.

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Chapter_06_11e 12. Suppose that a sawmill processes logs into four grades of lumber totalling 500,000 board feet as follows at a joint cost of £300,000: Grade First and second No. 1 common No. 2 common No. 3 common

Board Feet 75,000 200,000 100,000 125,000

Final Sales Value £56,250 180,000 105,000 127,500

What amount of joint costs will be allocated to No. 2 common using the constant gross margin percentage method? a. £300,000 b. £37,800 c. £67,200 d. £192,000 13. The ____ is where products become distinguishable after passing through a common process. a. work in progress b. relevant point c. break-even point d. split-off point 14. Carey Ltd. manufactures products X and Y from a joint process. Joint product costs were £60,000 during the month of December. Additional information is as follows: Sales Values at Product Units Produced Split-Off per Unit X 10,000 £24 Y 5,000 £8 What is the amount of joint product costs to be allocated to product X during December using the physical units method? a. £20,000 b. £45,000 c. £15,000 d. £40,000

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Chapter_06_11e 15. Amos, SA, manufactures products A and B from a joint process. Joint product costs were £40,000 during the month of October. Additional information is as follows:

Product A B

Units Produced 14,000 6,000

Sales Value at Split-Off £110,000 £90,000

Amos uses the sales value at split-off method of joint cost allocation. What is the amount of joint product costs to be allocated to products A and B in October, respectively? a. £20,000; £20,000 b. £22,000; £18,000 c. £28,000; £12,000 d. £18,000; £22,000 16. Stars Manufacturing Company produces Products A1, B2, C3 and D4 through a joint process. The joint costs amount to £200,000.

Product A1 B2 C3 D4

Units Produced 3,000 5,000 4,000 6,000

Sales Value at Split-Off £10,000 30,000 20,000 40,000

If Processed Further Additional Costs Sales Value £2,500 £15,000 3,000 35,000 4,000 25,000 6,000 45,000

If Product B2 is processed further, profits will a. increase by £30,000. b. decrease by £3,000. c. increase by £32,000. d. increase by £2,000. 17. Which of the following industries would most likely have joint costs in production? a. Flour milling b. Dairy products c. Commercial fishing d. All of the above

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Chapter_06_11e 18. Deli Products produces two products, X and Y, in a single process.The joint costs of this process for the period were £25,000. In addition, 4,000 units of X and 6,000 units of Y were produced. Separable processing costs beyond the split-off point were: X-£10,000; Y-£20,000. X sells for £10.00 per unit; Y sells for £7.50 per unit. What amount of joint costs will be allocated to product X using the estimated net realizable value method? a. £13,636 b. £40,000 c. £39,000 d. £11,765 19. Suppose that a concrete manufacturer produces four grades of concrete totalling 500,000 cubic yards as follows at a joint cost of £2,000,000: Grade A B C D

Cubic Yards 75,000 200,000 100,000 125,000

Sales Value £375,000 1,200,000 700,000 850,000

What is the gross profit of Grade D if the constant gross margin percentage method is used? a. £306,000 b. £1,125,000 c. £544,000 d. £900,000 20. Carey Ltd. manufactures Products X and Y from a joint process. Joint product costs were £60,000 during the month of December. Additional information is as follows:

Product X Y

Units Produced 10,000 5,000

Sales Value at Split-Off per Unit £24 £8

What is the amount of joint product costs to be allocated to Product X during December using the sales value at split-off method? a. £20,000 b. £45,000 c. £51,429 d. £40,000 21. The sales value at split-off method allocates joint production costs based on each product's share of a. revenues realized at the split-off point. b. costs realized at the split-off point. c. final sales value less further processing costs after the split-off point. d. units produced at the split-off point. Copyright Cengage Learning. Powered by Cognero.

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Chapter_06_11e 22. Suppose that a sawmill processes logs into four grades of lumber totalling 500,000 board feet as follows at a joint cost of £300,000: Grade First and second No. 1 common No. 2 common No. 3 common

Board Feet 75,000 200,000 100,000 125,000

Final Sales Value £56,250 180,000 105,000 127,500

No. 2 common can be cut into 2 × 4s. The final sales value will increase to £150,000. The cost of cutting No. 2 common is £15,000. Should the No. 2s be cut into 2 × 4s? a. Sell now. b. Cut into 2 × 4s; profits will increase £30,000. c. Cut into 2 × 4s; profits will increase £45,000. d. Cut into 2 × 4s; profits will increase £150,000. 23. Stars Manufacturing Company produces Products A1, B2, C3 and D4 through a joint process. The joint costs amount to £200,000.

Product A1 B2 C3 D4

Units Produced 3,000 5,000 4,000 6,000

Sales Value at Split-Off £10,000 30,000 20,000 40,000

If Processed Further Additional Costs Sales Value £2,500 £15,000 3,000 35,000 4,000 25,000 6,000 45,000

Which product(s) should be sold at split-off to maximize profits in the short run? a. Product A1 b. Product D4 c. Product B2 d. Products A1 and D4 24. The cost of crude oil used in producing gasoline products is an example of a. joint costs. b. a by-product. c. joint products. d. common cost allocation.

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Chapter_06_11e 25. Foster Company incurred £200,000 to manufacture the following products in a joint process:

Product I J K L

Units Produced 500 1,000 1,500 2,000

Weight per Unit 8kg 6kg 4kg 2kg

Selling Price per Unit £5 10 10 5

How much joint cost would be allocated to Product K based on the total sales value method? a. £13,334 b. £80,000 c. £26,666 d. £60,000 26. Gilbert Production Company incurred £150,000 to manufacture the following products in a joint process:

Product A B C D

Units Produced 250 500 750 1,000

Weight per Unit 4kg 3kg 2kg 1kg

Selling Price per Unit £20 40 40 20

How much joint cost would be allocated to product A based on total weight? a. £150,000 b. £20,000 c. £30,000 d. £50,000 27. Gilbert Production Company incurred £150,000 to manufacture the following products in a joint process:

Product A B C D

Units Produced 250 500 750 1,000

Weight per Unit 4kg 3kg 2kg 1kg

Selling Price per Unit £20 40 40 20

How much joint cost would be allocated to product B based on the physical units method? a. £150,000 b. £30,000 c. £45,000 d. £50,000

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Chapter_06_11e 28. Karl Body Parts produces three products in a joint process: Arms, Legs and Heads. The joint costs are as follows: Direct materials Direct labour Overhead

£25,000 10,000 20,000

The hypothetical values for Arms, Legs and Heads are £40,000, £50,000 and £30,000, respectively. If management processes the three products beyond the split-off point, sales values for Arms, Legs and Heads would increase to £75,000, £65,000 and £60,000, respectively. In order to process the products further, the company must incur separable costs of £7,000, £16,000, and £5,000 for products Arms, Legs and Heads, respectively. Karl uses the sales value at split-off method to allocate joint costs. Should Karl Body Parts process Arms further? a. Process further; profits will increase £28 000. b. Sell now. c. Process further; profits will increase £35 000. d. Process further; profits will increase £68 000. 29. Information about three joint products follows:

Anticipated production Selling price/kg at split-off Additional processing costs/kg after split-off (all variable) Selling price/kg after further processing

A 5,000kg £10

B 1,000kg £30

C 2,000kg £16

£6

£12

£24

£20

£40

£50

The cost of the joint process is £60,000. Which of the joint products should be sold at split-off? a. A b. B c. C d. Both A and B 30. Which of the following methods allocates joint production costs based on their proportionate share of eventual revenue less further processing costs? a. Sales value at split-off method b. Net realizable value method c. Physical units method d. Replacement cost method

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Chapter_06_11e 31. Amos, SA, manufactures products A and B from a joint process. Joint product costs were £40,000 during the month of October. Additional information is as follows: Sales Values at Product Units Produced Split-Off A 14,000 £110,000 B 6,000 £90,000 Amos uses the physical units method of joint cost allocation. What is the amount of joint product costs to be allocated to products A and B in October, respectively? a. £20,000; £20,000 b. £22,000; £18,000 c. £28,000; £12,000 d. £12,000; £28,000 32. James Ltd. produces three products in a joint process: A, B and C. The joint costs are as follows: Direct materials Direct labour Overhead

£50,000 20,000 40,000

The split-off values for A, B and C are £80,000, £100,000 and £60,000, respectively. If management processes the three products beyond the split-off point, sales values for A, B and C would increase to £150,000, £130,000 and £120,000, respectively. In order to process the products further, the company must incur separable costs of £14,000, £12,000 and £10,000 for products A, B and C, respectively. James uses the sales value at split-off method to allocate joint costs. Should James Ltd. process C further? a. Process further; profits will increase £56,000. b. Process further; profits will increase £66,000. c. Process further; profits will increase £50,000. d. Sell now. 33. Eden Company manufactures two products, Brights and Dulls, from a joint process. A production run costs £50,000 and results in 250 units of Brights and 1,000 units of Dulls. Both products must be processed past the split-off point, incurring separable costs for Brights of £60 per unit and £40 per unit for Dulls. The market price is £250 for Brights and £200 for Dulls. What is the gross profit for Dulls assuming the constant gross margin percentage method is used? a. £120,000 b. £150,000 c. £37,500 d. £200,000

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Chapter_06_11e 34. Which joint cost allocation method is described by the following statement? Joint cost is prorated to the products on the basis of each product's share of units. a. Physical units method b. Weighted average method c. Sales value at split-off method d. Net realizable value method 35. Suppose that a concrete manufacturer produces four grades of concrete totalling 500,000 cubic yards as follows at a joint cost of £2,000,000: Grade A B C D

Cubic Yards 75,000 200,000 100,000 125,000

Sales Value £375,000 1,200,000 700,000 850,000

What amount of joint costs will be allocated to Grade C using the constant gross margin percentage method? a. £2,000,000 b. £252,000 c. £448,000 d. £1,280,000 36. James Ltd. produces three products in a joint process: A, B and C. The joint costs are as follows: Direct materials Direct labour Overhead

£50,000 20,000 40,000

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Chapter_06_11e 37. Information about three joint products follows:

Anticipated production Selling price/kg at split-off Additional processing costs/kg after split-off (all variable) Selling price/kg after further processing

X 12,000kg £16

Y 8,000kg £26

Z 7,000kg £48

£8

£20

£40

£70

The cost of the joint process is £140 000. Which of the joint products should be processed further? a. X b. Y c. Z d. Both X and Y 38. Eden Company manufactures two products, Brights and Dulls, from a joint process. A production run costs £50,000 and results in 250 units of Brights and 1,000 units of Dulls. Both products must be processed past the split-off point, incurring separable costs for Brights of £60 per unit and £40 per unit for Dulls. The market price is £250 for Brights and £200 for Dulls. What is the amount of joint costs allocated to Dulls using the constant gross margin percentage method? a. £15,000 b. £40,000 c. £50,000 d. £10,000 39. Deli Products produces two products, X and Y, in a single process.The joint costs of this process for the period were £25,000. In addition, 4,000 units of X and 6,000 units of Y were produced. Separable processing costs beyond the split-off point were: X-£10,000; Y-£20,000. X sells for £10.00 per unit; Y sells for £7.50 per unit. What is the gross profit of product Y assuming the physical units method is used? a. £25,000 b. £-0c. £10,000 d. £15,000 40. Which of the following costs is NOT relevant to a decision to sell a product at split-off or process the product further and then sell the product? a. Joint costs allocated to the product b. The selling price of the product at split-off c. The additional processing costs after split-off d. The selling price of the product after further processing Copyright Cengage Learning. Powered by Cognero.

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Chapter_06_11e 41. Ottawa Ltd. produces two products from a joint process. Information about the two joint products is as follows:

Anticipated production (in kgs) Selling price per kg at split-off Additional processing costs per kg after split-off (all variable) Selling price per kg after further processing

Product X 2,000 £30

Product Y 4,000 £16

£15

£30

£40

£50

The cost of the joint process is £85,000. Which of Ottawa's joint products should be sold at split-off? a. Product X only b. Product Y only c. Both Product X and Product Y d. Neither Product X nor Product Y 42. Information about three joint products follows:

Anticipated production Selling price/kg at split-off Additional processing costs/kg after split-off (all variable) Selling price/kg after further processing

X 12,000kg £16

Y 8,000kg £26

Z 7,000kg £48

£8

£20

£40

£70

The cost of the joint process is £140 000. If the firm is currently processing all three products beyond split-off, the firm's income would be a. £736,000. b. £654,000. c. £596,000. d. £514,000.

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Chapter_06_11e 43. Deli Products produces two products, X and Y, in a single process.The joint costs of this process for the period were £25,000. In addition, 4,000 units of X and 6,000 units of Y were produced. Separable processing costs beyond the split-off point were: X-£10,000; Y-£20,000. X sells for £10.00 per unit; Y sells for £7.50 per unit. What is the gross profit of product Y assuming the net realizable value method is used? a. £13,636 b. £16,364 c. £30,000 d. £45,000 44. Suppose that a sawmill processes logs into four grades of lumber totalling 500,000 board feet as follows at a joint cost of £300,000: Grade First and second No. 1 common No. 2 common No. 3 common

Board Feet 75,000 200,000 100,000 125,000

Final Sales Value £56,250 180,000 105,000 127,500

What is the gross profit of No. 3 common if the constant gross margin percentage method is used? a. £45,900 b. £168,750 c. £81,600 d. £135,000 45. Joint costs are a. separable. b. allocated on the basis of cause and effect relationships. c. allocated arbitrarily. d. all of the above. 46. Which of the following would generally be a by-product? a. Canned fish b. Hamburger c. Cow hides d. Pineapples

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Chapter_06_11e 47. Foster Company incurred £200,000 to manufacture the following products in a joint process:

Product I J K L

Units Produced 500 1,000 1,500 2,000

Weight per Unit 8kg 6kg 4kg 2kg

Selling Price per Unit £5 10 10 5

How much joint cost would be allocated to product L based on total weight? a. £33,333 b. £26,667 c. £40,000 d. £44,444 48. Suppose that a concrete manufacturer produces four grades of concrete totalling 500,000 cubic yards as follows at a joint cost of £2,000,000: Grade A B C D

Cubic Yards 75,000 200,000 100,000 125,000

Sales Value £375,000 1,200,000 700,000 850,000

What amount of joint costs will be allocated to Grade B using the final sales value method? a. £2,000,000 b. £768,000 c. £800,000 d. £240,000 49. Which of the following is a by-product of agricultural and food Industries? a. Meat b. Flour c. Fresh fish d. Fertilizer 50. Which of the following costs is NOT relevant to a decision to sell a product at split-off or to process the product further and then sell the product? a. The joint costs allocated to the product b. The selling price of the product at split-off c. The additional processing costs after split-off d. The selling price of the product after further processing

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Chapter_06_11e 51. Suppose that a concrete manufacturer produces four grades of concrete totalling 500,000 cubic yards as follows at a joint cost of £2,000,000: Grade A B C D

Cubic Yards 75,000 200,000 100,000 125,000

Sales Value £375,000 1,200,000 700,000 850,000

Grade C can be made into bricks. The final sales value will increase to £900,000. The additional cost to make the bricks is £250,000. Should the concrete be processed into bricks? a. Sell now. b. Produce bricks; profits will increase £200,000. c. Produce bricks; profits will increase £900,000. d. Produce bricks; profits will increase £450,000. 52. Foster Company incurred £200,000 to manufacture the following products in a joint process:

Product I J K L

Units Produced 500 1,000 1,500 2,000

Weight per Unit 8kg 6kg 4kg 2kg

Selling Price per Unit £5 10 10 5

How much joint cost would be allocated to product J based on total weight? a. £33,333 b. £26,667 c. £60,000 d. £40,000

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Chapter_06_11e 53. Ottawa Ltd. produces two products from a joint process. Information about the two joint products is as follows:

Anticipated production (in kgs) Selling price per kg at split-off Additional processing costs per kg after split-off (all variable) Selling price per kg after further processing

Product X 2,000 £30

Product Y 4,000 £16

£15

£30

£40

£50

The cost of the joint process is £85,000. Ottawa currently sells both products at the split-off point. If Ottawa makes decisions that maximize profit, Ottawa's profit will increase by a. £16,000. b. £4,000. c. £50,000. d. £10,000. 54. A ____ is a secondary product recovered in the course of manufacturing a primary product during a joint process. a. by-product b. joint product c. main product d. both by-product and main product 55. The decision of whether or NOT to process joint products beyond their split-off point is a. based on the total cost of the finished product including joint costs. b. based on joint costs only. c. based on selling price at split-off point. d. based on additional revenues versus additional costs of processing further.

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Chapter_06_11e 56. Bond Ltd., which manufactures products W, X, Y, and Z through a joint process costing £18,000, has the following data for the period:

Product W X Y Z

Units Produced 10,000 6,000 16,000 8,000

Sales Value at Split-Off £5,000 2,500 3,000 4,500

What is the amount of joint costs assigned to Product Y using the sales value at split-off method? a. £7,200 b. £3,600 c. £18,000 d. £1,200 57. Eden Company manufactures two products, Brights and Dulls, from a joint process. A production run costs £50,000 and results in 250 units of Brights and 1,000 units of Dulls. Both products must be processed past the split-off point, incurring separable costs for Brights of £60 per unit and £40 per unit for Dulls. The market price is £250 for Brights and £200 for Dulls. What is the amount of joint costs allocated to Brights using the net realizable value method? a. £50,000 b. £11,906 c. £-0d. £11,446 58. ____ are products with substantial value which are produced simultaneously by the same process up to a splitoff point. a. By-products b. Joint products c. Minor products d. Both by-products and joint products 59. Explain how joint cost allocation may be misleading in managerial decision-making.

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Chapter_06_11e 60. Maxwell Company manufactures two products from a joint process. Information about the two joint products is as follows:

Anticipated production (in gallons) Selling price per gallon at split-off Additional processing costs per gallon after split-off (all variable) Selling price per gallon after further processing The cost of the joint process is £1,500,000.

Product ABC 40,000 £50

Product XYZ 50,000 £60

£25

£95

£100

£140

Required: a. b. c.

Which of Maxwell's joint products should be processed further? Assume that Maxwell currently sells both products at the split-off point. What is Maxwell's income? Assume that Maxwell makes decisions about its joint products that maximize profit. What is Maxwell's income?

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Chapter_06_11e 61. Nelson SA obtains two products and a by-product from its production process. By-product revenues are treated as other income and a noncost approach is used to assign costs to them. During the period, 1,200 units were processed at a cost of £12,000 for materials and conversion costs, resulting in the following:

Product X Y By-product

Sales Value Units 200 400 150

Costs after at Separation £4,000 5,000 500

Final Separation £2,000 6,000 500

Value £10,000 12,000 1,500

Required: a. b. c. d.

Account for all costs using a physical basis for allocation. Account for all costs using net realizable value as the basis for allocation. Account for all costs using final sales value as the basis for allocation. How much joint costs should be allocated to the by-product?

62. Anderson Company pays a flat fee of £500 for the right to retrieve stray golf balls from lakes and ponds at golf and country clubs. The recovered balls are then cleaned, graded as to quality (birdie, bogey or duffer), and sold to sporting goods stores at the following prices per dozen: birdie quality, £5; bogey quality, £4; and duffer quality, £3. Last month £8,000 of cost was incurred retrieving the following quantities of golf balls: birdie quality, 1,000 dozen; bogey quality, 3,000 dozen; and duffer quality, 2,000 dozen. Required: (Calculate relative quantity to three decimal points.) a. b. c.

Determine the cost and gross profit per cent for each type of golf ball using the physical units method of joint cost allocation. Repeat part (a) using the sales-value-at-split-off method of joint cost allocation. The company has an opportunity to sell bogey quality balls for £4.50 per dozen to a company that operates golf driving ranges; however, the balls will have to be painted and striped. The company estimates that the cost of painting and striping will be 60 pence per dozen. Assuming the physical unit method is used to allocate joint costs, should the offer be accepted?

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Chapter_06_11e 63. Arcadia, SA, uses a joint process to produce Products W, X, Y, Z. Each product may be sold at its split-off point or processed further. Additional processing costs of specific products are entirely variable. Joint processing costs for a single batch of joint products are £200,000. Other relevant data are as follows:

Product W X Y Z

Sales Value at Split-off £40,000 16,000 20,000 24,000 £100,000

Additional Processing Costs £24,000 10,000 10,000 16,000 £60,000

Sales Value of Final Product £70,000 20,000 48,000 36,000 £174,000

Required: a. b.

Determine which products should be processed further. How will processing each product further affect profits?

64. Mickey Company manufactures three joint products: X, Y and Z. The cost of the joint process is £30,000. Information about the three products follows:

Anticipated production Selling price/kg at split-off Additional processing costs/kg after split-off (all variable) Selling price/kg after further processing Allocated joint costs

X 5,600kg £2.00

Y 10,000kg £1.00

Z 2,500kg £3.00

£1.50

£1.25

£0.75

£2.50 £12,000

£3.75 £10,500

£6.25 £7,500

Required: a. b.

Determine whether each product should be sold at split-off or processed further. Show all supporting calculations in good form. Determine the firm's income if the firm processed all three products beyond split-off.

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Chapter_06_11e 65. Maddux Company manufactures products X, Y and Z in a joint process. The following information is available: Products X Units produced Sales value at split-off Joint costs Sales value if processed further Additional cost if processed further

12,000

Total 24,000

? £48,000

? ?

£50,000 ?

£200,000 £120,000

£110,000

£90,000

£60,000

£260,000

£18,000

£14,000

£10,000

£42,000

Joint product costs are allocated using the sales value at split-off approach. Required: a. b. c.

What is the sales value at split-off for Product X? What is the amount of joint costs allocated to Product Y using the sales value at split-off method? If the company used the physical units method to allocate joint cost, how much joint cost would be allocated to Product X?

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Chapter_06_11e 66. Park Company produces three products in a joint process: A, B and C. The joint costs are described as follows: Direct materials Direct labour Overhead

£45,000 60,000 30,000

The split-off values for A, B and C are £100,000, £120,000 and £80,000, respectively. If management processes A beyond the split-off point, the sales value of A would increase to £150,000. In order to process A further, the company must rent another facility for £24,000, as well as incur additional materials and labour costs equal to £15,000. Required: a. b.

What is the amount of joint costs allocated to products A, B and C if the sales value at splitoff value method is used? Should the division process A further or sell it at split-off? What is the effect of the decision on gross profit?

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Chapter_06_11e 67. Jazzmyne Company manufactures two products from a joint process. Information about the two joint products is as follows:

Anticipated production (in units) Selling price per unit at split-off Additional processing costs per unit after split-off (all variable) Selling price per unit after further processing The cost of the joint process is £1,750,000.

Product X 10,000 £60

Product Y 15,000 £100

£100

£55

£150

£175

Required: a. b. c.

Which of Jazzmyne's joint products should be processed further? Assume that Jazzmyne currently sells both products at the split-off point. What is Jazzmyne's income? Assume that Jazzmyne makes decisions about its joint products that maximize profit. What is Jazzmyne's income?

68. Lake Ltd. manufactures two products, AA and BB, from a joint process. A production run costs £20,000 and results in 500 units of AA and 2,000 units of BB. Both products must be processed past the split-off point, incurring separable costs of £5 per unit for AA and £10 per unit for BB. The market price is £25 for AA and £20 for BB. Required: a. b. c.

Allocate joint production costs to each product using the physical units method. Allocate joint production costs to each product using the net realizable value method. Allocate joint production costs to each product using the constant gross margin percentage method.

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Chapter_06_11e Answer Key 1. d 2. c 3. d 4. c 5. c 6. a 7. d 8. b 9. c 10. c 11. a 12. c 13. d 14. d 15. b 16. d 17. d 18. a 19. a 20. c 21. a 22. b 23. b 24. a 25. b 26. c

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Chapter_06_11e 27. b 28. a 29. b 30. b 31. c 32. c 33. a 34. a 35. c 36. a 37. c 38. b 39. c 40. a 41. a 42. d 43. a 44. a 45. c 46. c 47. c 48. b 49. d 50. a 51. a 52. c 53. a 54. a Copyright Cengage Learning. Powered by Cognero.

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Chapter_06_11e 55. d 56. b 57. d 58. b 59. Joint cost allocation may lead managers to believe that part of a joint cost is avoidable when this is not true. Additionally, allocated joint costs may impact on pricing decisions of the individual products when it is the overall product package that must be evaluated in terms of profitability. 60. Product ABC should be processed further; Product XYZ should be sold at split-off.

Product ABC Product XYZ b.

Process Further £100 - £25 = £75 £140 - £95 = £45

£3,500,000 Product ABC (40,000 gallons × £50) Product XYZ (50,000 gallons × £60) Less: Joint process costs Income

Split-off £50 £60

£2,000,000 3,000,000 £5,000,000 1,500,000 £3,500,000

£4,500,000 Product ABC (40,000 gallons × £100) Product XYZ (50,000 gallons × £60) Less: Joint process costs Income

£4,000,000 (40,000 gallons × £25)

1,000,000

£3,000,000 3,000,000 £6,000,000 1,500,000 £4,500,000

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Chapter_06_11e 61. a.

Product X Y

Units 200 400

Fraction 2/6 4/6

Allocation £4,000 8,000

Product X Y

Allocation £4,000 8,000 £12,000

Sep. Costs £2,000 6,000

Total £6,000 14,000 £20,000

Product X Y

Sales £10,000 12,000 £22,000

Sep. Costs £2,000 6,000 £8,000

NRV £8,000 6,000 £14,000

Product X Y

Allocation £6,857 5,143 £12,000

Sep. Costs £2,000 6,000

Total £8,857 11,143 £20,000

Product X Y

Sales £10,000 £12,000

Fraction 10/22 12/22

Allocation £5,455 6,545

Product X B

Allocation £5,455 6,545 £12,000

Sep. Costs £2,000 6,000

Total £7,455 12,545 £20,000

Fraction 8/14 6/14

d. None of the cost of the joint costs should be assigned to the by-product.

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Chapter_06_11e 62. a.

Quantity Joint Cost £8,000 = £8,000 = £8,000 =

Relative Allocation £1,336 4,000 2,664 £8,000

Bogeys 3,000

Duffers 2,000

Total 6,000

£5.00

£4.00

£3.00

Sales Joint costs Gross profit

£5 000 1 336 £3 664

£12 000 4 000 £ 8 000

£6 000 2 664 £3 336

Gross profit %

73.28%

66.67%

55.60%

65.22%

Joint Cost £8,000 = £8,000 = £8,000 =

Allocation £1,760 4,160 2,080 £8,000

Product Birdies Bogeys Duffers Total

(Dozens) 1,000 3,000 2,000 6,000

Quantity 0.167 × 0.500 × 0.333 × 1.000

Unit sales (dozens)

Birdies 1,000

Sales price/dozen

b. Product Birdies Bogeys Duffers

Relative Sales Value £5,000 12,000 6,000 £23,000

Sales Value 0.22 × 0.52 × 0.26 × 1.00

£23 000 8 000 £15 000

Sales Joint costs Gross profit

Birdies £5,000 1,760 £3,240

Bogeys £12,000 4,160 £7,840

Duffers £6,000 2,080 £3,920

Total £23,000 8,000 £15,000

Gross profit %

64.800%

65.333%

65.217%

c. The decision to accept the offer is not affected by the allocation of joint costs, only the relevant revenues and costs after split-off. Since the relevant revenue from further processing is 50 pence (£4.50 - £4.00) per unit and the relevant cost is 60 pence per unit for painting and striping, the net cost of further processing is 10 pence per dozen. The offer should not be accepted.

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Chapter_06_11e 63. Product Additional Sales Value Additional Costs Difference W £30,000 £24,000 £6,000 X 4,000 10,000 (6,000) Y 28,000 10,000 18,000 Z 12,000 16,000 (4,000) Arcadia, SA., should process products W and Y further because they increase profits by £6,000 and £18,000, respectively. Products X and Z should be sold at the split-off point. 64. a. X

Sell at Split-Off £11,200

£10,000

£7,500

Process Further Then Sell £14,000 (8,400) £5,600

Decision Sell at split-off

£37,500 (12,500) £25,000

Process further

£15,625 (1,875) £13,750

Process further

The joint costs are not relevant to the decision. b.

£14,350 (£13,750 + £25,000 + £5,600 - £30,000)

a. b. c.

£48,000/£120,000 × £200,000 = £80,000 {£120,000 - £48,000 - [(£50,000/£200,000) × £120,000]} = £42,000 12,000/24,000 × £120,000 = £60,000

65.

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Chapter_06_11e 66. a.

Product A B C Total

Additional revenues Additional costs Profit would increase by Process A further.

Split-Off £100,000 120,000 80,000 £300,000

Fraction 5/15 × 6/15 × 4/15 × 15/15

(£150,000 - £100,000) (£24,000 + £15,000)

Joint Cost £135,000 = £135,000 = £135,000 =

Allocation £45,000 54,000 36,000 £135,000 £50,000 39,000 £11,000

67. Product Y should be processed further; Product X should be sold at split-off.

Product X Product Y b.

Process Further £150 - £100 = £50 £175 - £55 = £120

£350,000 Product X Product Y Less: Joint process costs Income

Split-off £60 £100

(10,000 units × £60) (15,000 units × £100) £2,100,000 1,750,000 £350,000

£600,000 1,500,000

£650,000 Product X Product Y

Less: Joint process costs Income

(10,000 units × £60) (15,000 units × £175) (15,000 units × £55)

£600,000 £2,625,000 825,000

1,800,000 £2,400,000 1,750,000 £650,000

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Chapter_06_11e 68. a. AA BB

b. AA BB

Units 500 2,000 2,500

Fraction 5/25 × £20,000 = 20/25 × £20,000 =

Sales £12,500 40,000

Sep. Costs £2,500 £20,000

Allocation £4,000 £16,000

NRV £10,000 £20,000

Fraction 10/30 20/30

AA: 10/30 × £20,000 = £6,667 BB: 20/30 × £20,000 = £13,333 c. Sales (500 × £25) + (2,000 × £20) = £52,500 Costs (500 × £5) + (2,000 × £10) + £20,000 = £42,500 COGS Percentage = £42,500/£52,500 = 80.9524% AA: (500 × £25 × 80.9524%) - £2,500 = £7,619.05 BB: (2,000 × £20 × 80.9524%) - £20,000 = £12,380.96

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Chapter_07_11e Indicate the answer choice that best completes the statement or answers the question. 1. The following information pertains to Stark Ltd.: Beginning inventory Ending inventory Direct labour per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling costs per unit Fixed selling costs per unit

0 units 5,000 units £20 16 4 10 12 16

What is the value of ending inventory using the absorption costing method? a. £310,000 b. £250,000 c. £200,000 d. £390,000 2. Eastwood Company has the following information for the year: Selling price Variable production costs Variable selling and admin. expenses Fixed production costs Fixed selling and admin. expenses Units produced Units sold

£150 per unit £40 per unit produced £16 per unit sold £200,000 £140,000 10,000 units 8,000 units

There were no beginning inventories. What is the ending inventory for Eastwood using the variable costing method? a. £300,000 b. £180,000 c. £120,000 d. £80,000 3. Laguna Company had a net income of £25,000 using variable costing and a net income of £34,600 using absorption costing. The product cost using variable costing was £10.20 and using absorption costing was £15. If 10,000 units were sold, how many units were produced during? a. 2,000 b. 8,000 c. 12,000 d. 4,800

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Chapter_07_11e 4. What is the primary difference between variable and absorption costing? a. Inclusion of fixed selling expenses in product costs b. Inclusion of variable factory overhead in period costs c. Inclusion of fixed selling expenses in period costs d. Inclusion of fixed factory overhead in product costs 5. Inventory values calculated using variable costing as opposed to absorption costing will generally be a. equal. b. less. c. greater. d. twice as much. 6. Toshi Company incurred the following costs in manufacturing desk calculators: Direct materials Indirect materials (variable) Direct labour Indirect labour (variable) Other variable factory overhead Fixed factory overhead Variable selling expenses Fixed selling expenses

£14 4 8 6 10 28 20 14

During the period, the company produced and sold 1,000 units. What is the inventory cost per unit using variable costing? a. £52 b. £62 c. £42 d. £70 7. Which of the following costs would NOT be included in calculating inventory values under the absorption-costing basis? a. Direct materials b. Fixed overhead c. Selling and administrative expenses d. Direct labour

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Chapter_07_11e 8. Steele Ltd. has the following information for January, February, and March:

Units produced Units sold

January 10,000 7,000

February 10,000 8,500

March 10,000 10,500

Production costs per unit (based on 10,000 units) are as follows: Direct materials Direct labour Variable factory overhead Fixed factory overhead Variable selling and admin. expenses Fixed selling and admin. expenses

£12 8 6 4 10 4

There were no beginning inventories for January 2021, and all units were sold for £50. Costs are stable over the three months. What is the February contribution margin for Steele Ltd. using the variable costing method? a. £240,000 b. £170,000 c. £119,000 d. £204,000 9. Which of the following statements is TRUE? a. Absorption costing net income exceeds variable costing net income when units produced and sold are equal. b. Variable costing net income exceeds absorption costing net income when units produced exceed units sold. c. Absorption costing net income exceeds variable costing net income when units produced are less than units sold. d. Absorption costing net income exceeds variable costing net income when units produced are greater than units sold.

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Chapter_07_11e 10. The following information pertains to Mayberry Ltd.: Beginning inventory Ending inventory Direct labour per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling and admin. costs per unit Fixed selling and admin. costs per unit

1,000 units 6,000 units £40 20 10 30 6 14

What is the value of the ending inventory using the absorption costing method? a. £240,000 b. £360,000 c. £600,000 d. £420,000 11. Steele Ltd. has the following information for January, February and March:

Units produced Units sold

January 10,000 7,000

February 10,000 8,500

March 10,000 10,500

Production costs per unit (based on 10 000 units) are as follows: Direct materials Direct labour Variable factory overhead Fixed factory overhead Variable selling and admin. expenses Fixed selling and admin. expenses

£12 8 6 4 10 4

There were no beginning inventories for January and all units were sold for £50. Costs are stable over the three months. What is the February ending inventory for Steele Ltd. using the absorption costing method? a. £39,000 b. £45,000 c. £135,000 d. £300,000

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Chapter_07_11e 12. Eastwood Company has the following information for the year: Selling price Variable production costs Variable selling and admin. expenses Fixed production costs Fixed selling and admin. expenses Units produced Units sold

£150 per unit £40 per unit produced £16 per unit sold £200,000 £140,000 10,000 units 8,000 units

There were no beginning inventories. What is the net income for Eastwood using the absorption costing method? a. £452,000 b. £480,000 c. £1,200,000 d. £600,000 13. Toshi Company incurred the following costs in manufacturing desk calculators: Direct materials Indirect materials (variable) Direct labour Indirect labour (variable) Other variable factory overhead Fixed factory overhead Variable selling expenses Fixed selling expenses

£14 4 8 6 10 28 20 14

During the period, the company produced and sold 1000 units. What is the inventory cost per unit using absorption costing? a. £104 b. £70 c. £84 d. £32

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Chapter_07_11e 14. The following information pertains to Stark Ltd.: Beginning inventory Ending inventory Direct labour per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling costs per unit Fixed selling costs per unit

0 units 5,000 units £20 16 4 10 12 16

What is the value of ending inventory using the variable costing method? a. £310,000 b. £250,000 c. £200,000 d. £390,000 15. Focus Picture Company sold 5,600 units and produced 6,000 units this past year. Unit variable costs were £15 (including variable selling costs of £3), and total fixed manufacturing costs totalled £16,500. Which costing system (variable or absorption) will show a higher net income and by how much? a. Absorption costing, £1,100 b. Variable costing, £1,100 c. Absorption costing £17,600 d. This cannot be determined from the information given. 16. Proponents of ____ costing believe that fixed costs are incurred to provide the capacity to produce during a given period, and these costs expire with the passage of time. a. variable b. absorption c. activity-based d. all of the above 17. What is the central theoretical issue in the variable costing debate? a. The issue of how to differentiate between manufacturing and non-manufacturing costs b. The issue of whether or not fixed manufacturing costs add value to products. c. The issue of identifying which units were sold out of inventory. d. The issue of identifying which costs vary with activities. 18. Which costing approach assumes fixed overhead costs only expire when product is sold? a. Product costing b. Backflush accounting c. Absorption costing d. Cash basis accounting

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Chapter_07_11e 19. During this past year, Bouncy Company experienced no change in inventory. Sales were 40,000 units at a selling price of £3 per unit. Variable manufacturing costs were £1.25 per unit, and total manufacturing costs were £55,000. Under absorption costing, net income was calculated at £53,000. What was net income under variable costing? a. £65,000 b. £55,000 c. £53,000 d. £2,000 20. Ramon Company reported the following units of production and sales for June and July: Units Month June July

Produced 100,000 100,000

Sold 90,000 105,000

Net income under absorption costing for June was £40,000; net income under variable costing for July was £50,000. Fixed manufacturing costs were £600,000 for each month. How much was net income for July using absorption costing? a. £50,000 b. £20,000 c. £80,000 d. £40,000 21. When production is less than sales volume, net income under absorption costing will be ____ profits using variable costing procedures. a. greater than b. less than c. equal to d. randomly different than

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Chapter_07_11e 22. The following information pertains to Mayberry Ltd.: Beginning inventory Ending inventory Direct labour per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling and admin. costs per unit Fixed selling and admin. costs per unit

1,000 units 6,000 units £40 20 10 30 6 14

What is the value of the ending inventory using the variable costing method? a. £240,000 b. £360,000 c. £350,000 d. £420,000 23. Proponents of variable costing argue that inventories have value only to the extent that they a. avoid the necessity for incurring costs in the future. b. eliminate depreciation charges. c. can be sold for enough to cover costs and a reasonable profit. d. turn over in less than one year. 24. Assuming sales prices and cost behaviour remain unchanged, when absorption costing is used, overproducing creates which of the following situations? a. A buildup of inventory levels b. Higher net income c. Less fixed costs on the income statement d. All of the above 25. All of the following costs are included in inventory under absorption costing EXCEPT a. direct materials. b. direct labour. c. fixed selling expenses. d. fixed factory overhead. 26. In the month just ended, Aldebraun Industries produced 40,000 units and sold 37,000 units. There were 2,000 units in finished goods inventory at the start of the month. Manufacturing costs are stable from month to month. The fixed overhead rate was £8 per unit. Aldebraun uses absorption costing. If Aldebraun used variable costing, the difference in net income would have been a. £24,000. b. £16,000. c. £40,000. d. £8,000. Copyright Cengage Learning. Powered by Cognero.

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Chapter_07_11e 27. Using absorption costing, a company can ____ net operating income by simply producing more than it sells. a. decrease b. increase c. maintain d. none of the above 28. Under which of the following conditions is net income higher under absorption costing (relative to variable costing)? a. Current period production exceeds sales. b. Inventory is reduced during the current period. c. Sales prices are rising. d. Net income is higher under absorption costing under all conditions. 29. The method of accounting for inventory that assigns all manufacturing costs to inventory is sometimes referred to as a. absorption costing. b. FIFO. c. the weighted average cost method. d. conversion costing. 30. Assuming sales prices and cost behaviour remain unchanged, when variable costing is used, when does net income change in response to changes in unit sales? a. Only when number of units sold exceeds number of units produced b. Only when number of units produced exceeds number of units sold c. Only when number of units sold exactly equals number of units produced d. Under all the above conditions 31. The following information pertains to Stark Ltd.: Beginning inventory Ending inventory Direct labour per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling costs per unit Fixed selling costs per unit

0 units 5,000 units £20 16 4 10 12 16

Absorption costing net income would be ____ the variable costing net income. a. £50,000 greater than b. £70,000 greater than c. £70,000 less than d. £50,000 less than

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Chapter_07_11e 32. Steele Ltd. has the following information for January, February, and March:

Units produced Units sold

January 10,000 7,000

February 10,000 8,500

March 10,000 10,500

£12 8 6 4 10 4

There were no beginning inventories for January 2021, and all units were sold for £50. Costs are stable over the three months. What is the March ending inventory for Steele Ltd. using the variable costing method? a. £120,000 b. £104,000 c. £260,000 d. £15,000 33. Stannel Company had 5,200 units in its ending inventory last year. The fixed manufacturing overhead was £1.75 per unit in beginning inventory, and variable manufacturing cost is £5 per unit. Stannel's net income was £4,725 higher than variable costing. How many units did the company have in beginning inventory? a. 2,500 b. 7,900 c. 5,200 d. 5,000

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Chapter_07_11e 34. Steele Ltd. has the following information for January, February, and March: January 10,000 7,000

Units produced Units sold

February 10,000 8,500

March 10,000 10,500

£12 8 6 4 10 4

There were no beginning inventories for January 2021, and all units were sold for £50. Costs are stable over the three months. What is the January ending inventory for Steele Ltd. using the variable costing method? a. £260,000 b. £78,000 c. £108,000 d. £90,000 35. Ramon Company reported the following units of production and sales for June and July: Units Month June July

Produced 100,000 100,000

Sold 90,000 105,000

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Chapter_07_11e 36. Eastwood Company has the following information for the year: Selling price Variable production costs Variable selling and admin. expenses Fixed production costs Fixed selling and admin. expenses Units produced Units sold

£150 per unit £40 per unit produced £16 per unit sold £200,000 £140,000 10,000 units 8,000 units

There were no beginning inventories. What is the net income for Eastwood using the variable costing method? a. £412,000 b. £480,000 c. £1,200,000 d. £600,000 37. The efficient level of activity performance is called a. activity capacity. b. practical capacity. c. unused capacity. d. acquired capacity. 38. The following information pertains to Mayberry Ltd.: Beginning inventory Ending inventory Direct labour per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling and admin. costs per unit Fixed selling and admin. costs per unit

1,000 units 6,000 units £40 20 10 30 6 14

Absorption costing net income would be ____ variable costing net income. a. £150,000 greater than b. £150,000 less than c. £240,000 less than d. £240,000 greater than

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Chapter_07_11e 39. Daggett Company produced 30,000 units and sold 28,000 units during the current fiscal period. Beginning inventory was zero. During the period, the following costs were incurred: Direct labour per unit Direct materials per unit Variable selling expense per unit Fixed administrative expenses Fixed manufacturing overhead Fixed selling expenses Indirect labour (all variable) Indirect materials (all variable) Other variable overhead Required:

£40 10 20 75,000 90,000 60,000 30,000 15,000 45,000

Compute the monetary amount of ending inventory using a. b.

absorption costing. variable costing.

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Chapter_07_11e 40. The variable costing income statement for Hensley Company for this quarter is as follows: The Hensley Company Variable Costing Income Statement For the current quarter Sales (5,000 units) Cost of Goods Sold (variable) Variable selling (10% of sales) Contribution Margin

£500,000 £150,000 50,000

Fixed manufacturing overhead Fixed administrative expenses

£120,000 72,000

Net income Selected data for the quarter concerning the operations of the company are as follows: Beginning inventory Units produced Direct manufacturing labour Direct manufacturing materials Variable manufacturing overhead

200,000 £300,000

192,000 £108,000

0 units 8,000 units £15 per unit 8 per unit 7 per unit

Required: Prepare an absorption costing income statement for the quarter.

41. Since fixed product costs are eventually recorded as expenses under both variable and absorption costing by the time the inventory is sold, why does it matter whether fixed overhead is treated as a product cost or a period cost?

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Chapter_07_11e 42. Jensen Company produced 10,000 cases of cookies this year. It sold 9,500 cases for £10 each. There were no beginning inventories. Variable manufacturing costs were £30,000, and fixed manufacturing expenses were £50 ,000. Selling and administrative expenses were £10,000, all fixed. Required: a. Prepare income statements using the variable costing and absorption costing. b. Reconcile the net income under absorption and variable costing.

43. Baker Company produced 30,000 units and sold 28,000 units during the year. Beginning inventory was zero. During the period, the following costs were incurred: Indirect labour Indirect materials Other Fixed manufacturing overhead Fixed administrative expenses Fixed selling expenses Variable selling expenses, per unit Direct labour, per unit Direct materials, per unit Required:

£60,000 30,000 90,000 180,000 150,000 120,000 40 80 20

Compute the monetary amount of ending inventory using: a. b.

Absorption costing Variable costing

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Chapter_07_11e 44. Ivy, SA, produces a single product that sells for £60 per unit. There were no inventories of work in process or finished goods. Costs for the year were as follows: Variable costs: Direct materials Direct labour Manufacturing overhead Selling expenses

£8 per unit £12 per unit £5 per unit £3 per unit

Fixed costs: Manufacturing overhead Selling and administrative

£36,000 per month £15,000 per month

During the first three months of the year, production and sales in units were as follows:

January February March Total

Production 4,000 4,000 4,000 12,000

Sales 4,000 3,500 4,500 12,000

The company uses an actual cost system. There were no work-in-process inventories at the end of any month, and the company uses FIFO costing. Required: a.

Determine the unit cost of production under variable costing for each of the three months.

Determine the unit cost of production under absorption costing for each of the three months.

Determine income under variable costing for each of the three months.

Determine income under absorption costing for each of the three months.

45. Provide an argument in favor of using variable costing and an argument against the use of variable costing.

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Chapter_07_11e 46. Jensen Company produced 10,000 cases of cookies this year. It sold 9,500 cases for £10 each. There were no beginning inventories. Variable manufacturing costs were £30,000, and fixed manufacturing expenses were £50,000. Selling and administrative expenses were £10,000, all fixed. Required: a. Prepare income statements using the variable costing and absorption costing. b. Reconcile the net income under absorption and variable costing.

47. The variable costing income statement for Jackson Company for the year is as follows: Sales (5,000 units) Variable expenses: Cost of goods sold Selling (10% of sales) Contribution margin Fixed expenses: Manufacturing overhead Administrative Net income

£10,000 £30,000 10,000

£24,000 14,400

40,000 £60,000

38,400 £21,600

Selected data concerning the operations of the company are as follows: Beginning inventory Units produced

-0- units 8,000 units

Manufacturing costs: Direct labour Direct materials Variable overhead Required:

£3.00 per unit 1.60 per unit 1.40 per unit

Prepare an absorption costing income statement for the year.

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Chapter_07_11e 48. Griffiths Industries began operations on January 1. The company sells a single product for £75 per unit. During the year, 9,000 units were produced and 8,600 units were sold. There was no work-in-process inventory at December 31. The company uses an actual cost system for product costing, and actual costs for the year were as follows:

Direct materials Direct labour Manufacturing overhead Selling and administrative expenses Required: a. b. c. d. e. f.

Fixed Costs -0-0£90,000 £50,000

Variable Costs £22.00 per unit produced £16.00 per unit produced £5.00 per unit produced £3.00 per unit sold

Determine the cost per unit using absorption costing. Determine the cost per unit using variable costing. Determine the finished goods inventory cost at December 31 using absorption costing. Determine the finished goods inventory cost at December 31 using variable costing. Determine absorption-costing income. Determine variable-costing income.

49. Compare and contrast absorption and variable costing.

50. Compare and contrast absorption and variable costing.

51. Explain how variable costing is useful in evaluating the performance of managers.

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Chapter_07_11e 52. Explain the differences between variable and absorption costing.

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Chapter_07_11e Answer Key 1. b 2. d 3. c 4. d 5. b 6. c 7. c 8. c 9. d 10. c 11. c 12. a 13. b 14. c 15. a 16. a 17. b 18. c 19. c 20. b 21. b 22. d 23. a 24. d 25. c 26. d

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Chapter_07_11e 27. b 28. a 29. a 30. d 31. a 32. b 33. b 34. b 35. d 36. a 37. b 38. a 39. a. Variable costs: Direct materials Direct labour Indirect labour Indirect materials Other variable overhead Variable product costs per unit:

£10.00 40.00 1.00 0.50 1.50 £53.00

Variable product costs per unit Fixed manufacturing overhead Total product costs per unit

£53.00 3.00 £56.00

Total product costs per unit Inventory units Inventory value b. Variable product costs per unit Inventory units Inventory value

£56.00 2,000 £112,000

£53.00 × 2,000 £106,000

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Chapter_07_11e 40. Hensley Company Absorption Costing Income Statement For the quarter just ended Sales Cost of Goods Sold* Gross Profit

£500,000 225,000 275,000

Selling Expenses Administrative Expenses

£50,000 72,000

Net Income *COGS = 5,000 × [£15 + £8 + £7 + (£120,000/8,000)]

£153,000

41. It matters whether fixed overhead is treated as a product cost or a period cost because the way it is treated affects the measurement of income for a particular period as well as the valuation assigned to inventory on the balance sheet at the end of the period. It could also have a behavioural effect on management decisions.

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Chapter_07_11e 42. a. Jensen Company Variable Costing Income Statement For the Year just ended Sales (9,500 units) Cost of Goods Sold (variable) Contribution Margin

£95,000 28,500 £66,500

Fixed manufacturing overhead Fixed administrative expenses

£50,000 10,000

Net income

60,000 £6,500

Jensen Company Absorption Costing Income Statement For the Year just ended Sales (9,500 units) Cost of Goods Sold (variable) Cost of Goods Sold (fixed) Gross Margin

95,000 28,500 47,500

76,000 £19,000

Fixed administrative expenses

10,000

Net income

£9,000

b. Variable costing net income Increase in units in inventory Fixed cost per unit in inventory Absorption costing net income

£6,500 500 × £5

2,500 £9,000

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Chapter_07_11e 43. a. Variable costs: Direct materials Direct labour Indirect labour Indirect materials Other variable overhead Variable product costs per unit Fixed manufacturing overhead Total product costs per unit Inventory units Inventory value

£20.00 80.00 2.00 1.00 3.00 £106.00 6.00 £112.00 1,000 £112,000

b. Variable product costs per unit Inventory units Inventory value

£106.00 1,000 £106,000

44. a. Direct materials Direct labour Variable manufacturing overhead Total manufacturing cost per unit b. Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead (£36,000/4,000) Total manufacturing cost per unit

January £8 12 5 £25

February £8 12 5 £25

March

January £8 12 5

February £8 12 5

March

9 £34

£8 12 5 £25

£8 12 5 9 £34

January, £77,000; February, £61,000; March, £93,000 Variable-Costing Income Statements

Sales Less variable expenses: Beginning inventory Cost of goods manufactured (£25 × 4,000) Goods available for sale Less: Ending inventory Cost of goods sold Copyright Cengage Learning. Powered by Cognero.

January

February

£240,000

£210,000

March £270,000

Total £720,000

£ -0-

£12500

£ -0-

100,000 £100,000 -0£100,000

100,000 £100,000 12,500 £87,500

100,000 £112,500 -0£112,500

300,000 £300,000 -0£300,000 Page 24

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Chapter_07_11e Selling expenses (£3 per unit) Total variable expenses Contribution margin Less fixed expenses: Manufacturing Selling and administrative Total fixed expenses Net income

12,000 £112,000 £128,000

10,500 £98,000 £112,000

13,500 £126,000 £144,000

36,000 £336,000 £384,000

£36,000 15,000 £51,000 £77,000

£ 36,000 15,000 £51,000 £61,000

£ 36,000 15,000 £51,000 £93,000

£108,000 45,000 £153,000 £231,000

January, £77,000; February, £65,500; March, £88,500 Absorption-Costing Income Statements

Sales Less: Cost of goods sold Beginning inventory Cost of goods manufactured (£34 × 4,000) Goods available for sale Less: Ending inventory Cost of goods sold Gross margin Less: Selling and admin. expenses Net income

January

February

£240,000

£210,000

March £270,000

Total £720,000

£ -0-

£17,000

£ -0-

136,000 £136,000 -0£136,000 £104,000

136,000 £136,000 17,000 £119,000 £91,000

136,000 £153,000 -0£153,000 £117,000

408,000 £408,000 -0£408,000 £312,000

27,000 £77,000

25,500 £65,500

28,500 £88,500

81,000 £231,000

45. Variable costing essentially assumes that fixed manufacturing costs do not add value to products. Rather fixed manufacturing costs are incurred to provide the capacity to produce during a given period. Fixed manufacturing costs are not relevant based on the fact that these costs are incurred regardless of the degree to which the available capacity was utilized. Likewise, inventory can be viewed as valuable only to the extent that it eliminates incurrence of future costs. However, since inventory levels do not affect the incurrence of fixed manufacturing costs, it follows that these costs should not be reflected in inventory. On the other hand, fixed manufacturing costs are a necessary condition for manufacturing the product. For this reason, it seems reasonable to match these costs to products. Viewing the matter from a long-term perspective, all costs are variable. If these costs are not reflected in the costs of products, over time product costs will be understated.

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Chapter_07_11e 46. ,a. Jensen Company Variable Costing Income Statement For the Year just ended Sales (9,500 units) Cost of Goods Sold (variable) Contribution Margin

£95,000 28,500 £66,500

Fixed manufacturing overhead Fixed administrative expenses

£50,000 10,000

Net income

60,000 £6,500

Jensen Company Absorption Costing Income Statement For the Year just ended Sales (9,500 units) Cost of Goods Sold (variable) Cost of Goods Sold (fixed) Gross Margin

95,000 28,500 47,500

76,000 £19,000

Fixed administrative expenses

10,000

Net income

£9,000

b. Variable costing net income Increase in units in inventory Fixed cost per unit in inventory Absorption costing net income

£6,500 500 × £5

2,000 £9,000

47. Sales Less cost of goods sold: {5,000 × [£3.00 + £1.60 + £1.40 + (£24,000/8,000)]} Gross profit Less operating expenses: Selling expenses Administrative expenses Net income

£100,000 45,000 £55,000 £10,000 14,400

24,400 £30,600

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Chapter_07_11e 48. a. £53 Cost per unit using absorption costing: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead

£22.00 16.00 5.00 (£90,000/9,000 units)

10.00

Cost per unit

£53.00

b. £43 Cost per unit using variable costing: Direct materials Direct labour Variable manufacturing overhead Cost per unit

£22.00 16.00 5.00 £43.00

c. £21,200

(9,000 - 8,600) × £53

d. £17,200

(9,000 - 8,600) × £43

e. £113,400 Absorption Costing Sales (£75 × 8,600) Cost of goods sold: Beginning inventory Cost of goods manufactured

£645,000 £ -0(£53 × 9,000)

Goods available for sale Less: Ending inventory

477,000 £477,000

(£53 × 400) Gross margin Less selling and administrative expenses: Fixed Variable (£3 × 8,600) Total selling and administrative expenses Net income

21,200

455,800 £189,200

£50,000 25,800 75,800 £113,400

f. £109,400 Variable Costing Sales (£75 × 8,600) Less variable expenses: Cost of goods sold: Beginning inventory Copyright Cengage Learning. Powered by Cognero.

£645,000

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Chapter_07_11e Cost of goods manufactured (£43 × 9,000) Goods available for sale Less: Ending inventory (£43 × 400) Variable selling expenses (£3 × 8,600) Total variable expenses Contribution margin Less fixed expenses: Manufacturing overhead Selling and administrative Total fixed expenses Net income

38,700 £387,000 17,200

£369,800 25,800 395,600 £249,400 £9,000 50,000 140,000 £109,400

49. Absorption and variable costing methods are similar in that they both treat nonmanufacturing costs incurred during the period, such as selling and administration costs, as expenses (period costs). The difference between absorption and variable costing is how they treat manufacturing costs. Whereas absorption costing treats both variable and fixed manufacturing costs as inventoriable product costs, variable costing treats only variable manufacturing costs as inventoriable product costs; fixed manufacturing costs are treated as period costs. 50. Absorption and variable costing methods are similar in that they both treat non-manufacturing costs incurred during the period, such as selling and administration costs, as expenses (period costs). The difference between absorption and variable costing is how they treat manufacturing costs. Whereas absorption costing treats both variable and fixed manufacturing costs as inventoriable product costs, variable costing treats only variable manufacturing costs as inventoriable product costs; fixed manufacturing costs are treated as period costs. 51. By separating costs according to behaviour, variable costing enhances traceability and controllability of costs. Variable costing preserves the correspondence between effort and outcome necessary for good evaluation of management performance. 52. Variable and absorption costing differ in their treatment of fixed factory overhead. Variable costing treats fixed factory overhead as a period expense. Thus, unit production cost under variable costing consists of direct materials, direct labour, and variable factory overhead. Absorption costing treats fixed factory overhead as a product cost. Thus, unit production cost under absorption costing consists of direct materials, direct labour, variable factory overhead, and a share of fixed factory overhead.

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Chapter_08_11e Indicate the answer choice that best completes the statement or answers the question. 1. Information about the Harmon Company's two products includes:

Unit selling price Unit variable costs: Manufacturing Selling Total Monthly fixed costs are as follows: Manufacturing Selling and administrative Total

Product X £9.00

Product Y £9.00

£5.25 0.75 £6.00

£6.75 0.75 £7.50

£82,500 45,000 £127,500

What is the total monthly sales volume in units required to break even when the sales mix in units is 70 per cent Product X and 30 per cent Product Y? a. 8,333 units b. 50,000 units c. 16,667 units d. 56,667 units 2. When a company sells more units than the break-even point, a. it moves above the relevant range. b. profits are positive. c. there are no new variable costs incurred. d. profits are negative. 3. Lewis Production Company had the following projected information for the year: Selling price per unit Variable cost per unit Total fixed costs

£150 £90 £300,000

What is the contribution margin ratio? a. 0.400 b. 1.667 c. 2.500 d. 0.600 4. The range of operations within which a linear cost function is valid is called a. the linear average. b. the relevant range. c. the marginal range. d. the functional range. Copyright Cengage Learning. Powered by Cognero.

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Chapter_08_11e 5. Which of the following statements is TRUE? a. The slope of the total cost line is dependent on the variable cost per unit. b. The total cost line normally begins at zero. c. The total revenue line typically begins above zero. d. The slope of the total revenue line is the contribution margin per unit. 6. In a cost-volume-profit graph, the slope of the total revenue line represents a. the selling price per unit. b. the contribution margin per unit. c. the variable cost per unit. d. total contribution margin. 7. The income statement for Thomas Manufacturing Company for a period is as follows: Sales (10,000 units) Variable expenses Contribution margin Fixed expenses Operating income

£120,000 72,000 £48,000 36,000 £12,000

What is the contribution margin per unit? a. £7.20 b. £1.20 c. £4.80 d. £120,000 8. Total contribution margin is calculated by subtracting a. cost of goods sold from total revenues. b. fixed costs from total revenues. c. total manufacturing costs from total revenues. d. total variable costs from total revenues. 9. Assuming all other things are equal, fixed costs must have ____ if there was a decrease in the break-even point. a. remained the same b. increased first, then decreased c. increased d. decreased 10. Assuming all other things are the same, contribution margin per unit must have ____ if there was an increase in the break-even point. a. remained the same b. increased first, then decreased c. increased d. decreased Copyright Cengage Learning. Powered by Cognero.

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Chapter_08_11e 11. Cost-volume-profit models assume that a. the sales mix may vary among multiple products. b. unit selling prices are constant. c. inventories are dynamic and subject to change. d. the total cost function is quadratic. 12. Product 1 has a contribution margin of £6.00 per unit, and Product 2 has a contribution margin of £7.50 per unit. Total fixed costs are £300,000. Sales mix and total volume varies from one period to another. Which of the following is TRUE? a. At a sales volume in excess of 25,000 units of 1 and 25,000 units of 2, operations will be profitable. b. The ratio of net profit to total sales for 2 will be larger than the ratio of net profit to total sales for 1. c. The contribution margin per unit of direct materials is lower for 1 than for 2. d. The ratio of contribution to total sales always will be larger for 1 than for 2. 13. Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 per cent of sales and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its volume of sales. What sales pound level is needed to obtain a before-tax profit of £60,000 when the selling price is £6.00 per unit? a. £360,000 b. £120,000 c. £72,000 d. £90,000 14. Lewis Production Company had the following projected information for the year: Selling price per unit Variable cost per unit Total fixed costs

£150 £90 £300,000

What is the profit when one unit more than the break-even point is sold? a. £150 b. £60 c. £1,500,150 d. £600,060

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Chapter_08_11e 15. Urban Company had the following information: Activity Driver Units sold Setups Engineering hours Other data: Total fixed costs (traditional) Total fixed costs (ABC) Unit selling price

Unit Variable Cost £20 1,200 52

Level of Activity Driver -60 1,500

£600,000 £300,000 £60

Suppose Urban could reduce setup costs by £300 per setup and could reduce the number of engineering hours needed to 1,400 hours. How many units must be sold to break even in this case? a. 10,670 units b. 21,340 units c. 6,350 units d. 7,500 units 16. Which of the following assumptions is NOT necessary for cost-volume-profit analysis? a. Total variable costs are linear. b. Total revenues increase when total costs increase. c. Inventories are constant. d. The product sales mix is constant. 17. Assuming all other things are the same, selling price per unit must have ____ if there was a decrease in the break-even point. a. remained the same b. increased first, then decreased c. increased d. decreased 18. The contribution margin at the break-even point a. equals total fixed costs. b. is zero. c. plus total fixed costs equals total revenues. d. is greater than variable costs. 19. Management is interested in utilizing the full capacity of production facilities because it a. spreads variable costs over a greater number of units, thereby reducing the variable cost per unit. b. spreads fixed costs over a greater number of units, thereby reducing the fixed cost per unit. c. reduces total variable costs. d. reduces total fixed costs.

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Chapter_08_11e 20. Assuming all other things are the same, variable cost per unit must have ____ if there was an increase in the break-even point. a. remained the same b. increased first, then decreased c. increased d. depends on the circumstances 21. Which of the following assumptions does NOT pertain to cost-profit-volume analysis? a. Sales price per unit remains constant. b. The sales mix is constant. c. Inventories in a manufacturing entity may go up or down. d. Fixed expenses are constant at all volumes of activities within the relevant range. 22. The following information is provided: Sales price per unit Variable cost per unit Fixed costs Expected sales The margin of safety is a. 2,000 units. b. 3,000 units. c. 5,000 units. d. 7,000 units.

£70 £45 £50,000 5,000 units

23. Information about the Harmon Company's two products includes:

Unit selling price Unit variable costs: Manufacturing Selling Total Monthly fixed costs are as follows: Manufacturing Selling and administrative Total

Product X £9.00

Product Y £9.00

£5.25 0.75 £6.00

£6.75 0.75 £7.50

£82,500 45,000 £127,500

If the sales mix in units is 50 per cent Product X and 50 per cent Product Y, the monthly break-even total monetary sales is a. £150,000. b. £450,000. c. £510,000. d. £630,000.

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Chapter_08_11e 24. Which of the following statements is true concerning the use of linear analysis at high activity levels (above the range for which the company's facility was designed)? a. Linear analysis is well suited for estimating total costs at high activity levels. b. Linear analysis likely understates total costs at high activity levels. c. Linear analysis likely overstates total costs at high activity levels. d. Linear analysis of high activity levels fails to capture the fact that total fixed costs decrease as more units are produced. 25. A decrease in the sales price in the basic cost-volume-profit model would a. require a recomputation of the gross profit per unit. b. be offset by an increase in unit costs. c. decrease the break-even volume. d. increase the break-even volume. 26. The break-even point is a. the volume of activity where all fixed costs are recovered. b. where fixed costs equal total variable costs. c. where total revenues equal total costs. d. where total costs equal total contribution margin. 27. Which of the following items would NOT be considered in cost-volume-profit analysis? a. Units of production b. Fixed costs c. Product mix d. Gross profit margin 28. What is the first step in classifying costs according to behaviour? a. Identify the resources needed and the output of the activity b. Measure the outputs and inputs c. Determine the time horizon d. Determine the impact of output changes on the activity cost

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Chapter_08_11e 29. The following data pertain to the three products produced by Alberts Ltd.:

Selling price per unit Variable costs per unit Contribution margin per unit

A £5.00 4.00 £1.00

B £7.00 5.00 £2.00

C £6.00 3.00 £3.00

Fixed costs are £90,000 per month. Sixty per cent of all units sold are Product A, 30 per cent are Product B and 10 per cent are Product C. What is the monthly break-even point for total units? a. 45,000 units b. 36,000 units c. 60,000 units d. 180,000 units 30. Using cost-volume-profit analysis, we can conclude that a 20 per cent reduction in variable costs will a. reduce the break-even sales volume by 20 per cent. b. reduce total costs by 20 per cent. c. reduce the slope of the total cost line by 20 per cent. d. not affect the break-even sales volume if there is an offsetting 20 per cent increase in fixed costs. 31. Which of the following is a TRUE statement about sales mix? a. Profits may decline with an increase in total monetary sales if the sales mix shifts to sell more of the high contribution margin product. b. Profits may decline with an increase in total monetary sales if the sales mix shifts to sell more of the lower contribution margin product. c. Profits will remain constant with an increase in total monetary sales if the total sales in units remains constant. d. Profits will remain constant with a decrease in total monetary sales if the sales mix also remains constant. 32. Lewis Production Company had the following projected information for the year: Selling price per unit Variable cost per unit Total fixed costs

£150 £90 £300,000

What is the break-even point in units? a. 2,000 units b. 5,000 units c. 3,333 units d. 60,000 units

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Chapter_08_11e 33. Which of the following assumptions does NOT pertain to cost-volume-profit analysis? a. The units produced will equal the units sold. b. Inventories are constant. c. All costs are classified as fixed or variable. d. Sales mix may vary during the related period. 34. The Kringel Company provides the following information: Sales (200,000 units) Manufacturing costs: Variable Fixed Selling and administrative costs: Variable Fixed

£500,000 170,000 30,000 80,000 20,000

What is the break-even point in units for Kringel? a. 33,334 units b. 100,000 units c. 40,000 units d. 200,000 units 35. Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 per cent of sales and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its volume of sales. What is the monetary sales level required to break even at the old price of £7.50? a. £75,000 b. £12,000 c. £18,000 d. £50,000 36. The income statement for Thomas Manufacturing Company for a period is as follows: Sales (10,000 units) Variable expenses Contribution margin Fixed expenses Operating income

£120,000 72,000 £48,000 36,000 £12,000

If sales increase by £60,000, what will happen to profit? a. Increase by £60,000 b. Increase by £24,000 c. Increase by £6,000 d. Increase by £36,000 Copyright Cengage Learning. Powered by Cognero.

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Chapter_08_11e 37. The following diagram is a cost-volume-profit graph for a manufacturing company:

Select the answer that best describes the labelled item on the diagram. a. Area CDE represents the area of net loss. b. Line AC graphs total fixed costs. c. Point D represents the point at which the contribution margin per unit increases. d. Line AC graphs total costs. 38. In a profit-volume graph, the slope of the profit line represents a. the selling price per unit. b. the contribution margin per unit. c. the variable cost per unit. d. total contribution margin. 39. Camp Gordon has annual fixed operating costs of £150,000 and a variable cost of £550 per camper. Total fees charged to campers amount to £500 each. The camp expects 350 campers next summer. Projected government grants are £95,000. How much must Camp Gordon raise from other sources to break even? a. £45,000 b. £37,500 c. £97,500 d. £72,500 40. In a cost-volume-profit graph, the slope of the total cost line represents a. the selling price per unit. b. the contribution margin per unit. c. the variable cost per unit. d. total contribution margin. 41. Which of the following statements is TRUE about relevant range? a. When costs reach a level above the relevant range, they are considered appropriate for analysis. b. Linear estimates of an economist's curvilinear cost function is only valid within the relevant range. c. When costs reach a level below the relevant range, they are considered appropriate for analysis. d. The nonlinear relevant range is ignored, and only those costs outside of this range may be considered.

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Chapter_08_11e 42. A profit-volume graph a. measures profit or loss on the horizontal axis. b. illustrates total revenues, total cost and profits at various sales volumes. c. is not subject to the same limiting assumptions as cost-volume-profit graphs. d. illustrates the relationship between volume and profits. 43. Sarah Smith, a sole proprietor, has the following projected figures for next year: Selling price per unit Contribution margin per unit Total fixed costs

£150.00 £45.00 £630,000

How many units must be sold to obtain a target before-tax profit of £270,000? a. 6,000 units b. 20,000 units c. 8,572 units d. 14,000 units 44. The following diagram is a cost-volume-profit graph for a manufacturing company:

The difference between line AB and line AC (area BAC) is the a. contribution ratio. b. total variable cost. c. contribution margin per unit. d. total fixed cost.

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Chapter_08_11e 45. Sarah Smith, a sole proprietor, has the following projected figures for next year: Selling price per unit Contribution margin per unit Total fixed costs

£150.00 £45.00 £630,000

What is the break-even point in monetary terms? a. £426,000 b. £2,100,000 c. £189,000 d. £900,000 46. On a profit-volume graph, the profit line intersects the horizontal axis at a. the origin. b. the break-even point. c. a volume of 1,000 units. d. a point where profit is greater than zero. 47. On a profit-volume graph, the intersection of the profit line with the vertical axis provides a a. profit of £1,000. b. profit equal to zero. c. profit equal to fixed costs. d. loss equal to fixed costs. 48. What selling price per unit is needed to obtain a before-tax profit of £270,000 at a volume of 4,000 units? a. £150.00 b. £330.00 c. £225.00 d. £105.00 49. Dirth Company sells only one product at a regular price of £7.50 per unit. Variable expenses are 60 per cent of sales and fixed expenses are £30,000. Management has decided to decrease the selling price to £6.00 in hopes of increasing its volume of sales. What is the new break-even point in units for Dirth Company when the selling price is £6.00? a. 10,000 units b. 6,667 units c. 4,000 units d. 20,000 units

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Chapter_08_11e 50. Information about two products is as follows: Product C Product D Selling price per unit £20 £25 Variable costs per unit 11 18 Contribution margin per unit £9 £7 The firm expects 60 per cent of its sales (in units) to be Product C (a sales mix of 6:4). Fixed costs are expected to be £82,000. Break-even in units would be

a. 1,200 units b. 2,460 units c. 18,000 units d. 6,000 units

Product C 800 units 1,312 units 14,000 units 4,000 units

Product D

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Chapter_08_11e 51. Chopra Company developed the following income statement using a contribution margin approach: CHOPRA COMPANY PROJECTED INCOME STATEMENT FOR THE CURRENT YEAR ENDING DECEMBER 31 Sales Less variable costs: Variable manufacturing costs Variable selling costs Total variable costs Contribution margin Less fixed costs: Fixed manufacturing costs Fixed selling and administrative costs Total fixed costs Operating income

£240,000

£60,000 36,000 96,000 £144,000

£85,000 35,000 120,000 £24,000

The projected income statement was based on sales of 12,000 units. Chopra has the capacity to produce 15,000 units during the year. Required: a. b.

Determine the break-even point in units. The sales manager believes the company could increase sales by 1,000 units if advertising expenditures were increased by £15,000. Determine the effect on income if the company increases advertising expenditures. What is the maximum amount the company could pay for advertising if the advertising would increase sales by 1,000 units?

52. Describe the CVP analysis. Discuss how this analysis can be useful.

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Chapter_08_11e 53. Zachary Plumbing Company has the following information for 20X1: Selling price per unit Variable costs per unit Fixed costs

£10 £7 £1,500

Required: Prepare a profit-volume graph identifying the following items: a. b. c. d. e.

Profit line Intersection of profit line and vertical axis Break-even point Profit area Loss area

54. For each of the following situations, draw a graph that best describes the cost behaviour pattern. The vertical axis represents costs, and the horizontal axis represents volume. a. b. c. d. e.

Direct materials per unit Depreciation expense on a building per unit An employee paid £50 per hour with a guaranteed salary of £1,000 per week A consultant paid £100 per hour with a maximum fee of £2,000 Salaries of teachers where each teacher can handle a maximum of 15 students

55. Explain the limitation of basic cost-volume-profit analysis as it relates to an organization's sales mix.

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Chapter_08_11e 56. The Barnes Company manufactures two products. Information about the two product lines is as follows: Product K £80 45 £35

Selling price per unit Variable costs per unit Contribution margin per unit

Product Y £30 15 £15

The company expects fixed costs to be £189,000. The firm expects 60 per cent of its sales (in units) to be Product K (a sales mix of 3:2). Required: a.

Calculate the contribution margin per package.

b. c.

Determine the break-even point in units for Product K and Product Y. Determine the level of sales (in pounds) necessary to generate a before-tax profit of £135,000.

57. Supply the missing data in each independent case.

Unit sales Sales revenue Variable cost per unit Contribution Margin Fixed costs Operating income Unit contribution margin Break-even point (units) Margin of Safety

Case 1 700 £42,000 £45 ? £7,500 ? ? ? ?

Case 2 300 ? £1 £1,200 ? £100 ? ? ?

Case 3 ? ? £15 ? £60,000 ? ? 5,000 1,000

Case 4 ? £58,000 ? ? ? ? £1 30,000 -1,000

Case 5 ? £40,000 ? £10,000 ? ? £2 ? 600

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Chapter_08_11e 58. The Millennium Company produces two types of products: Quality and Superior. The company expects to sell 1,200 units of Quality and 800 units of Superior. A projected income statement for the firm as a whole follows: Sales Less: Variable costs Contribution margin Less: Fixed costs Operating income

£400,000 100,000 £300,000 75,000 £225,000

Required: a. b. c.

Determine the break-even point in terms of sales revenue. Determine the sales revenue necessary to generate a before-tax profit of £300,000. Determine the sales revenue necessary to generate an after-tax profit of £270,000 if the tax rate is 40 per cent.

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Chapter_08_11e 59. Anthony Industries developed the following income statement using a contribution margin approach: ANTHONY INDUSTRIES PROJECTED INCOME STATEMENT FOR THE CURRENT YEAR ENDING DECEMBER 31 Sales Less variable costs: Variable manufacturing costs Variable selling costs Total variable costs Contribution margin Less fixed costs: Fixed manufacturing costs Fixed selling and administrative costs Total fixed costs Operating income

£750,000

£280,000 120,000 400,000 £350,000

£130,000 80,000 210,000 £140,000

The projected income statement was based on sales of 100,000 units. Anthony has the capacity to produce 120,000 units during the year. Required: a. b.

Determine the break-even point in units. The sales manager believes the company could increase sales by 8,000 units if advertising expenditures were increased by £22,000. Determine the effect on income if the company increases advertising expenditures. What is the maximum amount the company could pay for advertising if the advertising would increase sales by 8,000 units?

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Chapter_08_11e 60. At a price of £32, the estimated monthly sales of a product are 12,000 units. Variable costs include manufacturing costs of £18 and distribution costs of £6. Fixed costs are £40,000 per month. Required: Determine each of the following values: a. b. c. d.

Unit contribution margin Monthly break-even unit sales volume Before-tax monthly profit Monthly margin of safety in units

61. Enola, SA, manufactures a product that sells for £400. The variable costs per unit are as follows: Direct materials £100 Direct labour 80 Variable manufacturing overhead 50 During the year, the budgeted fixed manufacturing overhead is estimated to be £500,000, and budgeted fixed selling and administrative costs are expected to be £250,000. Variable selling costs are £20 per unit. Required: a. b. c.

Determine the break-even point in units. Determine the number of units that must be sold to earn £300,000 in profit before taxes. Determine the number of units that must be sold to generate an after-tax profit of £90,000 if there is a 40 per cent tax rate.

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Chapter_08_11e 62. The Valdez Mug Company manufactures plastic mugs that sell to wholesalers for £4.00 each. Variable and fixed costs are as follows: Variable Costs per Unit Manufacturing: Direct materials Direct labour Factory overhead Selling and adm. Total

Fixed Costs per Month £0.60 0.70 0.50

£1.80 0.40 £2.20

Factory overhead Selling and adm. Total

£8,000 6,000 £14,000

Valdez Mug produced and sold 10,000 cups during April. There were no beginning or ending inventories. Required: a. b. c.

Determine Valdez Mug's monthly break-even point in units. If monthly sales increase by 500 cups, what will be the change in monthly profits? If Valdez Mug is now subject to an income tax of 40 per cent, what pound sales volume is required to earn a monthly after-tax net income of £12,000?

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Chapter_08_11e 63. The Young Manufacturing Company produces the following three products:

Selling price per unit Variable costs per unit Contribution per unit Fixed costs are £76,000 per year.

Hammers £40 28 £12

Screwdrivers £16 12 £4

Saws £50 30 £20

Fifty per cent of all sales in units are hammers, 30 per cent are screwdrivers and 20 per cent are saws. Required: Calculate the following values: a. b. c.

Break-even point in total units Number of hammers that will be sold at break-even Total sales in units to obtain a before-tax profit of £19,000

64. Xi Company is the exclusive Iowa distributor of lawn mowers for a small manufacturing company. It sells only one model at £600 per unit and for which Xi pays £250. Xi's other variable costs amount to £50 per unit. Fixed costs are £2,000. In October, Xi sold 15 lawn mowers and it sold 20 in November. Required: Calculate the following values: a. b. c. d. e.

Monthly break-even point in monetary sales Monthly break-even point in units Monthly income for October Monthly income for November Margin of safety for October

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Chapter_08_11e Answer Key 1. b 2. b 3. a 4. b 5. a 6. a 7. c 8. d 9. d 10. d 11. b 12. a 13. a 14. b 15. a 16. b 17. c 18. a 19. b 20. c 21. c 22. b 23. c 24. b 25. d 26. c

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Chapter_08_11e 27. d 28. c 29. c 30. c 31. b 32. b 33. d 34. c 35. a 36. b 37. d 38. b 39. d 40. c 41. b 42. d 43. b 44. b 45. b 46. b 47. d 48. b 49. d 50. d

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Chapter_08_11e 51. a. b. c.

10,000 units £3,000 decrease £12,000

£120,000/(£20 - £8) (1,000 × £12) - £15,000 1,000 × £12

52. Cost-Volume-Profit analysis is a technique used to examine the relationships among the total volume of some cost driver (usually volume), total costs, total revenues, and consequently, profits during a defined period of time (typically a month, a quarter or a year). CVP analysis is widely used in service, manufacturing, merchandising and even non-profit organizations. CVP analysis is most useful in the early stages of planning because it provides an easily understood framework for discussing planning issues and organizing relevant data. The analysis is used to address a variety of issues. These include (1) determining a breakeven point in sales units or monetary sales; (2) determining the amount of sales (units or pounds) necessary to earn a target profit; (3) determining sensitivity of profit to changes in price or costs.

53. *The break-even point is 500 units.

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Chapter_08_11e

54. 55. Sales mix refers to the relative portion of unit or pound sales that are derived from each product. One of the limiting assumptions of the basic cost-volume-profit model is that the analysis is for a single product or the sales mix is constant. When the sales mix is constant, managers of multiple-product organizations can use the average unit contribution margin, or the average contribution margin ratio, to determine the break-even point or sales volume required for a desired profit. Often, however, management is interested in the effect of a change in the sales mix rather than a change in sales volume at a constant mix.

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Chapter_08_11e 56. a.

£135 Selling Price £80 £30

Product K Product Y

Variable Cost £45 £15

= = =

Contribution Margin £35 £15

× × ×

Mix 3 = £105 2 = 30 £135

Product K: 4,200 units Product Y: 2,800 units £189,000/£135 per package = 1,400 packages Product K: 1,400 packages × 3 = Product Y: 1,400 packages × 2 = Total

4,200 units 2,800 units 7,000 units

£720,000 (£189,000 + £135,000)/£135 per package = 2,400 packages Product K sales: 2,400 packages × 3 units × £80 = Product Y sales: 2,400 packages × 2 units × £30 = Total sales

£576,000 144,000 £720,000

57. Unit sales Sales revenue Variable cost per unit Contribution Margin Fixed costs Operating income Unit contribution margin Break-even point (units) Margin of Safety

Case 1 700 £42,000 £45 £10,500 £7,500 £3,000 £15 500 200

Case 2 300 £1,500 £1 £1,200 £1,100 £100 £4 275 25

Case 3 6,000 £162,000 £15 £72,000 £60,000 £12,000 £12 5,000 1,000

Case 4 29,000 £58,000 £1 £29,000 £30,000 -£1,000 £1 30,000 -1,000

Case 5 5,000 £40,000 £6 £10,000 £8,800 £1,200 £2 4,400 600

Case 1: Price = £42,000/700 = £60; Unit CM = £60 - £45 = £15; Total CM = (£15)(700) = £10,500; Op. SA. = £10,500 - £7,500 = £3,000; Copyright Cengage Learning. Powered by Cognero.

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Chapter_08_11e B. E. point = £7,500/£15 = 500; Margin Safety = 700 - 500 = 200; Case 2: Revenue = £1,200 + (300)(£1) = £1,500; Fixed Costs = £1,200 - £100 = £1,100; Unit CM = £1,200/300 = £4; B. E. point = £1,100/£4 = 275; Margin Safety = 300 - 275 = 25; Case 3: Unit Sales = 5,000 + 1,000 = 6,000; Price = (£60,000/5,000) + (£15) = £27; Revenue = (£27)(6,000) = £162,000; CM = £162,000 - (6,000)(£15) = £72,000; Op. SA. = £72,000 - £60,000 = 12,000; Unit CM = £27 - £15 = £12; Case 4: Unit Sales = 30,000 - 1,000 = 29,000; Fixed Costs = (30,000)(£1) = £30,000; Price = £58,000/29,000 = £2; V. C. per unit = £2 - £1 = £1; CM = (£1)(29,000) = £29,000; Op. SA. = £29,000 - £30,000 = -£1,000; Case 5: Unit Sales = £10,000/£2 = 5,000; Price = £40,000/5,000 = £8; V. C. per unit = £8 - £2 = £6; B. E. point = 5,000 - 600 = 4,400; Fixed Costs = (4,400)(£2) = £8,800; Op. SA. = £10,000 - £8,800 = £1,200. 58. a. b. c.

£100,000 £500,000 £700,000

a. b. c.

60,000 units £6,000 increase £28,000

£75,000/(£300,000/£400,000) (£75,000 + £300,000)/75% [£75,000 + (£270,000/0.6)]/75%

59. £210,000/(£7.50 - £4.00) (8,000 × £3.50) - £22,000 8,000 × £3.50

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Chapter_08_11e 60. a.

Selling price Variable costs: Manufacturing Distribution Unit contribution margin

£32 £18 6

24 £8

Monthly break-even point = £40,000/£8 = 5,000 units

Monthly contribution = (£8 × 12,000) Monthly fixed costs Monthly before-tax monthly profit

£96,000 40,000 £56,000

Monthly sales volume Monthly break-even sales volume Monthly margin of safety

12,000 units 5,000 units 7,000 units

61. a. 5,000 units b. 7,000 units c. 6,000 units

(£500,000 + £250,000)/[£400 - (£100 + £80 + £50 + £20)] (£750,000 + £300,000)/(£400 - £250) [£750,000 + (£90,000/0.6)]/(£400 - £250)

62. a.

Unit selling price Unit variable costs Unit contribution margin

£4.00 2.20 £1.80

Break-even point = £14,000/£1.80 = 7,777.7 units, or 7,778 units b.

Increase in sales Unit contribution margin Increase in monthly profits

Desired before-tax profit = £12,000/(1.00 - 0.40) = £20,000

500units £1.80 £900

Contribution margin percentage = £1.80/4.00 = 45% Required sales volume = (£14,000 + £20,000)/0.45 = £75,556

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Chapter_08_11e 63. a.

Ave. CM/unit = (£12 × 0.5) + (£4 × 0.3) + (£20 × 0.2) = £11.20 £76,000/£11.20 = 6,786 units of hammers, screwdrivers and saws

6,786 × 0.5 = 3,393 hammers

(£76,000 + £19,000)/£11.20 = 8,482 units

a. b. c. d. e.

£2,000/[(600 - 250 - 50)/600] = £4,000 £2,000/(600 - 250 - 50) = 6.67 or 7 mowers (15 × £300) - £2,000 = £2,500 (20 × £300) - £2,000 = £4,000 £9,000 - £4,000 = £5,000, or 9 mowers

64.

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Chapter_09_11e Indicate the answer choice that best completes the statement or answers the question. 1. Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: Direct materials Direct labour Factory overhead (30% variable) Selling expenses (50% variable) Administrative expenses (10% variable) Total per unit

£2,400 960 1,800 900 840 £6,900

Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order. How much will income change if the special order is accepted? a. Increase by £398,400 b. Decrease by £180,000 c. Increase by £111,600 d. No change 2. Which of the following costs is NOT relevant for special decisions? a. Incremental costs b. Sunk costs c. Avoidable costs d. All of the above costs are relevant for special decisions. 3. Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: Direct materials Direct labour Factory overhead (30% variable) Selling expenses (50% variable) Administrative expenses (10% variable) Total per unit

£2,400 960 1,800 900 840 £6,900

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Chapter_09_11e 4. An important qualitative factor to consider regarding a special order is the a. variable costs associated with the special order. b. avoidable fixed costs associated with the special order. c. effect the sale of special order units will have on the sale of regularly priced units. d. incremental revenue from the special order. 5. Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: Direct materials Direct labour Factory overhead (30% variable) Selling expenses (50% variable) Administrative expenses (10% variable) Total per unit

£2,400 960 1,800 900 840 £6,900

Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales by 40 units in order to contract the special order. There are selling expenses on only the sales to the regular customers. What is the net income if the special order of 100 units is accepted? a. £831,960 b. £876,960 c. £1,011,600 d. £900,000 6. If there is excess capacity, the minimum acceptable price for a special order must cover a. only variable costs associated with the special order. b. variable and fixed manufacturing costs associated with the special order. c. variable and incremental fixed costs associated with the special order. d. variable costs and incremental fixed costs associated with the special order, plus the contribution margin usually earned on regular units. 7. Which of the following statements is true when making a decision between two alternatives? a. Variable costs may not be relevant when the decision alternatives have the same activity levels. b. Variable costs are not relevant when the decision alternatives have different activity levels. c. Sunk costs are always relevant. d. Fixed costs are never relevant.

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Chapter_09_11e 8. The following information relates to a product produced by Creamer Company: Direct materials Direct labour Variable overhead Fixed overhead Unit cost

£24 15 30 18 £87

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Chapter_09_11e 11. The Dot Company manufactures two products: X and Y. The contribution margin per unit is determined as follows: X £130 70 ,,£60

Sales Variable costs Contribution margin

Y £80 38 £42

Total demand for Product X is 16,000 units and for Product Y is 8,000 units. Machine hours is a scarce resource. During the year, 42,000 machine hours are available. Product X requires 6 machine hours per unit, while Product Y requires 3 machine hours per unit. How many units of Products X and Y should Dot Company produce?

a. 16,000 b. 8,000 c. 7,000 d. 3,000

Product X -04,000 -08,000

Product Y

12. If the firm is at full capacity, the minimum special-order price must cover a. variable costs associated with the special order. b. variable and fixed manufacturing costs associated with the special order. c. variable and incremental fixed costs associated with the special order. d. variable costs and incremental fixed costs associated with the special order, plus foregone contribution margin on regular units not produced. 13. If a firm is at full capacity, the minimum special order price must cover a. variable costs associated with the special order. b. variable and fixed manufacturing costs associated with the special order. c. variable and incremental fixed costs associated with the special order. d. variable costs and incremental fixed costs associated with the special order plus foregone contribution margin on regular units not produced.

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Chapter_09_11e 14. WJE Company has only 4,000 machine hours available each month. The following information on the company's three products is available:

Contribution margin per unit Machine hours per unit

Product AA £10 2

Product BB £13 1.5

Product CC £5 0.5

If demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits? a. Product AA first, Product BB second and Product CC third b. Product BB first, Product AA second and Product CC third c. Product CC first, Product BB second and Product AA third d. Product CC first, Product AA second and Product BB third 15. Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: Direct materials Direct labour Factory overhead (30% variable) Selling expenses (50% variable) Administrative expenses (10% variable) Total per unit

£2,400 960 1,800 900 840 £6,900

Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order. What is the profit earned by Reggie Ltd. on the original 1,000 units? a. £6,900,000 b. £8,400,000 c. £900,000 d. £2,640,000 16. Zandy Beverage Company plans to eliminate a branch that has a contribution margin of £50,000 and fixed costs of £75,000. Of the fixed costs, £55,000 cannot be eliminated. The effect of eliminating this branch on net income would be a(n) a. decrease of £25,000. b. increase of £25,000. c. decrease of £30,000. d. increase of £30,000.

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Chapter_09_11e 17. When there is one scarce resource, the product that should be produced first is the product with the highest a. contribution margin per unit of the scarce resource. b. sales price per unit of the scarce resource. c. demand. d. contribution margin per unit. 18. If there is excess capacity, the minimum acceptable price for a special order must cover a. variable costs associated with the special order. b. variable and fixed manufacturing costs associated with the special order. c. variable and incremental fixed costs associated with the special order. d. variable costs and incremental fixed costs associated with the special order plus the contribution margin usually earned on regular units. 19. Bridge Industries manufactures a product with the following costs per unit at the expected production of 78,000 units: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead

£15 22 12 19

The company has the capacity to produce 80,000 units. The product regularly sells for £90. A wholesaler has offered to pay £75 each for 2,000 units. If Bridge's special order is accepted, the effect on operating income would be a a. £20,000 decrease. b. £52,000 increase. c. £14,000 increase. d. none of these. 20. Which of the following costs is relevant to a make-or-buy decision? a. Original cost of the production equipment b. Annual depreciation of the equipment c. The amount that would be received if the production equipment were sold d. The cost of direct materials purchased last month and used to manufacture the component

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Chapter_09_11e 21. Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead

£12 36 18 24

The company has the capacity to produce 90,000 units. The product regularly sells for £120. A wholesaler has offered to pay £110 a unit for 7,500 units. If the special order is accepted, the effect on operating income would be a a. £75,000 decrease. b. £429,000 increase. c. £495,000 increase. d. £249,000 increase. 22. ____ are future costs that differ across alternatives. a. Relevant costs b. Irrelevant costs c. Sunk costs d. Past costs 23. The following information pertains to Ewing Company's three products:

Unit sales per month Selling price per unit Variable costs per unit Unit contribution margin

D 900 £6.00 3.00 £3.00

E 1,400 £11.25 9.00 £2.25

F 800 £7.50 7.80 £(0.30)

Assume that product F is discontinued and the space used to produce product F is rented for £600 per month. Monthly profits will a. increase by £360. b. decrease by £5,400. c. increase by £600. d. increase by £840.

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Chapter_09_11e 24. The operations of Knickers Ltd. are divided into the Pacers Division and the Bulls Division. Projections for the next year are as follows:

Sales Variable costs Contribution margin Direct fixed costs Segment margin Allocated common costs Operating income (loss)

Pacers Division £420,000 147,000 £273,000 126,000 £147,000 63,000 £84,000

Bulls Division £252,000 115,500 £136,500 105,000 £31,500 47,250 £(15,750)

Total £672,000 262,500 £409,500 231,000 £178,500 110,250 £68,250

Operating income for Knickers Ltd. as a whole if the Bulls Division were dropped would be a. £99,750. b. £84,000. c. £68,250. d. £36,750. 25. A decision that focuses on whether a specially priced order should be accepted or rejected is a a. special order decision. b. keep-or-drop a product line decision. c. make-or-buy decision. d. a special order and a make-or-buy decision.

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Chapter_09_11e 26. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: Variable costs per unit: Direct materials Direct labour Factory overhead Distribution Total

£9.00 4.50 3.00 1.50 £18.00

Fixed costs per month: Factory overhead Selling and admin. Total

£120,000 60,000 £180,000

The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of £25.20 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of £6,000. In addition, assume that overtime production is not possible and that all other information remains the same as the original data. What is the effect on profits if the special order is accepted? a. Increase of £54,900 b. Increase of £30,900 c. Increase of £36,900 d. Increase of £176,400 27. Meco Company produces a product that has a regular selling price of £360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to £270. Included in this average is £120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to £30,000 per month. Meco Company has just received a special order for 1,000 units at £240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order. Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be a. a £60,000 increase. b. a £60,000 decrease. c. a £30,000 increase. d. a £30,000 decrease. e. no change in profits.

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Chapter_09_11e 28. Boone Products had the following unit costs: Direct materials Direct labour Variable factory overhead

£24 10 8 18

Fixed factory overhead (allocated)

A one-time customer has offered to buy 1,000 units at a special price of £48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit (loss) will be generated from the special order? a. £12,000 loss b. £14,000 profit c. £48,000 profit d. £6,000 profit 29. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Total

£150,000 240,000 90,000 120,000 £600,000

An outside supplier has offered to sell the component for £25.50. What is the effect on income if Foster purchases the component from the outside supplier? a. £45,000 increase b. £15,000 increase c. £75,000 decrease d. £105,000 increase

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Chapter_09_11e 30. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Total

£75,000 120,000 45,000 60,000 £300,000

An outside supplier has offered to sell the component for £12.75. What is the effect on income if Vest Industries purchases the component from the outside supplier? a. £270,000 decrease b. £270,000 increase c. £30,000 decrease d. £30,000 increase 31. Firms may be asked to accept a special order of their product for a reduced price if a. it can be concealed from the government. b. excess capacity exists. c. the order is small. d. the plant is producing at maximum capacity. 32. Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units: Direct materials £4 Direct labour 12 Variable manufacturing overhead 6 Fixed manufacturing overhead 8 The company has the capacity to produce 40,000 units. The product regularly sells for £40. A wholesaler has offered to pay £32 a unit for 2,000 units. If the firm is at capacity and the special order is accepted, the effect on operating income would be a. a £20,000 increase. b. a £16,000 decrease. c. a £4,000 increase. d. £-0-. 33. For a cost or revenue to be relevant to a particular decision, the cost or revenue must a. differ between the alternatives being considered. b. be a past cost. c. be a future cost. d. differ between the alternatives being considered as well as be a future cost.

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Chapter_09_11e 34. The following information pertains to Dodge Company's three products:

Unit sales per year Selling price per unit Variable costs per unit Unit contribution margin Contribution margin ratio

A 250

B 400

C 250

£9.00 3.60 £5.40 60%

£12.00 9.00 £ 3.00 25%

£ 9.00 9.90 £(0.90) (10)%

Assume that product C is discontinued and the extra space is rented for £300 per month. All other information remains the same as the original data. Annual profits will a. increase by £75. b. decrease by £75. c. increase by £525. d. remain the same. 35. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Total

£75,000 120,000 45,000 60,000 £300,000

An outside supplier has offered to sell the component for £12.75. What is the effect on income if Vest purchases the component from the outside supplier? a. £225,000 increase b. £195,000 increase c. £165,000 decrease d. £135,000 increase 36. Sunk costs are a. future costs that have no benefit. b. relevant costs that have only short-run benefits. c. target costs. d. cannot be avoided.

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Chapter_09_11e 37. The following information relates to a product produced by Creamer Company: Direct materials Direct labour Variable overhead Fixed overhead Unit cost

£24 15 30 18 £87

Fixed selling costs are £500,000 per year, and variable selling costs are £12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for £120 each. A customer has offered to buy 60,000 units for £90 each. The incremental cost per unit associated with the special order is a. £84. b. £81. c. £69. d. £64. 38. Relevant costs are a. past costs. b. future costs. c. full costs. d. cost drivers. 39. Which of the following costs is NOT relevant to a special order decision? a. The direct labour costs to manufacture the special order units b. The variable manufacturing overhead incurred to manufacture the special order units c. The portion of the cost of leasing the factory that is allocated to the special order d. All of the above costs are relevant. 40. Which of the following costs is NOT relevant to a make-or-buy decision? a. £10,000 of direct labour used to manufacture the parts b. £30,000 of depreciation on the equipment used to manufacture the parts c. The supervisor's salary of £25,000, which would be avoided if the part is purchased from an outside supplier d. £15,000 in rent from leasing the production space to another company if the part is purchased from an outside supplier 41. Qualitative factors that should be considered when evaluating a make-or-buy decision are a. the quality of the outside supplier's product. b. whether the outside supplier can provide the needed quantities. c. whether the outside supplier can provide the product when it is needed. d. all of the above.

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Chapter_09_11e 42. Future costs that differ across alternatives describe a. relevant costs. b. target cost. c. full costs. d. activity-based costs. 43. Which of the following BEST describes relevant costs? a. Present costs with similar decision alternatives b. Future costs that differ between competing decision alternatives c. Past costs that correspond solely on competing decision alternatives d. Present costs that differ between competing decision alternatives 44. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Total

£150,000 240,000 90,000 120,000 £600,000

An outside supplier has offered to sell the component for £25.50. What is the effect on income if Foster Industries purchases the component from the outside supplier? a. £30,000 decrease b. £30,000 increase c. £90,000 decrease d. £90,000 increase

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Chapter_09_11e 45. Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part AA1 at this volume is as follows: Direct materials Direct labour Variable overhead Fixed overhead Total

£10.00 14.00 6.00 4.00 £34.00

An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of £31.00. If Harris Company accepts this offer, it can eliminate 50 per cent of the fixed costs assigned to part AA1. Furthermore, the space devoted to the manufacture of part AA1 would be rented to another company for £24,000 per year. If Harris Company accepts the offer of the outside supplier, annual profits will a. increase by £29,000. b. increase by £14,500. c. increase by £22,000. d. increase by £2,500. 46. Boone Products had the following unit costs: Direct materials Direct labour Variable factory overhead Fixed factory overhead (allocated)

£24 10 8 18

A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is £8 per unit. How much additional profit (loss) will be generated by accepting the special order? a. £30,000 loss b. £4,000 loss c. £24,000 loss d. £4,000 profit

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Chapter_09_11e 47. Rose Manufacturing Company had the following unit costs: Direct materials Direct labour Variable factory overhead Fixed factory overhead (allocated)

£24 8 10 18

A one-time customer has offered to buy 2,000 units at a special price of £48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit (loss) will be generated by accepting the special order? a. £12,000 profit b. £96,000 profit c. £84,000 loss d. £24,000 loss 48. Which of the following costs is NOT relevant to a make-or-buy decision? a. £10,000 of direct labour used to manufacture the parts b. £30,000 of depreciation on the plant used to manufacture the parts c. The supervisor's salary of £25,000 that will be avoided if the part is purchased from an outside supplier d. £15,000 in rent from leasing the production space to another company if the part is purchased from an outside supplier 49. Which item is not an example of a sunk cost? a. Materials needed for production b. Purchase cost of machinery c. Depreciation d. All are sunk costs.

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Chapter_09_11e 50. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: Variable costs per unit: Direct materials Direct labour Factory overhead Distribution Total

£9.00 4.50 3.00 1.50 £18.00

Fixed costs per month: Factory overhead Selling and admin. Total

£120,000 60,000 £180,000

The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of £24 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of £3,000. All other information remains the same as the original data. What is the effect on profits if the special order is accepted? a. Increase of £75,000 b. Increase of £57,000 c. Decrease of £168,000 d. Increase of £12,000 51. Salish Industries manufactures a product with the following costs per unit at the expected production of 60,000 units: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead

£8 15 10 12

The company has the capacity to produce 70,000 units. The product regularly sells for £60. A wholesaler has offered to pay £55 each for 5,000 units. If the special order is accepted, the effect on operating income would be a a. £42,000 decrease. b. £67,000 increase. c. £110,000 increase. d. £182,000 decrease. 52. The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship, its book value is a(n) a. relevant cost. b. sunk cost. c. opportunity cost. d. discretionary cost.

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Chapter_09_11e 53. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: Variable costs per unit: Direct materials Direct labour Factory overhead Distribution Total

£9.00 4.50 3.00 1.50 £18.00

Fixed costs per month: Factory overhead Selling and admin. Total

£120,000 60,000 £180,000

The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of £6.00 per unit. If Miller Company accepts the offer, it will be able to reduce variable costs by 30 per cent and rent unused space to an outside firm for £18,000 per year. All other information remains the same as the original data. What is the effect on profits if Miller Company buys from the Tennessee firm? a. Decrease of £19,000 b. Increase of £19,000 c. Increase of £13,000 d. Decrease of £6,000 54. A decision to make a component internally versus through a supplier is a a. special order decision. b. keep-or-drop a product line decision. c. make-or-buy decision. d. special order and make-or-buy decision.

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Chapter_09_11e 55. The operations of Smits Ltd. are divided into the Childs Division and the Jackson Division. Projections for the next year are as follows:

Sales Variable costs Contribution margin Direct fixed costs Segment margin Allocated common costs Operating income (loss)

Childs Division £250,000 90,000 £160,000 75,000 £85,000 35,000 £50,000

Jackson Division £180,000 100,000 £80,000 62,500 £17,500 27,500 £(10,000)

Total £430,000 190,000 £240,000 137,500 £102,500 62,500 £40,000

Operating income for Smits Ltd. as a whole if the Jackson Division were dropped would be a. £22,500. b. £40,000. c. £50,000. d. £60,000. 56. Tactical decision-making relies a. only on relevant cost information. b. on qualitative factors. c. on relevant costs as well as other qualitative factors. d. on neither relevant costs nor qualitative decisions. 57. The following information pertains to Ewing Company's three products:

Unit sales per month Selling price per unit Variable costs per unit Unit contribution margin

D 900 £6.00 3.00 £3.00

E 1,400 £11.25 9.00 £2.25

F 800 £7.50 7.80 £(0.30)

Assume that product F is discontinued and the space is used to produce E. Product E's production is increased to 2,200 units per month, but E's selling price of all units of E is reduced to £10.20. Monthly profits will a. decrease by £2,070. b. increase by £1,200. c. decrease by £270. d. increase by £2,640. 58. Which of the following is a qualitative factor that should be considered when evaluating a make-or-buy decision? a. The quality of the outside supplier's product b. Whether the outside supplier can provide the needed quantities c. Whether the outside supplier can provide the product WHEN it is needed d. All of the above Copyright Cengage Learning. Powered by Cognero.

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Chapter_09_11e 59. Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead

£12 36 18 24

The company has the capacity to produce 90,000 units. The product regularly sells for £120. If a wholesaler offered to buy 4,500 units for £100 each, the effect of the special order on income would be a a. £153,000 increase. b. £45,000 increase. c. £450,000 increase. d. £90,000 decrease. 60. Houston Ltd. manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Direct materials Direct labour Variable overhead Fixed overhead Total

£32 40 16 32 £120

Johnson Company has offered to sell Houston Ltd. 5,000 units of the part for £112 per unit. If Houston Ltd. accepts Johnson Company's offer, total fixed costs will be reduced to £60,000. What alternative is more desirable and by what amount is it more desirable? Alternative Amount a. Make £20,000 b. Make £120,000 c. Buy £40,000 d. Buy £100,000 e. Buy £140,000

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Chapter_09_11e 61. Meco Company produces a product that has a regular selling price of £360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to £270. Included in this average is £120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to £30,000 per month. Meco Company has just received a special order for 1,000 units at £240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order. Assuming Meco Company is operating at capacity and accepting the order would require an offsetting reduction in regular sales, the effect on profits of accepting the order would be a a. £240,000 decrease. b. £30,000 increase. c. £120,000 decrease. d. £150,000 decrease. 62. Application of the theory of constraints will improve all of the following EXCEPT a. net income. b. debt-to-equity ratio. c. cash flow. d. return on investment. 63. If a cost is identical under each alternative under consideration within a given decision context, the cost is considered a. an alternative cost. b. a discounted cost. c. an irrelevant cost. d. a procedural cost. 64. Throughput is calculated as a. Sales revenue - Unit-level variable cost. b. Sales revenue - Total manufacturing cost. c. Unit-level cost + Batch-level cost + Facilities-level cost. d. Unit-level cost + Non-unit-level cost.

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Chapter_09_11e 65. Caddo Ltd. produces two products using the same manufacturing equipment. Information about the two products is as follows:

Sales Variable costs Machine hours required Demand (units) Demand (machine hours)

Alpha £15 £5 0.5 30,000 15,000

Beta £35 £10 2.0 10,000 20,000

If Caddo can produce only one of the products in the next period, which product should be produced? a. Alpha should be produced because it requires less machine hours. b. Beta should be produced because it generates more revenue. c. Beta should be produced because it generates more contribution margin per unit. d. None of these. 66. Describe the theory of constraints and discuss some of its implications for management.

67. Mills SA. manufactures 50,000 components per year. The manufacturing cost per unit of the components is as follows: Direct materials Direct labour Variable overhead Fixed overhead Total unit cost

£12 13 5 10 £40

An outside supplier has offered to sell the component to Mills SA for £35. Required: a. b.

What is the effect on income if Mills SA purchases the component from the outside supplier? Assume that Mills SA can avoid £700,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Mills SA purchases the component from the outside supplier?

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Chapter_09_11e 68. The management of James Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A £200 cost per component was determined as follows: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Total

£15 40 10 35 £100

James Industries uses 4,000 components per year. After Light, SA, submitted a bid of £80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Light, SA, James's unused production facilities could be leased to another company for £50,000 per year. Required: a. b. c.

Determine the maximum amount per unit James should pay an outside supplier. Indicate if the company should make or buy the component and the total monetary difference in favour of that alternative. Assume the company could eliminate production supervisors with salaries totalling £30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total monetary difference in favour of that alternative.

69. What is an opportunity cost? Under what circumstances are opportunity costs relevant to a decision? Construct an example of an opportunity cost. Briefly discuss why you think financial reports for investors and managerial reports for mangers may or may not differ in their treatment of opportunity costs.

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Chapter_09_11e 70. Vance Company manufactures a product that has the following unit costs: direct materials, £15; direct labour, £12; variable overhead, £8; and fixed overhead, £12. Fixed selling costs are £1,500,000 per year. Variable selling costs of £4 per unit cover the transportation cost. Although production capacity is 800,000 units per year, the company expects to produce only 650,000 units next year. The product normally sells for £70 each. A customer has offered to buy 50,000 units for £45 each. The customer will pay the transportation charge on the units purchased. Required: a. b.

What is the incremental cost to Vance Company for the special order? What is the effect on Vance's income if the special order is accepted?

71. Junior Company currently buys 30,000 units of a part used to manufacture its product at £40 per unit. Recently the supplier informed Junior Company that a 20 per cent increase will take effect next year. Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): Direct materials Direct labour Variable overhead Fixed overhead Total

£16 12 12 10 £50

If the units are purchased from the supplier, £200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for £20,000 per year if the parts are purchased externally. Required: Should Junior Company buy the part externally or make it internally?

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Chapter_09_11e 72. The Dash Company manufactures two products: A and B. Information about the products is as follows:

Revenue per unit Variable costs per unit Contribution margin per unit Total demand Machine hours per unit

Product A £150 80 £ 70 15,000 units 0.5 MH

Product B £125 70 £ 55 12,000 units 0.25 MH

There are 5,000 machine hours available during the quarter. Required: a. b.

Which of the products should Dash Company produce if it can only produce one of the products?

Assume that Dash Company produces the product mix that will maximize profit. What is Dash's total contribution margin?

Assume that Dash Company uses half of the hours available to produce Product A and half of the hours available to produce Product B. What is Dash's total contribution margin?

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Chapter_09_11e 73. Rippey Ltd. manufactures a single product with the following unit costs for 5,000 units: Direct materials Direct labour Factory overhead (40% variable) Selling expenses (60% variable) Administrative expenses (20% variable) Total per unit

£60 30 90 30 15 £225

Recently, a company approached Rippey Ltd. about buying 1,000 units for £225. Currently, the models are sold to dealers for £412.50. Rippey's capacity is sufficient to produce the extra 1,000 units. No additional selling expenses would be incurred on the special order. Required: a. b. c. d.

What is the profit earned by Rippey Ltd. on the original 5,000 units? Should Rippey accept the special order if its goal is to maximize short-run profits? How much will income be affected? Determine the minimum price Rippey would want to receive in order to increase profits by £7,500 on the special order. When making a special order decision, what nonquantitative aspects of the decision should Rippey Ltd. consider?

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Chapter_09_11e 74. Terrazo Ltd. produces three kinds of ceramic tile that are used in home and office construction. Details of each type of tile are as follows:

Price per unit Unit variable cost Machine hours required

Type I £40 £10 0.2

Type II £60 £28 0.5

Type III £100 £48 1.25

Terrazo has 30,000 machine hours available for production. Required: Assume that Terrazo can sell all of each type of tile that it produces. a. b. c. d.

Determine the amount of each type of tile that Terrazo should produce. Determine Terrazo's contribution margin using your decision in requirement a. Assume that the demand for each type of tile is limited to 20,000 units each. Determine the amount of each type of tile that Terrazo should produce. Determine Terrazo's contribution margin using your decision in requirement (b).

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Chapter_09_11e 75. The operations of Grant Ltd. are divided into the Fix Division and the Roach Division. Projections for the next year are as follows:

Sales Variable costs Contribution margin Direct fixed costs Segment margin Allocated common costs Operating income (loss)

Fix Division £60,000 20,000 £40,000 12,500 £27,500 10,000 £17,500

Roach Division £40,000 15,000 £25,000 30,000 £(5,000) 7,500 £(12,500)

Total £100,000 35,000 £65,000 42,500 £22,500 17,500 £5,000

Required: a. b.

Determine operating income for Grant Ltd. as a whole if the Roach Division is dropped. Should the Roach Division be eliminated?

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Chapter_09_11e 76. Solomon Company manufactures 20,000 components per year. The manufacturing cost per unit of the components is as follows: Direct materials Direct labour Variable overhead Fixed overhead Total unit cost

£10 14 6 8 £38

Assume that the fixed overhead reflects the cost of Solomon's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Solomon for £32. Required: a. b.

What is the effect on income if Solomon purchases the component from the outside supplier? Assume that Solomon can avoid £50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Solomon purchases the component from the outside supplier?

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Chapter_09_11e 77. Bonilla Ltd., which produces one product, had the following income statement for a recent month: Bonilla Ltd. Income Statement For the Month of April Sales Cost of goods sold Gross profit Selling and administrative Net income

£30,000 27,000 £3,000 2,500 £500

There were no beginning or ending inventories of work-in-process or finished goods. Bonilla's manufacturing costs were as follows: Direct materials (1,200 units × £5) Direct labour (1,200 units × £8) Variable overhead (1,200 units × £4.50) Fixed overhead Total

£6,000 9,600 5,400 6,000 £27,000

Average cost per unit

£22.50

Selling and administrative expenses are all fixed. Bonilla has just received a special order from a firm in Canada to purchase 800 units at £20 each. The order will not affect the selling price to regular customers. Required: a. b.

Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or reject the special order, assuming Bonilla has excess capacity. Determine the net advantage or disadvantage (profit increase or decrease) of accepting the order, assuming Bonilla does not have excess capacity.

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Chapter_09_11e 78. The Bilko Company manufactures two products: widgets and gadgets. Information about the products is as follows:

Revenue per unit Variable costs per unit Contribution margin per unit Total demand Direct labour hours per unit

Widgets £200 110 £90 20,000 units 1.5 DLH

Gadgets £150 90 £60 20,000 units 1.2 DLH

There are 40,000 direct labour hours available during the year. Required: a. b.

Which of the products should Bilko Company produce if it can only produce one of the products?

Assume that Bilko Company produces the product mix that will maximize profit. What is Bilko's total contribution margin?

Assume that Bilko Company uses half of the hours available to produce widgets and half of the hours available to produce gadgets. What is Bilko's total contribution margin?

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Chapter_09_11e 79. KnitWorks Ltd. produces three kinds of yarn. Details of each type of yarn are as follows:

Price per unit Unit variable cost Machine hours required

Type I £200 £150 0.5

Type II £250 £100 2.0

Type III £100 £60 0.1

KnitWorks has 15,000 machine hours available for production. Required: Assume that KnitWorks can sell all of each type of yarn that it produces. a. b. c.

Determine the amount of each type of yarn that KnitWorks should produce. Assume that the demand for each type of yarn is limited to 10,000 units each. Determine the amount of each type of yarn that KnitWorks should produce. Assume that the demand for each type of yarn is limited to 10,000 units each. Determine KnitWorks' contribution margin.

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Chapter_09_11e 80. Scott Company has an annual capacity of 18,000 units. Budgeted operating results for the year are as follows: Revenues (16,000 units @ £60) Variable costs: Manufacturing Selling Contribution margin Fixed costs: Manufacturing Selling and administrative Operating income

£960,000 £384,000 128,000

£160,000 120,000

512,000 £448,000

280,000 £168,000

A foreign wholesaler wants to buy 1,000 units at a price of £40 per unit. All fixed costs would remain within the relevant range. Variable selling costs on the special order would be the same as variable selling costs for regular orders. Required: a. b. c. d. e.

Determine the effect on operating income if the company produces the special order. Should the company produce the special order? Determine operating income if the customer had wanted a special order of 3,000 units and the company produced the special order. Should the company produce the 3,000-unit special order? Discuss any nonquantitative factors the company might want to consider when making the decision.

81. What is a sunk cost? Under what circumstances are sunk costs relevant to a decision? Construct an example of a sunk cost. Briefly discuss why you think financial reports for investors and managerial reports for mangers may or may not differ in their treatment of sunk costs.

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Chapter_09_11e 82. Majestic Company manufactures a product that has the following unit costs: direct materials, £5; direct labour, £7; variable overhead, £3; and fixed overhead, £5. Fixed selling costs are £200,000 per year. Variable selling costs of £1 per unit cover the transportation cost. Although production capacity is 80,000 units per year, the company expects to produce only 65,000 units next year. The product normally sells for £30 each. A customer has offered to buy 10,000 units for £18 each. The customer will pay the transportation charge on the units purchased. Required: a. b.

What is the incremental cost per unit to Majestic Company for the special order? What is the effect on Majestic's income if the special order is accepted?

83. Describe the theory of constraints (TOC) and how it can be used to manage inventory.

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Chapter_09_11e Answer Key 1. c 2. b 3. b 4. c 5. b 6. c 7. a 8. c 9. d 10. a 11. d 12. d 13. d 14. c 15. c 16. c 17. a 18. c 19. b 20. c 21. d 22. a 23. d 24. d 25. a 26. b

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Chapter_09_11e 27. c 28. d 29. b 30. a 31. b 32. b 33. d 34. c 35. a 36. d 37. b 38. b 39. c 40. b 41. d 42. a 43. b 44. a 45. a 46. d 47. a 48. b 49. a 50. d 51. c 52. b 53. d 54. c Copyright Cengage Learning. Powered by Cognero.

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Chapter_09_11e 55. a 56. c 57. c 58. d 59. a 60. a 61. c 62. b 63. c 64. a 65. d 66. The theory of constraints, developed by Dr Goldratt, states that every process has a bottleneck and that production cannot take place faster than it is processed through the bottleneck. Implications for management include the following: Management should identify the bottleneck. Management should schedule production to maximize the efficient use of the bottleneck resource. Management should schedule production to avoid buildup of inventory. Management should work to eliminate or limit the bottleneck.

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Chapter_09_11e 67. a.

£250,000 decrease Make: Direct materials Direct labour Variable overhead Total cost to make Buy: Purchase price

(50,000 components × £12) (50,000 components × £13) (50,000 components × £5)

£600,000 650,000 250,000 £1,500,000

(50,000 components × £35)

£1,750,000

(50,000 components × £12) (50,000 components × £13) (50,000 components × £5)

£600,000 650,000 250,000 700,000 £2,200,000

£1,750,000 - £1,500,000 = £250,000 decrease in income b.

£450,000 increase Make: Direct materials Direct labour Variable overhead Avoidable fixed overhead Total cost to make Buy: Purchase price (50,000 components × £35)

£1,750,000

£1,750,000 - £2,200,000 = £450,000 increase in income

68. a.

£77.50 [£15 + £40 + £10 + (£50,000/4,000)]

£10,000 difference in favour of making the component Buy Outside supplier's price (£80 × 4,000) Direct materials (£15 × 4,000) Direct labour (£40 × 4,000) Variable manufacturing overhead (£10 × 4,000) Fixed manufacturing overhead (£35 × 4,000) Rental revenue

Make

£(320,000) £(60,000) (160,000) (40,000) (140,000) 50,000

(140,000) _________ Page 38

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Chapter_09_11e Totals

£(410,000)

£(400,000)

The make or buy alternatives also could be analysed as follows excluding the fixed manufacturing overhead:

Outside supplier's price Direct materials Direct labour Variable manufacturing overhead Rental revenue Totals c.

Buy £(320,000)

50,000 £(270,000)

Make £(60,000) (160,000) (40,000) _________ £(260,000)

£20,000 difference in favour of buying the component from the outside supplier Buy Outside supplier's price (£80 × 4,000) Direct materials (£15 × 4,000) Direct labour (£40 × 4,000) Variable manufacturing overhead (£10 × 4,000) Fixed manufacturing overhead (£35 × 4,000) (£140,000 - £30,000) Rental revenue Totals

Make

£(320,000) £(60,000) (160,000) (40,000) (140,000) (110,000) 50,000 £(380,000)

_________ £(400,000)

The analysis could be done including only avoidable fixed costs: Buy Outside supplier's price (£80 × 4,000) Direct materials (£15 × 4,000) Direct labour (£40 × 4,000) Variable manufacturing overhead (£10 × 4,000) Avoidable fixed manufacturing overhead Rental revenue Totals

Make

£(320,000) £(60,000) (160,000)

50,000 £(270,000)

(40,000) (30,000) _________ £(290,000)

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Chapter_09_11e 69. Opportunity costs are the net cash inflows that could have been obtained if the resources committed to one action were used in the most desirable alternative. Opportunity costs are relevant to decision-making because the cost of selecting a particular alternative includes the implications from not being able to select the other alternatives. Financial reporting is concerned with providing investors with information that is, among other things, reliable. These reports would not attempt to measure events on the basis of something so subjective and theoretical as an opportunity cost. Managerial reports are concerned with providing decision-makers the information to make good decisions. Such reports should include some consideration of the opportunities that decision-makers are conceding when making a particular decision. 70. a.

£1,750,000

50,000 units × (£15 + £12 + £8)

£500,000 increase

Incremental revenue Less: Incremental costs Incremental profit

(50,000 units × £45) (50,000 units × £35)

£2,250,000 1,750,000 £500,000

71. Produce internally; it saves £120,000. (£1,620,000 - £1,500,000) If purchased externally: Purchase price (30,000 × £40 × 1.20) Fixed costs Rent received Net cost to purchase

£1,440,000 200,000 (20,000) £1,620,000

If produced internally: Cost to produce (30,000 × £50)

£1,500,000

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Chapter_09_11e 72. a.

Product B should be the product produced first because it has the highest contribution margin per machine hour. Product A: £70 per unit/0.5 MH per unit = £140 per MH Product B: £55 per unit/0.25 MH per unit = £220 per MH

£900,000 Product A: 2,500 MH => 5,000 units (5,000 × £70) Product B: 2,500 MH => 10,000 units (10,000 × £55) Total contribution margin

£350,000 550,000 £900,000

£940,000 \Requirement a, produce Product B first. From 12,000 units × 0.25 MH per unit = 3,000 MH to produce Product B Use remaining 2,000 MH available to produce Product A. 2,000 MH/0.5 MH per unit = 4,000 units of Product A Product A (4,000 units × £70) Product B (12,000 units × £55) Total contribution margin

£280,000 660,000 £940,000

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Chapter_09_11e 73. a.

Sales (5,000 × £412.50) Less: costs (5,000 × £225) Net income

Yes, profit will increase by: Increase in sales (1,000 × £225) Less: Increase in direct materials (1,000 × £60) Increase in direct labour (1,000 × £30) Increase in var. overhead (1,000 × £90 × 0.40) Increase in var. selling (1,000 × £30 × 0.60) Increase in var. adm. (1,000 × £15 × 0.20) Increase in profits

£2,062,500 1,125,000 £937,500

£225,000 (60,000) (30,000) (36,000) (18,000) (3,000) £78,000

£60 + £30 + (£90 × 0.40) + (£30 × 0.60) + (£15 × 0.20) + (£7,500/1,000) = £154.50 per unit

What is the impact on regular customers? Will regular customers demand a similar price? Do we have the capacity to produce the extra units? Will we lose some regular customers? Will we be penetrating new markets? Will we be violating the Robinson-Patman Act?

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Chapter_09_11e 74. Contribution margin per scarce unit of resource: Type I: (£40 - £10)/0.2 = £150 per machine hour Type II: (£60 - £28)/0.5 = £64 per machine hour Type III: (£100 - £48)/1.25 = £41.60 per machine hour a.

Type I: 150,000 units (30,000 machine hours/0.20)

£4,500,000 (150,000 units × £30)

Type I: 20,000 units Type II: 20,000 units Type III: 12,800 units Type I: 20,000 units × 0.2 = Type II: 20,000 units × 0.5 = Type III: 12,800 units × 1.25 =

4,000 hours 10,000 hours 16,000 hours 30,000 hours

£1,905,600 Type I: 20,000 units × £30 = Type II: 20,000 units × £32 = Type III: 12,800 units × £52 =

£600,000 640,000 665,600 £1,905,600

75. a.

Sales Variable costs Contribution margin Direct fixed costs Segment margin Allocated common costs: (£10,000 + £7,500) Operating income

£60,000 20,000 £40,000 12,500 £27,500 17,500 £10,000

Yes. The Roach division should be dropped, since it has a negative segment margin of £5,000. Dropping the Roach Division increases the firm's income by £5,000.

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Chapter_09_11e 76. a.

£40,000 decrease Make: Direct materials Direct labour Variable overhead Total cost to make

(20,000 components × £10) (20,000 components × £14) (20,000 components × £6)

Buy: Purchase price (20,000 components × £32)

£200,000 280,000 120,000 £600,000

£640,000

£640,000 - £600,000 = £40,000 decrease in income b.

£10,000 increase Make: Direct materials Direct labour Variable overhead Avoidable fixed overhead Total cost to make Buy: Purchase price (20,000 components × £32)

(20,000 components × £10) (20,000 components × £14) (20,000 components × £6)

£200,000 280,000 120,000 50,000 £650,000

£640,000

£640,000 - £650,000 = £10,000 increase in income

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Chapter_09_11e 77. a. Increase in revenues (800 × £20) Increase in costs:

£16,000 Direct materials (800 × £5) Direct labour (800 × £8) Variable overhead (800 × 4.50)

£4,000 6,400 3,600

Increase in profits b. Contribution margin of special order Opportunity cost:

£2,000 Regular selling price Variable costs (£5 + £8 + £4.50) Regular unit contribution margin

Lost sales Net disadvantage

14,000 £2,000

£25.00 17.50 £7.50 800

6,000 £4,000

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Chapter_09_11e 78. a. Widgets should be the product produced first because they have the highest contribution margin per direct labour hour. Widgets: Gadgets:

£90 per unit/1.5 DLH per unit £60 per unit/1.2 DLH per unit

= £60 per DLH = £50 per DLH

20,000 DLH (13,333 × £90) 20,000 DLH (16,666 × £60)

=> 13,333 units

b. £2,199,930 Widgets: Gadgets: Total contribution margin

£1,199,970 => 16,666 units 999,960 £2,199,930

c. £2,299,980 From requirement a, produce widgets first. 20,000 units × 1.5 DLH per unit = 30,000 DLH to produce widgets Use remaining 10,000 DLH available to produce gadgets. 10,000 DLH/1.2 DLH per unit = 8,333 units of gadgets Widgets Gadgets Total contribution margin

(20,000 units × £90) (8,333 units × £60)

£1,800,000 499,980 £2,299,980

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Chapter_09_11e 79. Contribution margin per scarce unit of resource: Type I: (£200 - £150)/0.5 = £100 per machine hour Type II: (£250 - £100)/2.0 = £75 per machine hour Type III: (£100 - £60)/0.1 = £400 per machine hour a.

Type III: 150,000 units (15,000 machine hours/0.1)

Type III: 10,000 units Type I: 10,000 units Type II: 4,500 units Type III: 10,000 units × 0.1 = Type I: 10,000 units × 0.5 = Type II: 4,500 units × 2.0 =

1,000 hours 5,000 hours 9,000 hours 15,000 hours

£1,575,000 Type III: 10,000 units × £40 = Type I: 10,000 units × £50 = Type II: 4,500 units × £150 =

£400,000 500,000 675,000 £1,575,000

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Chapter_09_11e 80. a.

£8,000 increase Incremental revenue (£40 × 1,000) Incremental costs: Variable manufacturing (£24 × 1,000) Variable selling (£8 × 1,000) Incremental contribution margin

£40,000 (24,000) (8,000) £8,000

Since the company would still be operating within the relevant range, fixed costs would remain the same. b. Yes, the company should produce the special order. c.

£164,000 Without Special Order

Revenues: (16,000 × £60) (15,000 × £60) (3,000 × £40) Variable costs: Manufacturing: (16,000 × £24) (18,000 × £24) Selling: (16,000 × £8) (18,000 × £8) Contribution margin Fixed costs: Manufacturing Selling and administrative Operating income

With Special Order £960,000 £900,000 120,000

(384,000) (432,000) (128,000) ________ £448,000

(144,000) £444,000

(160,000) (120,000) £168,000

(160,000) (120,000) £164,000

d. No. If the decision is based on quantitative factors, the company should not produce the special order. e. Nonquantitative considerations might include: The possibility of repeat business with the special,order customer. Increasing the selling price on subsequent special orders. The reliability of regular customer repeat business. If the special order is produced, the reaction of regular customers to the reduced price on the special order.

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Chapter_09_11e 81. Sunk costs are costs that result from past decisions and cannot be changed. Sunk costs are never relevant to decisionmaking because decisions involve implications for the future. (However, some students may note that sunk costs considered in a decision context can have implications for future cash flows by affecting tax calculations). Financial reports are designed to provide investors with information that is, among other things, reliable. Such reports generally measure events on the basis of historical costs, which are obviously sunk costs reflecting past actions. Managerial reports are designed to provide decision-makers with the information to make good decisions. Such reports omit sunk costs, which could lead decision-makers to erroneous conclusions. 82. a.

£15

(£5 + £7 + £3)

£30,000 increase

Incremental revenue Less: Incremental costs Incremental profit

(10,000 units × £18) (10,000 units × £15)

£180,000 150,000 £30,000

83. TOC identifies an organization's constraints and exploits them so that throughput is maximized and inventories and operating costs are minimized. Identifying the optimal mix is part of this process. The major binding constraint is identified and is used to set the productive rate for the plant. Release of raw materials into the first process (operation) is regulated by the drummer constraint. A time buffer is located in front of critical constraints. This time buffer is sized so that it protects throughput from any interruptions. As in JIT, the interruptions are used to locate and correct the problem. However, unlike JIT, the time buffer serves to protect throughput. Furthermore, because buffers are located only in front of critical constraints, TOC may actually produce smaller inventories than JIT.

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Chapter_10_11e Indicate the answer choice that best completes the statement or answers the question. 1. Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2020 when 30,000 were projected. Sales for 2021 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options: Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10 and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed. Which option is preferred? a. Option One b. Option Two c. Option Three d. Options One and Three are equally preferred. 2. Farr Company had the following information: Revenues Cost of goods sold:

£400,000 Direct materials Direct labour Overhead

Gross profit Selling and administrative expenses Operating income

£100,000 50,000 50,000

200,000 £200,000

75,000 £125,000

What is the mark up based on cost of goods sold? a. 50.0% b. 100.0% c. 37.5% d. 62.5% 3. Setting prices below cost for the purpose of injuring competitors and eliminating competition is a. predatory pricing. b. target pricing. c. price discrimination. d. price gouging.

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Chapter_10_11e 4. Cost-based pricing has traditionally been important because a. cost data are available. b. cost-based prices are defensible. c. revenues must exceed costs if the firm is to remain in business. d. of all of these. 5. World-class organizations operating in competitive markets are more likely to take which one of the following approaches toward pricing? a. Begin with cost data as given and determine price by adding a reasonable mark-up. b. Determine price based on the amount management believes customers are willing to pay. c. Employ a cost-based approach to pricing. d. Determine the price that keeps the facilities fully utilized. 6. Multiple Products Co. has predicted the following costs for this year for 100,000 units: Selling and Manufacturing

Administrative

Variable

£400,000

£100,000

Fixed

600,000

300,000

Total £1,000,000 £400,000 What is the manufacturing cost mark up needed to obtain a target profit of £100,000? a. 100 per cent b. 67 per cent c. 50 per cent d. 25 per cent

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Chapter_10_11e 7. Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow:

Units purchased Orders placed Number of sales calls Manufacturing cost

Large Customer 400,000 10 20 £1,200,000

Five Smaller Customers 600,000 350 230 £1,800,000

Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000. What amount of sales-force costs would be allocated to the five smaller customers if these costs are allocated based on sales volume? a. £144,000 b. £216,000 c. £150,000 d. £225,000

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Chapter_10_11e 8. Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance Materials handling Setups Inspection

£120,000 18,000 16,000 60,000

£2,000 £6,000 4 6 8 80

In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver: direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours Material moves Setups Quality inspections

5,000 600 200 1,000

If Wheat Manufacturing used activity-based cost drivers to assign overhead and the company's bid is full cost plus 15 per cent, the company's bid would be a. £12,696.00 b. £13,965.60 c. £10,120.00 d. £9,936.00 9. Which of the following stages has revenues for the entire industry decreasing? a. Introduction b. Growth c. Maturity d. Decline

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Chapter_10_11e 10. Price skimming occurs in which of the following life cycle stages? a. Introduction b. Growth c. Maturity d. Decline 11. A target cost is computed as a. the cost to manufacture plus a desired mark-up. b. the cost to manufacture plus the designated selling expenses. c. the market willingness to pay less the cost to manufacture. d. the market willingness to pay less the desired profit. 12. Multiple Products Co. has predicted the following costs for this year for 100,000 units:

Variable Fixed Total

Manufacturing £400,000 600,000 £1,000,000

Selling and Administrative £100,000 300,000 £400,000

What is the mark up on variable costs needed to achieve a target profit of £100,000? a. 375 per cent b. 275 per cent c. 250 per cent d. 200 per cent 13. Which of the following stages is characterized by rapid increases in sales and production? a. Introduction b. Growth c. Maturity d. Decline

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Chapter_10_11e 14. Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow:

Units purchased Orders placed Number of sales calls Manufacturing cost

Large Customer 400,000 10 20 £1,200,000

Five Smaller Customers 600,000 350 230 £1,800,000

Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000. What amount of order-filling costs would be allocated to the large customer if these costs are allocated using an activity-based costing approach? a. £10,000 b. £350,000 c. £28,800 d. £331,200 15. Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow: Five SmallerCustomers 400,000 600,000 10 350 20 230 £1,200,000 £1,800,000

LargeCustomer Units purchased Orders placed Number of sales calls Manufacturing cost

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Chapter_10_11e 16. Which of the following statements describes a legitimate disadvantage of cost-based pricing? a. Marginal costs and revenues are difficult to measure. b. Determining the amount a customer is willing to pay may require sufficient estimation. c. Customers may not be willing to pay the price determined by the procedure. d. All of these. 17. Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2020 when 30,000 were projected. Sales for 2021 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options: Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10 and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed. What is the profit (loss) from Option One? a. £1,050,000 b. £210,000 c. £950,000 d. £110,000 18. Jamie Ltd. had the following information: Revenues Cost of goods sold:

£250,000 Direct materials Direct labour Overhead

Gross profit Selling and administrative expenses Operating income

£50,000 37,500 62,500

150,000 £100,000

37,500 £62,500

What is the mark up based on materials? a. 400.0% b. 185.7% c. 42.9% d. 71.4%

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Chapter_10_11e 19. Multiple Products Co. has predicted the following costs for this year for 100,000 units: Selling and Manufacturing

Administrative

Variable

£400,000

£100,000

Fixed

600,000

300,000

Total £1,000,000 What is the mark up on variable costs needed to break even? a. 100 per cent b. 40 per cent c. 140 per cent d. 180 per cent

£400,000

20. Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2020 when 30,000 were projected. Sales for 2021 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options: Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10 and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed. What is the profit (loss) from Option Three? a. £215,000 b. £1,200,00 c. £110,000 d. (£60,000) 21. Which of the following is a FALSE statement about target costing? a. Target costing is a method of determining the cost of a product or service based on the price that customers are willing to pay. b. The cost is calculated by subtracting the desired profit from the target price. c. Target costing is an interactive process. d. Target costing is cost driven. 22. Which of the following statements concerning target costing is NOT true? a. Implementing target costing requires detailed information on the cost of alternative activities. b. Target costing can be applied to components of products as well as the new products as a whole. c. A primary advantage of target costing is that it requires little or no coordination among processes. d. Short product life cycles increase the importance of target costing.

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Chapter_10_11e 23. Farr Company had the following information: Revenues Cost of goods sold:

£400,000 Direct materials Direct labour Overhead

Gross profit Selling and administrative expenses Operating income

£100,000 50,000 50,000

200,000 £200,000

75,000 £125,000

What is the mark up based on prime costs? a. 300.0% b. 133.3% c. 50.0% d. 166.7% 24. Which of the following accurately describes the effect target costing has on the manufacturing design function? a. Target costing allows the design engineer's job to end once the product is designed. b. Target costing forces design engineers to explicitly consider the costs of manufacturing and other aspects of business that traditionally fall outside the engineering department. c. Target costing defines clear lines of responsibility among departments allowing for design engineers to be evaluated purely on meeting the customer's functional requirements. d. Target costing has no implications for design engineering. 25. ____ is the pricing of a new product at a low initial price to build market share quickly. a. Penetration pricing b. Predatory pricing c. Price skimming d. Target costing 26. When cost-based pricing is employed and mark up is based on manufacturing costs, the mark up must be sufficiently large enough to a. cover selling expenses. b. cover administrative expenses. c. provide for the desired profit. d. accomplish all of the above.

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Chapter_10_11e 27. Ander Company produces precision equipment for major buyers. Of the six customers, one accounts for 40 per cent of the sales, with the remaining five accounting for the rest of the sales. The five smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Ander's customer activity follow:

Units purchased Orders placed Number of sales calls Manufacturing cost

Large Customer 400,000 10 20 £1,200,000

Five Smaller Customers 600,000 350 230 £1,800,000

Order-filling costs for Ander Company total £360,000, and sales-force costs are £375,000. What amount of order-filling costs would be allocated to the five smaller customers if these costs are allocated using an activity-based costing approach? a. £10,000 b. £350,000 c. £28,800 d. £331,200 28. Anderson Company manufactures a variety of toys and games. John Boone, president, is disappointed in the sales of a new board game. The game sold only 10,000 units in 2020 when 30,000 were projected. Sales for 2021 look no better. At £100 per game, it is not a hot seller. Direct costs of the board game are £56 variable cost and £100,000 fixed. John is considering several options: Option One: Cut the price to £70 and perhaps sell 15,000 units. Option Two: Cut the price to £60, reduce material costs by £10 and cut advertising by £60,000. Anticipated volume for this option is 10,000 units. Option Three: Cut the price to £80 and include a £10 mail-in rebate offer. It is anticipated that 15,000 units could be sold and only 30 per cent of the rebate coupons would be redeemed. What is the profit (loss) from Option Two? a. £600,000 b. £100,000 c. £40,000 d. (£100,000)

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Chapter_10_11e 29. Jamie Ltd. had the following information: Revenues Cost of goods sold:

£250,000 Direct materials Direct labour Overhead

Gross profit Selling and administrative expenses Operating income

£50,000 37,500 62,500

150,000 £100,000

37,500 £62,500

What would be the price for something that has a cost of £500, assuming that the mark up is based on cost of goods sold? a. £833 b. £625 c. £708 d. £2,000 30. ____ is where a higher price is charged at the beginning of a product's life cycle. a. Penetration pricing b. Predatory pricing c. Price skimming d. Target costing 31. Which of the following statements is FALSE? a. The mark up is a percentage applied to base cost. b. The mark up is an absolute rule. c. A major advantage of mark up pricing is that standard mark ups are easy to apply. d. The mark up can be calculated using a variety of bases.

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Chapter_10_11e 32. Wheat Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance Materials handling Setups Inspection

£120,000 18,000 16,000 60,000

£2,000 £6,000 4 6 8 80

5,000 600 200 1,000

If Wheat Manufacturing used direct labour hours as the cost driver and the company's bid is full cost plus 15 per cent, the company's bid would be a. £17,480. b. £16,583. c. £13,110. d. £12,765.

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Chapter_10_11e Indicate one or more answer choices that best complete the statement or answer the question. 33. Multiple Products Co. Multiple Products Co. has predicted the following costs for this year for 100,000 units: Manufacturing

Selling and administrative

Variable

£400,000

Fixed

£600,000

Total

£1,000,000

What is the mark-up on variable costs needed to break even? a. 100 per cent b. 40 per cent c. 140 per cent d. 180 per cent 34. Common segment costs, when contrasted with direct segment costs, are a. costs of all segments such as direct labour. b. costs related to more than one segment and not directly traceable to a particular segment. c. incurred at one level for the benefit of two or more segments. d. both b and c. 35. Multiple Products Co. Multiple Products Co. has predicted the following costs for this year for 100,000 units: Manufacturing

Selling and administrative

Variable

£400,000

Fixed

£600,000

Total

£1,000,000

What is the mark-up on manufacturing costs needed to break even? a. 100 per cent b. 40 per cent c. 140 per cent d. 280 per cent

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Chapter_10_11e 36. Multiple Products Co. Multiple Products Co. has predicted the following costs for this year for 100,000 units: Manufacturing Variable Fixed Total

Selling and administrative £400,000 £600,000 £1,000,000

What is the mark-up on variable costs needed to achieve a target profit of £100,000? a. 375 per cent b. 275 per cent c. 250 per cent d. 200 per cent 37. The following information pertains to three different products being sold by Andy Company: Product

Old price

New price

Old quantity

New quantity

$10.00

11.00

2,000

1,900

$20.00

18.00

4,000

4,600

$30.00

33.00

6,000

5,500

Which products have an elastic demand curve? a. Product A b. Product B c. Product C d. All three products

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Chapter_10_11e 38. The following information pertains to three different products being sold by Andy Company: Product

Old price

New price

Old quantity

New quantity

$10.00

11.00

2,000

1,900

$20.00

18.00

4,000

4,600

$30.00

33.00

6,000

5,500

Which products have an inelastic demand curve? a. Product A b. Product B c. Product C d. Both Product A and Product C 39. Charging different prices to different customers for essentially the same product is a. predatory pricing. b. target pricing. c. price discrimination. d. price gouging. 40. Multiple Products Co. Multiple Products Co. has predicted the following costs for this year for 100,000 units: Manufacturing

Selling and administrative

Variable Fixed

£400,000 £600,000

Total

£1,000,000

What is the manufacturing cost mark-up needed to obtain a target profit of £100,000? a. 100 per cent b. 67 per cent c. 50 per cent d. 25 per cent 41. Marginal Revenues are best defined as a. the average selling price of a good. b. the varying increment in total revenue derived from the sale of one more unit. c. the profit received from the last unit sold. d. total revenues divided by the number of units sold. Copyright Cengage Learning. Powered by Cognero.

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Chapter_10_11e 42. Etro Company sells a product used in many manufacturing processes. The sales activity involves three activity areas: Activity Area Order taking Sales visits Delivery vehicles Product handling Special runs The following customer information is given:

Cost Driver and Rate £100 per purchase order £50 per visit £1 per delivery mile £0.05 a unit £300 per run

A Units sold List price Actual sales price Number of purchase orders Number of sales visits Number of deliveries Miles traveled per delivery Number of special runs Required:

B 100,000 £50 £45 30 6 10 40 1

D 80,000 £50 £48 20 5 8 5 0

60,000 £50 £50 10 3 6 20 2

What is the profitability of customer B?

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Chapter_10_11e 43. Vicki Johns operates a catering company. Vicki provides food and servers for parties. She also rents tables, chairs, dinnerware, glassware and linens. Alan and Debbie Holms contacted Vicki about catering for their daughter's wedding. They have requested an open bar, hors d'oeuvres (enough for 300 people), a large wedding cake and forty tables with linens, dinnerware and glassware. Vicki put together the following bid: Food (300 x £7.50)

£2,250

Wedding cake (£150)

150

Beverages (300 x £5)

1,500

Servers (12 x 4 hours x £10)

480

Bartender (1 x 3 hours x £12)

Rental of: Linen

Tables

200

Dinnerware

Glassware

Total

£4,856

Required: Suppose that the Holmses blanch when they see the bid. Mr. Holmes suggests that they had hoped to spend no more than £3,750 or so on the party. How could Vicki work with the Holmses to achieve a target cost of that amount?

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Chapter_10_11e 44. Bay Company produces boats for 11 major buyers. Of the 11 customers, one accounts for 45 per cent of the sales, with the remaining ten accounting for the rest of the sales. The ten smaller customers purchase boats in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Bay's customer activity follow:

Units purchased Orders placed Number of sales calls Manufacturing cost

Large Customer Ten Smaller Customers 4,500 5,500 5 545 15 245 £800,000 £980,000

Order-filling costs for Bay Company total £401,500, and sales-force costs are £260,000. Required: a.

Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the ten smaller customers if these costs are allocated based on sales volume. Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the ten smaller customers if these costs are assigned using activitybased costing. Comment on the differences in amounts attributed to the smaller customers in requirements (a) and (b).

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Chapter_10_11e 45. Johnson Company produces office equipment for 16 major buyers. Of the 16 customers, one accounts for 50 per cent of the sales, with the remaining 15 accounting for the rest of the sales. The 15 smaller customers purchase equipment in roughly equal quantities. Orders placed by the smaller customers are about the same size. Data concerning Johnson's customer activity follow:

Units purchased Orders placed Number of sales calls Manufacturing cost

Large Customer 50,000 6 26 £750,000

15 Smaller Customers 50,000 294 224 £750,000

Order-filling costs for Johnson Company total £270,000, and sales-force costs are £300,000. Required: a.

Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the 15 smaller customers if these costs are allocated based on sales volume. Determine the amount of selling costs (order-filling and sales-force costs) allocated to (1) the large customer and (2) the 15 smaller customers if these costs are assigned using activity-based costing. Comment on the differences in amounts attributed to the smaller customers in requirements (a) and (b).

46. Todd Ltd. sells a product for £400 per unit. Its market share is 22 per cent of the units sold. The marketing manager feels that the market share can be increased to 28 per cent of the units sold with a reduction in price to £340. The product is currently earning a profit of £64 per unit. The president of Todd Ltd. feels that his company needs to maintain the same profit level per unit. The market share consists of £4,000,000 (10,000 units). Required: a. b. c. d.

How many units does Todd Ltd. currently sell of the product? What is the target price per unit? What is the original cost per unit? What is the target cost per unit?

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Chapter_10_11e

47. Nordholm Construction Company builds houses. Each job requires a bid. Nordholm's bidding policy is to estimate the costs materials, direct labour and subcontractor's costs. These are totaled and a mark up is applied to cover overhead and profit coming year, Nordholm believes it will be the successful bidder on ten jobs with the following total revenues and costs: Revenues Materials Direct labour Subcontractors Residual The residual will cover overhead and profits.

£648,000 £200,000 250,000 150,000

600,000 £48,000

Required: a.

What is the mark-up percentage on total direct costs?

Suppose Nordholm is asked to bid on a job with estimated direct costs of £55,000. What is the bid? If the customer c that the profit seems pretty high, how might Nordholm counter that?

48. Spencer Manufacturing Company sells a product for £200 per unit. Its market share is 18 per cent of the units sold. The marketing manager feels that the market share can be increased to 25 per cent of the units sold with a reduction in price to £170. The product is currently earning a profit of £32 per unit. The president of Spencer Manufacturing Company feels that his company needs to maintain the same profit level per unit. The market share consists of £2,000,000 (10,000 units). Required: a. b. c. d.

How many pounds does Spencer Manufacturing Company currently sell of the product? What is the target price per unit? What is the original cost per unit? What is the target cost per unit?

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Chapter_10_11e 49. Foley Ltd. has predicted the following costs for this year for 10,000 units:

Variable Fixed Total

Manufacturing £800,000 1,200,000 £2,000,000

Selling and Administrative £200,000 600,000 £800,000

Required: a. b. c. d.

What is the mark-up on variable costs needed to achieve a target profit of £200,000? What is the initial unit selling price needed to obtain a target profit of £200,000 using the variable cost mark-up method? What is the manufacturing cost mark-up needed to obtain a target profit of £200,000? What is the initial unit selling price needed to obtain a target profit of £200,000 using the manufacturing cost mark-up method?

50. Many products have a predictable profit or product life cycle. Describe the product life cycle from the marketing perspective. In addition, graph profit versus the different phases. Finally, discuss the impact of the product life cycle on products, learning effects, setups, purchasing and marketing expenses.

51. Provide a short critique of cost-based pricing. What are the four major drawbacks to this pricing approach?

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Chapter_10_11e 52. Wurster Company sells a product for £400 per unit. Its market share is 20 percent of the units sold. The marketing manager believes that the market share can be increased to 28 percent of the units sold with a reduction in price to £360. The product is currently earning a profit of £62 per unit. The president of Wurster Company believes that his company needs to maintain the same profit level per unit. The total market for the product has annual sales of 5,000 units. Required: a. How many units does Wurster Company currently sell of the product? b. What is the target price per unit? c. What is the target cost per unit?

53. Baker Manufacturing has four categories of overhead. The four categories and the expected overhead costs for each category for next year are as follows: Maintenance Materials handling Setups Inspection

£140,000 60,000 50,000 100,000

Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 50,000 direct labour hours are budgeted. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 30 per cent. Estimates for the proposed job are as follows: Direct materials Direct labour (750 hours) Number of materials moves Number of inspections Number of setups Number of machine hours

£5,000 £7,500 8 5 3 300

In the past, full manufacturing cost has been calculated by allocating overhead using a traditional volume-based cost driver system: direct labour hours. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity-based cost drivers that would be used are as follows: Machine hours Material moves Setups Copyright Cengage Learning. Powered by Cognero.

16,000 4,000 2,000 Page 22

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Chapter_10_11e Quality inspections

8,000

Required: a.

Determine the amount of overhead that would be allocated to the proposed job if direct labour hours are used as the traditional volume-based cost driver. Determine the total cost of the proposed job. Determine the company's bid if the bid is based upon full manufacturing cost plus 30 per cent. Determine the amount of overhead that would be applied to the proposed job if activity-based costing is used. Determine the total cost of the proposed job if activity-based costing is used. Determine the company's bid if activity-based costing is used and the bid is based upon full manufacturing cost plus 30 per cent. Which product costing method produces the more competitive bid?

54. List some of the pros and cons of target costing.

55. Provide a short critique of cost-based pricing. What are the four major drawbacks to this pricing approach?

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Chapter_10_11e Answer Key 1. c 2. b 3. a 4. d 5. b 6. c 7. d 8. a 9. d 10. a 11. d 12. d 13. b 14. a 15. a 16. c 17. d 18. a 19. d 20. a 21. d 22. c 23. d 24. b 25. a 26. d

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Chapter_10_11e 27. b 28. b 29. a 30. c 31. b 32. b 33. d 34. d 35. a 36. d 37. b 38. d 39. c 40. c 41. b 42. B = (80,000 × £48) - (20 × £100) - (5 × £50) - (8 × 5 × £1) - 0 = £3,837,710 43. Vicki will need to sit down with the Holmses and determine which features of the reception are most important to them and which are less important. For example, perhaps the large wedding cake could be replaced with a small wedding cake, along with several sheet cakes. The party time could be reduced from three hours to two. The Holmses could provide their own tables and linens. In addition, less expensive food and appetizers could be offered.

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Chapter_10_11e 44. a.

Order-filling costs: Large customer:

£401,500 × 0.45 = £180,675

Smaller customers:

£401,500 × 0.55 = £220,825

Sales-force costs: Large customer:

£260,000 × 0.45 = £117,000

Smaller customers:

£260,000 × 0.55 = £143,000

Order-filling costs: £401,500/(5 + 545) = £730 per order Large customer: £730 × 5 = £3,650 Smaller customers:

£730 × 545 = £397,850

Sales-force costs: £260,000/(15 + 245) = £1,000 per sales call Large customer: £1,000 × 15 = £15,000 Smaller customers: c.

£1,000 × 245 = £245,000

The smaller customers are shown to be more expensive when activity-based costing is used. The smaller customers cost more due to smaller, more frequent orders and the need for more contact with the sales force. The order-filling costs for smaller customers increase from £220,825 to £397,850 (the increase is £177,025), and the sales-force costs increase from £143,000 to £245,000 (the increase is £102,000).

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Chapter_10_11e 45. a.

Order-filling costs: Large customer: Large Smaller customers: Sales-force costs: Large customer: Large Smaller customers:

£270,000 × 0.50 = £135,000 £270,000 × 0.50 = £135,000

£300,000 × 0.50 = £150,000 £300,000 × 0.50 = £150,000

Order-filling costs: £270,000/(6 + 294) = £900 per order Large Large customer: £900 × 6 = £5,400 Large Smaller customers:

£900 × 294 = £264,600

Sales-force costs: £300,000/(26 + 224) = £1,200 per sales call Large Large customer: £1,200 × 26 = £31,200 Large Smaller customers:

£1,200 × 224 = £268,800

The smaller customers are shown to be more expensive when activity-based costing is used. The smaller customers cost more due to smaller, more frequent orders and the need for more contact with the sales force. The order-filling costs for smaller customers increase from £135,000 to £264,600 (the increase is £129,600), and the sales-force costs increase from £150,000 to £268,800 (the increase is £118,800).

a. b. c. d.

10,000 × 0.22 = 2,200 £340 £400 - £64 = £336 £340 - £64 = £276

Mark-up percentage = £48,000/£600,000 = 8%

Bid = £55,000 × 1.08 = £59,400

46.

47.

Nordholm should remind the customer that the 8 per cent mark-up on direct costs is not pure profit. It includes overhead as well as profit. In construction, an 8 per cent overhead plus profit rate may be a little low.

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Chapter_10_11e 48. a. b. c. d.

£2,000,000 × 0.18 = £360,000 £170 £200 - £32 = £168 £170 - £32 = £138

(£1,200,000 + £600,000 + £200,000)/(£800,000 + £200,000) = 200 per cent

(£800,000 + £200,000)/100,000 units = £10 per unit + (£10 × 200 per cent) = £30

(£800,000 + £200,000)/£2,000,000 = 50 per cent

£2,000,000/100,000 units = £20 per unit + (£20 × 50 per cent) = £30

49.

50. The product life cycle describes the profit history of the product according to four stages; introduction, growth, maturity and decline. The graph would look like the following: The impact of the product life cycle on cost management would be as follows:

Product:

Introduction

Growth

Maturity

Decline

Basic design, few models

Some improvements, expanding

Proliferation of product lines, extensive

Minimal changes, reduced number of product lines

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Chapter_10_11e product line

differentiation

Learning Effects:

High costs, much learning, but little payoff

Still strong, learning begins to reduce costs

Stable production, little to no learning

No learning, labour as efficient as it can be

Setups:

Few, but new and unfamiliar

More, as new models are introduced

Many, as product differentiation occurs

Fewer, as only best selling lines are produced

Purchasing:

May be high as new materials and suppliers are sought

Lower, reliable suppliers found, few materials changes

May be high, depending on line changes

Fewer suppliers and orders as existing inventories are liquidated

Marketing Expense: Low selling and distribution cost to small number of target markets

Increased advertising and distribution

Supportive advertising, increased trade discounts, high distribution costs

Minimal advertising, distribution, and promotion

51. Cost-based pricing was the dominant approach to pricing when products were long-lived and competition was low. However, in today's business environment, few products or services meet either of these conditions. Cost-based pricing models generally assume all costs are unavoidable and do not encourage the efficiency in operations that is needed to compete in today's business environment. The four drawbacks to such an approach are: 1. Managers face limitations of obtaining accurate cost information. Particularly challenging are the issues of accurately classifying fixed and variable costs and of determining accurate cost assignments. 2. Unassigned costs can lead to underpricing, and thus to reduced or negative profits. 3. Customers may not be willing to pay the price determined by the model. 4. This approach can slow the time required to new products to market.

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Chapter_10_11e 52. a.

5,000 × 0.20 = 1,000 units

£360

£360 - £62 = £298

53. a. £5,250: (£140,000 + £60,000 + £50,000 + £100,000)/50,000 = £7 per DLH £7 × 750 DLH = £5,250 £17,750: £5,000 + £7,500 + £5,250 £23 075: £17,750 × 130% b. £2,882.50 Maintenance: £140,000/16,000 = £8.75 per machine hour Materials handling: £60,000/4,000 = £15 per move Setups: £50,000/2,000 = £25 per setup Inspection: £100,000/8,000 = £12.50 per inspection Overhead assigned: £8.75 × 300 £15 × 8 £25 × 3 £12.50 × 5

£2,625.00 120.00 75.00 62.50 £2,882.50

£15,382.50: £5,000 + £7,500 + £2,882.50 £19,997.25: £15,382.50 × 130% c. Activity-based costing produces more accurate cost information and a more competitive bid.

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Chapter_10_11e 54. A number of correct answers are possible. The major advantages are: 1. Target costing produces a proactive approach toward cost management. 2. Target costing produces a customer orientation. 3. Target costing increases coordination among departments that often work in isolation. 4. Target costing allows for employee empowerment. 5. Target costing fosters supplier relations. 6. Target costing highlights non-value-added activities for elimination. 7. Target costing highlights lower cost value-added alternatives. 8. Target costing reduces cycle time and time to market. The disadvantages are: 1. Target costing depends on effective and detailed cost data. 2. Target costing is ineffective without interdepartmental coordination. 3. Target costing increases planning and meeting time. 55. Cost-based pricing was the dominant approach to pricing when products were long-lived and competition was low. However, in today's business environment, few products or services meet either of these conditions. Cost-based pricing models generally assume all costs are unavoidable and do not encourage the efficiency in operations that is needed to compete in today's business environment. The four drawbacks to such an approach are: 1. Managers face limitations of obtaining accurate cost information. Particularly challenging are the issues of accurately classifying fixed and variable costs and of determining accurate cost assignments. 2. Unassigned costs can lead to underpricing, and thus to reduced or negative profits. 3. Customers may not be willing to pay the price determined by the model. 4. This approach can slow the time required to new products to market.

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Chapter 11_11e Indicate the answer choice that best completes the statement or answers the question. 1. The Overdale plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance

£120,000

Inspection

£200,000

The plant currently applies overhead using direct labour hours and expected capacity of 80 000 direct labour hours. The following data has been assembled for use in developing a bid for a proposed job: Direct materials

£1,500

Direct labour

£5,000

Machine hours

400

Number of inspections

Direct labour hours

750

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Chapter 11_11e 2. Owens Ltd produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£1,000,000 900,000 2,000,000 800,000 250,000 180,000

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

25,000 200 5,000 2,500

The costs of facility-level activities are assigned using machine hours. What is(are) the batch-level activity(ies)? a. Engineering b. Setups c. Inspecting d. All of these 3. An activity-based costing system uses which of the following procedures? a. Overhead costs are traced to departments, then costs are traced to products. b. Overhead costs are traced to activities, then costs are traced to products. c. Overhead costs are traced directly to products. d. All overhead costs are expensed as incurred. 4. If activity-based costing is used, electricity usage would be an example of a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity.

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Chapter 11_11e 5. Maintenance of the production equipment would be classified as a a. unit-level activity. b. product-level activity. c. cell-level activity. d. facility-level activity. 6. An example of a nonunit-level driver is a. pounds of direct materials. b. number of setups. c. number of machine hours where each product manufactured requires one machine hour. d. number of labour hours. 7. Committed resources are a. hard to purchase. b. purchased precisely at the time the resource is needed and have no unused capacity. c. supplied in advance of usage and may have unused capacity. d. none of these. 8. The overhead rates of the traditional-based approach to product costing use a. nonunit-based cost drivers. b. unit-based cost drivers. c. process costing. d. job-order costing. 9. Which of the following items would be classified as committed resources (long-term)? a. Salaried employees b. Depreciation on building c. Lease on machinery d. Both depreciation on building and lease on machinery

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Chapter 11_11e 10. Owens Ltd produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£1,000,000 900,000 2,000,000 800,000 250,000 180,000

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

25,000 200 5,000 2,500

The costs of facility-level activities are assigned using machine hours. What is the cost pool rate for the facility-level activities? a. £80.00 per machine hour b. £13,500.00 per setup c. £17.20 per machine hour d. £97.20 per machine hour

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Chapter 11_11e 11. Owens Ltd produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£1,000,000 900,000 2,000,000 800,000 250,000 180,000

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

25,000 200 5,000 2,500

The costs of facility-level activities are assigned using machine hours. What is(are) the unit-level activity(ies)? a. Engineering b. Setups c. Inspecting d. Machining 12. An activity-based cost system a. differs from a traditional-based cost system in the nature and number of the cost drivers used. b. uses both unit-based and nonunit-based cost drivers that reflect a cause-and-effect relationship. c. can trace cost accurately to cost objects other than products. d. does all of these. 13. Product costs can be distorted if a unit-based cost driver is used and a. nonunit-based overhead costs are a significant proportion of total overhead. b. the consumption ratios differ between unit-based and nonunit-based input categories. c. both nonunit-based overhead costs are a significant proportion of total overhead and the consumption ratios differ between unit-based and nonunit-based input categories. d. neither nonunit-based overhead costs are a significant proportion of total overhead nor the consumption ratios differ between unit-based and nonunit-based input categories.

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Chapter 11_11e 14. If activity-based costing is used, insurance on the plant would be classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity. 15. When selecting an activity driver, a company should consider a. the cost of measurement. b. the time of the year. c. the cause and effect between the activity driver and the cost pool. d. both the cost of measurement and the cause and effect between the activity driver and the cost pool. 16. All of the following are nonunit-based activity drivers EXCEPT a. number of setups. b. number of direct labour hours. c. number of inspections. d. number of material moves. 17. Which of the following items would be classified as flexible resources? a. Salaried employees b. Depreciation on building c. Fuel to generate electricity internally d. Lease on machinery 18. More accurate product costing information is produced by assigning costs using a. volume-based, plantwide rates. b. volume-based, departmental rates. c. activity-based pool rates. d. all of these produce accurate product costing information. 19. If activity-based costing is used, setups would be classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity.

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Chapter 11_11e 20. Granite, SA, has identified the following overhead costs and cost drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost £100,000 40,000 200,000 20,000

Cost Driver Number of setups Number of orders Machine hours Kilowatt hours

Expected Quantity 500 3,200 4,000 80,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job 500 £1,500 £1,400 100 100 2 8 40 60

Job 501 £2,000 £2,400 160 160 8 10 50 100

The company's normal activity is 4,000 direct labour hours. If Granite, SA, used activity-based cost drivers to allocate overhead costs, the total cost of Job 500 would be a. £5,715. b. £5,667. c. £5,415. d. £5,315. 21. Resources that are only purchased precisely at the time the resource is needed are called a. committed resources. b. flexible resources. c. scarce resources. d. none of these.

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Chapter 11_11e 22. Owens Ltd produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£1,000,000 900,000 2,000,000 800,000 250,000 180,000

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

25,000 200 5,000 2,500

The costs of facility-level activities are assigned using machine hours. What is the cost pool rate for the product-level activities? a. £80.00 per machine hour b. £13,500.00 per setup c. £17.20 per machine hour d. None of these

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Chapter 11_11e 23. Peach, SA, has identified the following overhead costs and cost drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost £200,000 80,000 400,000 40,000

Cost Driver Number of setups Number of orders Machine hours Kilowatt hours

Expected Quantity 500 3,200 4,000 80,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job 400 £750 £700 100 50 1 4 20 30

Job 401 £2,000 £2,400 160 80 4 5 25 50

The company's normal activity is 4,000 direct labour hours. If Peach, SA, used activity-based cost drivers to allocate overhead costs, the unit cost for Job 401 would be (round to two decimal places) a. £42.81. b. £53.13. c. £53.91. d. £54.06.

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Chapter 11_11e 24. The Overdale plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance Inspection

£120,000 £200,000

£1,500 £5,000 400 6 750

Total expected machine hours for all jobs during the year are 40,000, and the total expected number of inspections is 2,500. Using direct labour hours to assign overhead, the total cost of the potential job would be a. £9,500. b. £6,000. c. £3,000. d. £1,600. 25. Ubben Manufacturing uses an activity-based costing system. The company produces Model X and Model Y. Information relating to the two products is as follows:

Units produced Machine hours Direct labour hours Engineering labour (hours) Setups

Model X 20,000 8,000 14,000 1,000 40

Model Y 40,000 10,000 16,000 1,400 60

The following costs are reported: Engineering Setups Machine-related overhead

£48,000 100,000 144,000

Setups would be classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity.

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Chapter 11_11e 26. Owens Ltd produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£1,000,000 900,000 2,000,000 800,000 250,000 180,000

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

25,000 200 5,000 2,500

The costs of facility-level activities are assigned using machine hours. What is(are) the facility-level activity(ies)? a. Providing utilities b. Providing space c. Inspecting d. Both providing utilities and providing space

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Chapter 11_11e 27. Riley, SA, has identified the following overhead costs and activity drivers for next year: Expected Overhead Item Setup costs Ordering costs Maintenance Power

Cost £100,000 40,000 200,000 20,000

Expected Activity Driver Number of setups Number of orders Machine hours Kilowatt hours

Quantity 500 3,200 4,000 80,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job AA £375 £350 100 50 1 4 20 30

Job BB £1,000 £1,200 160 80 4 5 25 50

The company's normal activity is 4,000 direct labour hours. If the activity drivers are used to allocate overhead costs, the unit cost (rounded to two decimal places) for Job BB would be a. £21.40. b. £26.56. c. £26.95. d. £27.03.

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Chapter 11_11e 28. Moss Ltd has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries Equipment Supplies Total

£ 75,000 40,000 10,000 £125,000

The equipment is used for two activities: improving processes and designing tooling. Thirty-five per cent of the equipment's time is used for improving processes and 65 per cent is used for designing tools. The salaries are for two engineers. One is paid £50,000, while the other earns £25,000. The £50,000 engineer spends 40 per cent of his time training employees in new processes and 60 per cent of his time on improving processes. The remaining engineer spends equal time on all activities. Supplies are consumed in the following proportions: Creating BOMs Studying capabilities Improving processes Training employees Designing tooling

25% 10% 20% 25% 20%

What is the cost assigned to the training employees activity? a. £27,500 b. £125,000 c. £31,250 d. £81,250 29. What is the initial step in implementing an activity-based costing system? a. Assigning costs to activities b. Assigning costs to products c. Identifying activities and attributes d. Dividing activity costs by activity drivers

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Chapter 11_11e 30. Owens Ltd produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£1,000,000 900,000 2,000,000 800,000 250,000 180,000

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

25,000 200 5,000 2,500

The costs of facility-level activities are assigned using machine hours. What is the cost pool overhead rate for the unit-level activities? a. £80.00 per machine hour b. £13,500.00 per setup c. £17.20 per machine hour d. £97.20 per machine hour 31. The use of unit-based activity drivers to assign costs tends to a. overcost low-volume products. b. overcost high-volume products. c. undercost all products. d. overcost all products. 32. All of the following are unit-based activity drivers EXCEPT a. machine hours. b. number of setups. c. number of units. d. direct labour hours.

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Chapter 11_11e 33. An example of a production or unit-level driver is a. pounds of direct materials. b. number of setups. c. number of batches. d. number of product lines. 34. Which of the following items would be classified as committed resources (short-term)? a. Salaried employees b. Depreciation on building c. Fuel to generate electricity internally d. Lease on machinery 35. Granite, SA, has identified the following overhead costs and cost drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost £100,000 40,000 200,000 20,000

Cost Driver Number of setups Number of orders Machine hours Kilowatt hours

Expected Quantity 500 3,200 4,000 80,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job 500 £1,500 £1,400 100 100 2 8 40 60

Job 501 £2,000 £2,400 160 160 8 10 50 100

The company's normal activity is 4,000 direct labour hours. If Granite, SA, used activity-based cost drivers to allocate overhead costs, the unit cost for Job 500 would be a. £53.15. b. £54.15. c. £56.67. d. £57.15.

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Chapter 11_11e 36. Moss Ltd has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries Equipment Supplies Total

£ 75,000 40,000 10,000 £125,000

25% 10% 20% 25% 20%

What is the cost assigned to the designing tooling activity? a. £81,250 b. £33,000 c. £25,000 d. £125,000 37. In an activity-based cost system, what types of drivers are used to describe cost behaviour? a. Activity drivers b. Production or unit-level drivers c. Nonunit-level drivers d. Both production (or unit-level) and nonunit-level drivers

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Chapter 11_11e 38. Ubben Manufacturing uses an activity-based costing system. The company produces Model X and Model Y. Information relating to the two products is as follows:

Units produced Machine hours Direct labour hours Engineering labour (hours) Setups

Model X 20,000 8,000 14,000 1,000 40

Model Y 40,000 10,000 16,000 1,400 60

The following costs are reported: Engineering Setups Machine-related overhead

£48,000 100,000 144,000

Machine-related overhead would be classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity. 39. Basing overhead allocation solely on volume a. will undercost high-volume products and overcost low-volume products. b. will overcost high-volume products and undercost low-volume products. c. is the sole basis of the activity-based costing model. d. all of these are correct.

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Chapter 11_11e 40. Moss Ltd has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries Equipment Supplies Total

£ 75,000 40,000 10,000 £125,000

25% 10% 20% 25% 20%

What is the cost assigned to the creating BOMs activity? a. £31,250 b. £7,500 c. £43,750 d. £125,000

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Chapter 11_11e 41. Owens Ltd produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£1,000,000 900,000 2,000,000 800,000 250,000 180,000

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

25,000 200 5,000 2,500

The costs of facility-level activities are assigned using machine hours. What is(are) the product-level activity(ies)? a. Engineering b. Setups c. Inspecting d. None of these

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Chapter 11_11e 42. Moss Ltd has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries Equipment Supplies Total

£ 75,000 40,000 10,000 £125,000

25% 10% 20% 25% 20%

Product costs can be distorted if a unit-based activity driver is used and a. nonunit-based overhead costs are a significant proportion of total overhead. b. the consumption ratios differ between unit-based and nonunit-based input categories. c. nonunit-based overhead costs are a significant proportion of total overhead and the consumption ratios differ between unit-based and nonunit-based input categories. d. neither nonunit-based overhead costs are a significant proportion of total overhead nor the consumption ratios differ between unit-based and nonunit-based input categories. 43. Activity-based costing assigns costs to cost object by first a. tracing costs to products and then tracing costs to cost objects. b. tracing costs to departments and then tracing costs to products. c. tracing costs to activities and then tracing costs to cost objects. d. tracing costs to customers and then tracing costs to products. 44. If activity-based costing is used, product inspections would be classified as a a. unit-level activity. b. batch-level activity. c. product-level activity. d. facility-level activity.

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Chapter 11_11e 45. Batch-related costs are added to which of the following costs in break-even analysis? a. Variable b. Fixed c. Mixed d. None of these 46. Owens Ltd produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£1,000,000 900,000 2,000,000 800,000 250,000 180,000

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

25,000 200 5,000 2,500

The costs of facility-level activities are assigned using machine hours. What is the cost pool rate for the batch-level activities? a. £80.00 per machine hour b. £13,500.00 per setup c. £17.20 per machine hour d. £97.20 per machine hour

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Chapter 11_11e 47. Moss Ltd has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries Equipment Supplies Total

£ 75,000 40,000 10,000 £125,000

25% 10% 20% 25% 20%

What is the cost assigned to the improving processes activity? a. £250,000 b. £25,000 c. £43,750 d. £51,000 48. An activity cost driver is a. a factor that causes variations in a cost. b. another term for input measure. c. the largest single category of cost in a company. d. a variable cost. 49. Which of the following quantities is an example of an activity driver in activity-based costing? a. Number of setups b. Number of orders placed c. Number of machine hours d. All of these

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Chapter 11_11e 50. Peach, SA, has identified the following overhead costs and cost drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost £200,000 80,000 400,000 40,000

Cost Driver Number of setups Number of orders Machine hours Kilowatt hours

Expected Quantity 500 3,200 4,000 80,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job 400 £750 £700 100 50 1 4 20 30

Job 401 £2,000 £2,400 160 80 4 5 25 50

The company's normal activity is 4,000 direct labour hours. If Peach, SA, used direct labour hours to assign overhead, the unit cost for Job 401 would be a. £117.50. b. £111.88. c. £105.00. d. £102.50.

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Chapter 11_11e 51. Godwin Ltd produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£250,000 225,000 500,000 200,000 62,500 45,000

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

25,000 200 5,000 2,500

The costs of facility-level activities are assigned using machine hours. Required: a. b. c. d.

Identify the activities within each process as unit-level, batch-level, product-level or facilitylevel. Create homogeneous cost pools. Identify the activities that belong to each pool and the activity driver that will be used for computing pool rates. Build an activity relational (i.e. cost) table. Compute the cost pool rates.

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Chapter 11_11e 52. Lyons, SA, has identified the following overhead costs and activity drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost £150,000 40,000 200,000 20,000

Activity Driver Number of setups Number of orders Machine hours Kilowatt hours

Expected Qty. 1,200 10,000 16,000 100,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job XX £2,250 3,000 375 90 6 8 180 90

Job YY £2,500 1,875 300 110 8 15 150 120

The company's normal activity is 20,000 direct labour hours. Required: a. b. c.

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Chapter 11_11e 53. Holbrook, SA., has identified the following overhead costs and cost drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost £960,000 160,000 640,000 80,000

Cost Driver Number of setups Number of orders Machine hours Kilowatt hours

Expected Quantity 4,800 20,000 64,000 200,000

The following are two of the jobs completed during the year:

Prime costs Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job 701 £25,000 650 180 12 16 360 180

Job 702 £18,000 500 220 15 30 300 650

The company's normal activity is 40,000 direct labour hours. Required: a. b. c.

54. The most critical step in activity-based costing is identifying cost drivers. Explain this statement.

55. Briefly discuss the problem with the unit-level approach to cost estimation and discuss some of the errors that may occur.

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Chapter 11_11e 56. Ernest, SA, has identified the following overhead costs and cost drivers for next year: Overhead Item Setup costs Ordering costs Maintenance Power

Expected Cost £320,000 120,000 480,000 40,000

Cost Driver Number of setups Number of orders Machine hours Kilowatt hours

Expected Quantity 4,000 20,000 24,000 160,000

The following are two of the jobs completed during the year:

Direct materials Direct labour Units completed Direct labour hours Number of setups Number of orders Machine hours Kilowatt hours

Job 320 £8,000 £6,400 800 240 12 20 400 280

Job 321 £19,000 £12,000 1,600 500 20 40 600 400

The company's normal activity is 32,000 direct labour hours. (Round amounts to two decimal places.) Required: a. b. c.

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Chapter 11_11e 57. Hill Manufacturing uses an activity-based costing system. The company produces Model A and Model B. Information concerning the two products is as follows:

Units produced Direct labour hours Engineering labour (hours) Setups Kilowatt hours

Model A 30,000 24,000 4,000 20 5,000

Model B 50,000 26,000 6,000 30 7,000

The following costs are reported: Power Labour-related overhead Setups

£12,000 70,000 60,000

Required: a.

Classify the following overhead activities as unit-level activities, batch-level activities, or product-level activities: Power Engineering Setups Calculate the following: A cost pool rate for power A cost pool rate for setups A cost pool rate for engineering Calculate the following: Power costs assigned to Model B Setups costs assigned to Model A Engineering costs assigned to Model A

58. Compare and contrast traditional organization-based costing with activity-based costing.

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Chapter 11_11e 59. Hunter Company manufactures two products (XX and YY). The overhead costs have been divided into four cost pools that use the following activity drivers:

Product XX YY

Number of Orders 60 20

Number of Setups 20 80

Number of Labour Transactions 50 70

Labour Hours 2,000 500

Cost per pool

£16,000

£13,000

£2,400

£20,000

Required: a.

Compute the allocation rates for each of the activity drivers listed.

Allocate the overhead costs to Products XX and YY using activity-based costing.

c. d.

Compute the overhead rate using labour hours under the traditional functional-based costing system. Allocate the overhead costs to Products XX and YY using the traditional functional-based costing system overhead rate calculated in part (c).

60. Discuss how volume-based unit-level analysis underestimates and/or overestimates the cost of products.

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Chapter 11_11e 61. Flanigan Manufacturing uses an activity-based cost system. The company produces Product R and Product X. Information concerning the two products is as follows:

Units produced Direct labour hours Engineering labour (hours) Setups Kilowatt hours

Product R 30,000 24,000 4,000 20 5,000

Product X 50,000 26,000 6,000 30 7,000

The following costs are reported: Power Engineering Setups

£ 24,000 140,000 120,000

Required: a.

Classify the overhead activities as: Unit-level activities Batch-level activities Product-sustaining activities

Calculate the following: The pool rate for power The pool rate for setups The pool rate for engineering

Calculate the following: Power costs assigned to Product X Setup costs assigned to Product R Engineering costs assigned to Product R

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Chapter 11_11e 62. Funk Manufacturing Company produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering Setups Machining Inspection Providing space Providing utilities

£125,000 112,500 250,000 100,000 31,250 22 500

Activity drivers for each activity have been identified and their practical capacities listed: Machine hours Setups Engineering hours Inspection hours

50,000 400 10,000 5,000

The costs of facility-level activities are assigned using machine hours. Required: a. b. c. d.

Identify the activities within each process as unit-level, batch-level, product-level, or facilitylevel. Create homogeneous cost pools. Identify the activities that belong to each pool and the activity driver that will be used for computing pool rates. Build an activity relational (i.e. cost) table. Compute the cost pool rates.

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Chapter 11_11e 63. Books Company manufactures and sells two products: Soft Cover (S) and Hard Cover (H). The firm's activities have been analysed and placed into a hierarchy of activity costs. Presented is information on activity cost drivers and costs per unit of cost driver at each activity level. Activity Level Unit level

Batch level Product level Facility level

Activity X11, S acquire direct materials X12, H acquire direct materials X13, S other manufacturing costs X14, H other manufacturing costs X21, S setup X22, H setup X31, S advertising X32, H advertising X41, Rent

Cost b11, £6 b12, £10 b13, £2 b14, £4 b21, £200 b22, £300 b31, £20,000 b32, £30,000 b41, £10,000

During January, Books Company produced 10,000 units of Soft Covers and 5,000 units of Hard Covers. Each batch of products includes 1,000 units of Soft Covers or 1,000 units of Hard Covers. Required: Determine the total costs for each activity level and the total predicted costs for January.

64. Identify Cooper and Kaplan's four categories of activities and provide a brief description of each category.

65. Explain how the activity resource usage model is used in assessing relevancy.

66. Describe the unit level approach to cost behaviour analysis. Discuss the appropriateness of this approach.

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Chapter 11_11e Answer Key 1. b 2. d 3. b 4. a 5. a 6. b 7. c 8. b 9. d 10. c 11. d 12. d 13. c 14. d 15. d 16. b 17. c 18. c 19. b 20. c 21. b 22. d 23. d 24. a 25. b 26. d

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Chapter 11_11e 27. d 28. a 29. c 30. a 31. b 32. b 33. d 34. a 35. b 36. b 37. d 38. a 39. a 40. b 41. d 42. c 43. c 44. b 45. b 46. b 47. d 48. a 49. d 50. a 51. a.

Manufacturing process: Unit-level: Machining Batch-level: Engineering, setups, and inspecting Product-level: None

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Chapter 11_11e Sustaining process: Facility-level: Providing utilities, providing space b.

Pools and drivers: Manufacturing process: Unit-level: Pool 1: Machine costs

£500,000 Activity driver: Machine hours

Batch-level: Pool 2: Engineering costs Setup costs Inspecting costs Total pool cost

£250,000 225,000 200,000 £675,000 Activity driver: Engineering or inspection hours, setups

Note: Number of setups is chosen as the driver; this driver would likely be measured readily and easily associated with product Sustaining process: Facility-level: Pool 3: Providing space Providing utilities Total pool cost c. Activity 1 2 3 4 5 6 d.

Activity Name Machining Engineering Setup Inspecting Prov. space Prov. util.

£ 62,500 45,000 £107,500

Process Manufact. Manufact. Manufact. Manufact. Sustaining Sustaining

Level Unit Batch Batch Batch Facility Facility

Activity Driver Mach. hrs. # of setups # of setups # of setups Mach. hrs. Mach. hrs.

Capacity 25,000 200 200 200 25,000 25,000

Pool rates: Pool 1: £500,000/25,000 = £20.00 per machine hour

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Chapter 11_11e Pool 2: £675,000/200 = £3,375.00 per setup Pool 3: £107,500/25,000 = £4.30 per machine hour

52. a.

Unit cost for Job XX: Unit cost for Job YY:

£18.92 £22.10

Direct materials Direct labour Overhead assigned: (£20.50* × 90) Total cost

Job XX £2,250 3,000 1,845 £7,095

Unit cost (£7,095/375)

£18.92

*(£150,000 + £40,000 + £200,000 + £20,000)/20,000 = £20.50/DLH

Direct materials Direct labour Overhead assigned: (£20.50 × 110) Total cost

Job YY £2,500 1,875 2,255 £6,630

Unit cost (£6,630/300)

£22.10

Unit cost for Job XX: Unit cost for Job YY:

£22.13 £24.45

Setup: Ordering: Maintenance: Power:

£150,000/1,200 = £125/setup £40,000/10,000 = £4/order £200,000/16,000 = £12.50/hour £20,000/100,000 = £0.20/kilowatt hour

Direct materials Direct labour Overhead assigned: £125 × 6 £4 × 8 £12.50 × 180 £0.20 × 90 Total cost Unit cost (£8,300/375) Copyright Cengage Learning. Powered by Cognero.

Job XX £2,250 3,000 750 32 2,250 18 £8,300 £22.13 Page 36

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Direct material Direct labour Overhead assigned: £125 × 8 £4 × 15 £12.50 × 150 £0.20 × 120 Total cost Unit cost (£7,334/300)

Job YY £2,500 1 875 1,000 60 1,875 24 £7,334 £24.45

Activity-based costing produces more accurate cost information because overhead incurrence is often related to many different activities rather than a single volume-based activity driver.

Unit cost for Job 701: £51.20 Unit cost for Job 702: £56.24

53.

Prime costs Overhead assigned: £46* × 180 Total cost Unit cost (£33,280/650)

Job 701 £25,000 8,280 £33,280 £ 51.20

*(£960,000 + £160,000 + £640,000 + £80,000)/40,000 = £46 per DLH

Prime costs Overhead assigned: £46 × 220 Total cost Unit cost (£28,120/500) b.

Job 702 £18,000 10,120 £28,120 £ 56.24

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Chapter 11_11e Prime costs Overhead assigned: £200 × 12 £8 ×16 £10 × 360 £0.40 × 180 Total cost

£25,000

Unit cost (£31,200/650)

£ 48.00

Prime costs Overhead assigned: £200 × 15 £8 × 30 £10 × 300 £0.40 × 650 Total cost Unit cost (£24,500/500) c.

2,400 128 3,600 72 £31,200

Job 702 £18,000 3,000 240 3,000 260 £24,500 £ 49.00

Activity-based costing produces more accurate cost information because overhead incurrence is often related to many different activities rather than to a single volume-based cost driver.

54. The activity cost driver for a particular cost (or cost pool) is the characteristic selected for measuring the quantity of the activity for a particular period of time. It is critical that the activity measure used has a logical causal relationship to the costs in the pool. Statistical methods such as regression analysis and correlation analysis can be very useful in selecting activity cost drivers. 55. When cost estimation is limited to the volume-based unit-level approach, while actual costs follow an activity cost hierarchy, there is a high probability of significant errors in cost estimation and cost prediction. Such errors may lead management to believe that some products cost less and some products cost more than they really do. Based on such a belief, management might discontinue products that are, in fact, profitable or emphasize the production of products that are, in fact, unprofitable. 56. a.

Unit cost for Job 320: £27.00 Unit cost for Job 321: £28.75 Direct materials Direct labour Overhead assigned: £30* × 240 Total cost Unit cost (£21,600/800)

Job 320 £ 8,000 6,400 7,200 £21,600 £ 27.00 Page 38

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*(£320,000 + £120,000 + £480,000 + £40,000)/32,000 = £30 per DLH

Direct materials Direct labour Overhead assigned: £30 × 500 Total cost Unit cost (£46,000/1,600) b.

Job 321 £19,000 12,000 15,000 £46,000 £ 28.75

Unit cost for Job 320: £29.44 Unit cost for Job 321: £28.09 Setup: £320,000/4,000 = £80 per setup Ordering: £120,000/20,000 = £6 per order Maintenance: £480,000/24,000 = £20 per hour Power: £40,000/160,000 = £0.25 per kilowatt hour

Direct materials Direct labour Overhead assigned: £80 × 12 £6 × 20 £20 × 400 £0.25 × 280 Total cost Unit cost (£23,550/800)

Direct materials Direct labour Overhead assigned: £80 × 20 £6 × 40 £20 × 600 £0.25 × 400 Total cost Unit cost (£44,940/1,600) c.

Job 320 £ 8,000 6,400 960 120 8,000 70 £23,550 £ 29.44 Job 321 £19,000 12,000 1,600 240 12,000 100 £44,940 £ 28.09

Activity-based costing produces more accurate cost information because overhead incurrence is often related to many different activities rather than a single volume-based cost driver.

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57. a.

Power: Engineering: Setups:

Unit-level activity Product-level activity Batch-level activity

£1.00/kwh £1,200/setup £7/hour

[£12,000/(5,000 + 7,000)] = £1.00 [£60,000/(20 + 30)] = £1,200 [£70,000/(4,000 + 6,000)] = £7

£7,000 £24,000 £28,000

(£1.00 × 7,000) (£1,200 × 20) (£7 × 4,000)

58. Procedurally, ABC is not a new method for assigning costs to cost objectives. For decades, traditional costing systems have used a two-stage allocation model (similar to the ABC model) to assign costs to cost pools (such as departments) and subsequently assign those cost pools to products using an allocation base. In many organizationbased costing (OBC) systems, overhead is assigned to one or more cost pools based on departments and functional characteristics and then reassigned to products using a general allocation base such as direct labour hours or machine hours. ABC is different in that it divides the overall manufacturing operations into processes, which are broken down into activities. ABC accumulates costs in cost pools for the major activities and then assigns the costs of these activities to products or other cost objectives that benefit from these activities. Conceptually, ABC is different from OBC because it is a different way of viewing the operations of the company; procedurally, it uses a methodology that is very similar to OBC.

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Chapter 11_11e 59. a. Cost per pool Total Allocation rate

Number of Orders £16,000 ÷ 80 £ 200

Number of orders Number of setups No. of labour trans. Labour hours

Product XX 60 × £200 = 20 × £130 = 50 × £20 = 2,000 × £8 =

Number of Setups £13,000 ÷ 100 £ 130

£12,000 2,600 1,000 16,000 £31,600

(£16,000 + £13,000 + £2,400 + £20,000)/2,500 = £20.56 per DLH

Product XX: 2,000 × £20.56 = £41,120 Product YY: 500 × £20.56 = £10,280

Number of labour Transactions £ 2,400 ÷ 120 £ 20 Product B 20 × £200 = 80 × £130 = 70 × £20 = 500 × £8 =

labour Hours £20,000 ÷ 2,500 £ 8

£ 4,000 10,400 1,400 4,000 £19,800

60. Volume-based unit-level analysis: underestimates the cost of products produced in batches containing a small number of units, overestimates the cost of products produced in batches containing a large number of units, underestimates the cost of the most complex products with the highest product-level costs and overestimates the cost of the least complex products with the lowest product-level costs. 61. a.

Power: Engineering: Setups: £2.00 per kwh £2,400 per setup £14 per hour £14,000 £48,000 £56,000

Unit-level activity Product-sustaining activity Batch-level activity £24,000/(5,000 + 7,000) £120,000/(20 + 30) £140,000/(4,000 + 6,000) £2.00 × 7,000 £2 400 × 20 £14 × 4,000

62. a.

Manufacturing process: Unit-level:

Machining Page 41

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Batch-level: Product-level:

Engineering, setups, and inspecting None

Sustaining process: Facility-level:

Providing utilities, providing space

Pools and drivers: Manufacturing process: Unit-level: Pool 1: Machine costs

£250,000 Activity driver: Machine hours

Batch-level: Pool 2: Engineering costs Setup costs Inspecting costs Total pool cost

£125,000 112,500 100,000 £337,500

Activity driver: Engineering or inspection hours, setups

Note: Number of setups is chosen as the driver; this driver would likel be measured readily and easily associated with product demands.

c. Activity 1 2 3 4 5 6 d.

Facility-level: Pool 3: Providing space Providing utilities Total pool cost

£31,250 22,500 £53,750

Activity Name Machining Engineering Setup Inspecting Prov. space Prov. util.

Level Unit Batch Batch Batch Facility Facility

Process Manufact. Manufact. Manufact. Manufact. Sustaining Sustaining

Activity Driver Mach. hrs. # of setups # of setups # of setups Mach. hrs. Mach. hrs.

Capacity 50,000 400 400 400 50,000 50,000

Cost £250,000 125,000 112,500 100,000 31,250 22,500

Pool rates:

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Chapter 11_11e Pool 1: £250,000/50,000 = £5.00 per machine hour Pool 2: £337,500/400 = £843.75 per setup Pool 3: £53,750/50,000 = £1.08 per machine hour

63. Unit level: 10,000(£6) + 5,000(£10) + 10,000(£2) + 5,000(£4) = £150,000 Batch level: 10(£200) + 5(£300) = £3,500 Product level: £20,000 + £30,000 = £50,000 Facility level: £10,000 Total costs: £150,000 + £3,500 + £50,000 + £10,000 = £213,500 64. Unit-level activities are performed for each unit of product produced. Batch-level activities are performed for each batch of product produced. Product-level activities are performed to support the production of each different type of product. Facility-level activities are performed to maintain general manufacturing capabilities. 65. The activity resource usage model breaks costs into two groups: flexible resources and committed resources. Flexible resources are acquired as used and needed; supply equals demand. If demand changes, the cost is relevant. Committed resources are acquired in advance; therefore, they may have unused capacity. The cost may or may not be relevant. If committed resources have unused capacity, their cost is not relevant. If there is not sufficient excess capacity, the additional cost is relevant. 66. The unit level approach to cost analysis assumes changes in an organization's costs are best explained by changes in the number of units or sales revenues (or some other measure of business volume). Because of its relative simplicity, unit level analysis has been widely used and accepted. In many circumstances this approach may provide acceptable results. However, in many other circumstances, this approach may be insufficient to capture the critical drivers of cost. This is especially true in organizations offering multiple products of various complexities, which vary in their consumption of the organization's resources. In these situations, an analysis that includes additional variables for considerations such as the influence of number of batch runs on costs and the influence of the number of products offered on costs would provide more accurate estimation.

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Chapter_12_11e Indicate the answer choice that best completes the statement or answers the question. 1. The maximum amount that is worth paying to obtain additional information consists of a. the expected price of the information. b. the difference between the expected value if the information is acquired compared with the expected value with the absence of the information. c. an amount equal to the most likely benefit that the information will provide. d. an amount equal to the highest benefit that the information will provide. 2. Which of the following represent states of nature? a. A potential set of outcomes expressed in monetary terms b. The most likely result that is going to occur c. A list of potential courses of action that can be undertaken d. A list of different conditions that might be experienced relating to the economy such as recession, boom etc. 3. In a decision tree the boxes refer to a. the point at which decisions have to be taken. b. possible alternative courses of action. c. the point at which environmental changes occur that affect the consequences of prior decisions. d. the possible types of environment that may occur. 4. ZX Company is faced with choosing from the following four mutually exclusive alternatives. Each project has the same duration and the cash flows are expected to occur at the same point in time. Their net cash inflows will be determined by the prevailing market conditions. The forecast net cash inflows and their associated probabilities are shown below: Market conditions Probability Project A Project B Project C Project D

Poor 0.20 £600,000 500,000 440,000 432,000

Good 0.50 £620,000 660,000 480,000 480,000

Excellent 0.30 £660,000 684,000 570,000 504,000

Based on the expected value of net cash flows, which project should be undertaken? a. Project A b. Project B c. Project C d. Project D

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Chapter_12_11e 5. The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand – high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are:

Alternative 1 Alternative 2

Low demand (£) 350,000 35,000

High demand (£) 560,000 700,000

Using the data above relating to the Lee Company, which alternative should be selected using the regret criterion? a. Neither alternative b. Alternative 1 c. Alternative 2 d. It is not possible to use the regret criterion for the data given. 6. Which of the following assumptions apply when making decisions on the basis of expected values a. the decision must be a ‘one-off’. b. there must be many possible outcomes. c. it is based on the assumption that the decision will be repeated many times. d. none of these. 7. The joint probability of two events occurring together is a. the sum of the probabilities of the two events. b. the higher probability of the two events. c. the average of the probability for the two events. d. the probability of one event times the probability of the other event. 8. Sentosa Company is considering launching a new product which it believes has a 70% probability of success. The company is, however, considering undertaking an advertising campaign costing £60,000, which would increase the probability of success to 95%. If successful the product would generate income of £240,000 otherwise £84,000 would be received. What is the maximum amount that the company should be prepared to pay for advertising? a. £34,800 b. £21,000 c. £39,000 d. £60,000

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Chapter_12_11e 9. The expected value represents a. the weighted average of the possible outcomes. b. the most likely outcome. c. the outcome with the highest probability. d. none of these. 10. The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand – high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are: Low demand (£) 350,000 35,000

Alternative 1 Alternative 2

High demand (£) 560,000 700,000

Using the data above relating to the Lee Company, what is the amount of regret that is used to determine the choice of alternatives under consideration? a. £140,000 b. £210,000 c. £665,000 d. £315,000 e. It is not possible to apply the regret criterion to the data given. 11. Joe Bloggs is considering the following three alternatives that are estimated to yield the following potential monetary benefits: Possible outcomes 1 2 3

Alternative A £18,000 20,000 22,000

Alternative B £ 9,000 20,000 31,000

Alternative C £ 0 20,000 40,000

It is estimated that all of the outcomes are equally likely. Assuming that Joe is a risk averter which alternative is he likely to prefer? a. Alternative A b. Alternative B c. Alternative C d. He will be indifferent as to which alternative to choose.

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Chapter_12_11e 12. Which of the following are true with regard to expected values? 1. Expected values represent the single most likely estimate of the outcome. 2. Expected values take no account of decision-makers risk. 3. Expected values are reliant on the accuracy of the probability distribution. a. 1, 2 and 3 b. 1 and 2 only c. 1 and 3 only d. 2 and 3 only 13. Which of the following is NOT a measure of uncertainty? a. The standard deviation of the probability distribution b. An examination of the probability distribution c. The expected value d. The coefficient of variation 14. The following represent a tutor’s estimate of the probability of students A, B, C and D failing an examination. Which student does the tutor consider has the best chance of passing the examination? a. Student A = 0 b. Student B = 0.5 c. Student C = 0.6 d. Student D = 0.2 15. The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand – high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are:

Alternative 1 Alternative 2

Low demand (£) 350,000 35,000

High demand (£) 560,000 700,000

Using the data above relating to the Lee Company, which alternative should be selected using the maximin criterion? a. Neither alternative b. Alternative 1 c. Alternative 2 d. It is not possible to use the maximin criterion for the data given.

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Chapter_12_11e 16. The decision rule under the maximin criterion is to a. select the alternative that has the best outcome should the worst event occur. b. select the alternative that has the best average outcome. c. select the alternative that has the best outcome should the best event occur. d. select the alternative that has the best chance of maximising the return. 17. The Tamesek Company is considering purchasing one of two mutually exclusive machines. Machine A is most suited to low levels of demand whereas machine B is suited to high-level demand. There are only two possible outcomes and each has the same level of probability. The estimated profits for each demand level are as follows: Low demand (£) High demand (£) Machine A 140,000 224,000 Machine B 14,000 280,000 There is a possibility of employing a firm of management consultants who would be able to provide a perfect prediction of actual demand. What is the maximum amount that the company would be prepared to pay for the additional information? a. £98,000 b. £14,000 c. £70,000 d. None of these 18. ZX Company is faced with choosing from the following four mutually exclusive alternatives. Each project has the same duration and the cash flows are expected to occur at the same point in time. Their net cash inflows will be determined by the prevailing market conditions. The forecast net cash inflows and their associated probabilities are shown below: Market conditions Probability Project A Project B Project C Project D

Poor 0.20 £600,000 500,000 440,000 432,000

Good 0.50 £620,000 660,000 480,000 480,000

Excellent 0.30 £660,000 684,000 570,000 504,000

The expected value of Project D is: a. £472,000. b. £480,000. c. £477,600. d. None of these.

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Chapter_12_11e 19. The following represent the expected values and standard deviations for alternatives a-d. Which alternative has the highest absolute risk? a. Alternative A has an expected profit of £100,000 and a standard deviation of £18,000. b. Alternative B has an expected profit of £300,000 and a standard deviation of £75,000. c. Alternative C has an expected profit of £500,000 and a standard deviation of £70,000. d. Alternative D has an expected profit of £700.000 and a standard deviation of £60,000. 20. The most likely outcome represents a. the expected value. b. the actual outcome. c. the average outcome that is expected to occur. d. the outcome with the highest probability. 21. Joe Bloggs is considering the following three alternatives that are estimated to yield the following potential monetary benefits: Possible outcomes Alternative A Alternative B 1 £18,000 £ 9,000 2 20,000 20,000 3 22,000 31,000 It is estimated that all of the outcomes are equally likely.

Alternative C £ 0 20,000 40,000

Assume that Joe is a risk neutral. Which alternative is Joe likely to choose? a. Alternative A b. Alternative B c. Alternative C d. He will be indifferent between the three alternatives. 22. Jackson is considering launching a new product which it believes has an 80% probability of success. The company, however, is considering undertaking an advertising campaign at a cost of £40,000 which would increase the probability of success to 90%. If successful the product would generate income of £840,000 otherwise £294,000 would be received. What will be the expected loss or gain from obtaining the additional information? a. A loss of £40,000 b. A gain of £14,600 c. A gain of £54,600 d. None of these

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Chapter_12_11e 23. The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand – high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are:

Alternative 1 Alternative 2

Low demand (£) 350,000 35,000

High demand (£) 560,000 700,000

Which alternative should the company choose using the maximax criterion? a. Neither alternative b. Alternative 1 c. Alternative 2 d. There is insufficient data to use the maximin criterion. 24. The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand – high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are:

Alternative 1 Alternative 2

Low demand (£) 350,000 35,000

High demand (£) 560,000 700,000

Assume that the probabilities of 0.5 for high and 0.5 for low demand are changed to 0.6 and 0.4 respectively. How would the change in probabilities change the values used to apply the maximax, maximin and regret criteria? a. All of the values would increase. b. All of the values would decrease. c. Some values would increase and others would decrease. d. The values would remain unchanged. e. None of these because it is not possible to apply any of the criteria from the data given.

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Chapter_12_11e 25. Joe Bloggs is considering the following three alternatives that are estimated to yield the following potential monetary benefits: Possible outcomes 1 2 3

Alternative A £18,000 20,000 22,000

Alternative B £ 9,000 20,000 31,000

Alternative C £ 0 20,000 40,000

It is estimated that all of the outcomes are equally likely. Assume that Joe is a risk seeker. Which alternative is Joe likely to choose? a. Alternative A b. Alternative B c. Alternative C d. He will be indifferent between the three alternatives. 26. Under what circumstances can risk reduction NOT be achieved from combining investments? a. Where the projects are perfectly positively correlated b. Where the projects are perfectly negatively correlated c. Where the projects have low levels of positive correlation d. Where the projects have low levels of negative correlation 27. Which of the following is NOT a feature of a probability distribution? a. A value of 0 for an event denotes a nil likelihood of occurrence b. A value of 1 for an event signifies absolute certainty c. The total of the probabilities for all possible events listed in the distribution can vary d. A probability distribution attempts to provide a list of all possible outcomes 28. Which of the following statements is untrue regarding a probability distribution? a. It will show all possible outcomes and their probabilities. b. It can be used to provide an indication of the risk of undertaking a possible course of action. c. It will show the average outcome that is expected to occur. d. It will enable an estimate of the most likely outcome to be derived.

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Chapter_12_11e 29. The following represent the expected values and standard deviations for alternatives W-Z: a. b. c. d.

Alternative W has an expected profit of £100,000 and a standard deviation of £18,000. Alternative X has an expected profit of £300,000 and a standard deviation of £54,000. Alternative Y has an expected profit of £500,000 and a standard deviation of £90,000. Alternative Z has an expected profit of £700,000 and a standard deviation of £126,000.

Which of the following statements are true? a. Alternative Z has the highest amount of relative risk. b. Alternative W has the lowest amount of relative risk. c. All of the alternatives have an equal amount of relative risk. d. None of these statements are true. 30. Which of the following best describes objective probabilities? a. Repeating an experiment that exactly simulates the decision and using the data to derive the probability b. Obtaining an estimate from an expert c. Using a firm of management consultants to provide the value of the probability d. None of these

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Chapter_12_11e Answer Key 1. b 2. d 3. a 4. b 5. b 6. c 7. d 8. c 9. a 10. a 11. a 12. d 13. c 14. a 15. b 16. a 17. d 18. c 19. b 20. d 21. d 22. b 23. c 24. d 25. c 26. a

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Chapter_12_11e 27. c 28. c 29. c 30. a

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Chapter_13_11e Indicate the answer choice that best completes the statement or answers the question. 1. The Bradshaw Company is considering purchasing equipment for £78,000. This equipment will save the company £22,000 in operating costs annually. The payback period for this equipment is a. 3.5 years. b. 4 years. c. 2.2 years. d. 0.3 years. 2. JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent. JD's approximate internal rate of return of the project is a. 17%. b. 15%. c. 13%. d. 12%. 3. What is a weakness of the payback method? a. It emphasizes projects with possible liquidity problems. b. It ignores the profitability of investments beyond the payback period. c. It can be used in conjunction with discounted cash flow methods. d. It emphasizes projects with possible liquidity problems and it ignores the profitability of investments beyond the payback period. 4. Which of the following methods assumes a reinvestment rate equal to the discount rate? a. Payback b. Accounting rate of return c. Net present value d. Internal rate of return 5. Ducky Pizza Restaurant purchases a van to deliver pizzas to their customers. The van costs £28,000 and is projected to increase revenues by £10,000 a year and to increase costs by £4,500. The payback period for this van is a. 2.8 years. b. 6.2 years. c. 5.1 years. d. 0.4 years.

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Chapter_13_11e 6. If the investment's internal rate of return is more than the required rate of return, the investment should be a. accepted. b. rejected. c. put on hold. d. none of these are correct. 7. JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent. Based on quantitative factors, should JD accept, reject or wait on the project? a. Accept b. Reject c. Wait 8. Glady, Inc., is considering the purchase of production equipment that costs £800,000. The equipment is expected to generate annual cash inflows of £250,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 14 per cent. Payback for Glady's project is a. 5 years. b. 3.2 years. c. 4 years. d. 3.125 years. 9. Which of the following is NOT included in the calculation of net present value of a proposed project? (Ignore income taxes.) a. Salvage value b. Working capital c. Discount rate d. Depreciation expense 10. If NPV and IRR produce different rankings, which method should be used in choosing investment projects? a. Payback b. Accounting rate of return c. Net present value d. Internal rate of return

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Chapter_13_11e 11. Glady, Inc., is considering the purchase of production equipment that costs £800,000. The equipment is expected to generate annual cash inflows of £250,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 14 per cent. If depreciation is £190,000 per year, Glady's accounting rate of return based on the average investment would be a. 15.0%. b. 7.5%. c. 6.25%. d. 5.5%. 12. Which of the following capital investment models would be preferred when choosing among mutually exclusive alternatives? a. Payback period b. Accounting rate of return c. IRR d. NPV 13. JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent. JD's net present value of the project is a. £40,480. b. £48,625. c. £50,625. d. £54,450. 14. Which of the following methods uses income instead of cash flows? a. Payback b. Accounting rate of return c. Internal rate of return d. Net present value 15. If the annual cash flows are an annuity (equal each period), payback is calculated as a. Annual net cash inflows/Capital investment. b. Capital investment/Annual net cash inflows. c. Annual net cash inflows/Present value factor. d. (Annual net cash inflows - Annual depreciation)/Capital investment.

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Chapter_13_11e 16. Brooks Company invested in a project that is expected to have an annual cash flow of £10,000. The project's life is five years and has an IRR of 14 per cent. How much was the initial investment in the project? a. £34,330 b. £50,000 c. £36,050 d. £29,140 17. A firm is considering a project with an annual cash flow of £200,000. The project would have a 7-year life, and the company uses a discount rate of 10 per cent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable? a. £718,200 b. £1,400,000 c. £973,600 d. £200,000 18. The time required for a project to return its investment is the a. accounting rate of return. b. interest. c. net present value. d. payback period. 19. Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects? a. The NPV method does not assume reinvestment of cash flows, while the IRR method assumes the cash flows will be reinvested at the internal rate of return. b. The NPV method assumes a reinvestment rate equal to the discount rate, while the IRR method assumes a reinvestment rate equal to the internal rate of return. c. The IRR method does not assume reinvestment of the cash flows, while the NPV method assumes the reinvestment rate is equal to the discount rate. d. The NPV method assumes a reinvestment rate equal to the bank loan interest rate, while the IRR method assumes a reinvestment rate equal to the discount rate. 20. When the discount rate is decreased, a. the present value of future cash flows increases. b. the present value of future cash flows decreases. c. there is no change in the present value. d. net present value would equal zero.

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Chapter_13_11e 21. Matusadona Company plans to invest £450,000 in a new factory. With a discount rate of 14 per cent, the present value from the factory is £483,000. To yield a 14 per cent internal rate of return, the actual investment cost cannot exceed the £450,000 estimate by more than a. £63,000. b. £33,000. c. £16,500. d. This cannot be determined from the information given. 22. How is working capital needed in the operations of investments treated in discounted cash flow analysis? a. Added to cost of the investment b. Added to cash inflows when recovery occurs c. Added to cost of the investment and to cash inflows when recovery occurs d. None of these 23. A firm is considering a project with an annual cash flow of £240,000. The project would have an 8-year life, and the company uses a discount rate of 12 per cent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)? a. £977,480 b. £1,125,228 c. £1,160,582 d. £1,192,320 24. ____ are capital budgeting models that identify criteria for accepting or rejecting projects without considering the time value of money. a. Net present value models b. Nondiscounting models c. Discounting models d. Capital return models 25. A firm is considering a project requiring an investment of £100,000. The project would generate annual cash inflows of £26,380 per year for the next five years. The approximate internal rate of return for the project is a. 8%. b. 10%. c. 12%. d. 16%. 26. Lake Kariba Company is considering buying a new boat that would cost £120,000. The accountant determined that the boat promises an internal rate of return of 10 per cent and has a life of four years. The accountant resigned and the president wanted to check her calculations. What were the approximate annual net cash inflows from the project? a. £20,490 b. £30,000 c. £37,855 d. Net cash inflows cannot be determined from the information given. Copyright Cengage Learning. Powered by Cognero.

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Chapter_13_11e 27. A project requires an investment of £90,000 in equipment. Annual cash inflows of £15,000 are expected to occur for the next ten years. No salvage value is expected. Using the initial capital investment, the accounting rate of return for the project would be a. 6.25%. b. 6.67%. c. 16.67%. d. 26.67%. 28. A capital investment project requires an investment of £60,000 and has an expected life of four years. Annual cash flows, which occur evenly throughout the year, are expected to be as follows: Year 1 2 3 4

Amount £20,000 £34,000 £24,000 £40,000

Payback for the project is a. 2.25 years. b. 2.5 years. c. 3 years. d. 2 years. 29. Firms may select projects with short paybacks because a. projects with longer paybacks may be riskier. b. shorter paybacks may help reduce liquidity problems. c. if the risk of obsolescence is high, the firm may want to recover the funds rapidly. d. all of these are correct. 30. The problem with the accounting rate of return is that it fails to consider the a. profitability of the project. b. life of the project. c. timing of cash flows. d. effect on net income.

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Chapter_13_11e 31. Investment Annual revenues Annual variable costs Annual fixed out-of-pocket costs Salvage value Discount rate Expected life of project

£80,000 £50,000 £15,000 £10,000 £5,000 12% 8 years

The net present value of the project is a. £24,500. b. £36,411. c. £44,200. d. £46,220. 32. JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent. JD's payback for the project is a. 2.9 years. b. 3.2 years. c. 3.25 years. d. 4.2 years. 33. The present value of £8,000 to be received each year for ten years and earning a 16 per cent return is a. £1,655. b. £1,816. c. £35,242. d. £38,664. 34. The present value of £2,000 to be received three years from now and earning a 12 per cent return is a. £1,424. b. £1,760. c. £2,440. d. £2,720. 35. If the annual cash flows are not an annuity (equal each period), payback is calculated by a. dividing the investment required by the average annual cash inflow. b. dividing the average annual cash inflow by the investment required. c. accumulating the net cash flows until they equal the initial investment. d. Payback cannot be calculated for a project with unequal cash flows.

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Chapter_13_11e 36. A firm is considering a project requiring an investment of £14,150. The project would generate annual cash inflows of £3,300 per year for the next seven years. The approximate internal rate of return for the project is a. 6%. b. 8%. c. 12%. d. 14%. 37. Glady, Inc., is considering the purchase of production equipment that costs £800,000. The equipment is expected to generate annual cash inflows of £250,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 14 per cent. The approximate internal rate of return of Glady's project is a. 16%. b. 20%. c. 24%. d. 25%. 38. If a project has a net present value of £0 when a discount rate of 10 per cent is used, what can be concluded about the rate of return of the project? a. The rate of return is greater than 10 per cent. b. The rate of return is less than 10 per cent. c. The rate of return equals 10 per cent. d. The rate of return is 0. 39. The accounting rate of return is calculated as a. Investment/Income. b. Income/Debt. c. Income/Investment. d. Assets/Debt. 40. A firm is considering two projects with the following cash flows:

Year 1 Year 2 Year 3

Project A £ 40,000 60,000 140,000

Project B £140,000 60,000 40,000

Each project requires an investment of £120,000. Which project will have the higher net present value? a. Project A b. Project B c. Project A and Project B will have the same net present value. d. The question cannot be answered from the information provided. Copyright Cengage Learning. Powered by Cognero.

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Chapter_13_11e 41. In computing the net present value of a project, a manager uses a cost of capital number that is too low. This error causes the manager to compute a net present value that a. is lower that what it in fact should be. b. is higher that what it in fact should be. c. has no effect on the net present value computation. d. is undefined in mathematical terms. 42. Investment Annual revenues Annual variable costs Annual fixed out-of-pocket costs Salvage value Discount rate Expected life of project

£120,000 £70,000 £15,000 £11,000 £27,000 14% 3 years

The net present value of the project is a. (£3,215). b. £393. c. £6,102. d. £6,412. 43. JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent. If depreciation is £90,000 per year, JD's accounting rate of return based on the average investment would be a. 12.0%. b. 14.5%. c. 17.0%. d. 17.5%. 44. Glady, Inc., is considering the purchase of production equipment that costs £800,000. The equipment is expected to generate annual cash inflows of £250,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 14 per cent. Excluding the effect of income taxes, Glady's net present value of the project is a. £165,200. b. £450,000. c. £58,250. d. £233,550.

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Chapter_13_11e 45. The internal rate of return is the a. rate of return that sets the project's net present value equal to zero. b. hurdle rate. c. cost of capital. d. required rate of return. 46. A firm is evaluating a project that has a net present value of £0 when a discount rate of 8 per cent is used. A discount rate of 6 per cent will result in a. a negative net present value. b. a positive net present value. c. a net present value of £0. d. The question cannot be answered based upon the information provided. 47. A firm is considering a project with annual cash flows of £40,000. The project would have a 10-year life, and the company uses a discount rate of 8 per cent. What is the maximum amount the company could invest in the project and the project still be acceptable? a. £400,000 b. £268,400 c. £203,200 d. £363,600 48. A firm is evaluating a project that has a net present value of £0 when a discount rate of 8 per cent is used. A discount rate of 10 per cent will result in a. a negative net present value. b. a positive net present value. c. a net present value of £0. d. The question cannot be answered based upon the information provided. 49. Investment Annual revenues Annual variable costs Annual fixed out-of-pocket costs Salvage value Discount rate Expected life of project

£80,000 £50,000 £15,000 £10,000 £5,000 12% 8 years

The present value of the annual net cash inflows from operations is a. £77,740. b. £86,669. c. £116,411. d. £124,200.

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Chapter_13_11e 50. A project requires an investment of £90,000 in equipment. Annual cash inflows of £15,000 are expected to occur for the next ten years. No salvage value is expected. If the annual cash inflows occur throughout the year, payback for the project would be a. 4.5 years. b. 4.8 years. c. 5 years. d. 6 years. 51. A company invests in a project that realizes an internal rate of return equal to its cost of capital. This project should a. increase the value of the company. b. have little or no effect on the value of the company. c. decrease the value of the company. d. cause the company to realize an infinite net present value. 52. Future cash flows expressed in present value terms are a. compounded cash flows. b. extended cash flows. c. budgeted cash flows. d. discounted cash flows. 53. The internal rate of return model assumes that all net cash inflows are reinvested at the a. project's internal rate of return. b. discount rate. c. prime rate. d. none of these. 54. A firm is considering a project with annual cash flows of £75,000. The project would have a 7-year life, and the company uses a discount rate of 10 per cent. What is the maximum amount the company could invest in the project and the project still be acceptable? a. £525,000 b. £365,100 c. £269,325 d. None of these 55. A firm is considering a project with annual cash flows of £120,000. The project would have an 8-year life, and the company uses a discount rate of 12 per cent. What is the maximum amount the company could invest in the project and the project still be acceptable? a. £488,740 b. £562,614 c. £580,291 d. £596,160

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Chapter_13_11e 56. Which of the following methods consider the time value of money? a. Payback and accounting rate of return b. Payback and internal rate of return c. Internal rate of return and accounting rate of return d. Internal rate of return and net present value 57. The present value of £2,000 to be received each year for three years and earning a 10 per cent return is a. £5,560. b. £4,974. c. £4,922. d. £4,600. 58. Why would a company use the accounting rate of return? a. To ensure that a new investment will not adversely affect accounting income b. Because it does not consider the time value of money c. Because it is a measure of liquidity d. All of these 59. The present value of £10,000 to be received five years from now and earning a 12 per cent return is a. £2,774. b. £5,670. c. £17,637. d. £36,050. 60. Kaylin Company purchased a piece of equipment for £100,000 that had a useful life of 5 years. The equipment had no salvage value. It saves the company £40,000 a year and costs the company £5,000 a year to operate. What is the accounting rate of return on the equipment? a. 30% b. 15% c. 40% d. 35%

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Chapter_13_11e 61. Lewis Manufacturing Company is planning to invest in equipment costing £240,000. The estimated cash flows from this equipment are expected to be as follows: Year 1 2 3 4 5 Total

Cash Inflows £100,000 75,000 55,000 40,000 50,000 £320,000

Assume that the cash inflows occur evenly over the year. The payback period for this investment is a. 3.75 years. b. 3.25 years. c. 2.4 years. d. 1.3 years. 62. A capital investment project requires an investment of £60,000 and has an expected life of four years. Annual cash flows, which occur evenly throughout the year, are expected to be as follows: Year 1 2 3 4

Amount £20,000 £34,000 £24,000 £40,000

The net present value of the project using a 6 per cent discount rate is a. £40,960. b. £43,950. c. £53,160. d. £35,040. 63. Which of the following is a capital investment criterion, but NOT captured in any of the basic capital budgeting models examined in the text? a. The period of time required to recoup an initial investment b. Various non-quantitative factors c. The time value of money d. The company's discount rate

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Chapter_13_11e 64. Five mutually exclusive projects had the following information:

NPV IRR

A £200 11%

B £400 13%

C £2,000 10%

D £1,000 12%

E £(400) 8%

Which project is preferred? a. Project A b. Project B c. Project C d. Project D 65. Projects that, if accepted, preclude the acceptance of competing projects are a. priority projects. b. mutually exclusive projects. c. independent projects. d. equity projects. 66. Investment Annual revenues Annual variable costs Annual fixed out-of-pocket costs Salvage value Discount rate Expected life of project

£120,000 £70,000 £15,000 £11,000 £27,000 14% 3 years

The present value of the annual net cash inflows from operations is a. £101,416. b. £101,897. c. £102,168. d. £104,618.

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Chapter_13_11e 67. Barker Production Company is considering the purchase of a flexible manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: Decreased waste Increased quality Decrease in operating costs Increase in on-time deliveries

£ 75,000 100,000 62,500 12,500

The system will cost £750,000 and will last ten years. The company's cost of capital is 10 per cent. Required: a. b. c.

What is the payback period for the flexible manufacturing system? What is the NPV for the flexible manufacturing system? What is the IRR for the flexible manufacturing system?

68. A capital investment project requires an investment of £350,000. It has an expected life of ten years with annual cash flows of £50,000 received at the end of each year. Required: a. b. c. d. e.

Compute payback for the project. Determine the accounting rate of return for the project, based on the initial capital investment. Compute the internal rate of return for the project. Compute the net present value of the project using a 14 per cent discount rate. Would you recommend this project be accepted? Why or why not?

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Chapter_13_11e 69. A capital investment project requires an investment of £1,000,000. It has an expected life of five years with annual cash flows of £240,000 received at the end of each year. Required: a. b. c. d.

Compute payback for the project. Compute the internal rate of return for the project. Compute the net present value of the project using a 12 per cent discount rate. Ignore income taxes. Would you recommend this project be accepted? Why or why not?

70. Mitchell, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of £80,000, while Project 2 requires an investment of £90,000. Cash revenues and cash costs for each project are shown below:

YEAR Revenues Variable costs Fixed costs

1 £30,000 8,000 12,000

PROJECT 1 2 £50,000 12,000 10,000

YEAR Revenues Variable costs Fixed costs

1 £65,000 15,000 5,000

PROJECT 2 2 £80,000 30,000 20,000

3 £70,000 20,000 10,000

4 £90,000 25,000 10,000

3 £60,000 14,000 10,000

4 £40,000 12,000 8,000

The company estimates that at the end of the fourth year Project 1 would have a salvage value of £10,000 and Project 2 would have a salvage value of £5,000. Required: a. b.

Determine the net present value of EACH project using an 8 per cent discount rate. Prepare a memorandum for management stating your recommendation. Include supporting calculations in good form.

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Chapter_13_11e 71. Maxim, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of £40,000, while Project 2 requires an investment of £30,000. Cash revenues and cash costs for each project are shown below. PROJECT 1 YEAR Revenues Variable costs Fixed costs

1 £13,000 7,000 1,000

2 £18,000 9,000 2,000

3 £35,000 12,000 3,000

4 £25,000 12,000 1,000

PROJECT 2 YEAR Revenues Variable costs Fixed costs

1 £22,000 12,000 4,000

2 £38,000 21,000 3,000

3 £16,000 8,000 2,000

4 £9,000 5,000 1,000

The company estimates that at the end of the fourth year Project 1 would have a salvage value of £3,000 and Project 2 would have a salvage value of £1,000. Required: a. b.

Determine the net present value of EACH project using a 16 per cent discount rate. Prepare a memorandum for management stating your recommendation. Include supporting calculations in good form.

72. A capital investment project requires an investment of £450,000. It has an expected life of six years with an annual cash flow of £90,000 received at the end of each year. The company uses the straight-line method of depreciation. Ignore income taxes. Required: a. b. c.

Compute payback for the project. Compute the net present value of the project using a 12 per cent discount rate. Would you recommend this project be accepted? Why or why not?

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Chapter_13_11e 73. Fill in the lettered blanks in the following table: Investment A £40,000 10 £ 5,000 (c) (e) £ 5,500

Amount of investment Economic life in years Annual cash flow Payback period in years Present value of cash flows Net present value

Investment B (a) 5 (b) 4 £33,000 £ 3,000

Investment C £20,000 8 £ 2,500 (d) (f) (£1,000)

74. Compare the various quantitative models used to evaluate capital budgeting proposals. Which models are preferred if used as the only criterion?

75. A capital investment project requires an investment of £145,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Year 1 2 3 4

Amount £35,000 £45,000 £55,000 £50,000

Required: a. b.

Compute payback assuming that the cash flows occur evenly throughout the year. Compute the net present value of the project using an 8 per cent discount rate.

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Chapter_13_11e 76. A capital investment project requires an investment of £75,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Year 1 2 3 4

Amount £40,000 £30,000 £10,000 £35,000

Required: a. b.

Compute payback assuming that the cash flows occur evenly throughout the year. Compute the net present value of the project using a 12 per cent discount rate.

77. Dale Davis Company is evaluating a proposal to purchase a new machine that would cost £100,000 and have a salvage value of £10,000 in four years. It would provide annual operating cash savings of £10,000, as follows:

Salaries Supplies Maintenance Total

Old Machine £40,000 7,000 9,000 £56,000

New Machine £36,000 5,000 5,000 £46,000

If the new machine is purchased, the old machine will be sold for its current salvage value of £20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of £2,000. The old machine's present book value is £40,000. If kept, in one year the old machine will require repairs predicted to cost £35,000. Dale Davis's cost of capital is 14 per cent. Required: Should the new machine be purchased? Why or why not?

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Chapter_13_11e 78. Explain what a capital investment decision is. In your answer, distinguish between independent and mutually exclusive capital investment decisions.

79. KT Enterprises is considering the purchase of a flexible manufacturing system. The savings associated with the system are estimated to be as follows: Increased quality Decrease in operating costs Increase in on-time deliveries

£40,000 20,000 9,000

The system will cost £250,000 and will last seven years. The system would have a salvage value of £30,000 at the end of seven years. The company's cost of capital is 8 per cent. Required: Prepare a memorandum to management with your recommendation regarding whether KT Enterprises should purchase the flexible manufacturing system. Include a discussion of qualitative factors that might influence management's decision. Include your supporting calculations (including NPV analysis).

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Chapter_13_11e 80. (Memorandum required) Simon Enterprises is considering the purchase of a flexible manufacturing system. The savings associated with the system are estimated to be as follows: Increased quality Decrease in operating costs Increase in on-time deliveries

£75,000 20,000 5,000

The system will cost £400,000 and will last ten years. The system would have a salvage value of £30,000 at the end of ten years. The company's cost of capital is 8 per cent. Required: Prepare a memorandum to management with your recommendation regarding whether Simon Enterprises should purchase the flexible manufacturing system. Include a discussion of qualitative factors that might influence management's decision. Include your supporting calculations (including NPV analysis.)

81. Van Dyke Company is evaluating a capital expenditure proposal that has the following predicted cash flows: Original investment

£45,000

Cash flow: Year 1 Year 2 Year 3

£17,500 25,000 15,000

Salvage value

-0-

Discount rate Required:

14%

Determine the following values: a. b. c.

Net present value of the investment Proposal's internal rate of return Payback period

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Chapter_13_11e 82. Describe capital investment in the advanced manufacturing environment.

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Chapter_13_11e Answer Key 1. a 2. a 3. b 4. c 5. c 6. a 7. a 8. b 9. d 10. c 11. a 12. d 13. c 14. b 15. b 16. a 17. c 18. d 19. b 20. a 21. b 22. c 23. d 24. b 25. b 26. c

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Chapter_13_11e 27. b 28. a 29. d 30. c 31. d 32. b 33. d 34. a 35. c 36. d 37. a 38. c 39. c 40. b 41. b 42. b 43. d 44. c 45. a 46. b 47. b 48. a 49. d 50. d 51. b 52. d 53. a 54. b Copyright Cengage Learning. Powered by Cognero.

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Chapter_13_11e 55. d 56. d 57. b 58. a 59. b 60. a 61. b 62. a 63. b 64. c 65. b 66. c 67. a.

£750,000/£250,000 = 3 years

6.145 × £250,000 - £750,000 = £786,250

£750,000/£250,000 = 3.000, which is the present value factor for n = 10, and the interest rate is slightly greater than 30%.

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Chapter_13_11e 68. a.

7 years

£350,000/£50,000

4.29%

[£50,000 - (£350,000/10)]/£350,000

Approximately 7%

£350,000/£50,000 = 7 Annuity discount factor, 10 years, 6% = 7.360 Annuity discount factor, 10 years, 8% = 6.710 The exact IRR can be determined using interpolation:

PV discount factor 6% PV discount factor--IRR PV discount factor 8%

7.360 7.000 _____ 0.360

7.360 6.710 0.650

IRR = 6% + [2% × (0.360/0.650)] = 7.1% d.

NPV using a 14 per cent discount rate: Investment Present value of cash inflows (£50,000 × 5.216) Net present value

£(350,000) 260,800 £ (89,200)

e. No, the project should not be accepted. Although the payback period of seven years is less than the expected life of the project, the NPV is negative, indicating the project's return is less than 14 per cent. The IRR is approximately 7 per cent, which is much lower than the desired return of 14 per cent. Therefore, the project should be rejected.

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Chapter_13_11e 69. a.

4.17 years

£1,000,000/£240,000

Between 6% and 7% £1,000,000/£240,000 = 4.167 Annuity discount factor, 5 years, 6% = 4.212 Annuity discount factor, 5 years, 7% = 4.100

NPV using a 12 per cent discount rate: Investment Present value of cash inflows (£240,000 × 3.605) Net present value

£(1,000,000) 865,200 £ (134,800)

No, the project should not be accepted. Although the payback period is less than the expected life of the project, the NPV is negative, indicating the project's return is less than 12 per cent. The IRR is approximately 6.5 per cent, which is much lower than the desired return of 12 per cent. Therefore, the project should be rejected.

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Chapter_13_11e 70. a.

Project 1: Investment Revenues Variable costs Fixed costs Salvage value Net cash flows PV factors, 8% Present values Net present value

0 £(80,000)

112,791 £ 32,791

£ 30,000 (8,000) (12,000) ________ £ 10,000 × 0.926 £ 9,260

£ 50,000 (12,000) (10,000) ________ £ 28,000 × 0.857 £ 23,996

£ 70,000 (20,000) (10,000) ________ £ 40,000 × 0.794 £ 31,760

£ 90,000 (25,000) (10,000) 10,000 £ 65,000 × 0.735 £ 47,775

£ 80,000 (15,000) (5,000) ________ £ 45,000 × 0.926 £ 41,670

£ 60,000 (30,000) (20,000) ________ £ 30,000 × 0.857 £ 25,710

£ 40,000 (14,000) (10,000) ________ £ 36,000 × 0.794 £ 28,584

(12,000) (8,000) 5,000 £ 25,000 × 0.735 £ 18,375

Project 2: Investment Revenues Variable costs Fixed costs Salvage value Net cash flows PV factors, 8% Present values Net present value

0 £(90,000) £ 65,000

114,339 £ 24,339

The memorandum should recommend that Project 1 be accepted. Both projects have a return in excess of 8 per cent; however, because the projects are mutually exclusive only one can be accepted. The project with the greater net present value – Project 1 – should be accepted. The memorandum can also be graded upon the following factors: Is the recommendation consistent with the supporting calculations? Are adequate reasons provided to support the recommendation? Is the proper format used? Is the memorandum concise?

Additional factors to consider are content, spelling, grammar, punctuation and writing style.

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Chapter_13_11e 71. a.

Project 1: Investment Revenues Variable costs Fixed costs Salvage value Net cash flows PV factors, 16% Present values Net present value

0 £(40,000)

30,611 £ (9,389)

£13,000 (7,000) (1,000)

£18,000 (9,000) (2,000)

£ 35,000 (12,000) (3,000)

£ 5,000 × 0.862 £ 4,310

£ 7,000 × 0.743 £ 5,201

£ 20,000 × 0.641 £ 12,820

£ 25,000 (12,000) (1,000) 3,000 £ 15,000 × 0.552 £ 8,280

£ 22,000 (12,000) (4,000)

£ 38,000 (21,000) (3,000)

£16,000 (8,000) (2,000)

£ 6,000 × 0.862 £ 5,172

£ 14,000 × 0.743 £ 10,402

£ 6,000 × 0.641 £ 3,846

£ 9,000 (5,000) (1,000) 1,000 £ 4,000 × 0.552 £ 2,208

Project 2: Investment Revenues Variable costs Fixed costs Salvage value Net cash flows PV factors, 16% Present values Net present value

0 £(30,000)

£ 21,628 £ (8,372)

b. The memorandum should recommend that neither Project 1 nor Project 2 should be accepted. If a return of 16 per cent is required, neither project is acceptable. Both projects have negative net present values, indicating that the return is less than 16 per cent.

72. a.

5 years £450,000/£90,000

NPV using a 12 per cent discount rate: Investment Present value of cash flow (£90,000 × 4.111) Net present value

£(450,000) 369,990 £ (80,010)

No, the project should not be accepted. Although the payback period of five years is less than the expected life of the project, the NPV is negative, indicating the project's return is less than 12 per cent. The IRR is approximately 5.5 per cent, which is much lower than the desired return of 12 per cent; therefore, the project should be rejected.

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Chapter_13_11e 73. a.

£33,000 - £3,000 = £30,000

£30,000/4 = £7,500

£40,000/£5,000 = 8

£20,000/£2,500 = 8

£40,000 + £5,500 = £45,500

£20,000 - £1,000 = £19,000

74. The models discussed in the text are the Net Present Value, Internal Rate of Return, the Payback Period and the Accounting Rate of Return. Of these models, net present value and internal rate of return are the preferred models when used as the only criterion because they alone consider the time value of money. The payback period is lacking in this regard because it does not consider cash flows after the payback period and thus does not measure profitability. However, it is a quick supporting indication of liquidity and risk. The accounting rate of return uses accounting income as the return objective rather than cash flows. Of these models, only the net present value model explicitly considers the size of the initial investment. 75. a.

3.2 years Year 1 2 3 4

Projected Net Cash Inflows £ 35,000 45,000 55,000 10,000(0.20 × 50,000) £145,000

Net present value: £6,395

Investment Cash flows PV factors, 8% Present values Net present value

0 £(145,000)

151,395 6,395

£35,000 × 0.926 £32,410

£45,000 × 0.857 £38,565

£55,000 × 0.794 £43,670

£50,000 × 0.735 £36,750

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Chapter_13_11e 76. a.

2.5 years Year 1 2 3

Projected Net Cash Inflows £40,000 30,000 5,000 (1/2 × 10,000) £75,000

Net present value: £14,010 0 £(75,000)

Investment Cash flows PV factors, 12% Present values Net present value

89,010 £ 14,010

£40,000 × 0.893 £35,720

£30,000 × 0.797 £23,910

£10,000 × 0.712 £ 7,120

£35,000 × 0.636 £22,260

77. Present Period 0 0 1 1-4

Cash Flow £100,000 20,000 35,000 10,000

Value Factor 1.000 1.000 0.877 2.914

8,000

0.592

Net present value of new machine

New Machine £(100,000) 20,000 30,695 29,140 4,736

Comment Outlay cost Salvage of old Repairs avoided Lower operating costs Difference in salvage value

£ (15,429)

Negative net present value indicates that the new machine returns are less than the company's cost of capital. Do not buy the new machine.

78. Capital investment decisions are concerned with the process of planning, setting goals and priorities, arranging financing and using certain criteria to select long-term assets. Independent projects are projects that, if accepted or rejected, do not affect the cash flows of other projects. Mutually exclusive projects are those projects that, if accepted, preclude the acceptance of all other competing projects.

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Chapter_13_11e 79. MEMORANDUM TO:

KT Enterprises Management

FROM: Management Accountant SUBJECT: Acquisition of a Flexible Manufacturing System ______________________________________________________________________ This memo regards whether KT Enterprises should acquire a flexible manufacturing system. Based on the attached quantitative analysis, I recommend that KT Enterprises acquire the flexible manufacturing system. The system has a positive net present value of £126 704, which indicates that the rate of return of the project exceeds the 8 per cent cost of capital. Nonquantitative factors to consider include the possibility of the system enabling the company to increase its market share and improve its competitive position. In addition, the system should improve the company's on-time delivery performance and product quality, which in turn should increase customer satisfaction. If you have any questions regarding the analysis, please contact me at Extension 4750. SUPPORTING CALCULATIONS TO ACCOMPANY MEMORANDUM: Investment Annual cash inflows [(£40,000 + £20,000 + £9,000) × 5.206] Salvage value (£30,000 × 0.583) Net present value

£(250,000) 359,214 17,490 £ 126,704

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Chapter_13_11e 80. MEMORANDUM TO:

Simon Enterprises Management

FROM:

Management Accountant

SUBJECT: Acquisition of a Flexible Manufacturing System ______________________________________________________________________ This memo regards whether Simon Enterprises should acquire a flexible manufacturing system. Based on the attached quantitative analysis, I recommend that Simon Enterprises acquire the flexible manufacturing system. The system has a positive net present value of £284,890, which indicates that the rate of return of the project exceeds the 8 per cent cost of capital. Nonquantitative factors to consider include the possibility of the system enabling the company to increase its market share and improve its competitive position. In addition, the system should improve the company's on-time delivery performance and product quality, which in turn should increase customer satisfaction. If you have any questions regarding the analysis, please contact me at Extension 7509. SUPPORTING CALCULATIONS TO ACCOMPANY MEMORANDUM: Investment Annual cash inflows [(£75,000 + £20,000 + £5,000) × 6.710] Salvage value (£30,000 × 0.463) Net present value

£(400,000) 671,000 13,890 £ 284,890

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Chapter_13_11e 81. a.

Period 1 2 3 Total present value Less original investment Net present value

Approximately 14%

2 + £2,500/£15,000 = 2.167 years

Cash Flow £17,500 25,000 15,000

Present Value Factor 0.877 0.769 0.675

Present Value £15,347.50 19,255.00 10,125.00 £44,697.50 45,000.00 £ (302.50)

82. Capital investment in the advanced manufacturing environment is affected by the way in which inputs are determined. Much greater attention must be paid to the investment outlays, because peripheral items can require substantial resources. Furthermore, in assessing benefits, intangible items such as quality and maintaining competitive position can be deciding factors. Choice of the required rate of return is also critical. The tendency of firms to use required rates of return that are much greater than the cost of capital should be discontinued. Also, since the salvage value of an automated system can be considerable, it should be estimated and included in the analysis.

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Chapter_14_11e Indicate the answer choice that best completes the statement or answers the question. 1. Which of the following is least likely to affect taxes as a result of a capital budgeting decision? a. An increase in operating income b. The disposition of an old asset that is fully depreciated and worthless c. Salvage value of a new asset d. Depreciation of a new asset 2. Which of the following is a common adjustment to net present value models to incorporate risks inherent in an investment project? a. The discount rate used in the analysis can be increased. b. The payback period can be increased. c. A lower discount rate can be used. d. Risk is never considered in a model since it cannot be quantified. 3. Clemens Company is considering the purchase of a new machine for £160,000. The machine would generate an annual cash flow before depreciation and taxes of £62,588 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 per cent. The company claims capital allowances using straight-line depreciation and has a 40 per cent tax rate. What is the net present value for the machine? a. £162,640 b. £2,640 c. £30,080 d. (£45,952) 4. If an asset is sold for less than its tax written-down value, a. a gain results and additional taxes are incurred. b. a gain and tax savings result. c. a loss results and additional taxes are incurred. d. a loss and tax savings result.

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Chapter_14_11e 5. Jolly Ltd.is considering an investment in equipment for £25,000. Data related to the investment are as follows:

Year 1 2 3 4

Cash Flow before Depreciation and Taxes £12,500 12,500 12,500 12,500

Jolly claims capital allowances using the straight-line method of depreciation. In addition, its tax rate is 40 per cent, and the life of the equipment is four years with no salvage value. Cost of capital is 12 per cent. What is the net present value of the investment? a. £30,370 b. £(2,222) c. £12,962 d. £5,370 6. A follow-up analysis of an investment decision is called a(n) a. performance review. b. feedback session. c. audit. d. postaudit. 7. If the tax rate is 35 per cent, a tax depreciation deduction (WDA) of £75,000 would result in a tax savings of a. £25,000. b. £26,250. c. £48,750. d. £50,000. 8. Why should a company conduct postaudits of its investment projects? a. It ensures that investment resources were used wisely. b. Accountable managers would make goal-congruent decisions. c. It provides feedback for future decision-making. d. All of these. 9. Tax savings from tax allowable depreciation (i.e. writing down allowances) is calculated as a. Depreciation deduction × Tax rate. b. Depreciation deduction × (1 - Tax rate). c. Asset cost × MACRS percentage. d. Depreciation is not a cash flow; therefore, there is no tax savings from depreciation.

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Chapter_14_11e 10. Houston Ltd.is considering an investment in equipment for £45,000. Data related to the investment are as follows:

Year 1 2 3 4 5

Cash Flow before Depreciation and Taxes £30,000 30,000 30,000 30,000 30,000

Cost of capital is 18 per cent. Houston claims capital allowances (WDV’s) using the straight-line method of depreciation. In addition, their tax rate is 40 per cent, and the life of the equipment is five years with no salvage value. What is the net present value of the investment? a. £67,543 b. £22,543 c. £48,810 d. £11,286 11. If an asset is sold for more than its tax written-down value, a. a gain results and additional taxes are incurred. b. a gain and tax savings result. c. a loss results and additional taxes are incurred. d. a loss and tax savings result. 12. A company has pre-tax cash inflows from operations of £500,000. If the company's tax rate is 35 per cent, the company's after-tax net cash inflow from operations would be a. £166,667. b. £175,000. c. £325,000. d. £333,333. 13. A firm has £2,000,000 of long-term bonds paying 8 per cent interest and £8,000,000 of common stock. The firm is considered to be of average risk with the return to the stockholders estimated to be 14 per cent. If the company's tax rate is 40 per cent, what is the firm's weighted average cost of capital? a. 12.80% b. 12.16% c. 8.32% d. None of these

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Chapter_14_11e 14. Springer Company is considering the purchase of a new machine for £80,000. The machine would generate an annual cash flow before depreciation and taxes of £28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 per cent. The company claims capital allowances based on straight-line depreciation and has a 40 per cent tax rate. What is the net present value for the machine? a. £5,318 b. £-0c. £85,318 d. £23,744 15. ____ is the process of altering key variables to assess the effect on the original outcome. a. Alteration analysis b. Experimentation c. Net present value d. Sensitivity analysis 16. Which of the following is included in calculating the weighted average cost of capital? a. Interest rate paid on borrowed money b. Average return earned by stockholders c. Taxes d. All of these 17. A firm has £1,000,000 of long-term bonds paying 8 per cent interest and £3,000,000 of common stock. The firm is considered to be of average risk with the return to the stockholders estimated to be 12 per cent. If the company's tax rate is 35 per cent, what is the firm's weighted average cost of capital? a. 11.00% b. 7.15% c. 10.30% d. None of these 18. The depreciation tax shield is a. the increase in taxes due to the deductibility of depreciation from taxable revenues. b. the reduction in taxes due to the deductibility of depreciation from taxable revenues. c. the fact that equipment is not depreciable for accounting purposes. d. the fact that equipment is not depreciable for tax purposes. 19. The annual tax deduction for depreciation a. is not accompanied by a direct cash outlay. b. provides an indirect cash inflow by reducing taxes. c. multiplied by the tax rate equals the depreciation tax shield (i.e. the tax benefit from capital allowances). d. All of these.

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Chapter_14_11e 20. Young Company has a tax rate of 40 per cent. Information for the company is as follows:

Mortgage bonds Unsecured bonds Common stock (ordinary share capital)

Amount After-tax Cost £1,000,000 0.048 3,000,000 0.050 6,000,000 0.150

What is the weighted cost of capital? a. 0.1098 b. 0.2480 c. 0.0827 d. 0.0366 21. A postaudit compares a. estimated benefits and costs with budgeted benefits and cost. b. estimated benefits with estimated costs. c. actual benefits with actual costs. d. actual benefits and costs with estimated benefits and costs. 22. If the tax rate is 40 per cent and a company has pre-tax cash inflows from operations of £600,000, the company's after-tax net cash inflow from operations would be a. £396,000. b. £360,000. c. £240,000. d. £204,000.

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Chapter_14_11e 23. Ramsey Construction is considering the purchase of a backhoe for £300,000. The expected life is 4 years. The company uses the straight-line method of depreciation with no mid-year convention. The company's tax rate is 34 per cent. The present value factors at the company's cost of capital are as follows: Period 1 2 3 4 5

Present Value of £1.00 0.86 0.74 0.64 0.55 0.48

Required: Determine the present value of the tax shield (i.e. tax benefits) assuming that capital allowances are based on the straight-line method. Present your answer in good format.

24. Redding Industries is considering the acquisition of a new machine that would reduce operating costs by £100,000 per year throughout its life. The machine has a cost of £300,000 and has an expected salvage value of £25,000 at the end of 4 years. The tax shield (i.e. tax savings) from capital allowances is £34,000, £45,344, £15,111 and £7,555 for Years 1-4, respectively. The company is at the 34 per cent tax rate. The present value factors at the company's required rate of return are as follows: Period 1 2 3 4

Present Value of £1.00 0.88 0.77 0.68 0.59

Required: (Round all calculations to the nearest pound.) a. b. c.

Compute the after-tax operating cost savings per year. Determine the tax cost or tax savings related to the sale of the machine at the end of its useful life. Prepare a schedule computing the net present value of Redding Industries' investment in the machine.

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Chapter_14_11e 25. What are some of the types of sources of risk that a typical capital expenditures project can entail?

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Chapter_14_11e Answer Key 1. b 2. a 3. b 4. d 5. d 6. d 7. b 8. d 9. a 10. b 11. a 12. c 13. b 14. a 15. d 16. d 17. c 18. b 19. d 20. a 21. d 22. b

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Chapter_14_11e 23. Straight-Line: Year Base

Depreciation Rate

Annual Rate

Tax Shield

£300,000

£ 75,000

0.34

£ 25,500

300,000

75,000

0.34

25,500

300,000

75,000

0.34

25,500

300,000

75,000 £300,000

0.34

25,500 £102,000

Straight-Line Rates: Year Factor 1 2 3 4

Depreciation

Present Value Shield 0.86 0.74 0.64 0.55

Tax Shield £ 25,500 25,500 25,500 25,500 £102 000

Tax

Present Value of Tax £21,930 18,870 16,320 14,025 £71,145

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Chapter_14_11e 24. a.

After-tax cost savings = £100,000 × (1 - 0.34) = £66,000

Cash from sale of machine £25,000 Tax rate Taxes on gain

× 0.34 = £8,500

Present Value Discount (Outflow) £(300,000)

1-4

Cash Inflow Year(s) Purchase of machine Annual after-tax cost savings Depreciation tax shield

Sale of machine Taxes on gain on sale of machine Net present value of investment *(0.88 + 0.77 + 0.68 + 0.59)

Present Factor 1.00

Value £(300,000)

66,000

2.92*

192,720

1 2 3 4 4

34,000 45,334 15,111 7,555 25,000

0.88 0.77 0.68 0.59 0.59

29,920 34,907 10,275 4,457 14,750

(8,500)

0.59

(5,015)

£ (17,986)

25. There are many potential sources of risk entailed in the typical capital expenditures project. The text lists the following: ∙ the cost of the initial investment; ∙ the time required to complete the initial investment; ∙ the degree to which facilities operate as planned; ∙ the life of the facilities; ∙ customer demand (and thus, selling price); ∙ operating costs; ∙ disposal values.

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Chapter_15_11e Indicate the answer choice that best completes the statement or answers the question. 1. Which of the following expenses is an example of a discretionary fixed expense? a. Investment in production equipment b. Investment in the factory c. Electricity costs d. Employment costs 2. The budget that is a comprehensive financial plan for the organization as a whole is called a a. capital budget. b. master budget. c. comprehensive budget. d. continuous budget. 3. Michael Ltd has the following sales forecasts for the first three months of the year: Month January February March

Sales £36,000 24,000 40,000

Sixty-five per cent of sales are collected in the month of the sale and the remainder are collected in the following month. Accounts receivable balance (January 1) Cash balance (January 1)

£16,000 12,000

Minimum cash balance is £20,000. Cash can be borrowed in £1,000 increments from the local bank (assume no interest charges). How much cash would be collected in March from sales? a. £32,000 b. £58,400 c. £48,000 d. £34,400 4. Arlo Company uses an annual cost formula for overhead of £72,000 + £1.60 for each direct labour hour worked. For the upcoming month, Arlo plans to manufacture 96,000 units. Each unit requires five minutes of direct labour. Arlo's budgeted overhead for the month is a. £12,800. b. £18,800. c. £84,800. d. £225,600.

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Chapter_15_11e 5. Budgeted sales for the second quarter of the current year are as follows: Budgeted Sales £150,000 200,000 180,000

April May June

The company collects 20 per cent in the month of sale, 70 per cent in the first month following the sale and 10 per cent in the second month following the sale. April sales to be collected in May are a. £30,000. b. £105,000. c. £104,000. d. £-0-. 6. Rydingsward, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £15,000 + £4 per machine hour £35,000 + £1 per machine hour £60,000 + £750 per batch £1,000 per batch £50,000 + £10 per purchase order

What is the machine cost for production of 50,000 reflectors that will require 8,000 machine hours, 25 batches and 15,000 purchase orders? a. £47,000 b. £43,000 c. £38,410,000 d. None of these 7. Which of the following is usually prepared before the production budget? a. Direct materials purchases budget b. Direct labour budget c. Sales budget d. Cash budget 8. A budget based on additions and subtractions from last year's budget is a. a zero-based budget. b. a continuous budget. c. an incremental budget. d. none of these.

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Chapter_15_11e 9. If a department plans forward from resources to outputs, this describes which criticism of traditional budgeting? a. Department orientation b. Dynamic c. Process oriented, not results oriented d. Results oriented, not process oriented 10. Nichols Company sells a product for £20. Budgeted sales for the first quarter of the current year are as follows:

January February March

Budgeted Sales £80,000 50,000 90,000

The company wants to maintain an inventory of finished units equal to 30 per cent of the following month's sales, and 1,000 units are on hand at the beginning of the year. Each unit requires two pounds of raw material costing £1 per pound. The company maintains a raw materials inventory equal to 10 per cent of the following month's production needs. Budgeted production in units for February would be a. 2,500. b. 3,100. c. 3,850. d. 4,600. 11. Cal Company uses the following formula for annual overhead: £360,000 + £1.20 for each machine hour used. For the upcoming month, Cal plans to manufacture 6,000 units. Each unit requires 2 machine hours. Cal's budgeted overhead for the month is a. £367,200. b. £37,200. c. £374,400. d. £44,400.

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Chapter_15_11e 12. Feedee Company has budgeted sales and production (in units) over the next three months as follows:

Sales Production

January 50,000 52,000

February ? 64,000

March 80,000 78,000

There are 10,000 units on hand on January 1. A minimum of 20 per cent of the next month's sales in units must be on hand at the end of each month. April sales are expected to be 70,000. Budgeted sales for February would be a. 64,000. b. 78,000. c. 60,000. d. 52,000. 13. Budgeted sales for the first quarter for Cullison Company, a retailer, are as follows:

January February March

Budgeted Sales (Units) 75,000 100,000 110,000

Cullison started the year with an inventory of 7,500 units. The company likes to maintain an inventory equal to 10 per cent of next month's budgeted sales. Budgeted purchases in units for February would be a. 111,000. b. 110,000. c. 101,000. d. 100,000. 14. Budgeted sales for the second quarter of the current year are as follows:

April May June

Budgeted Sales £150,000 200,000 180,000

The company collects 20 per cent in the month of sale, 70 per cent in the first month following the sale and 10 per cent in the second month following the sale. Wemberly's budgeted cash receipts for March are a. £300,000. b. £335,000. c. £195,000. d. £261,000. Copyright Cengage Learning. Powered by Cognero.

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Chapter_15_11e 15. Jiggy Company plans to sell 33,000 units during the month of May. Beginning inventory was 1,200 units. The company plans to have 2,500 units on hand at the end of the month. Each unit requires 3 pounds of raw materials. If raw material inventory on May 1 is 4,400 pounds and desired ending inventory is 2,200 pounds, how many pounds of raw materials must be purchased during May? a. 103,500 b. 102,900 c. 105,100 d. 100,700 16. A budget where managers must justify all costs based on need is a(n) a. zero-based budget. b. participatory budget. c. continuous budget. d. incremental budget. 17. Gerald Company manufactures books. Manufacturing a book takes 10 units of A1 and 1 unit of A2. Scheduled production of books for the next two months is 1,000 and 1,200 units, respectively. Beginning inventory is 4,000 units of A1 and 30 units of A2. The ending inventory of A1 is planned to decrease 500 units in each of the next two months, and the A2 inventory is expected to increase 5 units in each of the next two months. Based on this information, the number of units of A1 that needs to be purchased by Gerald during the first month is a. 9,500 units. b. 10,000 units. c. 1,000 units. d. 10,500 units. 18. Rydingsward, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £15,000 + £4 per machine hour £35,000 + £1 per machine hour £60,000 + £750 per batch £1,000 per batch £50,000 + £10 per purchase order

What is the budgeted maintenance cost if there was production of 50,000 reflectors that will require 8,000 machine hours, 25 batches and 15,000 purchase orders? a. £15,000 b. £32,000 c. £47,000 d. £79,000

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Chapter_15_11e 19. Projected sales for Sommers, Inc., for next year and beginning and ending inventory data are as follows: Sales Beginning inventory Desired ending inventory

50,000 units 4,000 units 8,000 units

The selling price is £40 per unit. Each unit requires four pounds of material which costs £6 per pound. The beginning inventory of raw materials is 12,000 pounds. The company wants to have 3,000 pounds of material in inventory at the end of the year. According to Sommers' production budget, how many units should be produced? a. 54,000 b. 46,000 c. 62,000 d. 38,000 20. The first step in the budgeting process is the preparation of the a. production budget. b. selling and administrative expenses budget. c. sales forecast. d. cash budget. 21. Activity-based budgeting a. is a more powerful planning and control tool than a functional-based budget system. b. starts with sales and production budgets similar to a functional-based budget system. c. is simpler to construct than a functional-based budget system. d. is a more powerful planning and control tool than a functional-based budget system and starts with sales and production budgets similar to a functional-based budget system. 22. Which of the following is true about budgets? a. Budgets are financial plans for the future. b. Budgets identify objectives and the actions needed to achieve them. c. Budgets should be tightly linked to the strategic plan. d. All of these are true. 23. The budget committee a. has the responsibility to review the budget. b. resolves differences that may arise as the budget is prepared. c. prepares financial statements for the auditor. d. has the responsibility to review the budget and resolves differences that may arise as the budget is prepared.

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Chapter_15_11e 24. Activity-based budgets compare costs for items based on activities such as a. direct material. b. direct labour. c. setups. d. power. 25. Gerald Company manufactures books. Manufacturing a book takes 10 units of A1 and 1 unit of A2. Scheduled production of books for the next two months is 1,000 and 1,200 units, respectively. Beginning inventory is 4,000 units of A1 and 30 units of A2. The ending inventory of A1 is planned to decrease 500 units in each of the next two months, and the A2 inventory is expected to increase 5 units in each of the next two months. How many units of A1 does expect to use in production during the second month? a. 12,000 units b. 12,500 units c. 10,000 units d. 10,750 units 26. Brown, Inc., has budgeted £60,000 for annual fixed overhead costs for the coming year. Budgeted variable overhead is £0.10 per unit. For the next quarter, Brown plans to manufacture 500,000 units. Brown's budgeted overhead for the quarter is a. £50,000. b. £65,000. c. £110,000. d. £150,000. 27. Which of the following is an example of a discretionary fixed expense? a. Direct labour b. Depreciation on a factory building c. Insurance on a building d. Property taxes on a factory building 28. Which is NOT one of the four steps needed to build an activity-based budget? a. Determine output level. b. Determine the activities and their drivers needed to produce output. c. Estimate the demand for each activity to produce the output. d. Estimate the committed capacity. 29. Which budget is prepared without monetary amounts? a. Direct materials purchases budget b. Overhead budget c. Production budget d. All of these

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Chapter_15_11e 30. Projected sales for Sommers, Inc., for next year and beginning and ending inventory data are as follows: Sales Beginning inventory Desired ending inventory

50,000 units 4,000 units 8,000 units

April May June

Budgeted Sales (Units) 60,000 120,000 140,000

Maxwell started the quarter with an inventory of 30,000 units. The company likes to maintain an inventory equal to 10 per cent of next month's budgeted sales. Budgeted purchases in units for May would be a. 146,000. b. 120,000. c. 134,000. d. 122,000.

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Chapter_15_11e 33. The following forecasted sales pertain to Norah Company: Month April May June July

Sales £200,000 250,000 150,000 100,000

Collection pattern: 60 per cent in month of sale 40 per cent in month following the sale Accounts receivable as of March 31 Finished goods inventory as of March 31

£35,000 4,000 units

The company has a selling price of £10 per unit and expects to maintain ending inventories equal to 20 per cent of the next month's sales. How many units are expected to be produced in April? a. 21,000 units b. 19,000 units c. 25,000 units d. 20,000 units 34. Canceco Company produces and sells pillows. It expects to sell 10,000 pillows in the year 2022 and had 1,000 pillows in finished goods inventory at the end of 2021. Canceco would like to complete operations in the year 2022 with at least 1,250 completed pillows in inventory. There is no ending work-in-process inventory. The pillows sell for £5 each. What would be the total sales value for the year 2022? a. £50,000 b. £55,000 c. £56,250 d. £51,250

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Chapter_15_11e 35. Kara Ltd has the following sales forecasts for the selected three-month period: Month July August September

Sales £24,000 14,000 16,000

Seventy per cent of sales are collected in the month of the sale, and the remainder are collected in the following month. Accounts receivable balance (July 1) Cash balance (July 1)

£20,000 10,000

Minimum cash balance is £10,000. Cash can be borrowed in £1,000 increments from the local bank (assume no interest charges). How much cash would be collected in September from sales? a. £15,400 b. £17,000 c. £16,000 d. £20,000 36. Activity-based budgeting provides better planning because a. it incorporates change by understanding processes and drivers. b. it incorporates change by assuming production relationships to be the same. c. it incorporates change by making inflationary adjustments. d. all of these are correct. 37. Jordan Manufacturing Company expects to incur the following per unit costs for 1,000 units of production: Direct materials Direct labour Variable overhead Fixed overhead

3 lb. @ £5 = £15 1 hr @ £6 = £6 75% of direct labour costs 50% of direct labour costs

What is the total amount of overhead included in the overhead budget? a. £4,500 b. £3,000 c. £11,250 d. £7,500

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Chapter_15_11e 38. The following forecasted sales pertain to Reject City: Month June July August September

Sales £160,000 200,000 120,000 80,000

Collection pattern: 65 per cent in month of sale 35 per cent in month following sales Accounts receivable as of May 31 Finished goods inventory as of May 31

£28,000 6,000 units

Reject City has a selling price of £5 per unit and expects to maintain ending inventories equal to 25 per cent of next month's sales. How many units are expected to be produced in June? a. 36,000 units b. 50,000 units c. 82,000 units d. 42,000 units 39. A moving twelve-month budget where a future month is added as the current month expires is called a(n) a. zero-based budget. b. incremental budget. c. revolving budget. d. continuous budget. 40. Which of the following is NOT a criticism of the traditional master budget? a. Results oriented b. Interdependencies are recognized c. Static d. Department oriented

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Chapter_15_11e 41. Budgeted sales for the second quarter of the current year are as follows: Budgeted Sales £150,000 200,000 180,000

April May June

The company collects 20 per cent in the month of sale, 70 per cent in the first month following the sale and 10 per cent in the second month following the sale. Wemberly's budgeted cash receipts for February are a. £220,000. b. £209,000. c. £194,000. d. £143,000. 42. General Ltd manufactures boxes. The estimated number of boxes sold for the first three months of the year are: Month January February March

Sales 3,000 4,200 3,900

Finished goods inventory at the end of December was 900 units. Ending finished goods inventory is equal to 20 per cent of the next month's sales. General Ltd expects to sell the boxes for £5 each. April sales is projected at 4,500 boxes. What is the expected sales amount for March? a. £15,000 b. £21,000 c. £19,500 d. £4,500

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Chapter_15_11e 43. Projected sales for Sommers, Inc., for next year and beginning and ending inventory data are as follows: Sales Beginning inventory Desired ending inventory

50,000 units 4,000 units 8,000 units

The selling price is £40 per unit. Each unit requires four pounds of material which costs £6 per pound. The beginning inventory of raw materials is 12,000 pounds. The company wants to have 3,000 pounds of material in inventory at the end of the year. Sommers' budgeted sales would be a. £2,160,000. b. £2,320,000. c. £2,480,000. d. £2,000,000. 44. At the beginning of the current month, Melrose had £10,000. Cash disbursements were £260,000 and cash collections were £235,000. Melrose invests all excess cash in a money market fund and has a line of credit to cover cash deficiencies. If Melrose wishes to start the next month with £15,000, Melrose must a. borrow £15,000. b. borrow £30,000. c. borrow £45,000. d. do nothing. 45. Rydingsward, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £15,000 + £4 per machine hour £35,000 + £1 per machine hour £60,000 + £750 per batch £1,000 per batch £50,000 + £10 per purchase order

What is the budget for maintenance if 20,000 reflectors were made that required 3,500 machine hours, 12 batches and 5,000 purchase orders? a. £3,500 b. £15,000 c. £29,000 d. £14,000

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Chapter_15_11e 46. Budgeted sales for the second quarter of the current year are as follows:

April May June

Budgeted Sales £150,000 200,000 180,000

The company collects 20 per cent in the month of sale, 70 per cent in the first month following the sale and 10 per cent in the second month following the sale. Total cash collected in June will be a. £180,000. b. £191,000. c. £90,000. d. £140,000. 47. The production budget a. summarizes the cost of producing units for the budget period. b. is calculated based on the sales budget and the desired ending inventory. c. specifies the required overhead. d. specifies the required direct labour hours. 48. Which of the following is usually prepared before the direct materials purchases budget? a. Production budget b. Cash budget c. Pro forma income statement d. Pro forma balance sheet 49. Projected sales for Sommers, Inc., for next year and beginning and ending inventory data are as follows: Sales Beginning inventory Desired ending inventory

50,000 units 4,000 units 8,000 units

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Chapter_15_11e 50. A bank manager may review a company's cash budget to a. determine whether the firm will earn net income. b. uncover possible employee theft. c. evaluate the company's ability to repay a loan. d. do all of these. 51. Which of the following appears in the cash budget? a. Interest payments b. Purchase of equipment on credit c. Depreciation d. All of these 52. Activity-based budgeting a. focuses on processes that result in output. b. focuses on eliminating non-value-added activities. c. focuses on the best use of capacity. d. all of these are correct. 53. Rydingsward, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £15,000 + £4 per machine hour £35,000 + £1 per machine hour £60,000 + £750 per batch £1,000 per batch £50,000 + £10 per purchase order

What is the budgeted inspection cost if there was production of 50,000 reflectors that will require 8,000 machine hours, 25 batches and 15,000 purchase orders? a. £18,750 b. £60,000 c. £66,000 d. £78,750

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Chapter_15_11e 54. Canceco Company produces and sells pillows. It expects to sell 10,000 pillows in the year 2022 and had 1,000 pillows in finished goods inventory at the end of 2021. Canceco would like to complete operations in the year 2022 with at least 1,250 completed pillows in inventory. There is no ending work-in-process inventory. The pillows sell for £5 each. How many pillows would be produced in the year 2022? a. 10,000 pillows b. 11,000 pillows c. 11,250 pillows d. 10,250 pillows 55. Activity-based budgeting is most useful when a. output is homogeneous. b. production processes are simple. c. diverse products are produced. d. volume levels are stable. 56. Bronco Company sells a product for £10. Budgeted sales for the first quarter of the current year are as follows:

January February March

Budgeted Sales £600,000 800,000 900,000

The company wants to maintain an inventory of finished units equal to 30 per cent of the following month's sales, and 10 000 units are on hand at the beginning of the year. Each unit requires two pounds of raw material costing £1 per pound. The company maintains a raw materials inventory equal to 20 per cent of the following month's production needs. Budgeted production in units for February would be a. 131,000. b. 107,000. c. 83,000. d. 80,000. 57. A budget is a. a planning tool. b. a control tool. c. a means of communicating goals to the firm's divisions. d. all of these.

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Chapter_15_11e 58. ____ are costs incurred for the acquisition of short-run activity capacity, usually as the result of yearly planning. a. Discretionary fixed expenses b. Committed fixed expenses c. Mixed costs d. Step-variable costs 59. Diely Company has the following sales budget:

Budgeted Sales

July £105,000

August £211,000

September £134,000

Credit sales represent 80 per cent of budgeted sales. Of the credit sales, 20 per cent is collected in the month of the sale, 60 per cent in the month after the sale and the remaining 15 per cent is collected two months after the sale. Five per cent of all sales are uncollectible and written-off. Cash receipts from sales in September amounted to a. £169,150. b. £135,320. c. £107,200. d. £162,120. 60. Which of the following is an advantage of the budgeting process? a. Budgeting provides resource information for decision-making. b. Budgeting provides a standard for performance evaluation. c. Budgeting improves communication and coordination within the organization. d. All of these are advantages. 61. Rydingsward, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £15,000 + £4 per machine hour £35,000 + £1 per machine hour £60,000 + £750 per batch £1,000 per batch £50,000 + £10 per purchase order

What is the budgeted setup costs if there was production of 50,000 reflectors that will require 8,000 machine hours, 25 batches and 15,000 purchase orders? a. £1,000 b. £25,000 c. £8,000,000 d. £15,000,000

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Chapter_15_11e 62. Schrandt Company, an importer and retailer of Polish pottery and kitchenware, prepares a monthly master budget. Data for the July master budget are given below: The June 30th balance sheet follows: Cash Accounts receivable Inventory Building and equipment (net)

£ 25,000Accounts payable 110,000Capital stock 54,000Retained earnings 250,000

£ 45,000 300,000 94,000

Actual sales for June and budgeted sales for July, August, and September are given below: June July August September

£137,500 360,000 400,000 320,000

Sales are 20 per cent for cash and 80 per cent on credit. All credit sales are collected in the month following the sale. There are no bad debts. The gross margin percentage is 40 per cent of sales. The desired ending inventory is equal to 25 per cent of the following month's sales. One fourth of the purchases are paid for in the month of purchase and the others are purchased on account and paid in full the following month. The monthly cash operating expenses are £43,000, and the monthly depreciation expenses are £7,000. What is the balance of the cash account at the end of July? a. £8,500 b. £15,500 c. £63,500 d. £114,000 63. Which of the following is an example of a discretionary fixed cost? a. The cost of a donation to the United Way b. The cost of the manufacturing facilities c. The cost of the manufacturing equipment d. Taxes on the property used for manufacturing

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Chapter_15_11e 64. Rydingsward, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £15,000 + £4 per machine hour £35,000 + £1 per machine hour £60,000 + £750 per batch £1,000 per batch £50,000 + £10 per purchase order

What is the budgeted purchasing cost if there was production of 50,000 reflectors that will require 8,000 machine hours, 25 batches and 15,000 purchase orders? a. £150,000 b. £200,000 c. £100,000 d. None of these 65. Jiggy Company plans to sell 33,000 units during the month of May. The company plans to have 2,500 units on hand at the end of the month. If 1,200 units are on hand on May 1, how many units must be produced during May? a. 33,000 b. 35,500 c. 34,300 d. 31,800

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Chapter_15_11e 66. Harald, Inc., has done a cost analysis for its production of bumper stickers. The following activities and cost drivers have been developed: Activity Maintenance Machining Setups Purchasing

Cost Formula £11,000 + £0.11 per machine hour £25,000 + £0.50 per machine hour £50 per batch £200 + £45 per purchase order

Following are the actual costs of producing 85,000 stickers: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Setups Purchasing

£11,500 28,300 550 1,000

What is the actual cost per sticker? (Round to three decimal places.) a. £0.468 b. £0.478 c. £0.486 d. £0.487 67. Harald, Inc., has done a cost analysis for its production of bumper stickers. The following activities and cost drivers have been developed: Activity Maintenance Machining Setups Purchasing

Cost Formula £11,000 + £0.11 per machine hour £25,000 + £0.50 per machine hour £50 per batch £200 + £45 per purchase order

Following are the actual costs of producing 85,000 stickers: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Setups Purchasing

£11,500 28,300 550 1,000

What is the budgeted cost per sticker? (Round to three decimal places.) a. £0.468 b. £0.478 c. £0.486 d. £0.487

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Chapter_15_11e 68. The first step in planning and control is a. preparation of the budget. b. performance evaluation. c. strategic planning. d. setting long-term objectives. 69. The following budget estimates have been prepared by Flowers Company:

January February March

Cash Receipts £220,000 380,000 320,000

Cash Payments £220,000 400,000 319,800

The company likes to maintain a minimum cash balance of £50,000. Any excess cash is invested in a money market account earning 8 per cent compounded monthly. Interest is reinvested in the money market account. Any cash deficiencies are covered by a withdrawal from the money market account. If additional cash is needed, the company has a line of credit at 12 per cent interest with the local bank. Assume a cash balance on January 1 of £50,000, a money market account balance of £0 and a credit line loan balance of £0. Required: Prepare a cash budget for each of the first three months of the year.

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Chapter_15_11e 70. Smithson Ltd. has the following budgeted sales for the selected six-month period: Month June July August September October November

Unit Sales 15,000 20,000 35,000 25,000 30,000 20,000

There were 7,500 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished product equal to 20 per cent of the unit sales for the next month. Three pounds of materials are required for each unit produced. Each pound of material costs £20. Inventory levels for materials equal 30 per cent of the needs for the next month. Materials inventory on June 1 was 5,000 pounds. Required: a. b.

Prepare production budgets in units for July, August and September. Prepare a purchases budget in pounds and dollars for July, August and September.

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Chapter_15_11e 71. Retro, Inc., produces a single product. The projected sales for the first month of the coming year and the beginning and ending inventory data are as follows: Sales Unit price Beginning inventory Desired ending inventory

80,000 units £12 6,000 units 9,000 units

Each unit requires three pounds of material costing £2 per pound. The beginning inventory of raw materials is 2,500 pounds, and the company wants to have 4,500 pounds of material in inventory at the end of the month. Each unit requires one hour of direct labour time, which is billed at £8 per hour. Required: a. b.

Prepare a production budget for the first month. Prepare a direct materials purchases budget for the first month.

72. Discuss the features of an ideal budgetary process.

73. Budgeted sales for the second quarter of the year for Reuben Company are as follows:

April May June

Budgeted Sales £400,000 200,000 600,000

The company normally collects 60 per cent in the month of sale and 30 per cent in the month following the sale. Ten per cent of all sales are uncollectible and are written off in the following month. The balance in accounts receivable at April 1 was £200,000, which represents 40 per cent of March sales. Required: Prepare a schedule of cash collections on accounts receivable for the second quarter.

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Chapter_15_11e 74. Steve manufactures picture frames. Sales for July are expected to be 10,000 units of various sizes. Historically, the average frame requires five foot of framing, one square foot of glass, and one square feet of backing. Beginning inventory includes 7,000 feet of framing, 1,500 square feet of glass and 2,500 square feet of backing. Current prices are £0.90 per foot of framing, £4.50 per square foot of glass and £1.50 per square foot of backing. Ending inventory should be 150 per cent of beginning inventory. Purchases are paid for in the month acquired. Required: a. b.

Determine the quantity of framing, glass, and backing that is to be purchased during July. Determine the total amount of cash needed for July purchases.

75. Define budgeting and control. How are budgets used in planning? How are budgets used to control? What are some of the reasons for budgeting?

76. Describe zero-based budgeting.

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Chapter_15_11e 77. Budgeted sales for the third quarter of the year for Brown Company are as follows:

July August September

Budgeted Sales £300,000 375,000 450,000

The company normally collects 30 per cent in the month of sale and 65 per cent in the month following the sale. Five per cent of all sales are uncollectible and are written off in the following month. The balance in accounts receivable at July 1 was £245,000, which represents 70 per cent of June sales. Required: Prepare a schedule of cash collections on accounts receivable for the third quarter.

78. In what ways does a department orientation hinder traditional budgeting?

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Chapter_15_11e 79. Dodge Ltd. is in the process of preparing its budget for next year. Cost of goods sold has been estimated at 60 per cent of sales. Merchandise purchases are to be made during the month preceding the month of the sales. Dodge pays 60 per cent in the month of purchase, and 40 per cent in the month following. Wages are estimated at 20 per cent of sales and are paid during the month of sale. Other operating costs amounting to 10 per cent of sales are to be paid in the month following the sale. The accounts payable balance on June 30 was £20,000. Month June July August September October November Required:

Sales £170,000 200,000 120,000 150,000 160,000 100,000

Prepare a schedule of cash disbursements for July, August and September.

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Chapter_15_11e 80. The Good As Old Company manufactures antique-looking, oak rocking chairs. Budgeted sales for the first five months of the year are as follows:

January February March April May

Budgeted Sales (Units) 200 240 180 160 240

Each rocking chair requires 10 square feet of oak, at a cost of £20 per square foot. The company wants to maintain an inventory of chairs equal to 25 per cent of the following month's sales. At the beginning of the year, 40 chairs are on hand. Assume the company maintains an inventory of oak equal to 10 per cent of the next month's needs. At the beginning of the year, 240 square feet of oak are on hand. Inventory of oak at March 31 is estimated to be 180 square feet. Required: a. b.

Prepare a production budget, in units, for each of the first four months of the year. Prepare a purchases budget, in dollars, for each of the first three months of the year.

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Chapter_15_11e 81. Sales for October, November and December are expected to be £200,000, £180,000 and £220,000, respectively, for Ripken Company. All sales are on account (terms 2/15, net 30 days) and are collected 50 per cent in the month of sale and 50 per cent in the following month. One-half of all sales discounts are taken on the average. Materials are purchased one month before being needed, and all purchases and expenses are paid for as incurred. Activities for the quarter are expected to be:

Materials used Salaries Maintenance and repairs Depreciation Utilities and other Dividends paid Payment on bonds

October £40,000 70,000 18,000 36,000 14,000 -08,000

November £36,000 68,000 18,000 36,000 14,000 10,000 8,000

December £44,000 72,000 18,000 36,000 14,000 -08,000

Required: Using the given information, prepare a cash budget for November.

82. Describe the incremental approach to budgeting. In what settings is the incremental approach typically used? What is the primary advantage of this approach? What is the primary disadvantage of this approach?

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Chapter_15_11e 83. The following budget estimates have been prepared by Clifton Company:

May June

Cash Receipts £120,000 110,300

Cash Payments £150,000 150,000

The company likes to maintain a minimum cash balance of £40,000. Any excess cash is invested in a money market account earning 9 per cent compounded monthly. Interest is reinvested in the money market account. Any cash deficiencies are covered by a withdrawal from the money market account. If additional cash is needed, the company has a line of credit at 12 per cent interest with the local bank. Interest is paid monthly. Assume a cash balance on May 1 of £40,000, a money market account balance of £0, and a credit line loan balance of £0. Required: Prepare a cash budget for May and June.

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Chapter_15_11e 84. The city of Coventry had the following sales of water for the selected months of the year: Month January February March April May June

Sales £50,000 45,000 60,000 42,500 70,000 120,000

All sales are on credit. Historically, 50 per cent is collected in the month of sale, 35 per cent during the first month following the sale and 15 per cent in the second month following the sale. Cost of water averages 75 per cent of sales. Water is purchased in the month of sale. All purchases are paid during the month following the purchase. Operating costs of £40,000 are paid each month. The March 1 cash balance is expected to be the minimum balance of £5,000. Money can be borrowed from a local bank in increments of £1,000. (Do not include interest charges in your budget.) Required: Prepare a cash budget for March, April and May.

85. Compare and contrast the incremental budgetary approach to the zero-base budgeting approach to budgeting.

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Chapter_15_11e 86. Dusty Company manufactures oak porch swings. Budgeted sales for the first four months of the year are as follows:

January February March April

Budgeted Sales (Units) 320 280 340 240

Each porch swing requires 15 square feet of oak, at a cost of £20 per square foot. The company wants to maintain an inventory of swings equal to 20 per cent of the following month's sales. At the beginning of the year, 40 swings are on hand. Assume the company maintains an inventory of oak equal to 10 per cent of the next month's needs. At the beginning of the year, 500 square feet of oak are on hand. Inventory of oak at March 31 is estimated to be 400 square feet. Required: a. b.

Prepare a production budget, in units, for each of the first three months of the year. Prepare a purchases budget, in monetary values, for direct materials for each of the first three months of the year.

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Chapter_15_11e 87. Rydingsward, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £5,000 + £8 per machine hour £25,000 + £4 per machine hour £90,000 + £1,000 per batch £5,000 per batch £100,000 + £100 per purchase order

Required: Prepare an activity-based budget for the following: ∙ ∙

60,000 units: 20,000 purchase orders 100,000 units: 30,000 purchase orders

10,000 machine hours; 30 batches; 18,000 machine hours; 40 batches;

88. Describe an activity-based budget.

89. Explain how budgets provide a basis for performance evaluation.

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Chapter_15_11e 90. The following data is obtained from the general records in the shipping department at Fast Parcel Delivery Company for August: ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙

Inspecting packages prior to placement on truck takes 1 minute per package. Processing paperwork for each shipment (each truck loaded) takes 30 minutes. Loading packages takes 1 minute of labour per package plus an additional 3 labour hours per truck. Miscellaneous tasks take 2 hours per truck. Temporary employees to perform all of the above tasks can be hired for any amount of hours at a rate of £10 per hour during the summer (no benefits). One supervisor is needed for every 1,000 hours of temporary employee labour (rounded up). Supervisors are paid a flat rate of £3,600 per month. Supervisors divide their time evenly among inspecting, processing and loading activities and miscellaneous tasks. One thousand dollars per month general department overhead is allocated to miscellaneous tasks and £2,000 per month to loading, inspecting and processing activities.

August will have 24 working days. Fast Parcel expects to load 12 trucks per day during August. There are on average 100 packages per truck. Required: Prepare a budget using the activity based approach for the costs of inspecting, processing, loading and miscellaneous activities within the shipping department for August.

91. Discuss the role of budgeting in planning, control and decision making.

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Chapter_15_11e Answer Key 1. d 2. b 3. d 4. b 5. b 6. b 7. c 8. c 9. c 10. b 11. d 12. c 13. c 14. d 15. d 16. a 17. a 18. c 19. a 20. c 21. d 22. d 23. d 24. c 25. a 26. b

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Chapter_15_11e 27. c 28. d 29. c 30. c 31. a 32. d 33. a 34. a 35. a 36. a 37. d 38. a 39. d 40. b 41. c 42. c 43. d 44. b 45. c 46. b 47. b 48. a 49. b 50. c 51. a 52. d 53. d 54. d Copyright Cengage Learning. Powered by Cognero.

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Chapter_15_11e 55. c 56. c 57. d 58. a 59. d 60. d 61. b 62. c 63. a 64. b 65. c 66. c 67. b 68. c 69. January Beginning cash balance £ 50,000 Add: Cash receipts 220,000 Cash available £270,000 Less: Cash disbursements (220,000) Cash surplus (deficiency) £ 50,000 Add: Cash from loans -0Ending cash balance £ 50,000 *Includes £200 of interest expense (£20,000 × 0.12 × 1/12)

February £ 50,000 380,000 £430,000 (400,000) £ 30,000 20,000 £ 50,000

March £ 50,000 320,000 £370000 (320,000)* £ 50,000 -0£ 50,000

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Chapter_15_11e 70. a. Sales Add: Desired ending inventory Total needs Less: Beginning inventory Units to be produced b. Units to be produced Desired ending inventory* Production needs*** Total needs Less: Beginning inventory Purchases needed in lbs. Cost (£20 per lb.) Total purchase cost

July

August

September

20,000 7,000 27,000 4 000 23,000

35,000 5,000 40,000 7,000 33,000

25,000 6,000 31,000 5,000 26,000

July

August

September

23,000

33,000

29,700 69,000 98,700 20,700 78,000 × £20 £1,560,000

23,400 99,000 122,400 29,700 92,700 × £20 £1,854,000

26,000 25,200** 78,000 103,200 23,400 79,800 × £20 £1,596,000

* 0.30 times next month's needs ** (30,000 + 4,000 - 6,000) × £3 × 0.30 *** 3 lbs. times units to be produced

71. a.

Production budget: Sales (in units) Desired ending inventory Total needs Less: Beginning inventory Units to be produced Purchases budget: Units to be produced Direct materials per unit (pounds) Production needs (pounds) Desired ending inventory (pounds) Total needs Less: Beginning inventory (pounds) Direct materials to be purchased (pounds) Cost per pound Total purchase cost

80,000 9,000 89,000 6,000 83,000

83,000 3 249,000 4,500 253,500 2,500 251,000 × £2 £502,000 ×

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Chapter_15_11e 72. The ideal budgetary process does not exist. But preparers strive to make budgets that are used to evaluate performance based only on costs that are controllable by the manager. Other measures than budgets should be used to measure managerial performance. Standards should be realistic when performance is being evaluated. Budgeting should be participative to assure communication and responsibility. Ideal budgets should provide frequent feedback and incentives for achieving the organizational goals. 73. Cash collections: 60% of sales for current month 30% of sales for previous month Total cash collections

April

May

June

£240,000 150,000* £390,000

£120,000 120,000 £240,000

£360,000 60,000 £420,000

*March sales = £200,000/0.4 = £500,000 £500,000 × 0.3 = £150,000

74. a. Desired ending inventory Production needs (10,000 units) Total needs Less: Beginning inventory Direct materials to be purchased b.

Cash need: Framing Glass Backing Total

Framing 10,500 50,000 60,500 7,000 53,500

(53,500 × £0.90) (10,750 × £4.50) (11,250 × £1.50)

Glass 2,250 10,000 12,250 1,500 10,750

Backing 3,750 10,000 13,750 2,500 11,250

£ 48,150 48,375 16,875 £113,400

75. Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and strategies of an organization into operational terms. Control is the process of setting standards, receiving feedback on actual performance and taking corrective action whenever actual performance deviates significantly from planned performance. Budgets are the standards, and they are compared with actual costs and revenues to provide feedback. Budgeting forces managers to plan, provides resource information for decision making, sets benchmarks for control and evaluation and improves the functions of communication and coordination. 76. Under zero-based budgeting, every dollar of expenditure must be justified. The essence of zero-based budgeting is breaking an organizational unit's total budget into program packages with related costs. Management then ranks all program packages on the basis of the perceived benefits in relationship to their costs. Program packages are then funded for the budget period using this ranking. High-ranking packages are most likely to be funded and low-ranking packages are least likely to be funded. Copyright Cengage Learning. Powered by Cognero.

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Chapter_15_11e 77. Cash collections: 30% of sales for current month 65% of sales for previous month Total cash collections

July

August

September

£ 90,000 227,500* £317,500

£112,500 195,000 £307,500

£135,000 243,750 £378,750

*£245,000 = 0.70 X June sales = X = £245,000/0.7 X = £350,000 0.65 × £350,000 = £227,500 78. Traditionally, budgets are the aggregate of departmental budgets. Departments begin their budgets with the resources needed to perform current operations and adjust for the new output levels. Traditional budgeting does not challenge departments to find new ways to work. It sustains the old levels, and departments compete with each other for resources. It encourages departments to spend all of their budgets so they won't get cut the next year. 79. Sales Cost of goods sold

Cash paid to suppliers: June July (£72,000) August (£90,000) September (£96,000) Total cash paid to suppliers Cash paid for wages Cash paid for operating cost Total cash disbursements

July £200,000 × 0.60 £120,000

August £120,000 × 0.60 £ 72,000

September £150,000 × 0.60 £ 90,000

October £160,000 × 0.60 £ 96,000

July

August

September

£ 20,000 43,200 ________ £ 63,200

£ 28,800 54,000 ________ £ 82,800

£ 36,000 57,600 £ 93,600

40,000 17,000 £120,200

24,000 20,000 £126,800

30,000 12,000 £135,600

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Chapter_15_11e 80. a.

PRODUCTION BUDGET IN UNITS

Budgeted sales in units Desired ending inventory (25% of next month's sales) Total needs Less: Beginning inventory Units to be produced

January 200

February 240

March 180

April 160

260 40 220

285 60 225

220 45 175

220 40 180

PURCHASES BUDGET IN DOLLARS

Units to be produced Multiplied by: Sq. ft. of oak per unit Sq. ft. of material needed for production Desired ending inventory (10% of next month's needs) Total sq. ft. needed Less: Beginning inventory Sq. ft. to be purchased Multiplied by: Cost per sq. ft. Cost of raw material purchases

January 220

February 225

March 175 ×

2,200

2,250

1,750

225 2,425 240 2,185

175 2,425 225 2,200

180 1,930 175 1,755

£20

£43,700

£20

£44,000

£20

£35,100

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Chapter_15_11e 81. Cash receipts: Sales: October (£200,000 × 0.50 × 0.99*) November (£180,000 × 0.50 × 0.99*) Total Cash disbursements: Materials Salaries and wages Maintenance and repairs Utilities and other Dividends Payment on bonds Net cash inflow (outflow) *Average discount is 1% (2% × 1/2)

£99,000 89,100 £188,100

£44,000 68,000 18,000 14,000 10,000 8,000

162,000 £ 26,100

82. The incremental approach to budgeting adjusts budget line items for the coming period as a dollar or percentage change from the amount budgeted or spent during the previous period. This approach is widely used in government and nonprofit organizations where relationships between inputs and outputs are weak or nonexistent. The advantage of this approach is the simplification of the budget process by considering only the increments in the various budget items. The disadvantage to this approach is that wastes and inefficiencies previously built into budget are not detected and addressed. 83. Beginning cash balance Add: Cash receipts Cash available Less: Cash disbursements Cash surplus (deficiency) Add: Cash from loans Ending cash balance *Includes interest on the May loan of £300 (£30,000 × 0.12 × 1/12)

May £ 40,000 120,000 £ 160,000 (150,000) £ 10,000 30,000 £ 40,000

June £ 40,000 110,300 £ 150,300 (150,300)* £ 0 40,000 £ 40,000

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Chapter_15_11e 84. Beginning cash balance Plus: Cash collections: Month of sale (0.50) Month following (0.35) mo. following (0.15) Total cash available

March £ 5,000

April £14,500

May £ 8,500

Total £ 5,000

30,000 15,750 7,500 £58,250

21,250 21,000 6,750 £63,500

35,000 14,875 9,000 £67,375

86,250 51,625 23,250 £166,125

Less disbursements: Water Operating costs Total disbursements Ending cash balance

£33,750 10,000 £43,750 £14,500

£45,000 10,000 £55,000 £ 8,500

£31,875 10,000 £41,875 £25,500

£110,625 30,000 £140,625 £ 25,500

85. Incremental budgets are based on adjustments to last year's budget. They consider only marginal change. There is a tendency for organizations to give across-the-board increases or cuts. Priorities are not given. Incremental budgeting maintains the status quo. Zero-base budgeting requires complete justification of a budget. Existing operations are analyzed to ensure that all activities are still needed. It is time consuming but aids in eliminating waste and inefficiency.

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Chapter_15_11e 86. a. Budgeted sales, in units Desired ending inventory (20% of next month's sales) Total needs Less: Beginning inventory Units to be produced b.

PRODUCTION BUDGET IN UNITS January February March 320 280 340 56 376 40 336

68 348 56 292

48 388 68 320

PURCHASES BUDGET IN DOLLARS January Units to be produced Multiplied by: Sq. ft. of oak per unit Sq. ft. of material needed for production Desired ending inventory (10% of next month's needs) Total sq. ft. needed Less: Beginning inventory Sq. ft. to be purchased Multiplied by: Cost per sq. ft. Cost of raw material purchases

February 336

March 292

320 ×

5,040

4,380

4,800

438 5,478 500 4,978

480 4,860 438 4,422

400 5,200 480 4 ,720

£20

£99,560

£88,440

Maintenance Machining Inspection Setups Purchasing

60,000 Units £ 85,000 65,000 120,000 150,000 2,100,000

100 000 Units £ 49,000 97,000 130,000 200,000 3,100,000

Total costs

£2,520,000

£3,676,000

£20

£94,400

87.

88. An activity-based budget cuts across functional areas to bring together all budgeted costs for a cost objective. This budget is based on activities (such as developing and designing a product, procuring, setting up, operating, inspecting and packaging), rather than on expense categories such as direct labour and overhead. An activity-based budget would also reflect a cost hierarchy with total cost at the unit level, batch level and product level. Facility-level costs are not included in such a budget unless the organization manufactures only one product. Copyright Cengage Learning. Powered by Cognero.

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Chapter_15_11e 89. After employees accept the budget as a guide to action, they can be held responsible for their portion of the budget. When results do not agree with plans, managers attempt to determine the cause of the divergence. This information is then used to adjust operations or to modify plans. 90. Temporary Employee Hours Required: Inspecting (1/60 × 100 packages × 12 trucks × 24 days) 480 Processing (1/2 × 12 trucks × 24 days) 144 Loading 480 (1/60 × 100 packages × 12 trucks × 24 days) + (3 × 12 trucks × 24 days) 864 Miscellaneous (2 × 12 trucks × 24 days) 576 Total 2,544 Rounding up, we determine that three supervisors are needed at a cost of 3 × £3,600 = £10,800 Cost per Activity: Inspecting Temporary help Supervisory salary allocation General overhead allocation Total Processing Temporary help Supervisory salary allocation General overhead allocation Total Loading Temporary help Supervisory salary allocation General overhead allocation Total Miscellaneous Temporary help Supervisory salary allocation General overhead allocation Total

£4,800 2,700 2,000 £9,500 £1,440 2,700 2,000 £6,140 £13,440 2,700 2,000 £18,140 £5,760 2,700 1,000 £9,460

91. Budgets are a key component of planning because they are the financial plans for the future. Control means looking backward, determining what actually happened and comparing it with the previously planned outcomes (the budget). Budgets improve decision making by providing useful information.

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Chapter_16_11e Indicate the answer choice that best completes the statement or answers the question. 1. Torino, SA., manufactures machine parts. Torino has developed a static budget for its plant at an activity level of 10,000 direct labour hours for the month of March. The actual level of activity was 11,000 hours. The following table summarizes the static budget and the actual costs for March:

Variable costs Fixed costs Total

Static Budget (10,000 DLH) £21,000 7,800 £28,800

Actual Costs (11,000 DLH) £22,000 7,700 £29,700

Variance £1,000 U 100F £900U

What is the flexible budget variance for March? a. £-0b. £1,200 F c. £900 U d. £1,100 F 2. When budgets are used for control, a. budgeted amounts from different years are compared. b. actual amounts from different years are compared. c. budgeted amounts are compared to actual amounts. d. None of these is correct.

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Chapter_16_11e 3. Villafane, SA., has done a cost analysis for its production of decals. The following activities and cost drivers have been developed: Activity Design Machining Setups Purchasing

Cost Formula £5,000 + £0.05 per machine hour £25,000 + £0.01 per machine hour £35 per batch £50 + £15 per purchase order

Following are the actual costs of producing 35,000 decals: 1,000 machine hours; 5 batches; 30 purchase orders Design Machining Setups Purchasing

£5,080 ? ? £600

The following variances were given in the activity performance report: Design Machining Setups Purchasing

? £40 F £15 F ?

What is the activity variance for purchasing? a. £500 U b. £100 U c. £50 U d. None of these

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Chapter_16_11e 4. Glenn, SA., has done a cost analysis for its production of T-shirts. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £11,000 + £2 per machine hour £55,000 + £3 per machine hour £70,000 + £500 per batch £2,000 per batch £80,000 + £150 per purchase order

Following are the actual costs of producing 75,000 T-shirts: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Inspection Setups Purchasing

£20,000 73,000 73,000 18,000 82,000

What is the budget variance for purchasing in an activity-based performance report? a. £1,000 U b. £2,000 U c. £3,000 U d. None of these 5. Goal congruence means a. there is alignment of organizational and managerial goals. b. the organization is aligned to the needs of the environment. c. the organization is aligned to shareholder goals. d. there is no divergence between organization and stockholder goals.

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Chapter_16_11e 6. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

The following actually occurred: Actual unit sales for the year Actual unit production for the year Actual fixed overhead for the year: Supervision Depreciation Rent Actual variable costs: Direct materials Direct labour Supplies Indirect labour Power

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The static budget variance for supplies is a. £10 U. b. £10 F. c. £50 U. d. £50 F.

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Chapter_16_11e 7. Torino, SA., manufactures machine parts. Torino has developed a static budget for its plant at an activity level of 10,000 direct labour hours for the month of March. The actual level of activity was 11,000 hours. The following table summarizes the static budget and the actual costs for March:

Variable costs Fixed costs Total

Static Budget (10,000 DLH) £21,000 7,800 £28,800

Actual Costs (11 000 DLH) £22,000 7,700 £29,700

Variance £1,000 U 100F £900U

Which of the following describes how well the plant manager performed for the month of March? a. The manager performed a good job in controlling costs. b. The manager performed a poor job in controlling costs. c. The manager exceeded his goals. d. The manager performed a good job in controlling costs and exceeded his goals. 8. The static budget variance for materials is £200 F and the budgeted cost for materials is £52,000. If the budgeted volume is 13,000 and the actual volume is 13,500, then the flexible budget variance is a. £2,200 F. b. £3,000 F. c. £2,000 F. d. £1,800 F. 9. If the static budget variance for materials is £200 F and the budgeted cost for materials is £52,000, then the actual cost of materials is a. £52,000. b. £52,200. c. £51,200. d. £51,800. 10. Torino, SA., manufactures machine parts. Torino has developed a static budget for its plant at an activity level of 10,000 direct labour hours for the month of March. The actual level of activity was 11,000 hours. The following table summarizes the static budget and the actual costs for March:

Variable costs Fixed costs Total

Static Budget (10,000 DLH) £21,000 7,800 £28,800

Actual Costs (11,000 DLH) £22,000 7,700 £29,700

Variance £1,000 U 100F £900U

What is the flexible budget for March? a. £28,800 b. £29,800 c. £30,900 d. £31,680 Copyright Cengage Learning. Powered by Cognero.

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Chapter_16_11e 11. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The flexible budget variance for total cost for the year is a. £90 U. b. £140 U. c. £230 U. d. £50 U.

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Chapter_16_11e 12. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The total flexible budgeted costs for the year are a. £10,560. b. £13,460. c. £13,510. d. £11,340.

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Chapter_16_11e 13. Glenn, SA., has done a cost analysis for its production of T-shirts. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £11,000 + £2 per machine hour £55,000 + £3 per machine hour £70,000 + £500 per batch £2,000 per batch £80,000 + £150 per purchase order

Following are the actual costs of producing 75,000 T-shirts: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Inspection Setups Purchasing

£20,000 73,000 73,000 18,000 82,000

What is the budget variance for total costs in an activity-based performance report? a. £1,000 F b. £2,000 F c. £3,000 F d. None of these 14. What results could be expected by placing pressure on management to perform at certain levels? a. Lower level managers could become frustrated if they believe upper management is placing a burden on them for costs out of their control. b. Managers may resort to unethical practices to compensate for unfavorable results. c. Efforts to deal with immediate controllable factors could become diluted. d. All of these could be correct.

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Chapter_16_11e 15. Glenn, SA., has done a cost analysis for its production of T-shirts. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £11,000 + £2 per machine hour £55,000 + £3 per machine hour £70,000 + £500 per batch £2,000 per batch £80,000 + £150 per purchase order

Following are the actual costs of producing 75,000 T-shirts: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Inspection Setups Purchasing

£20,000 73,000 73,000 18,000 82,000

What is the budget variance for maintenance in an activity-based performance report? a. £1,000 U b. £3,000 U c. £3,000 F d. None of these 16. If production was budgeted at 400 units and the actual production was 420 units, what would be the static budget variance for materials if the actual cost of materials was £4,150 and the budgeted cost per unit is £10? a. £50 F b. £200 U c. £100 F d. £150 U 17. Flexible budgets do NOT provide a. expected costs for a range of activity. b. budgeted costs for the actual level of activity. c. budgeted costs for a predetermined level of activity. d. expected costs for the actual performance level.

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Chapter_16_11e 18. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The flexible budget for direct materials cost for the year is a. £3,500. b. £3,600. c. £3,900. d. £4,000. 19. Which of the following departments would NOT be classified as a profit centre? a. The accounting department of a large PLc b. The automotive division of a large PLc c. The hardware department of a department store d. The men's shoe department of a department store

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Chapter_16_11e 20. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The flexible budget variance for indirect labour for the year is a. £1,250 F. b. £50 F. c. £50 U. d. £1,200 U.

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Chapter_16_11e 21. Harald, SA., has done a cost analysis for its production of bumper stickers. The following activities and cost drivers have been developed: Activity Maintenance Machining Setups Purchasing

Cost Formula £11,000 + £0.11 per machine hour £25,000 + £0.50 per machine hour £50 per batch £200 + £45 per purchase order

Following are the actual costs of producing 85,000 stickers: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Setups Purchasing

£11,500 28,300 550 1,000

What is the budget variance for purchasing in an activity-based performance report? a. £50 F b. £50 U c. £100 U d. None of these 22. Harald, SA., has done a cost analysis for its production of bumper stickers. The following activities and cost drivers have been developed: Activity Maintenance Machining Setups Purchasing

Cost Formula £11,000 + £0.11 per machine hour £25,000 + £0.50 per machine hour £50 per batch £200 + £45 per purchase order

Following are the actual costs of producing 85,000 stickers: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Setups Purchasing

£11,500 28,300 550 1,000

What is the budget variance for maintenance in an activity-based performance report? a. £50 F b. £50 U c. £550 U d. £550 F

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Chapter_16_11e 23. Villafane, SA., has done a cost analysis for its production of decals. The following activities and cost drivers have been developed: Activity Design Machining Setups Purchasing

Cost Formula £5,000 + £0.05 per machine hour £25,000 + £0.01 per machine hour £35 per batch £50 + £15 per purchase order

Following are the actual costs of producing 35,000 decals: 1,000 machine hours; 5 batches; 30 purchase orders Design Machining Setups Purchasing

£5,080 ? ? £600

The following variances were given in the activity performance report: Design Machining Setups Purchasing

? £40 F £15 F ?

What is the actual cost of machining? a. £24,970 b. £25,010 c. £25,050 d. None of these

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Chapter_16_11e 24. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The static budget variance for total fixed overhead is a. £50 U. b. £50 F. c. £-0-. d. £100 U. 25. Which budget should be used to determine how efficiently managers controlled costs? a. Master budget b. Flexible budget c. Static budget d. Cash budget

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Chapter_16_11e 26. Harald, SA., has done a cost analysis for its production of bumper stickers. The following activities and cost drivers have been developed: Activity Maintenance Machining Setups Purchasing

Cost Formula £11,000 + £0.11 per machine hour £25,000 + £0.50 per machine hour £50 per batch £200 + £45 per purchase order

Following are the actual costs of producing 85,000 stickers: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Setups Purchasing

£11,500 28,300 550 1,000

What is the budget variance for total costs in an activity-based performance report? a. £700 U b. £700 F c. £800 U d. None of these 27. Which of the following is not an objective of responsibility accounting? a. To redesign processes to be more effective b. To align individual and organizational goals c. To influence behaviour d. To increase profitability

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Chapter_16_11e 28. Glenn, SA., has done a cost analysis for its production of T-shirts. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £11,000 + £2 per machine hour £55,000 + £3 per machine hour £70,000 + £500 per batch £2,000 per batch £80,000 + £150 per purchase order

Following are the actual costs of producing 75,000 T-shirts: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Inspection Setups Purchasing

£20,000 73,000 73,000 18,000 82,000

What is the budget variance for inspection in an activity-based performance report? a. £1,000 F b. £2,000 F c. £3,000 F d. None of these

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Chapter_16_11e 29. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The static budget variance for rent is a. £100 F. b. £100 U. c. £-0-. d. £50 U. 30. Which of the following is not an essential element of responsibility accounting? a. Assigning responsibility b. Establishing performance measures c. Evaluating performance d. Ridiculing poor performers

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Chapter_16_11e 31. Which of the following is NOT a key feature of an ideal budgetary system? a. Participation b. Incentives c. Accountability for noncontrollable costs d. Feedback on performance 32. The budget most appropriate for control purposes is the a. static budget. b. flexible budget. c. continuous budget. d. incremental budget. 33. Which cost centre listed below is evaluated with the aid of flexible budgets drawn up for the actual level of activity? a. Discretionary cost centres b. Standard cost centres c. Non-relational cost centres d. Flexible cost centres 34. Participative budgeting offers which of the following advantages? a. It offers nonmonetary incentives to employees that may lead to higher levels of employee performance. b. It involves individuals whose knowledge of local conditions may enhance the budgeting process. c. It communicates a sense of employee responsibility. d. All of these are advantages of participative budgeting. 35. Which of the following is NOT a potential disadvantage of participative budgeting? a. Pseudoparticipation b. Performance feedback c. Unrealistic standards d. Budgetary slack

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Chapter_16_11e 36. Torino, SA., manufactures machine parts. Torino has developed a static budget for its plant at an activity level of 10,000 direct labour hours for the month of March. The actual level of activity was 11,000 hours. The following table summarizes the static budget and the actual costs for March:

Variable costs Fixed costs Total

Static Budget (10,000 DLH) £21,000 7,800 £28,800

Actual Costs (11,000 DLH) £22,000 7,700 £29,700

Variance £1,000 U 100F £900U

Which of the following describes the flexible budget variance for March? a. The fixed overhead variance is £100 F. b. The variable overhead variance is £1,000 U. c. The variable overhead variance is £1,100 F. d. The fixed overhead variance is £100 F and the variable overhead variance is £1,100 F. 37. An example of a negative incentive is a. promotion. b. nonfinancial incentive. c. feedback reports. d. termination of employment. 38. Controllable costs are those that a manager a. has no authority over. b. cannot avoid. c. does not participate in authorizing. d. can influence through decision making.

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Chapter_16_11e 39. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The flexible budget for rent for the year is a. £100. b. £200. c. £2,900. d. £2,950.

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Chapter_16_11e 40. Villafane, SA., has done a cost analysis for its production of decals. The following activities and cost drivers have been developed: Activity Design Machining Setups Purchasing

Cost Formula £5,000 + £0.05 per machine hour £25,000 + £0.01 per machine hour £35 per batch £50 + £15 per purchase order

Following are the actual costs of producing 35,000 decals: 1,000 machine hours; 5 batches; 30 purchase orders Design Machining Setups Purchasing

£5,080 ? ? £600

The following variances were given in the activity performance report: Design Machining Setups Purchasing

? £40 F £15 F ?

What is the actual cost of setups? a. £160 b. £190 c. £300 d. None of these 41. Which of the following is NOT a key feature of an ideal budgetary system? a. Controllable costs b. Single measure for performance c. Incentives d. Frequent feedback

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Chapter_16_11e 42. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The static budget variance for direct materials is a. £100 F. b. £100 U. c. £400 F. d. £400 U.

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Chapter_16_11e 43. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The flexible budget variance for supervision for the year is a. £67 F. b. £67 U. c. £50 F. d. none of these. 44. Which of the following departments is likely to be evaluated as a discretionary cost centre? a. The machining department of an automotive division b. The food products division of a large plc c. The personnel department of an automotive division d. The men's shoe department of a department store

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Chapter_16_11e 45. Villafane, SA., has done a cost analysis for its production of decals. The following activities and cost drivers have been developed: Activity Design Machining Setups Purchasing

Cost Formula £5,000 + £0.05 per machine hour £25,000 + £0.01 per machine hour £35 per batch £50 + £15 per purchase order

Following are the actual costs of producing 35,000 decals: 1,000 machine hours; 5 batches; 30 purchase orders Design Machining Setups Purchasing

£5,080 ? ? £600

The following variances were given in the activity performance report: Design Machining Setups Purchasing

? £40 F £15 F ?

What is the activity variance for design? a. £40 F b. £30 U c. £15 F d. £100 U 46. Which of the following is NOT an advantage of participative budgeting? a. Encourages incrementalism b. Encourages communication c. Encourages responsibility d. Encourages creativity

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Chapter_16_11e 47. Harald, SA., has done a cost analysis for its production of bumper stickers. The following activities and cost drivers have been developed: Activity Maintenance Machining Setups Purchasing

Cost Formula £11,000 + £0.11 per machine hour £25,000 + £0.50 per machine hour £50 per batch £200 + £45 per purchase order

Following are the actual costs of producing 85,000 stickers: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Setups Purchasing

£11,500 28,300 550 1,000

What is the budget variance for machining in an activity-based performance report? a. £50 F b. £50 U c. £800 U d. None of these 48. If production was budgeted at 400 units and the actual production was 420 units, what would be the flexible budget variance for materials if the actual cost of materials was £4,150 and the budgeted cost per unit is £10? a. £50 F b. £200 U c. £100 F d. £150 U

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Chapter_16_11e 49. Glenn, SA., has done a cost analysis for its production of T-shirts. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £11,000 + £2 per machine hour £55,000 + £3 per machine hour £70,000 + £500 per batch £2,000 per batch £80,000 + £150 per purchase order

Following are the actual costs of producing 75,000 T-shirts: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Inspection Setups Purchasing

£20,000 73,000 73,000 18,000 82,000

What is the budget variance for setups in an activity-based performance report? a. £1,000 F b. £2,000 F c. £3,000 F d. None of these 50. A manager of a profit centre a. does not control revenues. b. does not control expenses. c. does not control investments. d. only controls revenues.

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Chapter_16_11e 51. Glenn, SA., has done a cost analysis for its production of T-shirts. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £11,000 + £2 per machine hour £55,000 + £3 per machine hour £70,000 + £500 per batch £2,000 per batch £80,000 + £150 per purchase order

Following are the actual costs of producing 75,000 T-shirts: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Inspection Setups Purchasing

£20,000 73,000 73,000 18,000 82,000

What is the budget variance for machining in an activity-based performance report? a. £1,000 U b. £2,000 U c. £3,000 U d. None of these 52. Which of the following must be addressed if budgets are to be used in performance evaluation? a. Determine how budgeted amounts should be compared with actual results b. Consider the impact of budgets on human behaviour c. Determine how budgeted amounts should be compared with actual results and consider the impact of budgets on human behaviour d. Neither determine how budgeted amounts should be compared with actual results nor consider the impact of budgets on human behaviour

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Chapter_16_11e 53. Harald, SA., has done a cost analysis for its production of bumper stickers. The following activities and cost drivers have been developed: Activity Maintenance Machining Setups Purchasing

Cost Formula £11,000 + £0.11 per machine hour £25,000 + £0.50 per machine hour £50 per batch £200 + £45 per purchase order

Following are the actual costs of producing 85,000 stickers: 5,000 machine hours; 10 batches; 20 purchase orders Maintenance Machining Setups Purchasing

£11,500 28,300 550 1,000

What is the budget variance for setups in an activity-based performance report? a. £50 F b. £50 U c. £800 U d. None of these

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Chapter_16_11e 54. Armati, SA., is looking for feedback on company performance. The company compares the budget for the year with the actual costs. Data have been collected below: Armati, SA., had the following budgeted data: Unit sales for the year Unit production for the year Budgeted fixed overhead for the year: Supervision Depreciation Rent Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

26,000 26,000 £800 2,000 100 £0.15 0.20 0.02 0.05 0.02

24,000 28,000 £850 2,000 100 £3,500 4,900 530 1,250 470

The static budget for total variable costs is a. £90 U. b. £180 U. c. £790 F. d. £880 F. 55. Which of the following facets of a responsibility accounting system is most likely to lead employees to distrust the entire budgeting and performance evaluation system? a. Tight standards b. Well-defined standards c. Budget participation d. Static qualifiers

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Chapter_16_11e 56. Classics, SA., uses a flexible budget for overhead costs. The company expects to produce 20,000 units of the product it manufactures. Half of the units require 0.50 direct labour hours per unit. The remainder requires 0.75 direct labour hours per unit. The cost formulas for each of the four overhead items is as follows:

Power Maintenance Indirect labour Rent

Fixed Cost £ 1,000 £ 5,000 £ 8,000 £12,000

Variable Cost £0.25 £0.40 £2.00

Required: a. b.

Prepare an overhead budget for the expected activity level for the coming year. Prepare an overhead budget that reflects production that is 10 per cent higher than expected.

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Chapter_16_11e 57. Mertz, SA., has done a cost analysis for its production of flags. The following activities and cost drivers have been developed: Activity Maintenance Machining Inspection Setups Purchasing

Cost Formula £13,000 + £2 per machine hour £45,000 + £6 per machine hour £70,000 + £500 per batch £2,000 per batch £80,000 + £150 per purchase order

Following are the actual costs of producing 75,000 flags: 1,000 machine hours; 15 batches; 10 purchase orders Maintenance Machining Inspection Setups Purchasing

£14,000 50,000 70,000 32,000 82,000

Required: Prepare an activity-based performance report.

58. Make a distinction between the manager's basic responsibilities for the following types of responsibility centres: a. cost centre b. revenue centre c. profit centre d. investment centre

59. Before implementing a responsibility accounting system, all areas of authority and responsibility within an organization must be clearly defined. Explain how this accomplished and why it is important.

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Chapter_16_11e 60. Glock, SA., is looking for feedback on performance. The company compares the budget for the year with the actual costs. Glock had the following budgeted data: Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

£11.00 15.00 0.80 1.00 0.10

Budgeted fixed overhead for the period: Supervision Depreciation Rent

£ 9,000 13,000 12,000

Required: Prepare a flexible budget for production costs for the following range of activity: 2,500 units; 4,000 units; 6,000 units.

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Chapter_16_11e 61. Riemay, SA., has done a cost analysis for its production of sports cards. The following activities and cost drivers have been developed: Activity Photography Printing Setups Purchasing

Cost Formula £50 + £35 per labour hour £25,000 + £0.01 per machine hour £25 per batch £25 + £25 per purchase order

Following are the actual costs of producing 35,000 cards: 60 labour hours; 500 machine hours; 5 batches; 30 purchase orders Photography Printing Setups Purchasing

? £25,000 ? £770

The following variances were given in the activity performance report: Photography Printing Setups Purchasing

£10 F ? £20 U ?

Required: Find the missing values. Prepare an activity-based performance report in good form

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Chapter_16_11e 62. Klamaty, SA., is looking for feedback on performance. The company compares the budget for the year with the actual costs. Klamaty, SA., had the following budgeted data: Unit sales for the year Unit production for the year

10,000 10,000

Budgeted fixed overhead for the year: Supervision Depreciation Rent

£18,000 20,000 10,000

Budgeted variable costs per unit: Direct materials Direct labour Supplies Indirect labour Power

£18.00 25.00 0.20 1.00 0.10

The following actually occurred: Actual unit sales for the year Actual unit production for the year

11,000 12,000

Actual fixed overhead for year: Supervision Depreciation Rent

£17,850 20,000 10,000

Actual variable costs for the year: Direct materials Direct labour Supplies Indirect labour Power

£214,000 320,000 2,500 10,000 1,500

Required: a. b.

Prepare a performance report for all costs showing static budget variances. Prepare a performance report for all costs showing flexible budget variances.

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Chapter_16_11e 63. Timothy, SA., uses a flexible budget for overhead costs. The company expects to produce 40,000 units of the product it manufactures. Each unit requires 0.40 direct labour hours. The cost formulas for each of the four overhead items (where X is measured in direct labour hours) is as follows:

Power Maintenance Indirect labour Rent

Cost Formula 0.40X £15,000 + 0.60X £18,000 + 2.50X £20,000

Required: a. b.

Prepare an overhead budget for the expected activity level for the coming year. Prepare an overhead budget that reflects production that is 25 per cent lower than expected.

64. Why should motivational considerations be a part of budget planning and utilization? List several ways to motivate employees with budgets.

65. Identify and discuss the key features that a budgetary system should have to encourage managerial, goalcongruent behaviour.

66. Define responsibility accounting and describe four types of responsibility centres.

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Chapter_16_11e 67. If budget performance is overemphasized, myopic behaviour can occur where a manager takes actions that improve budgetary performance in the short run but cause long-run harm to the firm. Required: a. b.

Give at least two examples of myopic behaviour that might be encouraged if there is an overemphasis on budgets as a performance measure. Discuss ways to discourage or prevent myopic behaviour in managers.

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Chapter_16_11e Answer Key 1. b 2. c 3. b 4. d 5. a 6. a 7. d 8. a 9. d 10. c 11. b 12. b 13. c 14. d 15. d 16. d 17. c 18. b 19. a 20. c 21. d 22. a 23. a 24. a 25. b 26. a

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Chapter_16_11e 27. a 28. b 29. c 30. d 31. c 32. b 33. b 34. d 35. b 36. d 37. d 38. d 39. a 40. a 41. b 42. c 43. d 44. c 45. b 46. a 47. c 48. a 49. b 50. c 51. c 52. c 53. b 54. c Copyright Cengage Learning. Powered by Cognero.

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Chapter_16_11e 55. a 56. a.

Projected activity level: (20,000 units/2) × 0.50 hours = (20,000 units/2) × 0.75 hours =

5,000 hours 7,500 hours 12,500 hours

Overhead budget: Power [£1,000 + (£0.25 × 12,500)] Maintenance [£5,000 + (£0.40 × 12,500)] Indirect labour [£8,000 + (£2 × 12,500)] Rent Total overhead b.

£ 4,125 10,000 33,000 12,000 £59,125

High activity level: 12,500 × 1.10 = 13 750 Overhead budget: Power [£1,000 + (£0.25 × 13,750)] Maintenance [£5,000 + (£0.40 × 13,750)] Indirect labour [£8,000 + (£2 × 13,750)] Rent Total overhead

£ 4,438 10,500 35,500 12,000 £62,438

57. Maintenance Machining Inspection Setups Purchasing

Actual £ 14,000 50,000 70,000 32,000 82,000

75,000 Flags £ 15,000 51,000 77,500 30,000 81,500

Variance £1,000 F 1,000 F 7,500 F 2,000 U 500 U

Total

£248,000

£255,000

£7,000 F

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Chapter_16_11e 58. a. b. c. d.

A cost centre is the responsibility centre whose manager is responsible only for managing costs; there is no revenue responsibility. A revenue centre is a responsibility centre whose manager is responsible for the generation of sales revenues. A profit centre is a responsibility centre whose manager is responsible for revenues, costs and resulting profits. An investment centre is a responsibility centre whose manager is responsible for the relationship between its profits and the total assets involved in the centre.

59. Organization charts and other documents should be examined to determine an organization's authority and responsibility structure. Organization structure is the arrangement of lines of responsibility within the organization. These structures vary widely. Some companies have functional-based structures along the lines of marketing, production, research and so on; other companies use products, services, customers or geography as the basis of organization. When an attempt is made to implement a responsibility accounting system, management could find instances of overlapping duties, authority not commensurate with responsibility and expenditures for which no one appears responsible. These circumstances make the development of a responsibility accounting system difficult. 60. Direct materials Direct labour Supplies Indirect labour Power

£11.00 15.00 0.80 1.00 0.10

Budgeted fixed overhead for the period: Supervision Depreciation Rent Total costs

2,500 Units £ 27,500 37,500 2,000 2,500 250

4,000 Units £ 44,000 60,000 3,200 4,000 400

6,000 Units £ 66,000 90,000 4,800 6,000 600

9,000 13,000 12,000 £103,750

9,000 13,000 12,000 £145,600

9,000 13,000 12,000 £201,400

61. Photography Printing Setups Purchasing

Actual £ 2,140 25,000 145 770

Budget £ 2,150 25,005 125 775

Variance £10 F 5F 20 U 5F

Total costs

£28,055

£-0-

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Chapter_16_11e 62. a.

Actual

Budget for 10,000

Fixed costs: Supervision Depreciation Rent

£ 17,850 20,000 10,000

£ 18,000 20,000 10,000

£150 F -0-0-

Variable costs: Direct materials Direct labour Supplies Indirect labour Power

£214,000 320,000 2,500 10,000 1,500

£180,000 250,000 2,000 10,000 1,000

£34,000 U 70,000 U 500 U -0500 U

Total costs

£595,850

£491,000

£104,850 U

Actual

Budget for 12,000

Fixed costs: Supervision Depreciation Rent

£ 17,850 20,000 10,000

£ 18,000 20,000 10,000

£150 F -0-0-

Variable costs: Direct materials Direct labour Supplies Indirect labour Power

£214,000 320,000 2,500 10,000 1,500

£216,000 300,000 2,400 12,000 1,200

£ 2,000 F 20,000 U 100 U 2,000 F 300 U

Total costs

£595,850

£579,600

£16,250 U

Variance

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Chapter_16_11e 63. a.

Overhead budget: Power (£0.40 × 40,000 × 0.4) Maintenance [£15,000 + (£0.60 × 40,000 × 0.4)] Indirect labour [£18,000 + (£2.50 × 40,000 × 0.4)] Rent Total overhead

£ 6,400 24,600 58,000 20,000 £109,000

Overhead budget: Power (£0.40 × 30,000 × 0.40) Maintenance [£15,000 + (£0.60 × 30,000 × 0.40)] Indirect labour [£18,000 + (£2.50 × 30,000 × 0.40)] Rent Total overhead

£ 4,800 22,200 48,000 20,000 £ 95,000

64. Motivational considerations help reduce employee feelings of ill will, disrespect of the budget process and alienation from management. For example, participation in the budget process encourages adherence to the budget, self-pride, internalization of the budgeted numbers and loyalty to the organization. It also signals that management is committed to supporting the budget in addition to simply preparing the budget. Ways to use budgets to motivate employees include: 1. Communicate to employees the importance of the budget. 2. Encourage employee participation in all aspects of the budgeting process. 3. Emphasize that top management supports all aspects of the budgeting process. 4. Allow reasonable amounts of flexibility for adjustments to the budget. 5. Use the comparison of actual results to budgeted results to assess performance. 6. Reward performance on the basis of the comparison of actual results to budgeted results. 7. Educate employees concerning the budgeting process and the use of the budget.

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Chapter_16_11e 65. These features include the following: Frequent Feedback on Performance. Managers need to know how they are doing as the year unfolds so they can take corrective actions, as necessary. Monetary and Nonmonetary Incentives. Managers are believed to be primarily motivated by monetary incentives; however, nonmonetary incentives such as job enrichment and increased responsibility can also be used to enhance the budgetary control system. Participative Budgeting. A sense of responsibility can be communicated to subordinate managers and creativity can be fostered by participative budgeting. Realistic Standards. Managers are evaluated based on budgeted objectives; therefore, these standards should be based on realistic conditions and expectations. Controllability of Costs. Managers should be held accountable only for costs over which they have control. Multiple Measures of Performance. The performance of managers should be measured on several dimensions, including some long-run attributes as well as the budget. 66. Responsibility accounting is a system that measured the results of responsibility centres and compares those results with expected outcomes. Type Cost centre Revenue centre Profit centre Investment centre

Manager is responsible for these items: Costs Revenues Revenues and costs Revenues, costs and investment

67. a.

To meet budgeted cost objectives or profits, managers can reduce expenditures for preventive maintenance, for advertising and for new product development. Managers can also fail to promote employees in order to keep the cost of labour low, perhaps damaging employee morale. Managers may use lower quality materials to reduce the cost of raw materials. In the short run, these actions will lead to improved budgetary performance; but in the long run, productivity will fall, market share will decline and valuable employees will leave for more attractive opportunities. The best way to prevent myopic behaviour is to measure the performance of managers on several dimensions, including some long-run attributes. Market share, productivity, quality and personnel development are examples of other areas of performance that could be evaluated. Financial measures of performance are important, but overemphasis on them can be counterproductive.

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Chapter_17_11e Indicate the answer choice that best completes the statement or answers the question. 1. Shannon Ltd.'s standard cost card contained the following information: Direct labour: 1.25 hours × £8.00 per hour = £10.00 Shannon planned to make 12,000 units. Shannon actually made 10,000 units using 13,000 hours. If Shannon's actual labour cost was £136,500, Shannon's labour rate variance was a. £32,500 unfavourable. b. £32,500 favourable. c. £6,500 unfavourable. d. £6,500 favourable. 2. Max Company has developed the following standards for one of its products: Direct materials

15 pounds × £16 per pound

Direct labour

4 hours × £24 per hour

Variable overhead

4 hours × £14 per hour

The following activities occurred during the month of October: Materials purchased

10,000 pounds costing £170,000

Materials used

7,200 pounds

Units produced

500 units

Direct labour Actual variable overhead

2,300 hours at £23.60 per hour £30,000

The company records materials price variances at the time of purchase. Max's materials price variance would be a. £50,000 favourable. b. £50,000 unfavourable. c. £10,000 unfavourable. d. £10,000 favourable. 3. Fortensky Construction planned to produce 275,000 units using 34,375 machine hours. Actual output was 290,000 units using 37,425 machine hours. Fortensky's volume variance a. was favourable. b. was unfavourable. c. was zero. d. cannot be determined from the information given.

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Chapter_17_11e 4. The standard fixed overhead rate is calculated as a. Actual fixed overhead/Actual activity. b. Budgeted fixed overhead/Budgeted activity. c. Budgeted fixed overhead/Actual activity. d. Budgeted overhead/Budgeted activity. 5. Rax Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

12 pounds × £14 per pound 3 hours × £18 per hour 3 hours × £8 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

10,000 pounds at £13.60 per pound 9,000 pounds 800 units 2,500 hours at £19.00 per hour £22,000

The company records materials price variances at the time of purchase. Rax's labour rate variance would be a. £4,300 favourable. b. £4,300 unfavourable. c. £2,500 favourable. d. £2,500 unfavourable. 6. Budgeted fixed overhead for the year Budgeted direct labour hours for the year Actual fixed overhead for August Actual variable overhead for August Direct labour hours worked in August Standard variable overhead cost per direct labour hour Standard direct labour hours allowed for August production

£300,000 30,000 £24,000 £10,000 2,600 £4 2,750

The variable overhead spending variance would be a. £2,000 favourable. b. £1,200 favourable. c. £400 favourable. d. £200 favourable.

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Chapter_17_11e 7. A favourable materials usage variance may be caused by a. excessive rework. b. a special price offered by suppliers. c. use of experienced workers. d. none of these. 8. Rax Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

12 pounds × £14 per pound 3 hours × £18 per hour 3 hours × £8 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

10,000 pounds at £13.60 per pound 9,000 pounds 800 units 2,500 hours at £19.00 per hour £22,000

The company records materials price variances at the time of purchase. Rax's labour efficiency variance would be a. £4,300 unfavourable. b. £4,300 favourable. c. £1,800 unfavourable. d. £1,800 favourable. 9. Price variances focus on the difference between a. actual price and standard price for actual quantity allowed for units actually produced. b. actual price and standard price for standard quantity allowed for units actually produced. c. actual price and standard price for actual quantity allowed for estimated activity. d. none of these.

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Chapter_17_11e 10. Budgeted fixed overhead for the year Budgeted direct labour hours for the year Actual fixed overhead for August Actual variable overhead for August Direct labour hours worked in August Standard variable overhead cost per direct labour hour Standard direct labour hours allowed for August production

£300,000 30,000 £24,000 £10,000 2,600 £4 2,750

The fixed overhead volume variance would be a. £2,500 unfavourable. b. £2,500 favourable. c. £1,000 unfavourable. d. £1,000 favourable. 11. Using more highly skilled direct labourers might affect which of the following variances? a. Materials usage variance b. Labour efficiency variance c. Variable manufacturing overhead efficiency variance d. All of these 12. The two variances for variable overhead are a. spending and efficiency variances. b. spending and budget variances. c. budget and volume variances. d. budget and efficiency variances.

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Chapter_17_11e 13. Ebola Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

20 pounds×£4 per pound 5 hours×£18 per hour 5 hours×£4 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

230,000 pounds at £4.20 per pound 220,000 pounds 10,000 units 51,000 hours at £17.70 per hour £240,000

The company records materials price variances at the time of purchase. Ebola's variable overhead spending variance would be a. £36,000 favourable. b. £36,000 unfavourable. c. £40,000 favourable. d. £40,000 unfavourable. 14. Ebola Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

20 pounds × £4 per pound 5 hours × £18 per hour 5 hours × £4 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

230,000 pounds at £4.20 per pound 220,000 pounds 10,000 units 51,000 hours at £17.70 per hour £240,000

The company records materials price variances at the time of purchase. Ebola's materials usage variance would be a. £120,000 favourable. b. £120,000 unfavourable. c. £80,000 unfavourable. d. £80,000 favourable.

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Chapter_17_11e 15. The following information was extracted from the accounting records of Noelle Company:

Direct materials: Direct labour: Variable overhead: Fixed overhead Total standard cost per unit

STANDARD COST CARD PER UNIT 8 pounds × £1.20 per pound 3 hours × £20 per hour 3 hours × £6 per hour

£ 9.60 60.00 18.00 ? ?

Budgeted fixed overhead for the period is £420,000, and the budgeted fixed overhead rate is based on an expected capacity of 30,000 direct labour hours. The following information is available regarding the company's operations for the period: Units produced Direct labour Overhead incurred: Variable Fixed

10,500 29,000 hours costing £590,000 £182,000 £430,000

Noelle's fixed overhead volume variance would be a. £10,000 unfavourable. b. £11,000 unfavourable. c. £21,000 favourable. d. £31,000 favourable. 16. The labour rate variance is calculated as a. (Actual hourly wage rate - Standard hourly wage rate) × Actual direct labour hours used. b. (Actual hourly wage rate - Standard hourly wage rate) × Standard direct labour hours that should have been used. c. (Actual direct labour hours used - Standard direct labour hours that should have been used) × Actual hourly wage rate. d. (Actual direct labour hours used - Standard direct labour hours that should have been used) × Standard hourly wage rate.

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Chapter_17_11e 17. Budgeted fixed overhead for the year Budgeted direct labour hours for the year Actual fixed overhead for August Actual variable overhead for August Direct labour hours worked in August Standard variable overhead cost per direct labour hour Standard direct labour hours allowed for August production

£300,000 30,000 £24,000 £10,000 2,600 £4 2,750

The standard rate for total overhead is a. £14. b. £13. c. £10. d. £4. 18. Budgeted fixed overhead for the year Budgeted direct labour hours for the year Actual fixed overhead for August Actual variable overhead for August Direct labour hours worked in August Standard variable overhead cost per direct labour hour Standard direct labour hours allowed for August production

£300,000 30,000 £24,000 £10,000 2,600 £4 2,750

The fixed overhead spending variance would be a. £2,500 unfavourable. b. £2,500 favourable. c. £1,000 unfavourable. d. £1,000 favourable.

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Chapter_17_11e 19. Orient Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

10 pounds × £8 per pound 6 hours × £20 per hour 6 hours × £6 per hour

The following activities occurred during the month of November: Materials purchased Materials used Units produced Direct labour Actual variable overhead

8,000 pounds costing £70,000 6,500 pounds 600 units 4,200 hours costing £75,600 £26,400

The company records materials price variances at the time of purchase. Orient's labour rate variance would be a. £12,000 unfavourable. b. £12,000 favourable. c. £8,400 favourable. d. £3,600 unfavourable. 20. Efficiency variances focus on the difference between a. actual quantity used and standard quantity allowed for estimated activity. b. actual quantity used and standard quantity allowed for units actually produced. c. quantity allowed for estimated production and standard quantity allowed for units actually produced. d. none of these.

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Chapter_17_11e 21. Max Company has developed the following standards for one of its products: Direct materials

15 pounds × £16 per pound

Direct labour

4 hours × £24 per hour

Variable overhead

4 hours × £14 per hour

The following activities occurred during the month of October: Materials purchased

10,000 pounds costing £170,000

Materials used

7,200 pounds

Units produced

500 units

Direct labour Actual variable overhead

2,300 hours at £23.60 per hour £30,000

The company records materials price variances at the time of purchase. Max's labour rate variance would be a. £920 unfavourable. b. £920 favourable. c. £800 unfavourable. d. £800 favourable. 22. An unfavourable materials price variance may be caused by a. excessive rework. b. a special price offered by suppliers. c. use of experienced workers. d. none of these. 23. The purchase of inferior direct materials at a lower price might affect which of the following variances? a. Materials price variance b. Materials usage variance c. Labour efficiency variance d. All of these 24. Fixed overhead was budgeted at £210,000 and 25,000 direct labour hours were budgeted. If the fixed overhead volume variance was £8,000 unfavourable and the fixed overhead spending variance was £3,000 favourable, fixed overhead applied must be a. £218,000. b. £213,000. c. £207,000. d. £205,000. e. £202,000.

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Chapter_17_11e 25. If actual fixed overhead was £164,000 and there was a £4,800 favourable spending variance and a £1,000 unfavourable volume variance, budgeted fixed overhead must have been a. £168,800. b. £167,800. c. £165,000. d. £163,000. e. £159,200. 26. Shannon Ltd.'s standard cost card contained the following information: Direct labour: 1.25 hours × £8.00 per hour = £10.00 Shannon planned to make 12,000 units. Shannon actually made 10,000 units using 13,000 hours. Shannon's standard hours allowed for production was a. 12,500. b. 15,000. c. 16,250. d. 13,000. 27. Max Company has developed the following standards for one of its products: Direct materials

15 pounds × £16 per pound

Direct labour

4 hours × £24 per hour

Variable overhead

4 hours × £14 per hour

The following activities occurred during the month of October: Materials purchased

10,000 pounds costing £170,000

Materials used

7,200 pounds

Units produced

500 units

Direct labour Actual variable overhead

2,300 hours at £23.60 per hour £30,000

The company records materials price variances at the time of purchase. Max's labour efficiency variance would be a. £7,200 unfavourable. b. £7,200 favourable. c. £6,280 unfavourable. d. £6,280 favourable.

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Chapter_17_11e 28. A sales volume variance will be favourable when a. actual units sold is greater than budgeted sales volume. b. actual units sold is less than budgeted sales volume. c. actual selling price is greater than budgeted selling price. d. actual contribution margin is greater than budgeted contribution margin. 29. Ebola Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

20 pounds × £4 per pound 5 hours × £18 per hour 5 hours × £4 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

230,000 pounds at £4.20 per pound 220,000 pounds 10,000 units 51,000 hours at £17.70 per hour £240,000

The company records materials price variances at the time of purchase. Ebola's labour rate variance would be a. £15,000 unfavourable. b. £15,000 favourable. c. £15,300 unfavourable. d. £15,300 favourable. 30. Labour rate variances can be the result of a. the use of an average wage rate. b. unexpected overtime. c. seniority mix changes. d. all of these. 31. During October, 14,000 direct labour hours were worked at a standard cost of £40 per hour. If the labour rate variance for October was £70,000 favourable, the actual cost per labour hour must be a. £35. b. £40. c. £45. d. none of these.

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Chapter_17_11e 32. The following information was extracted from the accounting records of Noelle Company:

Direct materials: Direct labour: Variable overhead: Fixed overhead Total standard cost per unit

STANDARD COST CARD PER UNIT 8 pounds × £1.20 per pound 3 hours × £20 per hour 3 hours × £6 per hour

£ 9.60 60.00 18.00 ? ?

10,500 29,000 hours costing £590,000 £182,000 £430,000

Noelle's standard fixed overhead rate is a. £14.82. b. £14.48. c. £14.34. d. £14.00.

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Chapter_17_11e 33. Ebola Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

20 pounds × £4 per pound 5 hours × £18 per hour 5 hours × £4 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

230,000 pounds at £4.20 per pound 220,000 pounds 10,000 units 51,000 hours at £17.70 per hour £240,000

The company records materials price variances at the time of purchase. Ebola's variable overhead efficiency variance would be a. £4,000 favourable. b. £4,000 unfavourable. c. £8,000 favourable. d. £12,000 unfavourable. 34. Orient Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

10 pounds × £8 per pound 6 hours × £20 per hour 6 hours × £6 per hour

The following activities occurred during the month of November: Materials purchased Materials used Units produced Direct labour Actual variable overhead

8,000 pounds costing £70,000 6,500 pounds 600 units 4,200 hours costing £75,600 £26,400

The company records materials price variances at the time of purchase. Orient's variable overhead efficiency variance would be a. £1,200 unfavourable. b. £3,600 unfavourable. c. £4,800 unfavourable. d. £4,800 favourable.

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Chapter_17_11e 35. Fixed overhead was budgeted at £500,000 and 25,000 direct labour hours were budgeted. If the fixed overhead volume variance was £12,000 favourable and the fixed overhead spending variance was £16,000 unfavourable, fixed overhead applied must be a. £516,000. b. £512,000. c. £504,000. d. £528,000. 36. Rax Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

12 pounds × £14 per pound 3 hours × £18 per hour 3 hours × £8 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

10,000 pounds at £13.60 per pound 9,000 pounds 800 units 2,500 hours at £19.00 per hour £22,000

The company records materials price variances at the time of purchase. Rax's variable standard cost per unit would be a. £78. b. £192. c. £246. d. £222. 37. For better control of direct material prices, when should direct material price variance be recognized? a. When material is purchased b. When material is issued from the storeroom c. When material is put into production d. When production is completed

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Chapter_17_11e 38. Rax Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

12 pounds × £14 per pound 3 hours × £18 per hour 3 hours × £8 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

10,000 pounds at £13.60 per pound 9,000 pounds 800 units 2,500 hours at £19.00 per hour £22,000

The company records materials price variances at the time of purchase. Rax's materials usage variance would be a. £8,400 unfavourable. b. £8,400 favourable. c. £5,600 unfavourable. d. £5,600 favourable. 39. If a company was concerned with controlling expenditures on overhead items, which variance would be useful? a. Fixed overhead volume variance b. Variable overhead efficiency variance c. Variable overhead spending variance d. Both variable overhead efficiency variance and variable overhead spending variance 40. Tuvok Ltd. has developed the following standards for one of its products: Standard cost of materials Materials purchased and used Total paid to suppliers Standard quantity allowed

£0.50 per pound 20,000 pounds £11,000 18,000 pounds

Tuvok's materials usage variance is a. £1,000 unfavourable. b. £1,100 unfavourable. c. £2,000 unfavourable. d. cannot be determined from the information given.

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Chapter_17_11e 41. A favourable materials price variance may be caused by a. excessive rework. b. a special price offered by suppliers. c. use of experienced workers. d. none of these. 42. The following information was extracted from the accounting records of Noelle Company:

Direct materials: Direct labour: Variable overhead: Fixed overhead Total standard cost per unit

STANDARD COST CARD PER UNIT 8 pounds × £1.20 per pound 3 hours × £20 per hour 3 hours × £6 per hour

£ 9.60 60.00 18.00 ? ?

10,500 29,000 hours costing £590,000 £182,000 £430,000

Noelle's variable overhead efficiency variance would be a. £7,000 favourable. b. £8,000 unfavourable. c. £15,000 favourable. d. £23,000 unfavourable. 43. Tuvok Ltd. has developed the following standards for one of its products: Standard cost of materials Materials purchased and used Total paid to suppliers Standard quantity allowed

£0.50 per pound 20,000 pounds £11,000 18,000 pounds

Tuvok's material price variance is a. £1,000 unfavourable. b. £2,000 unfavourable. c. £1,100 unfavourable. d. cannot be computed from the information given. Copyright Cengage Learning. Powered by Cognero.

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Chapter_17_11e 44. Which of the following is information that would be included in the standard cost card (sheet)? a. Quantity and price of direct materials for each unit of output b. Retail price of the product charged to the customers c. Delivery cost per unit of product d. All of these 45. The following information was extracted from the accounting records of Noelle Company:

Direct materials: Direct labour: Variable overhead: Fixed overhead Total standard cost per unit

STANDARD COST CARD PER UNIT 8 pounds × £1.20 per pound 3 hours × £20 per hour 3 hours × £6 per hour

£ 9.60 60.00 18.00 ? ?

10,500 29,000 hours costing £590,000 £182,000 £430,000

Noelle's fixed overhead spending variance would be a. £10,000 unfavourable. b. £11,000 unfavourable. c. £21,000 favourable. d. £31,000 favourable. 46. During October, 16,000 direct labour hours were worked at a standard cost of £6 per hour. If the labour rate variance for October was £4,000 unfavourable, the actual cost per labour hour must be a. £6.25. b. £6.00. c. £5.75. d. none of these.

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Chapter_17_11e 47. The following information was extracted from the accounting records of Noelle Company:

Direct materials: Direct labour: Variable overhead: Fixed overhead Total standard cost per unit

STANDARD COST CARD PER UNIT 8 pounds × £1.20 per pound 3 hours × £20 per hour 3 hours × £6 per hour

£ 9.60 60.00 18.00 ? ?

10,500 29,000 hours costing £590,000 £182,000 £430,000

Noelle's variable overhead spending variance would be a. £7,000 favourable. b. £8,000 unfavourable. c. £15,000 favourable. d. £23,000 unfavourable. 48. During December, 6,000 pounds of raw materials were purchased at a cost of £16 per pound. If there was an unfavourable materials price variance of £6,000 for December, the standard cost per pound must be a. £17. b. £16. c. £15. d. none of these. 49. Standard cost systems can enhance operational control through the use of a. price variances, which indicate the need for enhanced spending control. b. efficiency variances, which indicate the need for corrective action. c. standard costs, which indicate the desired cost of a unit of input. d. actual costs, which indicate the price received for units sold. 50. A 5 per cent wage increase for all factory employees would affect which of the following variances? a. Materials price variance b. Labour rate variance c. Labour efficiency variance d. Variable manufacturing overhead efficiency variance Copyright Cengage Learning. Powered by Cognero.

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Chapter_17_11e 51. Ebola Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

20 pounds × £4 per pound 5 hours × £18 per hour 5 hours × £4 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

230,000 pounds at £4.20 per pound 220,000 pounds 10,000 units 51,000 hours at £17.70 per hour £240,000

The company records materials price variances at the time of purchase. Ebola's materials price variance would be a. £46,000 favourable. b. £46,000 unfavourable. c. £44,000 favourable. d. £44,000 unfavourable. 52. If actual fixed overhead was £120,000 and there was a £2,600 favourable spending variance and a £2,000 unfavourable volume variance, budgeted fixed overhead must have been a. £124,600. b. £122,000. c. £120,000. d. £122,600.

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Chapter_17_11e 53. Ebola Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

20 pounds × £4 per pound 5 hours × £18 per hour 5 hours × £4 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

230,000 pounds at £4.20 per pound 220,000 pounds 10,000 units 51,000 hours at £17.70 per hour £240,000

The company records materials price variances at the time of purchase. Ebola's labour efficiency variance would be a. £18,000 favourable. b. £18,000 unfavourable. c. £17,700 unfavourable. d. £17,700 favourable. 54. Rax Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

12 pounds × £14 per pound 3 hours × £18 per hour 3 hours × £8 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

10,000 pounds at £13.60 per pound 9,000 pounds 800 units 2,500 hours at £19.00 per hour £22,000

The company records materials price variances at the time of purchase. Rax's materials price variance would be a. £4,000 unfavourable. b. £4,000 favourable. c. £1,600 unfavourable. d. £1,600 favourable.

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Chapter_17_11e 55. The volume variance is caused by a. the difference between the activity allowed for the actual output and the budgeted activity used in computing the fixed overhead rate. b. the difference between total budgeted fixed overhead and total standard fixed overhead assigned to production. c. the difference between the activity allowed for the actual output and the total standard fixed overhead assigned to production. d. the difference between the standard fixed overhead rate and the actual fixed overhead rate. 56. During September, 40,000 units of product were produced. The standard quantity of material allowed per unit was four pounds at a standard cost of £6.00 per pound. If there was a favourable materials usage variance of £30,000 for April, the actual quantity of materials used must be a. 41,250 pounds. b. 38,750 pounds. c. 165,000 pounds. d. 155,000 pounds. 57. During April, 80,000 units of product were produced. The standard quantity of material allowed per unit was two pounds at a standard cost of £5 per pound. If there was a favourable materials usage variance of £40,000 for April, the actual quantity of materials used must have been a. 168,000 pounds. b. 152,000 pounds. c. 84,000 pounds. d. 76,000 pounds.

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Chapter_17_11e 58. Orient Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

10 pounds × £8 per pound 6 hours × £20 per hour 6 hours × £6 per hour

The following activities occurred during the month of November: Materials purchased Materials used Units produced Direct labour Actual variable overhead

8,000 pounds costing £70,000 6,500 pounds 600 units 4,200 hours costing £75,600 £26,400

The company records materials price variances at the time of purchase. Orient's materials price variance would be a. £22,000 unfavourable. b. £18,000 unfavourable. c. £6,000 unfavourable. d. £4,000 unfavourable. 59. Max Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

15 pounds × £16 per pound 4 hours × £24 per hour 4 hours × £14 per hour

The following activities occurred during the month of October: Materials purchased Materials used Units produced Direct labour Actual variable overhead

10,000 pounds costing £170,000 7,200 pounds 500 units 2,300 hours at £23.60 per hour £30,000

The company records materials price variances at the time of purchase. Max's variable standard cost per unit would be a. £392. b. £336. c. £296. d. £152.

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Chapter_17_11e 60. To determine the unit standard cost for a particular input, a company must decide how much a. input should be used per unit of output and how much should be paid for the quantity of the input to be used. b. input should be used per unit of output and how much output should be produced. c. output should be produced and how much should be paid for each unit produced. d. should be paid for the quantity of the input to be used and how much input should be purchased. 61. Franklin Company expected sales were 2,000 units at £100 per unit. During a period, it had actual sales of 1,800 units at £110 per unit. Budgeted variable costs were £60 per unit. What is Franklin's sales price variance? a. £8,000 (U) b. £20,000 (U) c. £18,000 (F) d. £2,000 (U) 62. Labour efficiency variances may be caused by a. the use of highly skilled workers. b. frequent machinery breakdowns. c. the use of marginally skilled workers. d. all of these. 63. Who is responsible for unfavourable labour efficiency variances caused by poor quality materials? a. Warehouse manager b. Production manager c. Purchasing manager d. Engineering manager 64. The two variances for fixed overhead are a. spending and efficiency variances. b. efficiency and volume variances. c. spending and volume variances. d. budget and efficiency variances. 65. The volume variance provides information to management about a. utilization of plant facilities. b. cost control. c. performance for evaluation purposes. d. all of these.

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Chapter_17_11e 66. An unfavourable materials price variance with a favourable materials usage variance would most likely be the result of a. machines breaking down. b. problems with labour efficiency. c. purchase of high quality materials. d. problems with labour rates. 67. An unfavourable materials usage variance may be caused by a. excessive rework. b. a special price offered by suppliers. c. use of experienced workers. d. none of these. 68. Variances indicate a. the cause of the variance. b. who is responsible for the variance. c. that actual performance is not going according to plan. d. when the variance should be investigated. 69. Shannon Ltd.'s standard cost card contained the following information: Direct labour: 1.25 hours × £8.00 per hour = £10.00 Shannon planned to make 12,000 units. Shannon actually made 10,000 units using 13,000 hours. Shannon's labour efficiency variance was a. £4,625 unfavourable. b. £4,000 unfavourable. c. £27,750 unfavourable. d. £24,000 unfavourable.

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Chapter_17_11e 70. Orient Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

10 pounds × £8 per pound 6 hours × £20 per hour 6 hours × £6 per hour

The following activities occurred during the month of November: Materials purchased Materials used Units produced Direct labour Actual variable overhead

8,000 pounds costing £70,000 6,500 pounds 600 units 4,200 hours costing £75,600 £26,400

The company records materials price variances at the time of purchase. Orient's labour efficiency variance would be a. £12,000 unfavourable. b. £12,000 favourable. c. £8,400 favourable. d. £3,600 unfavourable. Figure C17-6 Budgeted fixed overhead for the year Budgeted direct labour hours for the year Actual fixed overhead for August Actual variable overhead for August Direct labour hours worked in August Standard variable overhead cost per direct labour hour Standard direct labour hours allowed for August production

£300,000 30,000 £24,000 £10,000 2,600 £4 2,750

Budgeted fixed overhead for the year Budgeted direct labour hours for the year Actual fixed overhead for August Actual variable overhead for August Direct labour hours worked in August Standard variable overhead cost per direct labour hour Standard direct labour hours allowed for August production

£300,000 30,000 £24,000 £10,000 2,600 £4 2,750

71.

The variable overhead efficiency variance would be a. £1,000 favourable. b. £600 favourable. c. £400 favourable. d. £200 favourable.

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Chapter_17_11e 72. Orient Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

10 pounds × £8 per pound 6 hours × £20 per hour 6 hours × £6 per hour

The following activities occurred during the month of November: Materials purchased Materials used Units produced Direct labour Actual variable overhead

8,000 pounds costing £70,000 6,500 pounds 600 units 4,200 hours costing £75,600 £26,400

The company records materials price variances at the time of purchase. Orient's variable overhead spending variance would be a. £4,800 favourable. b. £4,800 unfavourable. c. £3,600 unfavourable. d. £1,200 unfavourable. 73. The sales price variance is created by a difference between a. actual and standard contribution margin. b. actual and expected sales price. c. expected and standard net income. d. actual and expected sales volume.

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Chapter_17_11e 74. Max Company has developed the following standards for one of its products: Direct materials

15 pounds × £16 per pound

Direct labour

4 hours × £24 per hour

Variable overhead

4 hours × £14 per hour

The following activities occurred during the month of October: Materials purchased

10,000 pounds costing £170,000

Materials used

7,200 pounds

Units produced

500 units

Direct labour Actual variable overhead

2,300 hours at £23.60 per hour £30,000

The company records materials price variances at the time of purchase. Max's materials usage variance would be a. £40,000 unfavourable. b. £40,000 favourable. c. £4,800 unfavourable. d. £4,800 favourable. 75. Orient Company has developed the following standards for one of its products: Direct materials Direct labour Variable overhead

10 pounds × £8 per pound 6 hours × £20 per hour 6 hours × £6 per hour

The following activities occurred during the month of November: Materials purchased Materials used Units produced Direct labour Actual variable overhead

8,000 pounds costing £70,000 6,500 pounds 600 units 4,200 hours costing £75,600 £26,400

The company records materials price variances at the time of purchase. Orient's materials usage variance would be a. £22,000 unfavourable. b. £12,000 favourable. c. £10,000 unfavourable. d. £4,000 unfavourable.

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Chapter_17_11e 76. During May, 6,000 pounds of raw materials were purchased at a cost of £2.60 per pound. If there was a favourable materials price variance of £900 for December, the standard cost per pound must be a. £2.75. b. £2.60. c. £2.45. d. none of these. 77. Taylor Company's budgeted sales were 10,000 units at £200 per unit. Actual sales were 9,200 units at £210 per unit. Taylor's sales price variance is a. £68,000 (U). b. £100,000 (U). c. £8,000 (U). d. £92,000 (F). 78. If variable overhead is applied based on direct labour hours and there is an unfavourable labour efficiency variance, a. the materials usage variance will be unfavourable. b. the labour rate variance will be favourable. c. the variable overhead efficiency variance will be unfavourable. d. the variable overhead spending variance will be unfavourable. 79. For planning and control purposes, fixed overhead is NOT included in the standard cost per unit because a. it is incurred based on the number of units produced. b. the number of units produced does not vary from period to period. c. it can best be controlled on a lump-sum basis. d. of all of these.

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Chapter_17_11e 80. Mills Company uses standard costing for direct materials and direct labour. Management would like to use standard costing for variable and fixed overhead. The following monthly cost functions were developed for overhead items: Overhead Item Indirect materials Indirect labour Utilities Insurance Depreciation

Cost Function £0.30 per DLH £0.20 per DLH £0.25 per DLH £2 000 £10 000

The cost functions are considered reliable within a relevant range of 70,000 to 100,000 direct labour hours. The company expects to operate at 80,000 direct labour hours per month. Information for the month of September is as follows: Actual overhead costs incurred: Indirect materials Indirect labour Utilities Insurance Depreciation Total Actual direct labour hours worked Standard direct labour hours allowed for production achieved

£22,500 15,000 21,000 2,500 10,000 £71,000 85,000 82,000

Required: a.

Calculate the following standard overhead rates based upon expected capacity: Variable overhead rate Fixed overhead rate Total overhead rate Calculate the following variances: Variable overhead spending variance Variable overhead efficiency variance Fixed overhead spending variance Fixed overhead volume variance

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Chapter_17_11e 81. The following budgeted and actual contribution statement is for a component sold by Dark, Inc. for June of this year:

Unit sales Unit selling price Sales revenue Cost of goods sold Gross profit Operating costs (all fixed) Contribution to corporate costs and profits

Actual 18,000 £3.70 £66,600 36,000 £30,600 20,000 £10,600

Budget 20,000 £4.00 £80,000 40,000 £40,000 24,000 £16,000

Required: a. Compute the sales price variance, the net sales volume variance and the operating cost variance for June. b. Use the calculations in part a. to reconcile the budgeted and actual contribution to corporate costs and profits. c. How would you evaluate the performance of Dark, Inc.'s manager?

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Chapter_17_11e 82. The following standard costs were developed for one of Commodore Company's products: STANDARD COST CARD PER UNIT Direct materials: Direct labour: Variable overhead: Fixed overhead Total standard cost per unit

3 pounds × £2 per pound 2 hours × £12 per hour £4 per hour

£ 6.00 24.00 ? ? ?

The following information is available regarding the company's operations for the period: Units produced Materials purchased Materials used Direct labour Overhead incurred: Variable Fixed

12,000 50,000 pounds at £2 per pound 40,000 pounds 25,000 hours at £13 per hour £90,000 £300,000

Budgeted fixed overhead for the period is £280,000, and expected capacity for the period is 28,000 direct labour hours. Required: a. b.

Calculate the standard fixed overhead rate. Complete the standard cost card for the product.

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Chapter_17_11e 83. The Chair Division operates as a revenue centre and has the following relevant information for a period: Sales price variance Sales volume variance Net sales volume variance Budgeted unit contribution margin per unit

£1,000 (U) £2,000 (F) £1,200 (F) £6

The actual selling price was £1 less than the budgeted selling price. Required: a. Calculate the budgeted sales price. b. Calculate the actual sales price. c. Calculate actual unit sales. d. Calculate budget unit sales.

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Chapter_17_11e 84. The following standard costs were developed for one of Commodore Company's products: STANDARD COST CARD PER UNIT Direct materials: Direct labour: Variable overhead: Fixed overhead Total standard cost per unit

4 pounds × £5 per pound 1.5 hours × £20 per hour £10 per hour

£20.00 30.00 ?

The following information is available regarding the company's operations for the period: Units produced Materials purchased Materials used Direct labour Overhead incurred: Variable Fixed

15,000 90,000 pounds at £3.60 per pound 80,000 pounds 9,000 hours at £16.50 per hour £220,000 £640,000

Budgeted fixed overhead for the period is £600,000, and expected capacity for the period is 20,000 direct labour hours. Required: a. b.

Calculate the standard fixed overhead rate. Complete the standard cost card for the product.

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Chapter_17_11e Answer Key 1. a 2. c 3. a 4. b 5. d 6. c 7. c 8. c 9. a 10. b 11. d 12. a 13. b 14. c 15. c 16. a 17. a 18. d 19. c 20. b 21. b 22. d 23. d 24. e 25. a 26. a

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Chapter_17_11e 27. a 28. a 29. d 30. d 31. a 32. d 33. b 34. b 35. b 36. c 37. a 38. b 39. c 40. a 41. b 42. c 43. a 44. a 45. a 46. a 47. b 48. c 49. b 50. b 51. b 52. d 53. b 54. b Copyright Cengage Learning. Powered by Cognero.

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Chapter_17_11e 55. a 56. d 57. b 58. c 59. a 60. a 61. c 62. d 63. c 64. c 65. a 66. c 67. a 68. c 69. b 70. a 71. b 72. d 73. b 74. d 75. d 76. a 77. d 78. c 79. c

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Chapter_17_11e 80. a.

Variable overhead rate: (£0.30 + £0.20 + £0.25) Fixed overhead rate: [(£2,000 + £10,000)/80,000 hours] Total overhead rate: (£0.75 + £0.15)

£0.75 per DLH £0.15 per DLH £0.90 per DLH

Variable overhead spending variance: [(£22,500 + £15,000 + £21,000) - (85,000 hours × £0.75)] Variable overhead efficiency variance: [(85,000 hours × £0.75) - (82,000 hours × £0.75)] Fixed overhead spending variance: (£12,500 - £12,000) Fixed overhead volume variance: [£12,000 -(82,000 hours × £0.15)]

£5,250 F £2,250 U £500 U £300 F

81. a.

Sales price variance = (£3.70 - £4.00) × 18,000 = £5,400 (U); Net sales volume variance = (18,000 - 20,000) × £2 per unit contribution margin = £4,000 (U); Operating costs variances = (£20,000 - £24,000) = £4,000 (F)

b. Budgeted contribution Sales price variance Net sales volume variance Operating costs variance Actual contribution c.

£16,000 (5,400) (U) (4,000) (U) 4,000 £10,600

Dark, Inc. was able to cut operating costs by £4,000 for the year. Economic conditions or competition appears to have forced a price reduction that did NOT increase sales in units.

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Chapter_17_11e 82. a. £10 per DLH £280,000/28,000 hours b.

STANDARD COST CARD PER UNIT Direct materials: 3 pounds × £2 per pound Direct labour: 2 hours × £12 per hour Variable overhead: 2 hours × £4 per hour Fixed overhead: 2 hours × £10 per hour Total standard cost per unit

£ 6.00 24.00 8.00 20.00 £58.00

83. BCM = Budgeted contribution margin per unit BSP = Budgeted selling price ASP = Actual selling price AS = Actual units sold BS = Budgeted units sold a.

Net sales volume variance = (AS - BS) × BCM

£1,200 = (AS - BS) × £6 200 units = (AS - BS) Sales volume variance = (AS - BS) × BSP 200 (BSP) = 2,000 BSP = £10 b.

£10 - £1 = £9

Sales price variance = (ASP - BSP)AS = - £1,000

(£9 - 10)AS = - £1,000 AS = 1,000 units d.

(AS - BS) = 200

1,000 - BS = 200 BS = 800 units

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Chapter_17_11e 84. a.

£30 per DLH £600,000/20,000 hours

STANDARD COST CARD PER UNIT Direct materials: Direct labour: Variable overhead: Fixed overhead: Total standard cost per unit

4 pounds × £5 per pound 1.5 hours × £20 per hour 1.5 hours × £10 per hour 1.5 hours × £30 per hour

£ 20.00 30.00 15.00 45.00 £110.00

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Chapter_18_11e Indicate the answer choice that best completes the statement or answers the question. 1. When should variances be investigated? a. When they fall out of the accepted range or the control limit. b. When the variances are unfavourable. c. When the variances are over £10,000. d. All variances should be investigated. 2. Roberts Company uses a standard costing system. The following information pertains to direct materials for the month of July: Standard price per lb. Actual purchase price per lb. Quantity purchased Quantity used Standard quantity allowed for actual output Actual output

£18.00 £16.50 3,100 lbs. 2,950 lbs. 3,000 lbs. 1,000 units

Roberts Company reports its material price variances at the time of purchase. What is the journal entry to record material purchases? a. Materials 55,800 Accounts Payable b. Accounts Payable 55,800 Materials c. Materials 55,800 Materials Price Variance Accounts Payable d. Materials 51,150 Materials Price Variance 4,650 Accounts Payable

55,800 55,800 4,650 51,150

55,800

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Chapter_18_11e 3. Regis Ltd. uses two materials in the production of its product. The materials, X and Y, have the following standards: Material X Y Yield

Standard Mix 3,500 units 1,500 units 4,000 units

Standard Unit Price £1.00 per unit 3.00 per unit

Standard Cost £3,500 £4,500

During April, the following actual production information was provided: Material X Y Yield

Actual Mix 30,000 units 20,000 units 36,000 units

What is the materials mix variance? a. £5,000 (F) b. £10,000 (U) c. £10,000 (F) d. £15,000 (F) 4. Froelech Company has developed capacity standards. Information is as follows: Standard cost of the activity capacity acquired Standard cost of the activity capacity used Standard cost of the actual activity used

£150,000 100,000 120,000

The unused capacity variance is a. £20,000 favourable. b. £30,000 favourable. c. £50,000 favourable. d. There is no variance.

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Chapter_18_11e 5. Pippen Company's activity-based performance report revealed that actual inspection costs totalled £100,000 at an actual activity level of 50 inspections. Further analysis of inspection costs revealed the following:

Inspection costs: Fixed Variable

Actual Cost

Budgeted Cost

£30,000 20,000

£28,500 17,500

Fixed inspection costs consist of the salaries of two inspectors, who are paid £14,250. Each inspector is capable of efficiently conducting inspections of 30 batches. Variable inspection costs consist of materials used during the inspections. The fixed spending variance is a. £1,500 U. b. £1,500 F. c. £2,100 U. d. £2,100 F. 6. Regis Ltd. uses two materials in the production of its product. The materials, X and Y, have the following standards: Material X Y Yield

Standard Mix 3,500 units 1,500 units 4,000 units

Standard Unit Price £1.00 per unit 3.00 per unit

Standard Cost £3,500 £4,500

During April, the following actual production information was provided: Material X Y Yield

Actual Mix 30,000 units 20,000 units 36,000 units

What is the materials yield variance? a. £4,000 (F) b. £8,000 (F) c. £8,000 (U) d. £9,000 (U)

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Chapter_18_11e 7. Laune Co.'s standard cost is £200,000, and its allowable deviation is £20,000. Laune's upper and lower control limits are a. £220,000 and £200,000. b. £200,000 and £180,000. c. £220,000 and £180,000. d. £210,000 and £190,000. 8. Allende Company has developed capacity standards. Information is as follows for a value-added activity: Activity capacity acquired Activity capacity used Actual activity usage Standard fixed activity rate

60 50 30 £2,000

The unused capacity variance is a. £20,000 favourable. b. £40,000 favourable. c. £60,000 favourable. d. There is no variance. 9. Pippen Company's activity-based performance report revealed that actual inspection costs totalled £100,000 at an actual activity level of 50 inspections. Further analysis of inspection costs revealed the following:

Inspection costs: Fixed Variable

Actual Cost

Budgeted Cost

£30,000 20,000

£28,500 17,500

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Chapter_18_11e 10. Froelech Company has developed capacity standards. Information is as follows: Standard cost of the activity capacity acquired Standard cost of the activity capacity used Standard cost of the actual activity used

£150,000 100,000 120,000

The volume variance is a. £20,000 unfavourable. b. £30,000 unfavourable. c. £50,000 unfavourable. d. There is no variance. 11. Regis Ltd. uses two materials in the production of its product. The materials, X and Y, have the following standards: Material X Y Yield

Standard Mix 3,500 units 1,500 units 4,000 units

Standard Unit Price £1.00 per unit 3.00 per unit

Standard Cost £3,500 £4,500

During April, the following actual production information was provided: Material X Y Yield

Actual Mix 30,000 units 20,000 units 36,000 units

What is the materials usage variance? a. £10,000 (U) b. £ 8,000 (U) c. £ 8,000 (F) d. £18,000 (U)

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Chapter_18_11e 12. Jann Industries' activity-based performance report revealed that actual inspection costs totalled £255,000 at an actual activity level of 150 inspections. Further analysis of inspection costs revealed the following:

Inspection Costs: Fixed Variable

Actual Cost

Budgeted Cost

£175,000 80,000

£175,000 75,000

Fixed inspection costs consist of the salaries of five inspectors, paid £35,000 each. Each inspector is capable of efficiently conducting inspections of 40 batches. Variable inspection costs consist of materials used during the inspections. Required: Calculate the activity volume variance and unused capacity variance for the inspections.

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Chapter_18_11e 13. Dubuque Company uses three materials in the production of their product. The materials, A, B and C, have the following standards: Material A B C

Standard Mix 5,000 units 3,000 units 2,000 units

Standard Unit Price £2.00 per unit 4.00 per unit 3.00 per unit

Yield

Standard Cost £10,000 £12,000 £ 6,000

9,000 units

During April, the following actual production information was provided: Material A B C

Actual Mix 40,000 units 20,000 units 10,000 units

Yield 60,000 units Required: Calculate the materials usage, mix and yield variances.

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Chapter_18_11e 14. Senocot Ltd. uses two different types of labour to manufacture its product. The types of labour, Assembly and Finishing, have the following standards: Labour Type Assembly Finishing

Standard Mix 800 hours 200 hours

Standard Unit Price £12.00 per unit 8.00 per unit

Yield

Standard Cost £9,600 £1,600

5,000 units

During January, the following actual production information was provided: Labour Type Assembly Finishing

Actual Mix 7,000 units 3, 000 units

Yield

45,000 units

Required: Calculate the labour efficiency and mix and yield variances.

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Chapter_18_11e 15. Davis Industries' activity-based performance report revealed that actual inspection costs totalled £225,000 at an actual activity level of 80 inspections. Further analysis of inspection costs revealed the following:

Inspection costs: Fixed Variable

Actual Cost

Budgeted Cost

£90,000 60,000

£84,000 56,000

Fixed inspection costs consist of the salaries of four inspectors, paid £21,000 each. Each inspector is capable of efficiently conducting inspections of 50 batches. Variable inspection costs consist of materials used during the inspections. Required: a.

Calculate the following fixed activity budget variances for inspection: Total fixed activity variance Fixed spending variance Volume variance Unused capacity variance Calculate the following variable activity budget variances for inspection: Spending variance Efficiency variance

16. Pine Industries' activity-based performance report revealed that actual inspection costs totalled £203,500 at an actual activity level of 350 inspections. Further analysis of inspection costs revealed the following: Actual Cost Inspection Costs: Fixed Variable

£130,000 73,500

Budgeted Cost £120,000 70,000

Fixed inspection costs consist of the salaries of five inspectors, paid £24,000 each. Each inspector is capable of efficiently conducting inspections of 80 batches. Variable inspection costs consist of materials used during the inspections. Required: Calculate the activity volume variance and unused capacity variance for the inspections.

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Chapter_18_11e 17. When should a variance be investigated?

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Chapter_18_11e Answer Key 1. a 2. c 3. b 4. b 5. a 6. c 7. c 8. c 9. c 10. c 11. d 12. Activity volume variance = £175,000 unfavourable Unused capacity variance = £43,750 unfavourable SP = £175,000/(40 × 5) = £875 per batch AQ = 50 × 4 = 200 batches Activity volume variance = (SP × AQ) - (SP × SQ) = (£875 × 200) - (£875 × 0) = £175,000 unfavourable Unused capacity variance = (AQ × SP) - (AU × SP) = (200 × £875) - (150 × £875) = £43,750 unfavourable

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Chapter_18_11e 13. Materials mix variance: SM(A) = (5,000/10,000) × (40,000 + 20,000 + 10,000) = 35,000 SM(B) = (3,000/10,000) × (40,000 + 20,000 + 10,000) = 21,000 SM(C) = (2,000/10,000) × (40,000 + 20,000 + 10,000) = 14,000 Material A B C

AQ 40,000 20,000 10,000

SM 35,000 21,000 14,000

AQ - SM (5,000) 1,000 4,000

SP £2.00 4.00 3.00

(AQ - SM)SP £(10,000) 4,000 12,000 £ 6,000 (U)

SP £12.00 8.00

(AQ - SM)SP £(12,000) 8,000 £ 4,000 (F)

Materials yield variance: (63,000 - 60,000) × (£28,000/9,000) = £9,333 (U) Materials usage variance: MUV

= Mix variance + Yield variance = £6,000 (U) + £9,333 (U) = £15,333 (U)

14. Labour mix variance: SM(assembly) = (8,000/10,000) × (7,000 + 3,000) = 8,000 SM(finishing) = (2,000/10,000) × (7,000 + 3,000) = 2,000 Labour Type Assembly Finishing

AQ 7,000 3,000

SM 8,000 2,000

AQ - SM (1,000) 1,000

Labour yield variance: (50,000 - 45,000) × (£11,200/5,000) = £11,200 (U) Labour efficiency variance: LEV

= Mix variance + Yield variance = £4,000 (F) + £11,200 (U) = £7,200 (U)

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Chapter_18_11e 15. a.

Total fixed activity variance = £90,000 unfavourable Fixed spending variance = £6,000 unfavourable Volume variance = £84,000 unfavourable Unused capacity variance = £16,800 favourable Supporting calculations: SP = £84,000/(50 × 4) = £420 per inspection AQ = 50 × 4 = 200 inspections Total fixed budget variance = Actual fixed costs - (SQ × SP) = £90,000 - (0 × £420) = £90,000 U Fixed spending variance = Actual fixed costs - (AQ × SP) = £90,000 - (200 × £420) = £6,000 U Volume variance = (AQ × SP) - (SQ × SP) = (200 × £420) - (0 × £420) = £84,000 U Unused capacity variance = (AQ × SP) - (AU × SP) = (200 × £420) - (160 × £420) = £16,800 F

Variable spending variance = £4,000 unfavourable Variable efficiency variance = £56,000 unfavourable Supporting calculations: SP = £56,000/80 inspections = £700 per inspection AP = £60,000/80 batches = £750 per inspection AQ = Actual activity of 80 batches Variable spending variance = (AQ × AP) - (AQ × SP) = (80 × £750) - (80 × £700) = £4,000 U Variable efficiency variance = (AQ × SP) - (SQ × SP) = (80 × £700) - (0 × £700) = £56,000 U

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Chapter_18_11e 16. Activity volume variance = £120,000 unfavourable Unused capacity variance = £15,000 favourable SP = £120,000/(80 × 5) = £300 per batch AQ = 80 × 5 = 400 batches Activity volume variance = (SP × AQ) - (SP × SQ) = (£300 × 400) - (£300 × 0) = £120,000 unfavourable Unused capacity variance = (AQ × SP) - (AU × SP) = (400 × £300) - (350 × £300) = £15,000 favourable 17. Random variations around the standard are expected. When variances are within this range, they are assumed to be caused by random factors. When a variance falls outside of this range, the deviation is likely to be caused by nonrandom factors, either factors that managers can control or factors they cannot control. However, investigating the cause of variances and taking corrective action have a cost associated with them. As a general principle, an investigation should be undertaken only if the anticipated benefits are greater than the expected costs. Assessing the costs and benefits of a variance investigation is not an easy task, however. Many firms adopt the general guideline of investigating variances only if they fall outside of an acceptable range. They are not investigated unless they are large enough to be of concern. They must be large enough to be caused by something other than random factors and large enough (on average) to justify the costs of investigating and taking corrective action.

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Chapter_19_11e Indicate the answer choice that best completes the statement or answers the question. 1. In order to promote goal congruence, a manager of an investment centre is best evaluated using a. standard variable costing income statements. b. budgets and standard costs. c. return on investment. d. economic value added. 2. The evaluation of investment centres and the evaluation of the managers who run them a. should be the same evaluation. b. should be separate evaluations. c. should be done quarterly. d. None of the above are correct. 3. Correll Company has two divisions, A and B. Information for each division is as follows:

Net earnings for division Asset base for division Target rate of return Margin Weighted average cost of capital

A £40,000 £100,000 15% 10% 12%

B £260,000 £1,200,000 18% 20% 12%

What is the residual income for A? a. £40,000 b. £25,000 c. £15,000 d. £28,000 4. Return on investment (ROI) is calculated as a. Divisional operating income/Divisional investment. b. Divisional investment - Division income. c. Divisional investment/Divisional operating income. d. Divisional income - (Divisional investment × Required rate of return). 5. The Production Department is most likely considered to be a(n) a. profit centre. b. contribution centre. c. investment centre. d. cost centre.

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Chapter_19_11e 6. Economic value added (EVA) is a. before-tax operating income minus the total annual cost of capital. b. after-tax operating income minus the total annual cost of capital. c. after-tax operating income minus the before-tax cost of debt. d. none of these. 7. The following information was extracted from the accounting records of Florissant Valley Motors: Prior Year 6.0 2.5

Margin Turnover

Current Year 5.0 3.2

Florissant Valley's ROI for the current year is a. greater than for the prior year due to the change in turnover. b. greater than for the prior year due to the change in margin. c. less than for the prior year due to the change in turnover. d. less than for the prior year due to the change in margin. 8. Project A B C

Income £40,000 44,000 46,875

Investment £800,000 400,000 625,000

Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent. If you were the division manager and you were evaluated based on ROI, which projects would you accept? a. Projects A, B and C b. Projects A and B c. Projects B and C d. Project B only 9. The EVA of Credit Financial's African Division was (£15,000) last year. If after-tax income is £60,000 and the capital employed totalled £500,000, what is the weighted average cost of capital? a. 15% b. 3% c. 12% d. 9% 10. Investment centre managers would be evaluated based on a. operating income of the profit centre. b. return on investment. c. economic value added. d. all of these. Copyright Cengage Learning. Powered by Cognero.

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Chapter_19_11e 11. A possible disadvantage of a decentralized organization is that a. decisions are made more slowly. b. divisional managers are less motivated. c. divisional managers are not specialized. d. divisional managers will run their divisions to benefit themselves at the expense of suboptimizing the entire organization. 12. Assuming all other things are equal, a company's ROI would decrease when a. operating expenses increase. b. operating income increases. c. average operating assets decrease. d. operating expenses decrease. 13. The manager of an investment centre is responsible for a. decisions regarding costs. b. decisions regarding revenues. c. decisions to invest in assets. d. all of these. 14. Economic value added (EVA) is a. a monetary figure. b. a percentage rate of return. c. negative if the company is creating capital. d. none of these. 15. The Marketing Department is most likely considered to be a(n) a. profit centre. b. revenue centre. c. investment centre. d. cost centre. 16. Return on investment (ROI) is calculated as a. Operating income/Average operating assets. b. (Operating income/Sales) × (Sales/Average operating assets). c. Operating income margin × Operating asset turnover. d. all of these. 17. A disadvantage of ROI is a. it leads to goal incongruence. b. its short-run focus. c. its focus on divisional profit rather than overall profit of the firm. d. all of these.

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Chapter_19_11e 18. Beta Division had the following information: Asset base in Beta Division Net income in Beta Division Weighted average cost of capital Target ROI Margin for Beta Division

£400,000 £50,000 12% 15% 20%

What is the residual income for Beta Division? a. £60,000 b. £48,000 c. £7,500 d. £(10,000) 19. GreenWorld Company wants to increase its ROI from 20 per cent to 25 per cent in the current year. They cannot increase operating income and sales from the previous year's levels of £50,000 and £1,200 000, respectively. To increase ROI, GreenWorld should a. make additional investments of £25,000. b. sell obsolete inventory for £10,000 and use the proceeds to pay off debts. c. sell obsolete inventory for £50,000 and use the proceeds to pay off debts. d. GreenWorld can't increase ROI. 20. The following information pertains to the three divisions of Marlow Company:

Sales Net operating income Average operating assets Return on investment Margin Turnover Target ROI

Division X ? £ 36,000 300,000 ? 0.10 1.5 15%

Division Y ? £25,000 ? 20% 0.05 ? 12%

Division Z 1,250,000 £75,000 ? 15% ? ? 10%

What is the residual income for Division X? a. £36,000 b. £45,000 c. £(9,000) d. £(36,000) 21. If Dixie Company has sales of £1,200,000 and operating assets of £600,000, what operating margin will they have to earn to generate an ROI of 20 per cent? a. 5% b. 7.5% c. 10% d. 20% Copyright Cengage Learning. Powered by Cognero.

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Chapter_19_11e 22. Which of the following departments would NOT be a cost centre? a. Advertising department b. City police department c. Building and grounds department d. Sales department 23. The following results for the year pertain to the Maddox Division of Ryan Ltd.: Sales Variable expenses Fixed expenses

£640,000 160,000 300,000

The weighted average cost of capital is 12 per cent. The firm's minimum required rate of return is 14 per cent. Taxes for the firm are 40 per cent. If average operating assets are £1,000,000, return on investment for the Maddox Division is a. 48%. b. 34%. c. 18%. d. 16%. 24. The following results for the year pertain to the Maddox Division of Ryan Ltd.: Sales Variable expenses Fixed expenses

£640,000 160,000 300,000

The weighted average cost of capital is 12 per cent. The firm's minimum required rate of return is 14 per cent. Taxes for the firm are 40 per cent. If the total capital employed by the Maddox Division is £800,000, what is the economic value added (EVA)? a. £12,000 b. £96,000 c. £108,000 d. £180,000 25. ____ exists when the major functions of organization are controlled by top management. a. Decentralization b. Centralization c. Optimization d. An unfavourable overhead variance

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Chapter_19_11e 26. ____ is the delegation of decision-making authority to successively lower management levels in an organization. a. Decentralization b. Centralization c. Optimization d. An unfavourable overhead variance 27. Return on investment can be broken into two components a. profit margin and asset turnover. b. contribution margin and asset turnover. c. segment margin and asset turnover. d. profit margin and inventory turnover. 28. Profit centre managers would be evaluated based on a. operating income of the profit centre. b. return on investment. c. economic value added. d. all of these. 29. The following information is provided:

Project A B C

Operating Income £44,000 70,000 30,000

Average Operating Investment £400,000 800,000 600,000

Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 8 per cent. If you were the division manager and you were evaluated based on ROI, which projects would you accept? a. Projects A, B and C b. Projects A and C c. Projects A and B d. Project A only

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Chapter_19_11e 30. Beta Division had the following information: Asset base in Beta Division Net income in Beta Division Weighted average cost of capital Target ROI Margin for Beta Division

£400,000 £50,000 12% 15% 20%

What is EVA for Beta Division? a. £60,000 b. £48,000 c. £7,500 d. £2,000 31. Dizzy Company's Asian Division employed capital of £250,000 last year. If the weighted average cost of capital is 15 per cent and if last year's after-tax income was £50,000, then EVA for the Asian Division last year was a. £2,500. b. £37,500. c. £12,500. d. £7,500. 32. Which of the following is a disadvantage of both residual income and ROI? a. They are both absolute measures of return. b. They both are difficult to calculate. c. They both do not discourage myopic behaviour. d. All of the above are disadvantages of both ROI and residual income. 33. The following information is provided: Project A B C

Income £33,000 56,250 27,500

Investment £300,000 750,000 550,000

Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 7 per cent. If you were the president of the company, which projects would you want the division manager to accept? a. Projects A, B and C b. Projects A and C c. Projects A and B d. Project A only

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Chapter_19_11e 34. What is an advantage of using economic value added (EVA) in performance measurement over return on investment (ROI)? a. It is easier to calculate. b. It encourages investments that are profitable to the company. c. It is easier to calculate and it encourages investments that are profitable to the company. d. None of these. 35. Advantages of decentralization include all of the following EXCEPT a. divisional management is able to react to changing market conditions more rapidly than top management. b. divisional management is a source of personnel for promotion to top management positions. c. decentralization can motivate divisional managers. d. decentralization permits divisional management to concentrate on firmwide problems and long-range planning. 36. A negative EVA means a. the company is destroying capital. b. the company is increasing capital. c. ROI is negative. d. the company is destroying capital and ROI is negative. 37. Project A B C

Income £40,000 44,000 46,875

Investment £800,000 400,000 625,000

Assume the division's current ROI is 10 per cent and the firm's minimum required rate of return is 6 per cent. If you were the president of the firm, which projects would you want the division manager to accept? a. Projects A, B and C b. Projects B and C c. Project A only d. Project B only

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Chapter_19_11e 38. The following results for the year pertain to the Northern Division of Garvey Ltd.: Sales Taxes Operating income after taxes

£400,000 60,000 160,000

Northern's total capital employed is £1,200,000, and their weighted average cost of capital is 12 per cent. Economic value added for the Northern Division is a. £240,000. b. £144,000. c. (£104,000). d. £16,000. 39. An example of an investment centre is a a. production department. b. company. c. marketing department. d. credit department. 40. Evaluating performance using ROI encourages managers to focus on a. income and investment. b. cost efficiency and operating asset efficiency. c. income and investment as well as cost efficiency and operating asset efficiency. d. neither income and investment nor cost efficiency and operating asset efficiency. 41. The manager of a cost centre is responsible for a. decisions regarding costs. b. decisions regarding revenues. c. decisions to invest in assets. d. decisions regarding both costs and revenues. 42. The operating margin for the Randall Company last year was 8 per cent. If total sales are £1,250,000 and average operating assets are £400,000, ROI was a. 25%. b. 20%. c. 16%. d. 10%. 43. Decentralization occurs when a. the firm's operations are located over a large geographic area to reduce risk. b. authority for important decisions is delegated to lower segments of the organization. c. important decisions are made at the upper levels and the lower levels of the organization are responsible for implementing the decisions. d. None of these are correct. Copyright Cengage Learning. Powered by Cognero.

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Chapter_19_11e 44. The sales in the Components Division last year totalled £600,000, and its ROI was 15 per cent. If the company's operating margin was 5 per cent, then its average operating assets must have been a. £4,000,000. b. £200,000. c. £60,000. d. It cannot be determined from the information given. 45. Which of the following measures should companies use for performance evaluation? a. ROI b. EVA c. Nonfinancial measures such as market share and customer's complaints d. All of these 46. Types of responsibility centres include all of the following EXCEPT a. profit centres. b. contribution centres. c. investment centres. d. cost centres. 47. The following results for the year pertain to the Northern Division of Garvey Ltd.: Sales Taxes Operating income after taxes

£400,000 60,000 160,000

If Northern's average operating assets are £1,200,000 and their minimum required rate of return is 12 per cent, what is the Northern Division's return on investment? a. 33.3% b. 18.3% c. 13.3% d. 12.0%

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Chapter_19_11e 48. The following results for the current year are for the Grundy Division of Salmon Enterprises: Sales Variable costs Contribution margin Fixed expenses Divisional income

£700,000 260,000 £440,000 300,000 £140,000

Average operating assets are £1,400,000. The firm's minimum required rate of return is 8 per cent. The weighted average cost of capital is 6 per cent. The division's tax rate is 30 per cent. Required: a. b. c. d.

Calculate profit margin for the division. Calculate asset turnover for the division. Calculate return on investment (ROI) for the division. Calculate economic value added (EVA) for the division.

49. Mr Baker, a divisional manager, is compensated as follows: An annual salary of £85,000 A bonus of 1 per cent of divisional income Stock options for 6,000 shares of company stock (the options permit Mr Baker to purchase the stock at £45 per share). Mr Baker's division reported operating income of £5,000,000 this year. On December 1, Mr Baker exercised his stock option when the stock was selling for £57 per share. Required: a. b. c.

Determine the amount of Mr Baker's bonus for the year. Determine the value of the stock option to Mr Baker. Determine the total amount of Mr Baker's compensation for the year.

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Chapter_19_11e 50. The manager of the recently formed Oak Division of Parkes, Incorporated, is evaluating the following four investment opportunities available to the division. Parkes, Incorporated, requires a minimum return of 10 per cent. Investment Opportunity 1 2 3 4

Income £ 91,000 63,000 59,400 117,600

Investment £650,000 700,000 540,000 980,000

Required: a. b. c.

Calculate the return on investment (ROI) for each investment opportunity. If only one investment opportunity can be funded and the division is evaluated based on ROI, which investment opportunity would be accepted? If Parkes, Incorporated, can fund all of the projects and wishes to achieve the best possible performance, which investments would be accepted?

51. Explain why an organization should not use only financial measures to monitor performance.

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Chapter_19_11e 52. The following results for the current year are for the Calvin Division of Stinson Enterprises: Sales Variable costs Contribution margin Fixed expenses Divisional income

£400,000 180,000 £220,000 160,000 £ 60,000

Average operating assets are £500,000. The firm's minimum required rate of return is 10 per cent, the weighted average cost of capital is 8 per cent and the tax rate is 30 per cent. Required: a. b. c. d.

Calculate profit margin for the division. Calculate asset turnover for the division. Calculate return on investment (ROI) for the division. Calculate economic value added (EVA) for the division.

53. O'Neil Company requires a return on capital of 15 per cent. The following information is available for the year:

Sales Income Assets

Division X Book £200,000 24,000 120,000

Division Y Current £200,000 20,000 160,000

Division Z Book Current £400,000 £400,000 32,000 34,000 180,000 200,000

Book £600,000 37,500 450,000

Current £600,000 39,000 435,000

Required: a. b. c. d.

Compute return on investment using both book and current values for each division. (Round answer to three decimal places.) Compute residual income for both book and current values for each division. Does book value or current value provide the better basis for performance evaluation? Which division do you consider the most successful?

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Chapter_19_11e 54. Discuss the differences between centralized and decentralized decision-making. Why would a firm decentralize its operations?

55. TotToys Ltd. recently made £2,000,000 of capital available to its Toddler Division. The manager of the Toddler Division is evaluating the possibility of investing the additional funds in two new toys. Information about the two new toys is as follows:

Projected investment Expected operating income

Toy #1 £900,000 144,000

Toy #2 £750,000 90,000

Any funds not invested in a project will be invested to earn the company's required minimum return of 10 per cent. Without the additional investment, the Toddler Division's average operating assets would have been £10,000,000, and its operating income would have been £1,400,000. Required: a. b. c. d.

Compute the Toddler Division's operating income and ROI, assuming that the division manager rejects both projects. Compute the Toddler Division's operating income and ROI, assuming that the division manager accepts only the Toy #1 project. Compute the Toddler Division's operating income and ROI, assuming that the division manager accepts only the Toy #2 project. Compute the Toddler Division's operating income and ROI, assuming that the division manager accepts both projects.

(Round all computations to the nearest two decimal places.)

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Chapter_19_11e 56. Stevens Company has two divisions that report on a decentralized basis. Their results for the year were as follows:

Sales Income Asset base Weighted average cost of capital

Helmet £150,000 £ 15,000 £ 75,000 12%

Ball £300,000 £ 45,000 £150,000 12%

Required: Compute the following amounts for each division: a. b. c. d. e.

Return on investment (ROI) if the desired rate of return is 12 per cent. Residual income if the desired rate of return is 20 per cent. EVA. Turnover if the desired rate of return is 25 per cent. Margin for each division if the desired rate of return is 10 per cent.

57. Compare and contrast decentralization and centralization.

58. a. Identify advantages of a decentralized approach to management. b. In comparison, identify advantages of a centralized approach to management.

59. Why do firms decentralize?

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Chapter_19_11e 60. Compare and contrast return on investment (ROI) and economic value added (EVA).

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Chapter_19_11e Answer Key 1. d 2. b 3. b 4. a 5. d 6. b 7. a 8. d 9. a 10. d 11. d 12. a 13. d 14. a 15. b 16. d 17. d 18. d 19. c 20. c 21. c 22. d 23. c 24. a 25. b 26. a

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Chapter_19_11e 27. a 28. a 29. d 30. d 31. c 32. c 33. c 34. b 35. d 36. a 37. b 38. d 39. b 40. c 41. a 42. a 43. b 44. b 45. d 46. b 47. b 48. a. b. c. d.

20% £140,000/£700,000 50% £700,000/£1,400,000 10% £140,000/£1,400,000 £14,000 [£140,000 × (1 - 0.3)] - (£1,400,000 × 6%)

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Chapter_19_11e 49. a. b. c.

£50,000 £5,000,000 × 1% £72,000 (£57 - £45) × 6,000 £207,000 £85,000 + £50,000 + £72,000

Project 1: 14% £91,000/£650,000 Project 2: 9% £63,000/£700,000 Project 3: 11% £59,400/£540,000 Project 4: 12% £117,600/£980,000 Project 1, because it has the highest ROI Projects 1, 3 and 4; their ROIs exceed the minimum return of 10 per cent.

50.

b. c.

51. First, no single financial measure captures all performance aspects of an organization. Second, financial measures have reporting time lags that could hinder timely decision-making. Finally, financial measures may not accurately capture the information needed for current decision-making because of the time lag that occurs between making financial investments and receiving their results. 52. a. b. c. d.

15% 80% 12% £2000

£60,000/£400,000 £400,000/£500,000 £60,000/£500,000 [£60,000 × (1 - 0.3)] - (£500,000 × 8%)

53. Division X Book

Division Y Current

Division Z Book Current

Book

Current

ROI

20.000%

12.500%

17.778%

17.000%

8.333%

8.966%

£ 6,000

£(4,000)

£ 5,000

£4,000

£(30,000)

£(26,250)

When available, current values are the better basis for performance evaluation. Unfortunately, they are more costly to acquire than book values.

Division Y is the most successful division. It has a positive residual income using current values.

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Chapter_19_11e 54. Decentralization is the delegation of decision-making authority to lower levels. In centralized decision-making, decisions are made at the very top level and lower-level managers are responsible for implementing these decisions. For decentralized decision-making, decisions are made and implemented by lower-level managers. Reasons for decentralization: access to local information, cognitive limitations, more timely response, focusing of central management, training and evaluation, motivation and enhanced competition. 55. a. £1,600,000 £1,400,000 + (£2,000,000 × 10%) 13.33% £1,600,000/(£10,000,000 + £2,000,000) b. £1,654,000 £1,400,000 + £144,000 + [(£2,000,000 - £900,000) × 10%] 13.78% £1,654,000/(£10,000,000 + £2,000,000) c. £1,615,000 £1,400,000 + £90,000 + [(£2,000,000 - £750,000) × 10%] 13.46% £1,615,000/(£10,000,000 + £2,000,000) d. £1,669,000 £1,400,000 + £144,000 + £90,000 + [(£2,000,000 - £900,000 - £750,000) × 10%] 13.91% £1,669,000/(£10,000,000 + £2,000,000)

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Chapter_19_11e 56. a.

Helmet Division:

ROI = £15,000/£75,000 = 20%

Ball Division:

ROI = £45,000/£150,000 = 30%

Asset base Desired return rate Minimum return

Helmet £75,000 × 0.20 £15,000

Ball £150,000 × 0.20 £ 30,000

Earned income Minimum return Residual income

£15,000 15,000 £ -0-

£ 45,000 30,000 £ 15,000

Helmet Division: EVA = £15,000 - (£75,000 × 0.12) = £6,000 Ball Division: EVA = £45,000 - (£150,000 × 0.12) = £27,000

Helmet Division: Oper. asset turnover = £150,000/£75,000 = 2.0 Ball Division: Oper. asset turnover = £300,000/£150,000 = 2.0

Helmet Division: Oper. income margin = £15,000/£150,000 = 10% Ball Division: Oper. income margin = £45,000/£300,000 = 15%

57. Decentralization is the delegation of decision-making authority to successively lower management levels in an organization. The lower in the organization that authority is delegated, the greater is the decentralization. Centralization exists when top management has a wide span of control, including direct control over all major functions of an organization (such as manufacturing, sales, accounting, computer operations, marketing, research and development and management control). Highly centralized organizations have fewer management levels and are referred to as flat organizational structures.

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Chapter_19_11e 58. a. Decentralization Advantages Firsthand decision-making. Personnel closely associated with problems and situations are allowed to make decisions. Experience in decision-making at the lower management levels results in having managers trained for higher level positions when they become available. Timely decisions. Most decisions are made locally without having to feed information up the chain of command and then wait for a response. Specialization. Corporate management can concentrate on operating decisions. Motivation. Managers who actively participate in decision-making are more committed to the success of programmes and are more willing to accept responsibility for the consequences of their actions than managers who have little participation in the more important decisions of the organization. Focus. Smaller organizational units have fewer objectives, are more flexible to changing conditions and are better able to keep their focus on the tasks at hand than are larger units. Frees up higher level management's time. b. Centralization Advantages Economies of scale. Centralized resources can be more fully utilized than the same resources divided into smaller groupings. Sophistication of applications. By combining the firm's resources, greater efficiency may be achieved and more complex tasks performed. Improved control. Direct lines of authority provide better control of resources. Improved control permits the organization to rapidly shift resources to achieve changing corporate goals. Centralization also permits a greater perspective by top managers because they are in contact with a larger proportion of activities than if they were decentralized. 59. Many companies choose to decentralize to increase overall efficiency. The following are advantages of decentralization: Ease of gathering and using local information Focusing of central management on strategy Training and motivating segment managers Enhanced competition, exposing segments to market forces 60. ROI is the ratio of operating income to average operating assets. This ratio can be broken down into two components: margin (the ratio of operating income to sales) and turnover (the ratio of sales to average operating assets). EVA is the difference between after-tax operating income and the total annual cost of capital employed. Both are used as measures of performance for managers of decentralized units. ROI can lead managers to focus on the short term.

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Chapter_20_11e Indicate the answer choice that best completes the statement or answers the question. 1. Transfer pricing is used when: a. multiple cost centres are conducting business within the company. b. a decentralized company has profit centres or investment centres. c. the return on investment ratio cannot be computed. d. a company is transferring goods to the government. 2. Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit. The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The minimum transfer price that the Jones Division would be willing to accept would be a. £400. b. £200. c. £420. d. £360. 3. Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit. The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500. Assume the Jones Division can sell 4,000 units at £420. Any excess capacity will be unused unless the units are purchased by the Thomas Division, which could use up to 200 units. The maximum transfer price that the Thomas Division would be willing to pay would be a. £400. b. £200. c. £420. d. £360.

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Chapter_20_11e 4. The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows: Direct materials Direct labour Variable overhead Fixed overhead Market price per unit

£600 1,200 300 150 2,730

What is the best transfer price to avoid transfer price problems? a. £2,730 b. £600 c. £1,800 d. £2,100 5. The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows: Direct materials Direct labour Variable overhead Fixed overheada Total cost

£30 8 10 12 £60

aBased on a practical volume of 250,000 components

Other costs incurred by the Adam Division are as follows: Fixed selling and administrative Variable selling

£1,200,000 £4 per unit

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Chapter_20_11e 6. The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows: Direct materials Direct labour Variable overhead Fixed overheada Total cost

£30 8 10 12 £60

aBased on a practical volume of 250,000 components

Other costs incurred by the Adam Division are as follows: Fixed selling and administrative Variable selling

£1,200,000 £4 per unit

The component usually sells for £90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally. The West Division has been buying the same component from an external supplier for £80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for £56 each. The effect on firmwide income if 40,000 components are transferred internally at £56 each instead of purchased from an external supplier at £80 per unit would be a a. £1,920,000 decrease. b. £1,280,000 increase. c. £960,000 decrease. d. £960,000 increase. 7. Which of the following types of transfer prices do NOT encourage the selling division to be efficient? a. Transfer prices based upon market prices b. Transfer prices based upon actual costs c. Transfer prices based upon standard costs d. Transfer prices based upon standard costs plus a mark-up for profit 8. The optimal transfer price from the viewpoint of the company is a. variable cost. b. absorption cost plus mark-up. c. variable cost plus opportunity cost. d. absorption cost plus selling expenses.

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Chapter_20_11e 9. The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows: Direct materials Direct labour Variable overhead

£30 8 10 12 £60

Fixed overheada Total cost aBased on a practical volume of 250,000 components

Other costs incurred by the Adam Division are as follows: Fixed selling and administrative Variable selling

£1,200,000 £4 per unit

The component usually sells for £90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally. The West Division has been buying the same component from an external supplier for £80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for £56 each. The maximum transfer price that the West Division would be willing to pay is a. £90. b. £60. c. £48. d. £38. 10. Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit. The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160. Assume the Fahl Division can sell all that it produces for £100 each. The Melton Division needs 100 units. What is the correct transfer price? a. £120 b. £110 c. £100 d. £60

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Chapter_20_11e 11. A transfer pricing system should satisfy which of the following objectives? a. Accurate performance evaluation b. Goal congruence c. Preservation of divisional autonomy d. All of these 12. Gregg Manufacturing has one plant located in Belgium and another plant located in the US. The Belgium plant manufactures a component used in a finished product manufactured at the US plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 30 per cent; in the US, the corporate income tax rate is 35 per cent. The market price of the component is £280 and the Belgium plant's costs to manufacture the component are as follows: Direct materials Direct labour Variable overhead Fixed overhead

£30 50 12 56

What is the minimum transfer price that the Belgium division would be willing to accept? a. £280 b. £148 c. £136 d. £92 13. If it is available, the correct transfer price is a. the market price from a perfectly competitive market. b. the negotiated transfer price. c. the variable production costs of the firm. d. none of these.

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Chapter_20_11e 14. Gregg Manufacturing has one plant located in Belgium and another plant located in the US. The Belgium plant manufactures a component used in a finished product manufactured at the US plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 30 per cent; in the US, the corporate income tax rate is 35 per cent. The market price of the component is £280 and the Belgium plant's costs to manufacture the component are as follows: Direct materials Direct labour Variable overhead Fixed overhead

£30 50 12 56

What is the maximum transfer price that the US division would be willing to pay? a. £280 b. £148 c. £136 d. £92 15. Pautner Company had the following historical accounting data per unit: Direct materials Direct labour Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

£60 30 15 24 45 9

The units are normally transferred internally from Division A to Division B. The units also may be sold externally for £210 per unit. The minimum profit level accepted by the company is a mark-up of 30 per cent. There were no beginning or ending inventories. What would be the transfer price if Division X uses full cost plus mark-up? a. £167.70 b. £198.90 c. £136.50 d. £129.00

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Chapter_20_11e 16. Miggs Manufacturing has one plant located in Belgium and another plant located in the US. The Belgium plant manufactures a component used in a finished product manufactured at the US plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 42 per cent; in the US, the corporate income tax rate is 35 per cent. The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows: Direct materials Direct labour Variable overhead Fixed overhead

£20 40 10 30

Which transfer price would be in the best interest of the overall company? a. £70 b. £110 c. £120 d. £200

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Chapter_20_11e 17. The Simonds Division produces a component that is used by the Allen Division. The cost of manufacturing the component is as follows: Direct materials Direct labour Variable overhead Fixed overheada Total cost

£10 6 4 5 £25

aBased on a practical volume of 400,000 components

Other costs incurred by the Simonds Division are as follows: Fixed selling and administrative Variable selling

£400,000 £1.50 per unit

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Chapter_20_11e 18. Conner Manufacturing has one plant located in Italy and another plant located in the US. The Italian plant manufactures a component used in a finished product manufactured at the US plant. Currently, the Italian plant is operating at 75 per cent capacity. In Italy, the income tax rate is 32 per cent; in the US, the corporate income tax rate is 35 per cent. The market price of the component is £240 and the Italian plant's costs to manufacture the component are as follows: Direct materials Direct labour Variable overhead Fixed overhead

£60 40 20 30

Which transfer price would be in the best interest of the overall company? a. £120 b. £100 c. £150 d. £240 19. Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit. The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160. Assume the Fahl Division can sell 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The maximum transfer price that the Melton Division would be willing to pay would be a. £120. b. £110. c. £100. d. £60.

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Chapter_20_11e 20. Universe Industries has two divisions: the Haley Division and the Comet Division. Information about a component that the Haley Division produces is as follows: Sales Variable manufacturing costs Fixed manufacturing overhead Expected sales in units

£120 per unit £30 per unit £20 per unit 4,000 units

The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200 units of the component for a product it manufactures. The maximum transfer price that the Comet Division would be willing to pay is a. £120. b. £70. c. £50. d. £30. 21. In most cases, ____ transfer prices achieve the optimal outcome for both the divisions and the company as a whole. a. cost-based b. market-based c. negotiated d. all of these 22. Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information about the component that the Bradley Division produces is as follows: Sales Variable manufacturing costs Fixed manufacturing overhead Expected sales in units

£180 per unit £80 per unit £50 per unit 10,000 units

The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs 800 units of the component for a product it manufactures. The maximum transfer price that the Rommel Division would be willing to pay is a. £50. b. £80. c. £130. d. £180.

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Chapter_20_11e 23. Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information about the component that the Bradley Division produces is as follows: Sales Variable manufacturing costs Fixed manufacturing overhead Expected sales in units

£180 per unit £80 per unit £50 per unit 10,000 units

The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs 800 units of the component for a product it manufactures. If the selling division did NOT have excess capacity, the minimum transfer price the selling division would be willing to accept would be a. £50. b. £80. c. £130. d. £180. 24. Callahan Industries is a decentralized company that evaluates its divisions based on ROI. The Jones Division has the capacity to make 5,000 units of a component. The Jones Division's variable costs are £200 per unit. The Thomas Division can use the component in one of its products. The Thomas Division would incur £100 of variable costs to put the component in its own product that sells for £500. The Jones Division can sell all that it produces for £360 each. The Jones Division needs 200 units. What is the correct transfer price? a. £400 b. £200 c. £420 d. £360 25. When an outside market exists for an intermediate product that is perfectly competitive, the ideal method of transfer pricing is often a. market price. b. the one that creates the highest margin to the selling unit. c. one that is higher than what the outside market is quoting. d. based on management accounting numbers.

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Chapter_20_11e 26. Universe Industries has two divisions: the Haley Division and the Comet Division. Information about a component that the Haley Division produces is as follows: Sales Variable manufacturing costs Fixed manufacturing overhead Expected sales in units

£120 per unit £30 per unit £20 per unit 4,000 units

The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200 units of the component for a product it manufactures. The minimum transfer price that the Haley Division would be willing to accept is a. £120. b. £70. c. £50. d. £30. 27. Negotiated prices transfer prices are a. determined between a division and corporate headquarters. b. negotiated with external customers. c. used when supplying and buying divisions independently agree on a price. d. agreed to by division management and unions.

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Chapter_20_11e 28. The Simonds Division produces a component that is used by the Allen Division. The cost of manufacturing the component is as follows: Direct materials Direct labour Variable overhead

£10 6 4 5 £25

Fixed overheada Total cost aBased on a practical volume of 400,000 components

Other costs incurred by the Simonds Division are as follows: Fixed selling and administrative Variable selling

£400,000 £1.50 per unit

The component usually sells for £35 in the external market. The Simonds Division is capable of producing 500,000 components per year; however, only 400,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally. The Allen Division has been buying the same component from an external supplier for £34 each. The Allen Division expects to use 50,000 units of the component next year. The manager of the Allen Division has offered to buy 50,000 units from the Simonds Division for £22.50 each. The maximum transfer price that the Allen Division would be willing to pay is a. £20.00. b. £25.00. c. £26.50. d. £34.00. 29. Allied Industries has two divisions: the Bradley Division and the Rommel Division. Information about the component that the Bradley Division produces is as follows: Sales Variable manufacturing costs Fixed manufacturing overhead Expected sales in units

£180 per unit £80 per unit £50 per unit 10,000 units

The Bradley Division can produce up to 12,000 components per year. The Rommel Division needs 800 units of the component for a product it manufactures. The minimum transfer price that the Bradley Division would be willing to accept is a. £50. b. £80. c. £130. d. £180.

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Chapter_20_11e 30. The Engine Division provides engines for the Tractor Division of a company. The standard unit costs for Engine Division are as follows: Direct materials Direct labour Variable overhead Fixed overhead Market price per unit

£600 1,200 300 150 2,730

The Engine Division has excess capacity. What is the best transfer price to avoid transfer price problems? a. £1,350 b. £300 c. £900 d. £2,100 31. British International has a division in the US that produces tires for automobiles. These tires are transferred to an automobile division in Germany. The tires can be (and are) sold externally in the US for £60 each. The cost to produce a tire is £40. It costs £3 per tire for shipping and £5 per tire for import duties. When the tires are sold externally, British International spends £2 per tire for commissions and an average of £1 per tire for advertising. An acceptable mark-up is 30 per cent of costs. What is the transfer price if the cost-plus method is used? a. £78.00 b. £60.00 c. £84.50 d. £52.00 32. Universe Industries has two divisions: the Haley Division and the Comet Division. Information about a component that the Haley Division produces is as follows: Sales Variable manufacturing costs Fixed manufacturing overhead Expected sales in units

£120 per unit £30 per unit £20 per unit 4,000 units

The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200 units of the component for a product it manufactures. If the selling division did NOT have excess capacity, the minimum transfer price the selling division would be willing to accept is a. £120. b. £75. c. £50. d. £30.

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Chapter_20_11e 33. When there is an outside market for an intermediate product which is perfectly competitive, the most equitable method of transfer pricing is a. market price. b. production cost pricing. c. variable cost pricing. d. cost plus mark-up pricing. 34. In a negotiated transfer price, a. market prices may not be suitable. b. opportunity costs could be used to set boundaries. c. buyers and sellers influence the transfer price set. d. all of these are true. 35. The opportunity cost approach to setting a transfer price would set the maximum transfer price as a. the opportunity cost of the firm as a whole. b. the opportunity cost of the selling division. c. the opportunity cost of the buying division. d. none of these. 36. Miggs Manufacturing has one plant located in Belgium and another plant located in the US. The Belgium plant manufactures a component used in a finished product manufactured at the US plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 42 per cent; in the US, the corporate income tax rate is 35 per cent. The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows: Direct materials Direct labour Variable overhead Fixed overhead

£20 40 10 30

What is the minimum transfer price that the Belgium division would be willing to accept? a. £70 b. £110 c. £120 d. £200

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Chapter_20_11e 37. The Simonds Division produces a component that is used by the Allen Division. The cost of manufacturing the component is as follows: Direct materials Direct labour Variable overhead

£10 6 4 5 £25

Fixed overheada Total cost aBased on a practical volume of 400,000 components

Other costs incurred by the Simonds Division are as follows: Fixed selling and administrative Variable selling

£400,000 £1.50 per unit

The component usually sells for £35 in the external market. The Simonds Division is capable of producing 500,000 components per year; however, only 400,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally. The Allen Division has been buying the same component from an external supplier for £34 each. The Allen Division expects to use 50,000 units of the component next year. The manager of the Allen Division has offered to buy 50,000 units from the Simonds Division for £22.50 each. The minimum transfer price that the Simonds Division would accept is a. £25. b. £21. c. £20. d. £16. 38. The opportunity cost approach to setting a transfer price would set the minimum transfer price as a. the opportunity cost of the firm as a whole. b. the opportunity cost of the selling division. c. the opportunity cost of the buying division. d. none of these. 39. If the divisions exchanging goods are located in different countries with different tax rate structures, the key determinant of transfer prices could be based largely on a. variable costs. b. negotiations. c. market prices. d. tax minimization strategy.

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Chapter_20_11e 40. A selling division produces components for a buying division that is considering accepting a special order for the products it produces. The selling division has excess capacity. The maximum price the buying division would be willing to accept is a. the selling division's variable costs. b. the buying division's outside purchase price. c. the price that would allow the buying division to cover its incremental cost of the special order. d. the price that would allow the selling division to maintain its current ROI. 41. Pautner Company had the following historical accounting data per unit: Direct materials Direct labour Variable overhead Fixed overhead Variable selling expenses Fixed selling expenses

£60 30 15 24 45 9

The units are normally transferred internally from Division A to Division B. The units also may be sold externally for £210 per unit. The minimum profit level accepted by the company is a mark-up of 30 per cent. There were no beginning or ending inventories. If variable manufacturing costs without a fixed fee are used as the transfer price, Division A's transfer price would be a. £60. b. £90. c. £105. d. £144. 42. Which of the following is a legitimate disadvantage of negotiated transfer pricing? a. Negotiated based transfer pricing fails to provide adequate autonomy to divisional managers. b. Negotiated based transfer prices will always be higher than market price. c. Negotiated based transfer prices usually fail to allow the seller to cover variable costs. d. Negotiated prices may lead to some less than optimal decisions. 43. A selling division produces components for a buying division that is considering accepting a special order for the products it produces. The selling division has excess capacity. The minimum price the selling division would be willing to accept is a. the selling division's variable costs. b. the buying division's outside purchase price. c. the price that would allow the buying division to cover its incremental cost of the special order. d. the price that would allow the selling division to maintain its current ROI.

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Chapter_20_11e 44. ____ is when the transfer price is computed equal to a sales price received by the reseller less an appropriate mark-up. a. Advance pricing agreement b. Comparable uncontrolled price approach c. Cost-plus approach d. Resale price method 45. Miggs Manufacturing has one plant located in Belgium and another plant located in the US. The Belgium plant manufactures a component used in a finished product manufactured at the US plant. Currently, the Belgium plant is operating at 70 per cent capacity. In Belgium, the income tax rate is 42 per cent; in the US, the corporate income tax rate is 35 per cent. The market price of the component is £200 and the Belgium plant's costs to manufacture the component are as follows: Direct materials Direct labour Variable overhead Fixed overhead

£20 40 10 30

What is the maximum transfer price that the US division would be willing to pay? a. £70 b. £110 c. £120 d. £200 46. Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit. The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160. Assume the Fahl Division can sell 800 units at £120 each. Any excess capacity will be unused unless the units are purchased by the Melton Division, which could use up to 100 units. The minimum transfer price that the Fahl Division would be willing to accept would be a. £120. b. £110. c. £100. d. £40.

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Chapter_20_11e 47. The Kelly Division of Zimmer Company sells all of its output to the Finishing Division of the company. The only product of the Kelly Division is chair legs that are used by the Finishing Division. The retail price of the legs is £20 per leg. Each chair completed by the Finishing Division requires four legs. Production quantity and cost data for the year are as follows: Chair legs Direct materials Direct labour Factory overhead (25% is variable) Operating expenses (20% is variable)

£30,000 £135,000 £90,000 £90,000 £150,000

Required: Compute the transfer price for a chair leg using: a. market price. b. variable product costs plus a fixed fee of 20 per cent. c. full cost plus 20 per cent mark-up. d. variable costs. e. full cost plus 10 per cent mark-up.

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Chapter_20_11e 48. The Bat Division of Baseball Company has just revised its actual cost data for a period. Bat Division transfers goods to the Sport Division. Sport Division can buy the same goods in the open market for £122 each. Bat's new cost data are as follows: Direct materials Direct labour Variable overhead Fixed overhead Variable selling expenses Fixed selling and administrative expenses Total costs Desired return Sales price

£ 40 30 10 16 6 12 £114 20 £134

Current production is 200,000 units, and the Bat Division has a capacity of 300,000 units. Required: a. b. c.

What is the lowest price the Bat Division should charge for the internal transfers of its goods? What is the highest price the Sport Division should pay for the units? Give the primary reason why the Bat Division should reduce its price.

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Chapter_20_11e 49. Chantilly Industries has two divisions: the Triangle Division and the Square Division. The Triangle Division produces a component that is used by the Square Division. Information about that component is as follows: Sales Variable manufacturing costs Fixed manufacturing overhead Expected sales in units

£200 per unit £80 per unit £50 per unit 12,000 units

The Triangle Division can produce up to 15,000 components per year. The Square Division needs 1,500 units of the component for a product it manufactures. Required: a. b. c.

Determine the minimum transfer price that the Triangle Division would accept. Determine the maximum transfer price that the Square Division would pay. If the Triangle Division produces and sells 15,000 units in a highly competitive market, what would be the correct transfer price?

50. Brown Industries has two divisions: the Hank Division and the Murray Division. Information about a component that the Hank Division produces is as follows: Sales Variable manufacturing costs Fixed manufacturing overhead Expected sales in units

£150 per unit £60 per unit £40 per unit 20,000 units

The Hank Division can produce up to 22,000 components per year. The Murray Division needs 1,000 units of the component for a product it manufactures. Required: a. b. c.

Determine the minimum transfer price that the selling division would be willing to accept. Determine the maximum transfer price that the buying division would be willing to pay. If the Hank Division did not have excess capacity, what would be the correct transfer price?

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Chapter_20_11e 51. Flugel Enterprises is a decentralized company that evaluates its divisions based on their reported return on investment. One of Flugel's divisions, Pipe division, manufactures pipe fittings that are used by the Equipment division as well as other users outside the organization. Pipe has the capacity to make only 3,000 of these fittings at a variable cost of £12 per fitting. Fixed costs of the Pipe division are £90,000 per period and include costs that are common to other products the Pipe division makes. Fixed costs allocated to the fittings sold to the Equipment division are £24,000 per period. The Equipment division uses the fittings and incurs £100 per unit of additional variable costs to make the equipment that sells on the open market for £150. Equipment expects to sell 1,000 pieces of equipment this period. Fixed costs of this division related to depreciation on past expenditures are estimated at £30,000. Fittings like those transferred from Pipe to Equipment sell on the open market for £25 each. Top management of the organization allows divisions to negotiate transfer prices and has a policy of not inferring with the negotiation process. Required: a. b. c.

What is the absolute minimum price Pipe would accept from Equipment for the fittings if Pipe has excess capacity? State any assumptions necessary to answer the question. What is the maximum price Equipment would pay the Pipe division for the fittings? What is the minimum price Pipe would accept if Pipe is operating at capacity to fill orders for these fittings on the open market?

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Chapter_20_11e 52. Halber Industries is a decentralized company that evaluates its divisions based on ROI. The Brock Division has the capacity to make 2,000 units of a component. The Brock Division's variable costs are £80 per unit. The Cliff Division can use the Brock component in the manufacturing of one of its own products. The Cliff Division would incur £60 of variable costs to convert the component into its own product, which sells for £300. Required: The following requirements are independent of each other: a. b.

Assume the Brock Division can sell all of the components that it produces for £180 each. The Cliff Division needs 100 units. What is the correct transfer price? Assume the Brock Division can sell 1,800 units at £260. Any excess capacity will be unused unless the units are purchased by the Cliff Division, which could use up to 100 units. Determine the minimum transfer price that the Brock Division would be willing to accept. Determine the maximum transfer price that the Cliff Division would be willing to pay.

53. Bernie Manufacturing Company has two divisions, X and Y. Division X prepares the steel for processing. Division Y processes the steel into the final product. No inventories exist in either division at the beginning or end of the year. During the year, Division X prepared 80,000kg of steel at a cost of £800,000. All the steel was transferred to Division Y where additional operating costs of £5 per kg were incurred. The final product was sold for £3,000,000. Required: a. b.

Determine the gross profit for each division and for the company as a whole if the transfer price is £8 per kg. Determine the gross profit for each division and for the company as a whole if the transfer price is £12 per kg.

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Chapter_20_11e 54. What is the role of transfer pricing in a decentralized firm?

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Chapter_20_11e Answer Key 1. b 2. b 3. a 4. a 5. c 6. b 7. b 8. c 9. a 10. c 11. d 12. d 13. a 14. a 15. a 16. a 17. a 18. d 19. b 20. a 21. b 22. d 23. d 24. d 25. a 26. d

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Chapter_20_11e 27. c 28. d 29. b 30. d 31. d 32. a 33. a 34. d 35. c 36. a 37. c 38. b 39. d 40. b 41. c 42. d 43. a 44. d 45. d 46. d 47. a.

£20

1.20 × [£135,000 + £90,000 + (0.25 × £90,000)]/30,000 = £9.90

1.20 × (£135,000 + £90,000 + £90,000)/30,000 = £12.60

[£135,000 + £960,000 + (0.25 × £90,000) + (0.20 × £150,000)]/30,000 = £9.25

[1.10 × (£135,000 + £90,000 + £90,000 + £150,000)]/30,000 = £17.05

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Chapter_20_11e 48. a.

Lowest price would be total variable costs per unit; (£40 + £30 + £10 + £6) = £86.

Highest price would be the open market price: £122.

It should reduce its price because it is not operating at capacity and the fixed costs could be reduced per unit if more units were produced and sold. Also, there would probably be few, if any, variable selling expenses. The current contribution margin is £36 per unit (£122 - £86), which amounts to a 29.5 per cent contribution margin ratio on the £122 open market price.

a. b. c.

£80 The variable manufacturing cost £200 The market price £200 The market price

a. b. c.

£60 £150 £150

The minimum price Pipe could accept at this time is £12 per fitting to cover the variable costs incurred in making the fittings. This assumes there is no opportunity cost or usage for the excess capacity and that all fixed costs (included those allocated to this product) are sunk.

The maximum price that Equipment would pay for the fittings is the market price of £25 each. At this price, Equipment has the opportunity to earn £150 on 1,000 units sold and incurs a cost of £100 plus the £25 transfer price paid for the fittings. Equipment is realizing a positive contribution margin. Note that Equipment's fixed costs are irrelevant to the decision as they are sunk. Therefore, it is advantageous to them to pay £25 for the fittings even if they fail to cover all fixed costs of this period.

Pipe would accept no less than £25 if operating at capacity because for every unit sold internally to Equipment, it foregoes the opportunity to sell the fitting for £25 on the open market.

49.

50. The variable manufacturing cost per unit The market price The market price

51.

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Chapter_20_11e 52. a. b.

£180 The market price Minimum: £80 Variable manufacturing cost Maximum: £240 The transfer price that results in a zero contribution margin on the goods for the buying division (£300 - £60)

53. a. Sales Cost of goods sold Gross profit

Division X £ 640,000 800,000 £(160,000)

Division Y £3,000,000 1,040,000* £1,960,000

Total £3,640,000 1,840,000 £1,800,000

Division X £960,000 800,000 £160,000

Division Y £3,000,000 1,360,000* £1,640,000

Total £3,960,000 2,160,000 £1,800,000

*£640,000 + £5(80,000) b. Sales Cost of goods sold Gross profit *£960,000 + £5(80,000)

54. A transfer price is an internal price that one division of a firm charges another division of the same firm. The transfer price is revenue to the selling division and cost to the buying division. The transfer pricing problem involves finding a mutually satisfactory transfer price that is compatible with the company's goals of accurate performance evaluation, divisional autonomy and goal congruence.

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Chapter_21_11e Indicate the answer choice that best completes the statement or answers the question. 1. ____ are outcome measures that relate to customers. a. Objective measures b. External measures c. Financial measures d. Lag measures 2. Roberts, SA., manufactures a product that experiences the following activities: Processing (three departments) Moving (four moves) Waiting time Storage time (before delivery) The MCE for the product is a. 0.48. b. 0.45. c. 0.42. d. 0.30.

18 hours 2 hours 14 hours 26 hours

3. Which of the following is not a step in developing the balanced scorecard? a. Setting balanced objectives b. Outlining control procedures c. Setting target values d. Rewards 4. A competitive advantage has been established when a. customers see the variation as important and the value added to the customer exceeds the cost of providing differentiation. b. a high-cost strategy increases customer value by minimizing customer sacrifices. c. a low-profit item is dropped from the product line. d. customers see the variation as important and the value added to the customer exceeds the cost of providing differentiation and when a high-cost strategy increases customer value by minimizing customer sacrifices. 5. When a computer company targets customers in the South, it is following a a. focusing strategy. b. low-cost strategy. c. differentiation strategy. d. strategic positioning strategy.

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Chapter_21_11e 6. ____ are outcome measures that are a result of past efforts. a. Objective measures b. External measures c. Financial measures d. Lag measures 7. ____ are outcome measures that are expressed in monetary terms. a. Objective measures b. External measures c. Financial measures d. Lag measures 8. Which of the following would be a lag measure? a. Budget forecasts b. Sales per employee c. Plant investment d. Employee training hours 9. ____ involves choosing among alternative strategies with the goal of selecting a strategy, or strategies, that provides a company with reasonable assurance of long-term growth and survival. a. Strategic decision-making b. Strategic cost management c. Competitive advantage d. Customer value 10. ____ are outcome measures that can be readily quantified and verified. a. Objective measures b. External measures c. Financial measures d. Lag measures 11. From the customer perspective, which of the following might be considered a core objective rather than a performance value? a. decrease price b. Increase customer retention c. Improve image d. Improve product quality 12. When a computer company maintains the internal storage space for a lower price, it is following a a. focusing strategy. b. low-cost strategy. c. differentiation strategy. d. strategic positioning strategy. Copyright Cengage Learning. Powered by Cognero.

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Chapter_21_11e 13. When a computer company selects a mix of strategies in order to create sustainable competitive advantage, it is following a a. focusing strategy. b. low-cost strategy. c. differentiation strategy. d. strategic positioning strategy. 14. Hampton, SA., manufactures a product that experiences the following activities: Processing (three departments) Moving (four moves) Waiting time Storage (before delivery) The manufacturing cycle efficiency (MCE) for the product is a. 0.33. b. 0.27. c. 0.25. d. 0.18.

40 hours 10 hours 30 hours 80 hours

15. An example of a lag measure is a. hours of employee training. b. customer profitability. c. employee capabilities. d. none of these. 16. Which of the following statements about a balanced scorecard is true? a. The balanced scorecard gives managers a perspective of the organization's performance using a recurring set of criteria. b. The advantage of a balanced scorecard approach is that it can best be used as a single, comprehensive measure of corporate performance. c. The advantage of a balanced scorecard approach is that it eliminates the need for management accounting data. d. The advantage of a balanced scorecard approach is that it leads management to focus exclusively on critical downstream issues such as consumer demand, and away from lesser upstream issues such as design and production. 17. ____ is the use of cost data to develop and identify superior strategies that will produce a sustainable competitive advantage. a. Strategic decision-making b. Strategic cost management c. Competitive advantage d. Customer value

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Chapter_21_11e 18. For a firm to have balanced measures, the measures selected must be balanced between a. lag and lead measures. b. objective and subjective measures. c. financial and nonfinancial measures. d. all of these. 19. ____ is creating better customer value for the same or lower cost than competitors or creating equivalent value for lower cost than offered by competitors. a. Strategic decision-making b. Strategic cost management c. Competitive advantage d. Total product 20. In the customer perspective, objectives and measures that drive the creation of customer value are a. customer survey ratings. b. postpurchase cost. c. on-time deliveries. d. all of these. 21. Hugh, SA., recently evaluated its manufacturing process and determined the following about its main product: Processing time Move time Inspection time Wait time

6 minutes 2 minutes 1 minute 3 minutes

The manufacturing cycle efficiency (MCE) for the product is a. 1.00. b. 0.75. c. 0.67. d. 0.50. 22. Which of the following would be a lead measure? a. Customer profitability b. Cost per employee c. Return on investment d. Employee training hours 23. Objectives for increasing revenue growth include a. adopting a new pricing strategy. b. reducing the cost per unit. c. eliminating non-value-added activities. d. reducing distribution channel cost.

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Chapter_21_11e 24. ____ provide some idea of what to expect currently or in the near future. a. Trailing measures b. Leading measures c. Financial measures d. All of these 25. Richards, SA., manufactures a product that experiences the following activities: Processing (three departments) Moving (four moves) Waiting time Storage (before delivery) The manufacturing cycle efficiency (MCE) for the product is a. 0.48. b. 0.45. c. 0.42. d. 0.30.

9 hours 1 hours 7 hours 13 hours

26. The five key core objectives of the customer perspective of the balanced scorecard do NOT include which of the following? a. Increase market share b. Increase customer satisfaction c. Increase customer retention d. Increase customer contact 27. When a computer company increases the internal storage space for the same price, it is following a a. focusing strategy. b. low-cost strategy. c. differentiation strategy. d. strategic positioning strategy. 28. Why does the balanced scorecard differ from company to company? Whose responsibility is the implementation?

29. How does the balanced scorecard communicate strategy to the organization? How is strategy translated into performance measures?

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Chapter_21_11e 30. Strategic-based performance measures are balanced measures. Give examples of four types of balanced measures.

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Chapter_21_11e 31. Clotheshound is a local clothing store in New England. Clotheshound has been experiencing increased competition from the national clothing chains. In an effort to improve performance, management intends to create a Balanced Scorecard. In a meeting, several measures were suggested by various managers. Management has identified a key problem. Customers are taking too long to pay their department store's charge card bills, and the company has an abnormal amount of bad debts. If this problem were solved, the company would have far more cash to invest in store improvements. Investigation has revealed that much of the problem with late payments and unpaid bills is apparently due to disputes about incorrect charges on the customer bills. Incorrect charges usually occur because sales clerks enter data incorrectly on the charge account slip. The performance measures suggested by the managers are given below: ∙ Total sales revenue ∙ Sales per square foot of floor space ∙ Sales to inventory ratio ∙ Sales per employee ∙ Sales to total assets ∙ Customer satisfaction with accuracy of charge account bills from monthly customer survey ∙ Customer wait time for service ∙ Travel expenses for buyers' trips ∙ Average age of accounts receivable ∙ Courtesy shown by junior staff members based on surveys of senior staff ∙ Unsold inventory at the end of the season as a percentage of total cost of sales ∙ Percentage of suppliers making just-in-time deliveries ∙ Quality of food in the staff cafeteria based on staff surveys ∙ Written-off accounts receivable as a percentage of sales ∙ Percentage of charge account bills containing errors ∙ Percentage of employees who have attended the city's cultural diversity workshop ∙ Total profit ∙ Profit per employee ∙ Percentage of salesclerks trained to correctly enter data on charge account slips Required: a.

Build an integrated balanced scorecard using only performance measures suggested by the managers. You do not have to use all the measures, but build a balanced scorecard that reveals a strategy for dealing with the problems with accounts receivable and unsold merchandise. Construct a testable strategy by showing the causal links (with arrows) between measures in the different perspectives, and show whether the performance measure should show an increase or decrease. Assume that the company adopts the balanced scorecard. After operating for a year, there are improvements in some performance measures but not in others. What should management do next?

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Chapter_21_11e

32. Describe the basic features of the balanced scorecard.

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Chapter_21_11e Answer Key 1. b 2. d 3. b 4. d 5. a 6. d 7. c 8. b 9. a 10. a 11. b 12. b 13. d 14. c 15. b 16. a 17. b 18. d 19. c 20. d 21. d 22. d 23. a 24. b 25. d 26. d

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Chapter_21_11e 27. c 28. A company's balanced scorecard should be derived from and support its strategy. Since different companies have different strategies, their balanced scorecards should be different. Successful implementation requires the commitment of the entire organization. 29. Balanced scorecard operationalizes strategy by setting operational objectives and performance measures for these objectives. The scorecard defines management's desired relationships among the financial, customer, process and learning and growth perspectives. The scorecard establishes causal links between the perspectives by establishing objectives, measures, targets and initiatives for each perspective. Each strategy is testable. 30. There are lead and lag measures. Lead measures drive future performance (research) and lag measures are results of past efforts (profitability). There are objective and subjective measures. Objective measures can be quantified and verified (market share), and subjective measures are less quantifiable and judgmental (capabilities). There are financial and nonfinancial measures. Financial measures are expressed in monetary terms (profit), and non-financial measures use non-monetary measures (number of returns). There are internal measures and external measures. Internal measures relate to processes and capabilities (efficiency), and external measures relate to customers and shareholders (satisfaction). Using many different types of measures allows a close link to strategy.

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Chapter_21_11e 31. a.

Financial: Total profit Average age of accounts receivable Customer: Customer satisfaction with accuracy of charge account bills Internal Processes: Percentage of charge account bills containing errors Learning and Growth: Percentage of sales clerks trained to correctly enter data on charge

The results can be explored for information about the company's strategic assumptions. Each link in the balanced scorecard is considered a causal link. Mixed results would present evidence that might challenge the causal assumptions. Management should try to figure out where the links break down. The answer may suggest a shift in strategy. Breakdowns in the causal links underlying the company's strategy and provides invaluable feedback that can lead to modification of the strategy.

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Chapter_21_11e 32. The balanced scorecard is a strategic management system that translates the vision and strategy of an organization into operational objectives and measures. Objectives and measures are developed for each of the four perspectives: the financial perspective, the customer perspective, the process perspective and the learning and growth perspective. The objectives and measures of the four perspectives are linked by a series of cause-and-effect hypotheses. This produces a testable strategy that provides strategic feedback to managers. The balanced scorecard is compatible with activity-based responsibility accounting because it focuses on processes and requires the use of activity-based information to implement many of its objectives and measures.

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Chapter_22_11e Indicate the answer choice that best completes the statement or answers the question. 1. Which of the following is NOT a necessary condition for classification as a value-added activity? a. The activity produces no change of state b. The change of state was not achievable by preceding activities c. Activity enables other activities to be performed d. All of these are necessary conditions. 2. The kanban system controls inventory through the use of a. electronic data interchange. b. markers or cards. c. rigid control of safety stock. d. reengineering the production process. 3. Inspection labour costs are a. prevention costs. b. appraisal costs. c. internal failure costs. d. external failure costs. 4. Product recalls are a. external failure costs. b. internal failure costs. c. appraisal costs. d. prevention costs. 5. ____ focuses on non-value-added activities. a. Activity sharing b. Activity elimination c. Activity selection d. Activity reduction 6. A company keeps 20 days of materials inventory on hand to avoid shutdowns due to materials shortages. Carrying costs average £4,000 per day. A competitor keeps 10 days of inventory on hand, and the competitor's carrying costs average £2,000 per day. The value-added costs would be a. £100,000. b. £10,000. c. £5,000. d. £-0-.

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Chapter_22_11e 7. Which of the following is a reason for managerial activity to be considered a value-added activity? a. It is an enabling resource for operational activities that bring about a change of state. b. Managing activities brings order by changing the state from uncoordinated activities to coordinated activities. c. Both are reasons for classifying managerial activities as value-added activity. d. Neither is a reason for classifying managerial activities as value-added activity. 8. Which of the following process dimensions of the activity-based management model deals with "what"? a. Resources b. Cost driver analysis c. Activities d. Performance measures 9. Cell workers have responsibility over a. multiple tasks within the cell. b. providing input for continuous improvement. c. support activities within the cell. d. all of these. 10. In the zero-defects view of quality, a. control costs do not increase without limit. b. control costs initially increase and then decrease as the firm approaches the robust start. c. failure costs can be driven to zero. d. all of these are true. 11. The costs of a consumer complaint department are a. prevention costs. b. appraisal costs. c. internal failure costs. d. external failure costs. 12. ____ describe the relationships of a firm's value chain activities that are performed with its suppliers and customers. a. External linkages b. Internal linkages c. Industrial value chain d. External and internal linkages 13. An activity analysis is used to determine a. the activities an organization performs. b. how many people perform activities. c. the time and resources required to perform activities. d. all of these. Copyright Cengage Learning. Powered by Cognero.

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Chapter_22_11e 14. Benchmarking a. is an approach to standard setting that is used to identify opportunities for activity improvement. b. uses best practices as the standard for evaluating activity performance. c. is an approach to standard setting that is used to identify opportunities for activity improvement and uses best practices as the standard for evaluating activity performance. d. None of these are correct. 15. Product life cycle costs do NOT include which of the following? a. Development costs b. Production costs c. Costs of logistics support d. All of these are life cycle costs. 16. Which of the following process dimensions of the activity-based management model deals with "why"? a. Resources b. Cost driver analysis c. Activities d. Performance measures 17. Quality training programs are a. prevention costs. b. appraisal costs. c. internal failure costs. d. external failure costs. 18. How can JIT avoid shutdowns? a. Increase in defective inventory b. Increase in the number of workers c. Preventive maintenance d. Short-term contracts with suppliers 19. Warranty work is a(n) a. prevention cost. b. appraisal cost. c. internal failure cost. d. external failure cost. 20. Which of the following is not an objective of activity-based management? a. To improve decision-making through better cost information b. To increase the activity it takes to perform processes c. To encourage cost reduction through continuous improvement d. To increase profitability

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Chapter_22_11e 21. Downtime attributed to quality problems is a(n) a. external failure cost. b. internal failure cost. c. appraisal cost. d. prevention cost. 22. Under JIT, the number and magnitude of direct fixed costs a. decreases. b. increases. c. stays the same. d. are eliminated. 23. ____ calls for establishing cost reduction targets for products or services that an organization is currently providing to customers. a. Target costing b. Kaizen costing c. Process reengineering d. Activity-based costing 24. Which of the following is TRUE about a manufacturing cell? a. There is increased movement of work in process. b. It usually produces a particular product or product family. c. Workers are highly specialized. d. Supervision is important. 25. At the beginning of this year, Sammie Company installed a JIT purchasing and manufacturing system. The following information has been gathered about one of the company's products:

Theoretical annual capacity Actual production Production hours available Scrap (kg) Materials used (kg) Actual cost per unit Days of inventory Number of defective units

Current Year 2,000 1,800 1,000 200 6,400 14 3 30

Sammie's actual cycle time for this year would be a. 1.8 hours per unit. b. 0.90 hours per unit. c. 0.56 hours per unit. d. 0.50 hours per unit.

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Chapter_22_11e 26. With JIT manufacturing, the major variable cost remaining is a. direct materials. b. overhead. c. inventory. d. direct labour. 27. ____ are those activities necessary to remain in business. a. Activity inputs b. Activity outputs c. Activity drivers d. Value-added activities 28. Over the LONG-TERM, prevention costs are expected to a. decrease as failure costs decrease. b. increase as failure costs increase. c. increase as failure costs decrease. d. decrease as failure costs increase. 29. ____ is the process of identifying, describing, and evaluating the activities an organization performs. a. Activity inputs b. Activity analysis c. Cost driver analysis d. Value-added activities 30. Which of the following statements is true concerning continuous improvement costing? a. It is also referred to as kanban costing. b. It is a prerequisite for target pricing. c. It calls for the establishment of cost reduction targets for products or services. d. All of these statements are true. 31. Costs incurred to determine whether products and services are conforming to requirements are called a. external failure costs. b. internal failure costs. c. appraisal costs. d. prevention costs.

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Chapter_22_11e 32. Rollo Company has developed cost formulas for the drivers of the following production activities: Driver Activity Labour hours Materials Labour hours Labour Machine hours Maintenance Machine hours Machining Number of setups Inspections Number of setups Setups Number of purchase orders Purchasing The budgeted inspection cost for 20 setups is a. £175,860. b. £40,000. c. £34,000. d. £30,000.

Fixed -0-010,000 50,000 30,000 -075,000

Variable 20 10 8 2 200 300 3

33. In comparison to a traditional environment, a JIT environment has more overhead assigned by a. direct tracing. b. driver tracing. c. allocation. d. Overhead assignment is the same between traditional and JIT. 34. A firm's warranty costs are £125,000 per year. A competitor's warranty costs are £25,000 per year. The value-added costs are a. £125,000. b. £100,000. c. £25,000. d. £-0-. 35. The strategic objectives of JIT are a. to increase profits. b. to improve a firm's competitive position. c. both to increase profits and to improve a firm's competitive position. d. none of these.

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Chapter_22_11e 36. A company keeps 20 days of materials inventory on hand to avoid shutdowns due to materials shortages. Carrying costs average £4,000 per day. A competitor keeps 10 days of inventory on hand, and the competitor's carrying costs average £2,000 per day. The non-value-added costs for the company are a. £80,000. b. £40,000. c. £20,000. d. £-0-. 37. At the beginning of the year, Grant Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

Sales Quality training Material inspections Scrap Rework Product inspection Product warranty

Preceding Year £3,000,000 3,000 7,500 60,000 120,000 15,000 105,000

Current Year £3,000,000 4,500 12,000 45,000 75,000 30,000 82,500

For the current year, appraisal costs are what percentage of sales? a. 1.40% b. 1.00% c. 0.14% d. 0.40% 38. As preventive and appraisal costs increase, internal and external failure costs are expected to a. decrease. b. increase. c. remain the same. d. vary with no relation to preventive and appraisal costs. 39. Labour and overhead incurred for rework of defective products is a(n) a. prevention cost. b. appraisal cost. c. internal failure cost. d. external failure cost.

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Chapter_22_11e 40. JIT reduces lead times to meet delivery dates by a. reducing setup times. b. expediting delivery to customers. c. having more inventory available. d. working overtime to fill orders. 41. At the beginning of the year, Andrew Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

Sales Quality training Material inspections Scrap Rework Product inspection Product warranty

Preceding Year £2,400,000 30,000 7,000 48,000 60,000 10,000 36,000

Current Year £2,400,000 48,000 8,000 30,000 48,000 12,000 24,000

For the current year, external failure costs are what percentage of sales? a. 1.5350% b. 1.1875% c. 1.0000% d. 0.8350%

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Chapter_22_11e 42. Brad Company developed the following budgeted life cycle income statement for two proposed products. Each product's life cycle is expected to be two years.

Sales Cost of goods sold Gross profit Period expenses: Research and development Marketing Life cycle income

Product A £200,000 120,000 £80,000

Product B £200,000 130,000 £70,000

Total £400,000 250,000 £150,000 (70,000) (50,000) £30,000

A 10 per cent return on sales is required for new products. Because the proposed products did not have a 10 per cent return on sales, the products were going to be dropped. Relative to Product B, Product A requires more research and development costs but fewer resources to market the product. Sixty per cent of the research and development costs are traceable to Product A, and 30 per cent of the marketing costs are traceable to Product A. If research and development costs and marketing costs are traced to each product, life cycle income for Product B would be a. £35,000. b. £20,000. c. £12,000. d. £7,000. 43. The industrial value-chain analysis a. recognizes only complex linkages within the firm. b. is not compatible with differentiation strategies. c. determines a linked set of value-creating activities. d. requires a firm to operate across the entire value chain. 44. Which of the following process dimensions of the activity-based management model deals with "how well"? a. Resources b. Cost driver analysis c. Activities d. Performance measures 45. ____ are relationships among activities that are performed with a firm's portion of the value chain. a. External linkages b. Internal linkages c. Industrial value chain d. External and internal linkages

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Chapter_22_11e 46. The just-in-time (JIT) approach to inventory management a. allows greater flexibility as to when products can be manufactured. b. results in higher inventory levels but reduces ordering and setup costs. c. results in lower inventory carrying costs. d. None of these are correct. 47. Which of the following is NOT an expected outcome of activity analysis? a. What activities are performed? b. How many people perform the activities? c. The time and resources required to perform the activities. d. All of these are expected outcomes. 48. The word "kaizen" is Japanese for a. materials pull. b. materials push. c. continuous improvement. d. little car. 49. In a continuous improvement environment, waste includes a. inventories. b. rework. c. setup time. d. all of these. 50. Inspecting the components and the finished product is a. necessary to assure TQM. b. a non-value-added activity. c. a value-added activity. d. none of these. 51. Which of the following stages comes first? a. Introduction b. Growth c. Development d. Decline

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Chapter_22_11e 52. A company keeps 20 days of materials inventory on hand to avoid shutdowns due to materials shortages. Carrying costs average £4,000 per day. A competitor keeps 10 days of inventory on hand, and the competitor's carrying costs average £2,000 per day. The value-added costs are a. £80,000. b. £40,000. c. £20,000. d. £-0-. 53. Costs incurred because products or services fail to meet requirements after delivery to customers are called a. external failure costs. b. internal failure costs. c. appraisal costs. d. prevention costs. 54. At the beginning of this year, Sammie Company installed a JIT purchasing and manufacturing system. The following information has been gathered about one of the company's products:

Theoretical annual capacity Actual production Production hours available Scrap (kg) Materials used (kg) Actual cost per unit Days of inventory Number of defective units

Current Year 2,000 1,800 1,000 200 6,400 14 3 30

Sammie's defective units as a percentage of total units produced would be a. 3.16%. b. 3.00%. c. 1.67%. d. 1.50%. 55. The demand-pull system requires goods to be manufactured based on the a. current demand. b. anticipated demand. c. previous year's demand. d. average of the next five years' demand.

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Chapter_22_11e 56. A target cost is a. the standard cost. b. the difference between the sales price needed to capture a predetermined market share and the desired per-unit profit. c. the long-run average cost over the life cycle of the product. d. none of these. 57. Which of the following describes a kaizen cost reduction process? a. It has two process cycles, namely, continuous improvement and maintenance. b. It includes a kaizen standard, which is an ideal standard. c. A maximum standard is set for future performance based on the current kaizen standard attained. d. It has two process cycles, namely, continuous improvement and maintenance and it includes a kaizen standard, which is an ideal standard. 58. At the beginning of the year, Grant Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

Sales Quality training Material inspections Scrap Rework Product inspection Product warranty

Preceding Year £3,000,000 3,000 7,500 60,000 120,000 15,000 105,000

Current Year £3,000,000 4,500 12,000 45,000 75,000 30,000 82,500

As a result of quality improvements, profits have increased by a. £97,500. b. £61,500. c. £22,500. d. £15,000. 59. A time-and-motion study revealed that it should take 2 hours to produce a product that currently takes 6 hours to produce. Labour is £8 per hour. The non-value-added costs are a. £16. b. £32. c. £48. d. £-0-.

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Chapter_22_11e 60. Brad Company developed the following budgeted life cycle income statement for two proposed products. Each product's life cycle is expected to be two years.

Sales Cost of goods sold Gross profit Period expenses: Research and development Marketing Life cycle income

Product A £200,000 120,000 £80,000

Product B £200,000 130,000 £70,000

Total £400,000 250,000 £150,000 (70,000) (50,000) £30,000

A 10 per cent return on sales is required for new products. Because the proposed products did not have a 10 per cent return on sales, the products were going to be dropped. Relative to Product B, Product A requires more research and development costs but fewer resources to market the product. Sixty per cent of the research and development costs are traceable to Product A, and 30 per cent of the marketing costs are traceable to Product A. If research and development costs and marketing costs are traced to each product, life cycle income for Product A would be a. £38,000. b. £27,000. c. £23,000. d. £15,000. 61. The majority of the product cost is "locked in" during which of the following life cycle stages? a. Introduction b. Growth c. Development d. Decline 62. Which of the following is an example of a value-added activity? a. Supervision of production workers b. Inspection of products c. Scheduling of production d. All of these are value-added activities.

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Chapter_22_11e 63. At the beginning of the year, Andrew Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

Sales Quality training Material inspections Scrap Rework Product inspection Product warranty

Preceding Year £2,400,000 30,000 7,000 48,000 60,000 10,000 36,000

Current Year £2,400,000 48,000 8,000 30,000 48,000 12,000 24,000

If quality costs had been reduced to 2.5 per cent of sales in the current year, profits would have increased by a. £110,000. b. £108,400. c. £103,200. d. £100,200. 64. Activity-based management attempts to a. identify and eliminate all unnecessary activities. b. increase the efficiency of necessary activities. c. add new activities that increase value. d. do all of these. 65. At the beginning of the year, Andrew Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

Sales Quality training Material inspections Scrap Rework Product inspection Product warranty

Preceding Year £2,400,000 30,000 7,000 48,000 60,000 10,000 36,000

Current Year £2,400,000 48,000 8,000 30,000 48,000 12,000 24,000

For the current year, prevention costs are what percentage of sales? a. 9.00% b. 8.25% c. 7.00% d. 2.00%

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Chapter_22_11e 66. JIT avoids shutdowns due to materials shortages in all of the following ways EXCEPT a. using total preventive maintenance. b. holding inventory. c. using total quality control to reduce defective materials. d. working with suppliers to ensure the availability of materials. 67. At the beginning of the year, Grant Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

Sales Quality training Material inspections Scrap Rework Product inspection Product warranty

Preceding Year £3,000,000 3,000 7,500 60,000 120,000 15,000 105,000

Current Year £3,000,000 4,500 12,000 45,000 75,000 30,000 82,500

For the current year, prevention costs are what percentage of sales? a. 1.50% b. 0.65% c. 0.15% d. 0.05% 68. ____ is an effort to reduce costs of existing products and processes. a. Kaizen costing b. Activity elimination c. Activity selection d. Activity reduction 69. A technique for improving performance of activities and processes that searches for best practices is called a. value-added reporting. b. kaizen costing. c. trend reporting. d. benchmarking.

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Chapter_22_11e 70. At the beginning of this year, Sammie Company installed a JIT purchasing and manufacturing system. The following information has been gathered about one of the company's products:

Theoretical annual capacity Actual production Production hours available Scrap (kg) Materials used (kg) Actual cost per unit Days of inventory Number of defective units

Current Year 2,000 1,800 1,000 200 6,400 14 3 30

Sammie's goal for defective units as a percentage of total units produced would be a. 3.0%. b. 2.5%. c. 1.5%. d. 0%. 71. Lower sales due to poor product performance is an example of a. external failure costs. b. an internal failure cost. c. an appraisal cost. d. a prevention cost. 72. Reengineering is another name for a. product innovation. b. process innovation. c. process improvement. d. product improvement. 73. A withdrawal kanban specifies a. how much should be produced to replace inventory. b. the quantity that a subsequent process should withdraw from the preceding process. c. when customers should be notified to pick up orders. d. when suppliers should be notified to deliver more parts. 74. Life cycle cost management is particularly important for firms that have a. short life cycles because those firms have less opportunity to take advantage of the time value of money. b. long life cycles because those firms have more opportunity to take advantage of the time value of money. c. long life cycles because those firms have more opportunity to enhance profit performance through product redesign or cost reduction. d. short life cycles because those firms have less opportunity to enhance profit performance through product redesign or cost reduction. Copyright Cengage Learning. Powered by Cognero.

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Chapter_22_11e 75. Which of the following focuses on the relationship of activity inputs to activity outputs? a. Activity reduction b. Quality c. Time d. Efficiency 76. Which of the following is a value-added activity? a. Moving b. Inspection c. Processing d. Waiting 77. The kanban system is used to a. ensure parts or materials are available when needed. b. signal when preventive maintenance is needed. c. signal when a defective unit has been produced. d. ensure idle time of workers is not wasted. 78. A company has 20 days of finished goods inventory on hand to avoid stockouts. The carrying costs of the inventory average £5,000 per day. The non-value-added costs are a. £100,000. b. £10,000. c. £5,000. d. £250. 79. Costs incurred because products or services fail to meet requirements after delivery to customers are called a. external failure costs. b. internal failure costs. c. appraisal costs. d. prevention costs. 80. Which of the following is an example of a non-value-added manufacturing activity? a. Assembly b. Scheduling c. Finishing d. All of these are value-added activities.

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Chapter_22_11e 81. The major source of information for the activity cost management system is a. cost driver analysis. b. an activity-based costing system. c. a performance measurement system. d. product information. 82. A firm's warranty costs are £125,000 per year. A competitor's warranty costs are £25,000 per year. The non-value-added costs are a. £125,000. b. £100,000. c. £25,000. d. £0. 83. Kaizen costing is a. continuous improvement with the objective of cost reduction. b. characterized by constant improvements to existing processes and products. c. characterized by incremental improvement to existing processes and products. d. all of these. 84. At the beginning of this year, Sammie Company installed a JIT purchasing and manufacturing system. The following information has been gathered about one of the company's products:

Theoretical annual capacity Actual production Production hours available Scrap (kg) Materials used (kg) Actual cost per unit Days of inventory Number of defective units

Current Year 2,000 1,800 1,000 200 6,400 14 3 30

Sammie's theoretical cycle time for this year would be a. 2.00 hours per unit. b. 1.80 hours per unit. c. 0.56 hours per unit. d. 0.50 hours per unit.

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Chapter_22_11e 85. Describe how the activity-based management model combines the process and costing views. What are the steps involved in each? What are the objectives of the activity-based management system?

86. What is kaizen costing? How does activity analysis help reduce costs?

87. At the end of the current year, Sugarbaker Ltd.collected the following data about its quality program: Sales (50,000 × £40) Training program Rework Scrap Warranty repairs Complaints Inspection labour Test labour Supplier evaluation

£2,000,000 24,000 80,000 60,000 80,000 40,000 50,000 60,000 6,000

Required: Prepare a quality cost report by quality cost category.

88. Discuss cycle time (and its components) and its importance in JIT.

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Chapter_22_11e 89. At the beginning of the year, Sherwood Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, Sherwood's managers collected the following data for the current and preceding year:

Sales Quality training Scrap Materials inspection Rework Product inspection Product warranty

Preceding Year £20,000,000 40,000 400,000 80,000 550,000 100,000 700,000

Current Year £20,000,000 65,000 350,000 70,000 500,000 150,000 600,000

Required: a. b. c.

Compute prevention costs, appraisal costs, internal failure costs and external failure costs as a percentage of sales for the preceding year and the current year. How much has profit increased as a result of quality improvements? If quality costs can be reduced even further to 2.5 per cent of sales, how much additional profit would result?

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Chapter_22_11e 90. Using the abbreviations listed below, indicate for each of the costs whether the cost should be classified as: P A I E N

=Prevention =Appraisal =Internal failure =External failure =None of the above 1.Cost of recalling defective products 2.Design reviews 3.Downtime due to defects 4.Field testing 5.Inspection of work in process 6.Lost sales due to poor product performance 7.Process acceptance 8.Quality training programs 9.Scrap 10.Supplier evaluations

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Chapter_22_11e 91. The following reasons have been offered for holding inventories: 1. 2. 3.

4. 5. 6.

To balance ordering or setup costs and carrying costs To satisfy customer demand (e.g., meet delivery dates) To avoid shutting down manufacturing facilities because of (a) machine failure (b) defective parts (c) unavailable parts Unreliable production processes To take advantage of discounts To hedge against future price increases

Required: a. b.

Explain how the JIT approach responds to each of these reasons and, consequently, argues for insignificant levels of inventories. The theory of constraints (TOC) criticizes the JIT approach to inventory management, arguing that it fails to protect throughput. Explain what this means and describe how TOC addresses this issue.

92. For each following activity, determine the amount of value-added and non-value-added costs. a.

The company keeps 7 days of materials inventory on hand to avoid shutdowns due to materials shortages. Carrying costs are £50,000 per day.

A time-and-motion study revealed that it should take 10 minutes to produce a product that now takes 50 minutes to produce. Labour is £18 per hour.

Warranty work costs the firm £500,000 per year. Warranty costs for the industry average £100,000 per year.

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Chapter_22_11e 93. For each activity listed below, determine the amount of value-added and non-value-added costs. a.

The company keeps seven days of raw materials inventory on hand to avoid shutdowns due to raw materials shortages. Carrying costs are £25,000 per day. Value-added costs: Non-value-added costs: A time and motion study revealed that it should take 5 minutes to produce a product that now takes 50 minutes to produce. Labour is £24 per hour. Value-added costs: Non-value-added costs: Warranty work costs the firm £250,000 per year. Warranty costs for the industry average £50,000 per year. Value-added costs: Non-value-added costs:

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Chapter_22_11e 94. Grayson, SA., has developed ideal standards for four activities: labour, materials, inspection and receiving. Information is as follows: Activity Labour Materials Inspection Receiving

Activity Driver Hours kg Inspection hours Orders

SQ 1,000 4,000 -060

AQ 1,100 5,000 750 75

SP £ 16 £ 24 £ 11 £400

The actual prices paid per unit of each activity driver were equal to the standard prices. Required: Complete the following cost report: Activity Labour Materials Inspection Receiving Totals

Value-added £ ? ? ? ? £ ?

Non-value-added £ ? ? ? ? £ ?

Actual £

? ? ? ? ?

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Chapter_22_11e 95. At the beginning of the year, Bing Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, Bing's managers collected the following data for the current and preceding year:

Sales Quality training Materials inspection Scrap Product warranty Rework Product inspection

Preceding Year £10,000,000 45,000 100,000 500,000 900,000 750,000 200,000

Current Year £10,000,000 50,000 140,000 450,000 800,000 600,000 220,000

Required: a. b. c.

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Chapter_22_11e 96. In 2020, Style, SA., instituted a quality improvement program. At the end of 2021, the management of the company requested a report to show the amount saved by the measures taken during the year. The actual sales and actual quality costs for 2020 and 2021 are as follows:

Sales Scrap Rework Training programme Consumer complaints Lost sales, incorrect labeling Test labour Inspection labour Supplier evaluation

2020 £125,000 3,750 5,000 1,250 2,500 2,000 3,000 6,250 3,750

2021 £150,000 3,750 2,500 1,500 1,250 -2,000 6,000 3,250

Required: a. b.

Classify each cost as variable or fixed with respect to sales and compute the variable cost ratio. Be careful – costs may change because of quality improvement, not cost behaviour. How much did profits increase because of quality improvements made in 2021, assuming all reductions in quality costs are attributable to quality improvements?

97. What is a materials pull (kanban) system? What is required to make this system work? What are some of the system's advantages?

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Chapter_22_11e 98. At the beginning of the year, Randy Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

Sales Quality training Material inspections Scrap Rework Product inspection Product warranty

Preceding Year £5,000,000 6,000 15,000 80,000 15,000 25,000 150,000

Current Year £5,000,000 9,000 12,000 60,000 12,000 30,000 120,000

Required: a.

b. c.

Compute each category of quality costs as a percentage of sales for each year. Prevention costs Appraisal costs Internal failure costs External failure costs How much has profit increased as a result of quality improvements? If quality costs can be reduced to 2.5 per cent of sales, how much additional profit would result?

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Chapter_22_11e 99. Craig, SA., sells one of its products for £500 each. Sales volume averages 1,000 units per year. Recently, its main competitor priced their competing product at 10 per cent below Craig's price. Craig expects its sales to drop dramatically unless it matches the competitor's price. Despite the anticipated price reduction, Craig would like to maintain its current profit per unit. Information regarding the inputs required to produce 1,000 units of product is as follows:

Materials (kg) Labour (hours) Setups (hours) Material handling (moves) Warranties (number repaired)

SQ 7,800 600 -0-0-0-

AQ 8,000 720 600 300 200

Actual Cost £160,000 108,000 34,000 58,000 60,000

Required: a. b. c.

Calculate the target cost for maintaining current market share and profitability. Calculate the non-value-added cost per unit. If non-value-added costs can be reduced to zero, can the target cost be achieved?

100. Answer the following questions pertaining to just-in-time inventory management: a. b. c.

Identify key elements of the JIT philosophy. What elements of the JIT approach contribute to reducing materials inventory? Why do proponents of JIT believe inventory is an enemy?

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Chapter_22_11e 101. At the beginning of the year, Ball Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

Sales Quality training Material inspections Scrap Product warranty Rework Product inspection

Preceding Year £5,000,000 22,500 50,000 250,000 450,000 375,000 100,000

Current Year £5,000,000 25,000 80,000 225,000 400,000 300,000 100,000

Required: a.

b. c.

102. Define value chain. What is the relationship among a value chain, processes and activities?

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Chapter_22_11e 103. Palms, SA., sells one of its products for £80 each. Sales volume averages 2,000 units per year. Recently, its main competitor reduced the price of its product to £56. Palms expects its sales to drop dramatically unless it matches the competitor's price. In addition, the current profit per unit must be maintained. Information about the product (for production of 2,000) is as follows:

Materials (kg) Labour (hours) Setups (hours) Material handling (moves) Warranties (number repaired)

SQ 9,800 2,400 -0-0-0-

AQ 10,000 2,500 400 700 500

Actual Cost £40,000 20,000 12,000 4,000 20,000

Required: a. b. c.

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Chapter_22_11e 104. In 2020, Shelby Foods instituted a quality improvement program. At the end of 2021, the management of the company requested a report to show the amount saved by the measures taken during the year. The actual sales and actual quality costs for 2020 and 2021 are as follows:

Sales Scrap Rework Training programme Consumer complaints Lost sales, incorrect labeling Test labour Inspection labour Supplier evaluation

2020 £1,000,000 30,000 40,000 10,000 20,000 16,000 24,000 50,000 30,000

2021 £1,200,000 30,000 20,000 12,000 10,000 -16,000 48,000 26,000

Shelby's management believes that quality costs can be reduced to 2.5 per cent of sales within the next five years. At the end of Year 2026, Shelby's sales are projected to have grown to £1,500,000. The relative distribution of quality costs at the end of Year 2026 is as follows: Scrap Training Supplier evaluation Test labour Inspection Total quality costs

15% 20% 25% 25% 15% 100%

Required: a. b. c.

Prepare a long-range performance report that compares the quality costs incurred at the end of 2020 with the quality-cost structure expected at the end of 2026. Are the targeted costs in Year 2026 all value-added costs? What would be the increase in profits in 2026 if the 2.5 per cent performance standard is met in that year?

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Chapter_22_11e 105. Park, SA., sells one of its products for £40 each. Sales volume averages 2,000 units per year. Recently, its main competitor reduced the price of its product to £28. Park expects sales to drop dramatically unless it matches the competitor's price. In addition, the current profit per unit must be maintained. Information about the product (for production of 2,000) is as follows:

Materials (kg) Labour (hours) Setups (hours) Material handling (moves) Warranties (number repaired)

SQ 4,900 1,200 0 0 0

AQ 5,000 1,250 200 350 250

Actual Cost £20,000 10,000 6,000 2,000 10,000

Required: a. b. c.

106. Describe how activity-based management and activity-based costing systems differ.

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Chapter_22_11e 107. Clark, SA., sells one of its products for £150 each. Sales volume averages 800 units per year. Recently, its main competitor reduced the price of its product to £130. Clark expects sales to drop dramatically unless it matches the competitor's price. In addition, the current profit per unit must be maintained. Information about the product (for production of 800) is as follows:

Materials (kg) Labour (hours) Setups (hours) Material handling (moves) Warranties (number repaired)

SQ 14,400 2,000 0 0 0

AQ 15,000 2,400 1,400 600 400

Actual Cost £30,000 18,000 8,000 4,000 20,000

Required: a. b. c.

108. Describe activity-based performance measurement.

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Chapter_22_11e Answer Key 1. a 2. b 3. b 4. a 5. b 6. d 7. c 8. c 9. d 10. d 11. d 12. a 13. d 14. c 15. d 16. b 17. a 18. c 19. d 20. b 21. b 22. b 23. b 24. b 25. c 26. a

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Chapter_22_11e 27. d 28. a 29. b 30. c 31. c 32. c 33. a 34. d 35. c 36. a 37. a 38. a 39. c 40. a 41. c 42. d 43. c 44. d 45. b 46. c 47. d 48. c 49. d 50. b 51. c 52. d 53. a 54. c Copyright Cengage Learning. Powered by Cognero.

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Chapter_22_11e 55. a 56. b 57. a 58. b 59. b 60. c 61. c 62. a 63. a 64. d 65. d 66. b 67. c 68. a 69. d 70. d 71. a 72. b 73. b 74. d 75. d 76. c 77. a 78. a 79. a 80. b 81. b 82. a Copyright Cengage Learning. Powered by Cognero.

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Chapter_22_11e 83. d 84. d 85. The purpose of activity-based management is to improve profitability by improving decision-making through better cost information and reducing costs through continuous improvement. The improvement in cost information is achieved through activity-based costing, and continuous improvement is achieved through process value analysis. The activity-based costing system assigns resource costs to activities, identifies cost objectives and activity drivers, calculates activity rates and assigns costs to cost objects. Better cost assignments lead to better cost-based decision analysis and increased profitability. Process value analysis consists of assessing the value content of activities, defining root causes of each activity, establishing activity performance measures and searching for opportunities to improve the process. Improving processes reduces costs and increases profitability. 86. Kaizen costing is the effort to reduce costs of existing products and processes. It is characterized by constant, incremental improvements to existing processes and products. Activity analysis can reduce costs in four ways: 1. Activity elimination 2. Activity selection 3. Activity reduction 4. Activity sharing

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Chapter_22_11e 87. SUGARBAKER COMPANY QUALITY COST REPORT FOR THE CURRENT YEAR Quality Costs Prevention costs: Training program

£ 24,000

Appraisal costs: Inspection labour Test labour Supplier evaluation Total appraisal costs

£ 50,000 60,000 6,000

Internal failure costs: Rework Scrap Total internal failure costs

£ 80,000 60,000

External failure costs: Warranty repairs Complaint satisfaction Total external failure costs Total quality costs

Per cent of Sales

£ 24,000

1.20

116,000

5.80

140,000

7.00

120,000 £400,000

6.00 20.00

£ 80,000 40,000

88. In a manufacturing organization, cycle time is composed of the time needed for setup, processing, movement, waiting and inspection. Reducing cycle time is the key to reducing work-in-process inventories. Setup time is the time required to prepare equipment to produce a specific product. Processing time is the time spent working on units. Movement time is the time units spend moving between work or inspection stations. Waiting time is the time units spend in temporary storage waiting to be processed, moved or inspected. Inspection time is the amount of time it takes units to be inspected. Of the five elements of cycle time, only processing time adds value to the product.

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Chapter_22_11e 89. a.

Preceding Year Prevention costs: £40,000/£20,000,000 £65,000/£20,000,000 Appraisal costs: (£80,000 + £100,000)/£20,000,000 (£70,000 + £150,000)/£20,000,000 Internal failure costs: (£400,000 + £550,000)/£20,000,000 (£350,000 + £500,000)/£20,000,000 External failure costs: £700,000/£20,000,000 £600,000/£20,000,000

£135,000 (£1,870,000 - £1,735,000)

£1,235,000 [£1,735,000 - (2.5% × £20,000,000)]

E P I A A E A P I P

1.Cost of recalling defective products 2.Design reviews 3.Downtime due to defects 4.Field testing 5.Inspection of work in process 6.Lost sales due to poor product performance 7.Process acceptance 8.Quality training programs 9.Scrap 10.Supplier evaluations

Current Year

0.20% 0.325% 0.90% 1.10% 4.75% 4.25% 3.50% 3.00%

90.

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Chapter_22_11e 91. a.

JIT does not accept setup (or ordering) costs as a given; rather, JIT attempts to drive these costs to zero by reducing the time it takes to set up and by developing long-term contracts with suppliers. Carrying costs are minimized by reducing inventories to insignificant levels.

JIT reduces lead times, which increases a firm's ability to meet requested delivery dates. This is accomplished by (1) reduction of setup times, (2) improved quality and (3) cellular manufacturing.

The problems that usually cause shutdowns are (1) machine failure, (2) defective material or subassembly and (3) unavailability of a material or subassembly (either not delivered or delivered late). JIT attempts to solve each of the three problems by emphasizing total preventive maintenance, total quality control (strives for zero defects) and building the right kind of relationship with suppliers.

Unreliable production processes are addressed by total quality management. As fewer defective units are produced, there is less need for inventory to replace nonconforming units.

The objective of taking advantage of discounts is to lower the cost of inventory. JIT accomplishes the same objective by negotiating long-term contracts with a few chosen suppliers and establishing more extensive supplier involvement.

JIT emphasizes long-term contracts that stipulate prices and acceptable quality levels.

JIT has the policy of stopping production if a problem is detected so that the problem can be corrected (of course, the problem may also cause production to stop – independent of a policy or practice of stopping so that the source of the problem can be corrected). Since JIT produces on demand, any interruption of production means that throughput is lost. TOC uses a time buffer located in front of the binding constraint to protect throughput. The time buffer is designed to keep the constrained resource busy for a specified period of time – a time long enough to overcome most disruptions in production.

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Chapter_22_11e 92. a.

Value-added costs = £0 Non-value-added costs = (£50,000 × 7) = £350,000

Value-added costs = (£18 × 10/50) = £3.60 Non-value-added costs = [(50 - 10)/50] × £18 = £14.40

Value-added costs = £0 Non-value-added costs = £500,000

Value-added costs = £-0Non-value-added costs = £25,000 × 7 = £175,000

Value-added costs = £24 × 5/60 = £2 Non-value-added costs = [(50 - 5)/60] × £24 = £18

Value-added costs = £-0Non-value-added costs = £250,000

93.

94. Activity Labour Materials Inspection Receiving Totals

Value-added SQ × SP £ 16,000 96,000 -024,000 £136,000

Non-value-added (AQ - SQ) × SP £ 1,600 24,000 8,250 6,000 £39,850

Actual AQ × AP £ 17,600 120,000 8,250 30,000 £175,850

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Chapter_22_11e 95. a.

Preceding Year Prevention costs: £45,000/£10,000,000 £50,000/£10,000,000 Appraisal costs: (£100,000 + £200,000)/£10,000,000 (£140,000 + £220,000)/£10,000,000 Internal failure costs: (£500,000 + £750,000)/£10,000,000 (£450,000 + £600,000)/£10,000,000 External failure costs: £900,000/£10,000,000 £800,000/£10,000,000

£235,000

£2,010,000 [£2,260,000 - (2.5% × £10,000,000)]

Scrap: Rework: Training programme: Consumer complaints: Lost sales, incorrect labelling: Test labour: Inspection labour: Supplier evaluation:

Current Year

0.45% 0.50% 3.00% 3.60% 12.50% 10.50% 9.00% 8.00%

(£2,495,000 - £2,260,000)

96. variable 3% variable 4% fixed variable 2% variable 1.6% variable 2.4% variable 5% fixed Performance Report: Quality Costs Interim Trend Style, SA. For the Year Ended December 31, 2021

Actual Costs 2021

Budgeted Costs 2020*

Prevention costs: Training program Supplier evaluation Total prevention

£ 1,500 3,250 £ 4,750

£ 1,250 3,750 £ 5,000

Appraisal costs: Test labour Inspection labour Total appraisal

£ 2,000 6,000 £ 8,000

£ 3,600 7,500 £11,100

£ 1,600 F 1,500 F £ 3,100 F

Variance 250 U 500 F £ 250 F

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Chapter_22_11e Internal failure costs: Scrap Rework Total internal failure

£ 3,750 2,500 £ 6,250

£ 4,500 6,000 £10,500

£ 750 F 3,500 F £ 4,250 F

External failure costs: Consumer complaints Lost sales, labeling Total external failure

£ 1,250 0 £ 1,250

£_3,000 2,400 £ 5,400

£ 1,750 F 2,400 F £ 4,150 F

Total quality costs

£20,250

£32,000

£11,750 F

13.5%

21.33%

7.83%

Per cent of actual sales *Based on sales of £150,000 Profits increased by £11,750.

97. The materials pull system, also know as the kanban system, is an inventory management and production philosophy that seeks to eliminate inventories by replenishing inventory shortages at each step along the production process, rather than building excess inventory in anticipation of need. Thus, in this system, employees react to inventory needs rather than taking measures to preempt them. Tremendous coordination among all participating units is required to make the system work effectively. Processing speeds must be balanced or smoothed among stations, placing demands on equipment availability and quality control. Management must also accept the notion that idle employees are preferred to having employees at work building inventory. The goal of such a system is the elimination of excess inventory and the efficiency of the entire operation taken as a whole. 98. a.

Preventive: Quality training Appraisal: Materials inspections, product inspections Internal failure: Scrap, rework External failure: Product warranty

Prevention costs Appraisal costs Internal failure costs External failure costs b.

£48,000

£118,000 [£243,000 - (2.5% × £5,000,000)]

Preceding Year 0.12% 0.80% 1.90% 3.00%

Current Year 0.18% 0.84% 1.44% 2.40%

(£291,000 - £243,000)

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Chapter_22_11e 99. a.

£370 Current selling price Current cost (£420,000/1,000 units) Current profit per unit

£500 420 £ 80

Selling price to maintain market share Desired profit per unit Target cost

£450 80 £370

£174.00 per unit Non-value-added Costs

Materials (£160,000/8,000 kg) = £20 per kg (8,000 kg - 7,800 kg) × £20 Labour (£108,000/720 hours) = £150 per hour (720 hours - 600 hours) × £150 Setups Material handling Warranties Non-value-added costs

18,000 34,000 58,000 60,000 £174,000

Non-value-added cost per unit (£174,000/1,000)

£ 174.00

£ 4,000

Yes. If non-value-added costs can be reduced to zero, the cost per unit would be £246 (£420 £174), which is below the target cost of £370.

100. a.

Key elements of the JIT philosophy include inventory reduction, reduced production times and increased product quality and employee involvement.

The JIT approach to reducing inventories includes (1) developing long-term relationships with a limited number of suppliers, (2) selecting suppliers on the basis of service and material quality as well as price, (3) establishing procedures for production employees to order materials for current production needs directly from approved suppliers and (4) accepting supplier deliveries directly to the shop floor.

They argue that inventory is an enemy because it causes the incurring of carrying and handling costs, increases production times and hides quality problems.

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Chapter_22_11e 101. a. Prevention costs Appraisal costs Internal failure costs External failure costs b.

£117,500

£1,005,000 [£1,130,000 - (2.5% × £5,000,000)]

Preceding Year 0.45% 3.00% 12.50% 9.00%

Current Year 0.50% 3.60% 10.50% 8.00%

(£1,247,500 - £1,130,000)

102. The value chain for a product or service is the distinct set of value-producing activities that stretches from basic raw materials to the final customer. The entities that comprise the value chain are ultimately dependent on the perception of value placed on the final product or service by the end customer. Activities can be organized into large units of work called processes. Thus, a value chain is comprised of processes, which in turn is further comprised of activities.

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Chapter_22_11e 103. a.

£24 Current selling price Current cost (£96,000/2,000 units) Current profit per unit

£80 48 £32

Selling price to maintain market share Desired profit per unit Target cost

£56 32 £24

£18.80 per unit Non-value-added Costs Materials (£40,000/10,000 kg) = £4 per kg (10,000 kg - 9,800 kg) × £4 Labour (£20,000/2,500 hours) = £8 per hour (2,500 hours - 2,400 hours) × £8 Setups Material handling Warranties Non-value-added costs Non-value-added cost per unit (£37,600/2,000)

800

800 12,000 4,000 20,000 £37,600 £ 18.80

No. If non-value-added costs can be reduced to zero, the cost per unit would be £29.20 (£48 £18.80), which is above the target cost of £24.

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Chapter_22_11e 104. a. Long-Range Performance Report Shelby Foods For the Year Ended December 31, 2021 Actual Costs* Long-Range 2021 Target Costs** Prevention costs: Training programme Supplier evaluation Total prevention

£ 38,000

£16,875

£ 21,125 U

Appraisal costs: Test labour Inspection labour Total appraisal

£ 20,000 60,000 £ 80,000

£ 9,375 5,625 £15,000

£ 10,626 U 54,375 U £ 65,000 U

Internal failure costs: Scrap Rework Total internal failure

£ 37,500 25,000 £ 62,500

£ 5,625 -0£ 5,625

£ 31,875 U 25,000 U £ 56,876 U

External failure costs: Consumer complaints Lost sales, labeling Total external failure

£ 12,500 -0£ 12,500

-0-0-0-

£ 12,500 U -0£ 12,500 U

Total quality costs

£193,000

£37,500

£155,500 U

12.9%

2.5%

10.4%

Per cent of Actual Sales

£ 12,000 26,000

£ 7,500 9,375

Variance £ 4,500 U 16,625 U

*Based on sales of £1,500,000. ** for year 2026 Prevention and some appraisal costs can be interpreted as valueb. added costs. All failure costs are non-value-added. Thus, the distribution of costs for year 2026 cannot all be value-added. There would be a £155,500 increase in profits in 2026 if total quality c. costs are 2.5 per cent of sales and the targeted distribution is achieved.

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Chapter_22_11e 105. a.

Current selling price Less: Current cost (£48,000/2,000) Current profit per unit

£40 24 £16

Selling price to maintain market share Less: Desired profit per unit Target cost

£28 16 £12

Non-value-added Costs Materials: £20,000/5,000 = £4 per kg (5,000 - 4,900) × £4 Labour: £10,000/1,250 = £8 per hour (1,250 - 1,200) × £8 Setups Material handling Warranties Non-value-added costs

400 6,000 2,000 10,000 £18,800

Non-value-added cost per unit

£9.40

400

No. If non-value-added costs can be reduced to zero, the cost per unit would be £38.60 (£48 - £9.40), which is above the target cost of £24.

106. Activity-based management is a systemwide, integrated approach that focuses management attention on improving customer value. Improved profitability will result. Identifying processes and the activities that make up these processes is the focus of control. Continuous improvement in process and elimination of non-value-adding activities are the sources of improvement in costs and profits. The technique balances processes and costs. Activity-based costing presents just one-perspective costs. It identifies activities and drivers for these activities. It is focused on managing costs through understanding drivers.

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Chapter_22_11e 107. a.

Current selling price Less: Current cost (£80,000/800) Current profit per unit

£150 100 £ 50

Selling price to maintain market share Less: Desired profit per unit Target cost

£130 50 £ 80

Non-value-added Costs Materials: £30,000/15,000 = £2 per kg (15,000 - 14,400) × £2

£ 1,200

Labour: £18,000/2,400 = £7.50 per hour (2,400 - 2,000) × £7.50 Setups Material handling Warranties Non-value-added costs

3,000 8,000 4,000 20,000 £36,200

Non-value-added cost per unit (£36,200/800 units)

£ 45.25

Yes. If non-value-added costs can be reduced to zero, the cost per unit would be £54.75 (£100 - £45.25), which is well below the target cost of £80.

108. Activity performance is evaluated on three dimensions: efficiency, quality and time. Financial measures of efficiency allow managers to identify the monetary values for potential improvement and for the improvements achieved. Value and non-value-added cost reports, trends in costs, benchmarking, kaizen standards, capacity management and life cycle budgeting are examples of financial measures of activity efficiency.

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Chapter_23_11e Indicate the answer choice that best completes the statement or answers the question. 1. The difference between a company’s market value and its net book value of assets is one approach to calculate the a. value of intangible assets. b. value of intellectual capital. c. value of tangible assets. d. value of working capital. 2. The standards of ethical conduct for management accountants include a. competence and performance. b. integrity and respect for others. c. confidentiality, confidence, integrity and observance. d. competence, confidentiality, integrity and objectivity. 3. The record of raw facts, not organized, is known as a. intelligence. b. information. c. knowledge. d. data. 4. A(n) ____ is a computerized information system that strives to input data once and make it available to people across the company for different purposes. a. cost management information system b. enterprise resource planning system c. internal accounting system d. financial accounting information system 5. Breakthroughs in technology this century have given rise to which one of the following effects? a. Direct materials have GREATLY decreased as a percentage of total manufacturing costs. b. Manufacturing overhead has only SLIGHTLY decreased as a percentage of total manufacturing costs. c. Direct labour has GREATLY decreased as a percentage of total manufacturing costs. d. Manufacturing overhead has GREATLY decreased as a percentage of total manufacturing costs. 6. Which of the following is NOT as a result of globalization? a. Firms adopting standardized software packages b. Foreign divisions forced to accept practices of parent company c. Management accounting information being used the same in each country d. Convergence of management accounting practices

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Chapter_23_11e 7. The statement “interconnection via the internet of computer devices embedded in everyday items” best describes a. integrated reporting. b. the Internet of Things. c. cloud computing. d. big data. 8. Which of the following is NOT a detection activity? a. Inspecting products and processes b. Developing environmental performance measures c. Testing for contamination d. Operating pollution control equipment 9. ____ are the costs of activities performed after discharging contaminants and waste into the environment. a. Environmental prevention costs b. Environmental detection costs c. Environmental internal failure costs d. Environmental external failure costs 10. Which of the following is NOT a prevention activity? a. Evaluating and selecting supplies b. Evaluating and selecting pollution control equipment c. Auditing environmental activities d. Designing processes 11. Software that has integrated system capability using real time data is a. enterprise resource planning software. b. online analytic programs. c. computer-assisted engineering software. d. none of these. 12. Which of the following is NOT a component of digitalization in the context of management accounting? a. Artificial intelligence b. Big data c. Enterprise resource planning systems d. The Internet of Things 13. ____ are the costs of activities executed to determine if products, processes and other activities within the firm are in compliance with appropriate environmental standards. a. Environmental prevention costs b. Environmental detection costs c. Environmental internal failure costs d. Environmental external costs

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Chapter_23_11e 14. Which of the following is NOT an internal failure activity? a. Treating and disposing of toxic waste b. Maintaining pollution equipment c. Licensing facilities for producing contaminants d. Cleaning up a polluted lake 15. Which one of the following statements about ethical behaviour is true? a. Ethical behaviour is not guided by well-defined rules and is often subjective. b. Ethical behaviour is best described as doing actions that are permitted by law. c. Ethical behaviour always involves choosing between actions that are clearly right or wrong. d. Ethical behaviour is best guided by a policy of placing corporate performance above individual ends. 16. Which of the following activities is NOT significant to the advancement of information technology? a. Enterprise resource planning software b. Emergence of electronic commerce c. Theory of constraints d. Decision support systems 17. ____ are costs of activities performed because contaminants and waste have been produced but not discharged into the environment. a. Environmental prevention costs b. Environmental detection costs c. Environmental internal failure costs d. Environmental external costs 18. Principles of personal ethical behaviour that are essential to an ethical life include a. integrity. b. respect for others. c. accountability. d. all of these. 19. Which of the following is NOT an external failure activity? a. Obtaining ISO14001 certification b. Cleaning up oil spills c. Cleaning up contaminated soil d. Settling personal injury claims (environmentally related)

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Chapter_23_11e 20. Using the abbreviations listed below, indicate for each of the costs whether the cost should be classified as: P D I E N

=Prevention =Detection =Internal Failure =External Failure =None of the above 1.Cleaning up contaminated soil 2.Designing processes 3.Recycling scrap 4.Auditing environmental activities 5.Testing for contamination 6.Losing a lake for recreational use 7.Measuring contamination levels 8.Recycling products 9.Maintaining pollution equipment 10.Evaluating and selecting suppliers

21. What can a company do to increase the likelihood of its employees being ethical in all their undertakings?

22. Explain what is meant by confidentiality and why it is important.

23. Discuss how the goal of profit maximization is affected by ethical considerations. What incentives are there for managers to manipulate accounting data in unethical ways in order to increase profits?

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Chapter_23_11e 24. Discuss the change in composition of total manufacturing costs during the last century, using the three major cost categories: direct materials, direct labour and manufacturing overhead.

25. Using the abbreviations listed below, indicate for each of the costs whether the cost should be classified as: P D I E N

=Prevention =Detection =Internal Failure =External Failure =None of the above 1.Inspecting products and processes 2.Verifying supplier environmental performance 3.Testing for contamination 4.Obtaining ISO 14001 certification 5.Carrying out environmental studies 6.Operating pollution control equipment 7.Cleaning up a polluted lake 8.Recycling scrap 9.Recycling products 10.Cleaning up oil spills

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Chapter_23_11e 26. At the beginning of the year, Paris, SA., initiated an environmental cost reduction program. To help assess the impact of the environmental cost reduction improvement program, the following data was collected for the current and preceding year:

Operating costs Designing products Auditing environmental activities Recycling scrap Restoring land to natural state Operating pollution control equipment Testing for contamination

Preceding Year £4,000,000 18,000 40,000 200,000 360,000 250,000 80,000

Current Year £4,000,000 20,000 64,000 180,000 320,000 240,000 80,000

Required: a.

Compute each category of environmental quality costs as a percentage of operating costs for each year. Prevention costs Detection costs Internal failure costs External failure costs How much has profit increased as a result of the environmental cost reduction improvements?

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Chapter_23_11e Answer Key 1. b 2. d 3. d 4. b 5. c 6. c 7. b 8. d 9. d 10. c 11. a 12. c 13. b 14. d 15. a 16. c 17. c 18. d 19. a 20. E P I D D E D P I P

1.Cleaning up contaminated soil 2.Designing processes 3.Recycling scrap 4.Auditing environmental activities 5.Testing for contamination 6.Losing a lake for recreational use 7.Measuring contamination levels 8.Recycling products 9.Maintaining pollution equipment 10.Evaluating and selecting suppliers

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Chapter_23_11e 21. Companies can establish a culture and atmosphere of ethical business practices by rewarding those employees that are honest, fair and act with integrity. They can establish their own code of professional conduct that sets out the organizational purpose, beliefs, values and expectations of employees. The code of conduct should be known, visible and enforced. Companies should hire certified professionals, when appropriate. Professions have codes of conduct and standards appropriate to their duties. Companies can incorporate ethical values into the selection criteria for employee recruitment. 22. Management accountants are entrusted with sensitive information about their companies and their dealings with outside firms. Confidentiality standards require that accountants honour this trust. They cannot disclose confidential information without the permission of the company, unless legally required to do so. They must monitor their subordinates to make sure that they are upholding the confidentiality standard. They may not use or appear to use confidential information acquired in their work for unethical or illegal advantage. 23. The objective of profit maximization should be constrained by the requirement that profits are achieved through legal and ethical means. Because performance evaluation and rewards for managers often are linked to reported profits, managers might manipulate accounting data to show increased profits in order to increase their own bonuses. The evaluation and reward system should be designed to discourage unethical behaviour. 24. 1. 2.

Direct materials, the cost of primary raw materials converted into finished goods, have increased slightly as organizations purchase components that formerly fabricated. Direct labour, the wages earned by production employees for the time they spend converting raw materials into finished products, has decreased significantly as employees spend less time physically working on products and more time supporting automated production activities. Manufacturing overhead, which includes all manufacturing costs other than direct materials and direct labour, has increased significantly due to automation, product diversity and product complexity.

25. D D D P P I E I P E

1.Inspecting products and processes 2.Verifying supplier environmental performance 3.Testing for contamination 4.Obtaining ISO 14001 certification 5.Carrying out environmental studies 6.Operating pollution control equipment 7.Cleaning up a polluted lake 8.Recycling scrap 9.Recycling products 10.Cleaning up oil spills

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Chapter_23_11e 26. a. Prevention costs Detection costs Internal failure costs External failure costs b.

£44,000

Preceding Year 0.45% 3.00% 11.25% 9.00%

Current Year 0.50% 3.60% 10.50% 8.00%

£948,000 - £904,000

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Chapter_24_11e Indicate the answer choice that best completes the statement or answers the question. 1. Lee Ltd. manufactures and sells party items. The following representative direct labour hours and production costs are provided for a four-month period: Month January February March April Total Let

a b n X Y Σ

Direct labour Hours 3,600 4,800 6,000 4,800 19,200 = = = = = =

Production Costs £15,000 17,500 20,000 15,000 £67,500

Fixed production costs per month Variable production costs per direct labour hour Number of months Direct labour hours per month Total monthly production costs Summation

Monthly production costs can be expressed as follows: a. X = aY + b b. Y = a + bX c. X = a + bY d. Y = b + aX 2. The following information was taken from a computer printout generated with the least-squares method for use in estimating overhead costs: Slope Intercept Correlation coefficient Activity variable

45 5,700 0.72 Direct labour hours

The cost formula is a. Overhead = £5,700 - £45X. b. Overhead = £5,700 + £45X. c. Overhead = £5,700 + (£45 × 0.72). d. Overhead = £5,700 × 0.72. 3. The scatterplot method of cost estimation a. is influenced by extreme observations. b. requires the use of judgment. c. uses the least-squares method. d. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs.

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Chapter_24_11e 4. In the formula Y = a + bx, Y refers to the a. slope. b. intercept. c. dependent variable. d. independent variable. 5. In a simple least-squares regression where X refers to the number of sales calls made by a sales department and Y refers to the monthly total cost of the sales department, the value of X in the regression output would represent a. the estimated monthly total costs of the sales department. b. the estimated monthly fixed costs of the sales department. c. the estimated monthly variable costs per unit of the sales department. d. the per cent of variation in Y that is explained by X. 6. Which of the following statements is NOT true? a. In selecting an independent variable for cost behaviour analysis, it is important to determine the activity that causes the cost being analysed to occur. b. Professional judgment is very important in selecting an activity measure for a particular cost. c. A high correlation between two variables proves that one causes the other. d. The least-squares cost estimation method can be used to measure the linear function. 7. Silversleeves, SA., shipped 18,000 tons of silver for £450,000 in January and 22,000 tons for £549,000 in February. Shipping costs for 21,000 tons to be shipped in March would be expected to be a. £548,111. b. £499,500. c. £524,250. d. none of these. 8. Greene Enterprises has the following information about its truck fleet miles and operating costs: Year 1 2 3

Miles 400,000 480,000 560,000

Operating Costs £256,000 280,000 320,000

What is the best estimate of total costs using the high-low method if the expected fleet mileage for 4 is 500,000 miles? a. £288,000 b. £296,000 c. £256,000 d. £320,000

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Chapter_24_11e 9. A managerial accountant has determined the following relationships between overhead and several possible bases: Basis Direct labour hours Direct labour (£) Machine hours Employee minutes in coffee breaks

Correlation with Total Overhead 0.842 0.279 -0.837 -0.243

The best basis for overhead application is a. direct labour hours. b. coffee breaks. c. direct labour (£) d. machine hours. 10. The following information is available for maintenance costs: Month January February March April May

Production Volume 75 115 190 60 135

Maintenance Costs £250 310 400 240 355

Using a computer or calculator, compute the estimate of maintenance costs at 100 units of production using the method of least squares. This value would be a. £291. b. £321. c. £336. d. £698. 11. English Ltd. analysed the relationship between total factory overhead and changes in direct labour hours. It found the following: Y = £6,000 + £6X The Y in the equation is an estimate of a. total variable costs. b. total direct labour hours. c. total factory overhead. d. total fixed costs.

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Chapter_24_11e 12. Kane Ltd. found its maintenance cost and sales revenues to be somewhat correlated. Last year's high and low observations were as follows: Maintenance Cost £36,000 £42,000

Sales £400,000 £600,000

What is the fixed portion of the maintenance cost? a. £24,000 b. £42,000 c. £30,000 d. £12,000 13. The following computer printout estimated overhead costs using multiple regression:

Parameter Intercept Setup hours # of parts R Square (R2) Standard Error (Se) Observations

Estimate 1,000 25 100

t for H(0) Parameter = 0 1.96 81.96 9.50

Pr > t 0.0250 0.0001 0.0001

Std. error of parameter 510.204 0.305 10.527

0.94 75.00 160

Which slope and intercept parameters are significant at the 0.05 level? a. Intercept b. Setup hours c. Number of parts d. All of these are significant

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Chapter_24_11e 14. The following information is available for electricity costs for the last six months of the year: Month July August September October November December

Production Volume 1,400 2,800 3,200 1,750 1,200 2,100

Electricity Costs £3,150 5,400 5,700 3,900 2,400 4,050

Using the high-low method, estimated variable cost per unit of production is a. £1.26. b. £1.53. c. £1.65. d. £1.77. 15. Lee Ltd. manufactures and sells party items. The following representative direct labour hours and production costs are provided for a four-month period: Month January February March April Total Let

a b n X Y Σ

Direct labour Hours 3,600 4,800 6,000 4,800 19,200 = = = = = =

Production Costs £15,000 17,500 20,000 15,000 £67,500

Fixed production costs per month Variable production costs per direct labour hour Number of months Direct labour hours per month Total monthly production costs Summation

The cost function derived by the least-squares cost estimation method a. is linear. b. must be tested for minima and maxima. c. is parabolic. d. is quadratic.

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Chapter_24_11e 16. The following information is available for maintenance costs: Month January February March April May

Production Volume 75 115 190 60 135

Maintenance Costs £250 310 400 240 355

Using a computer or calculator, compute the estimate of the fixed portion of maintenance costs using the method of least squares. Rounded to the nearest figure, this value would be a. £66. b. £160. c. £166. d. £575. 17. The following computer printout estimated overhead costs using multiple regression:

Parameter Intercept Setup hours # of parts

Estimate 1,000 25 100

R Square (R2) Standard Error (Se) Observations

t for H(0) Parameter = 0 1.96 81.96 9.50

Pr > t 0.0250 0.0001 0.0001

Std. error of parameter 510.204 0.305 10.527

0.94 75.00 160

The degrees of freedom for the model is a. 157. b. 158. c. 159. d. 160.

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Chapter_24_11e 18. The following computer printout estimated overhead costs using linear regression:

Parameter Intercept DLH

Estimate 100.41 14.05

R Square (R 2) Standard Error (Se) Observations

t for H(0) Parameter = 0 4.81 6.78

Pr > t 0.0003 0.0001

Std. error of parameter 20.88 2.07

0.80 25.03 17

Table of Selected Values: t Distribution Degrees of Freedom 15 16 17 18 19

90% 1.753 1.746 1.740 1.734 1.729

95% 2.131 2.120 2.110 2.101 2.093

99% 2.947 2.921 2.898 2.878 2.861

What is the interval around Y if 95 per cent confidence is desired? a. Y ± 20.024 b. Y ± 43.87759 c. Y ± 52.8133 d. Y ± 53.33893 19. The following information was available about supplies cost for the first three months of the year: Month January February March

Production Volume 4,800 5,000 3,400

Supplies Cost £21,700 20,900 16,100

Using the high-low method, an estimate of supplies cost at 4,500 units of production would be a. £19,400. b. £20,500. c. £19,950. d. none of these.

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Chapter_24_11e 20. What is the difference between a correlation equal to -1 and a correlation equal to 0? a. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of 0 means they are moving in opposite directions. b. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of 0 means they are unrelated. c. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of 0 means they are moving in the same direction. d. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of 0 means they are unrelated. 21. In a simple least-squares regression where X refers to the number of sales calls made by a sales department and Y refers to the monthly total cost of the sales department, the constant in the regression output would represent a. the estimated monthly total costs of the sales department. b. the estimated monthly fixed costs of the sales department. c. the estimated monthly variable costs per unit of the sales department. d. the per cent of variation in Y that is explained by X. 22. Abboud Company is planning to introduce a new product with an 80 per cent cumulative learning curve for production for batches of 1,000 units. The variable labour costs are £30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are £10,000 in fixed costs not subject to learning. What is the cumulative total time (labour hours) to produce 2,000 units? a. 100 hours b. 80 hours c. 160 hours d. 20 hours 23. Which of the following is a strength of the high-low advantage method? a. Only two observations are used to develop the cost function. b. The high and low activity levels may not be representative. c. The method does not detect if the cost behaviour is nonlinear. d. The method is easy to apply.

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Chapter_24_11e 24. The following information is available for maintenance costs: Month January February March April May

Production Volume 75 115 190 60 135

Maintenance Costs £250 310 400 240 355

Using a computer or calculator, compute the estimate of variable cost per unit of production using the method of least squares. Rounded to two decimal places, this value would be a. £3.21. b. £2.70. c. £1.31. d. £1.23. 25. In the formula Y = a + bx, a refers to the a. slope. b. intercept. c. dependent variable. d. independent variable. 26. In the formula Y = a + bx, b refers to the a. slope. b. intercept. c. dependent variable. d. total variable costs. 27. The high-low method may give unsatisfactory results if a. the data points all fall on a line. b. volume of activity is heavy. c. volume of activity is light. d. the points are unrepresentative. 28. In a simple least-squares regression where X refers to the number of sales calls made by a sales department and Y refers to the monthly total cost of the sales department, the R-squared in the regression output would represent a. the estimated monthly total costs of the sales department. b. the estimated monthly fixed costs of the sales department. c. the estimated monthly variable costs per unit of the sales department. d. the per cent of variation in Y that is explained by X.

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Chapter_24_11e 29. What does a correlation coefficient near -1 mean? a. Two variables are moving in the opposite direction. b. Two variables are moving in the same direction. c. Two variables are unrelated. d. One variable is not a good predictor of the other. 30. What is the difference between a correlation equal to -1 and a correlation equal to +1? a. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of +1 means they are moving in opposite directions. b. A correlation equal to -1 means two alternatives are moving in the same direction, whereas a correlation of +1 means they are unrelated. c. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of +1 means they are moving in the same direction. d. A correlation equal to -1 means two alternatives are moving in opposite directions, whereas a correlation of +1 means they are unrelated. 31. In the formula Y = a + bx, bx refers to the a. total variable costs. b. intercept. c. dependent variable. d. independent variable. 32. The appropriate range for the coefficient of correlation (r) is a. 0 ≤ r ≤ 1. b. -% ≤ r ≤ +%. c. -1 ≤ r ≤ 1. d. -1 ≤ r ≤ +%. 33. The percentage change in the dependent variable that is explained by the change in the independent variable is measured by the a. intercept. b. slope. c. coefficient of determination. d. correlation coefficient. 34. Which of the following decision-making tools would NOT be useful in determining the slope and intercept of a mixed cost? a. Linear programming b. Least-squares method c. High-low method d. Scatter diagrams

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Chapter_24_11e 35. What does a correlation coefficient near 0 mean? a. Two variables are moving in the opposite direction. b. Two variables are moving in the same direction. c. Two variables are unrelated. d. One variable is a good predictor of the other. 36. The following cost functions were developed for manufacturing overhead costs: Manufacturing Overhead Cost Electricity Maintenance Supervisors' salaries Indirect materials

Cost Function £400 + £140 per direct labour hour £800 + £40 per direct labour hour £16,000 per month £50 per direct labour hour

If July production is expected to be 200 units that require 300 direct labour hours, estimated manufacturing overhead costs would be a. £17,430. b. £55,200. c. £63,200. d. £86,200. 37. Hook Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data: Month January April July October

Cost of Electricity £ 8,100 9,000 10,200 8,700

Direct labour Hours 750 850 1,000 800

Using the high-low method, which of the following is the best equation? a. Y = £900 + £12.00X b. Y = £900 + £8.40X c. Y = £1,800 + £8.40X d. Y = £2,400 + £8.40X 38. Which method can be used to estimate the cost function? a. High-low method b. Scatterplot method c. Method of least squares d. All of these methods can be used to estimate the cost function

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Chapter_24_11e 39. Advantages of the method of least squares over the high-low method include all of the following EXCEPT a. a statistical method is used to mathematically derive the cost function. b. only two points are used to develop the cost function. c. the squared differences between actual observations and the line (cost function) are minimized. d. all the observations have an effect on the cost function. 40. Which of the following equations uses multiple regression? a. Overhead = a + b(MH) b. DL Costs = a + b(MH) c. Overhead = a + b(DLH) d. Overhead = a + b(DLH) + c(MH) 41. Given the cost function, Y = £10,000 + £4X, at what level of the activity cost drivers will total cost be £22,000? a. 3,000 units b. 5,500 units c. 10,000 units d. 3,250 units 42. Abboud Company is planning to introduce a new product with an 80 per cent incremental unit-time learning curve for production for batches of 1,000 units. The variable labour costs are £30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are £10,000 in fixed costs not subject to learning. What is the cumulative total time (labour hours) to produce 2,000 units? a. 100 hours b. 80 hours c. 160 hours d. 180 hours 43. Advantages of the method of least squares over the high-low method include all the following EXCEPT a. a statistical method is used to mathematically derive the cost function. b. only two points are used to develop the cost function. c. the squared differences between actual observations and the line (cost function) are minimized. d. all the observations have an effect on the cost function.

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Chapter_24_11e 44. The following computer printout estimated overhead costs using multiple regression:

Parameter Intercept Setup hours # of parts

t for H(0) Parameter = 0 1.96 81.96 9.50

Estimate 1,000 25 100

R Square (R 2) Standard Error (Se) Observations

Pr > t 0.0250 0.0001 0.0001

Std. error of parameter 510.204 0.305 10.527

0.94 75.00 160

The model being measured is a. Overhead = 1,000 + 25(Setup hours) + 100(# of parts). b. Overhead = 510 + 0.305(Setup hours) + 10.527(# of parts). c. Overhead = 0.98 + 40.98(Setup hours) + 4.865(# of parts). d. Overhead = 1,000 + 25(Setup hours). 45. Which of the following is a weakness of the high-low method? a. The method is easy to apply because only two observations are required to develop the cost function. b. The data points used may represent atypical cost-activity relationships. c. Any two observers will arrive at the same conclusion. d. The method is quick to use and easy to understand. 46. The following information was available about supplies cost for the second quarter of the year: Month April May June

Production Volume 700 1,600 600

Supplies Cost £3,185 7,100 2,700

Using the high-low method, the estimate of supplies cost at 1000 units of production is a. £2,700. b. £4,460. c. £4,900. d. £7,100. 47. When the method of least squares is used to fit an equation involving two or more explanatory or independent variables, the method is called a. simple regression. b. multiple regression. c. variable regression. d. none of these.

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Chapter_24_11e 48. Assume the following information: Volume 80 units 88 units 96 units

Total Cost £1,200 £1,300 £1,400

What is the variable cost per unit? a. £15.00 b. £14.78 c. £13.75 d. £12.50 49. Weaknesses of the high-low method include all of the following EXCEPT a. only two observations are used to develop the cost function. b. the high and low activity levels may not be representative. c. the method does not detect if the cost behaviour is nonlinear. d. the method is relatively complex and difficult to apply. 50. Which of the following statements is TRUE about the learning curve? a. The curve decreases at an increasing rate. b. The learning effect will eventually disappear as the number of units produced increases. c. Failure to recognize learning curve effects will cause units produced later in a new production process to receive less cost than they should. d. All of these are true. 51. The coefficient of determination is a. a measure of the variability of actual costs around the cost-estimating equation. b. used to construct probability intervals for cost estimates. c. a standardized measure of the degree to which two variables move together. d. a measure of the per cent variation in the dependent variable that is explained by the cost estimating equation. 52. If the coefficient of correlation between machine hours and utilities cost is equal to 0.98 (r = 0.98), the correlation is a. positive. b. negative. c. not related. d. none of these.

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Chapter_24_11e 53. What does a correlation coefficient near +1 mean? a. Two variables are moving in the opposite direction. b. Two variables are moving in the same direction. c. Two variables are unrelated. d. One variable is not a good predictor of the other. 54. ____ is a measure of the per cent of variation in the dependent variable (such as total cost) that is explained by variations in the independent variable (such as total shipments) when the least-squares estimation equation is used. a. The constant b. The standard error of Y estimate c. The coefficient of determination d. The standard error of X estimate 55. In the formula Y = a + bx, x refers to the a. slope. b. intercept. c. dependent variable. d. independent variable. 56. In the method of least squares, the deviation is the difference between the a. predicted and estimated costs. b. predicted and average costs. c. average and actual costs. d. predicted and actual costs. 57. Baker Enterprises developed a cost function for manufacturing overhead costs of Y = £8,000 + £1.60X. Estimated manufacturing overhead costs at 10,000 units of production are a. £16,000. b. £17,600. c. £24,000. d. £26,000. 58. If the independent variable is production volume and the dependent variable is total manufacturing cost, a coefficient of determination of 0.90 indicates a. 90 per cent of the change in manufacturing cost can be explained by the change in the production volume. b. 90 per cent of the change in volume is caused by changes in manufacturing cost. c. 10 per cent of the change in volume is caused by changes in manufacturing cost. d. costs will change by 90 per cent of the change in volume.

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Chapter_24_11e 59. A coefficient of determination of 0.91 means a. the two variables move together in the same direction and have a strong relationship. b. the parameter is not significant. c. the model is significant 91 per cent of the time. d. that the independent variable explains 91 per cent of the cost. 60. The following computer printout estimated overhead costs using regression:

Parameter Intercept DLH R Square (R 2) Standard Error (Se) Observations

Estimate 100.41 14.05

t for H(0) Parameter = 0 4.81 6.78

Pr > t 0.0003 0.0001

Std. error of parameter 20.88 2.07

0.80 25.03 17

What is the 95 per cent confidence interval around the slope estimate? a. 11.98 to 16.13 b. 10.67 to 17.45 c. 9.57 to 18.54 d. 9.63 to 18.48 61. Abboud Company is planning to introduce a new product with an 80 per cent cumulative learning curve for production for batches of 1,000 units. The variable labour costs are £30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are £10,000 in fixed costs not subject to learning. What is the individual unit time (labour hours) to produce 2,000 units? a. 100 hours b. 80 hours c. 20 hours d. 60 hours

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Chapter_24_11e 62. The Knapp Company needs to predict the labour cost in producing small carrot patch dolls. The following production information is available: Year 1 2 3 4 5 6

Dolls Produced 1,150 1,600 1,100 2,100 1,500 1,300

labour Hours 850 975 800 1,150 950 875

labour (£) £17,000 23,400 25,600 36,800 34,200 35,000

Wage rates have steadily increased since Year 1; however, management expects no further increases in Year 7. Required: a. b.

Select the appropriate independent variable for predicting labour cost. Explain the reason for your selection. Develop an equation to predict for Year 7 the labour cost of producing carrot patch dolls. Use the high-low method.

63. Samwise, SA., and Gandolph, SA., are two companies in the same industry. Both companies estimate total fixed and variable overhead costs based on direct labour hours. Required: a.

Assume that Samwise, SA., estimated its total overhead at £400,000, the variable overhead per direct labour hour at £8 and the activity level at 30,000 direct labour hours. Determine fixed overhead.

Assume that Gandolph, SA., uses a predetermined overhead rate of £15, based on 40,000 direct labour hours. The predetermined variable overhead rate is £12 per direct labour hour. Determine the budgeted variable overhead and the budgeted fixed overhead.

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Chapter_24_11e 64. The following computer printout estimated overhead costs using linear regression:

Parameter Intercept Setup hours # of parts

t for H(0) Parameter = 0 2.25 5.10 1.65

Estimate 75 13 50

R Square (R2) Standard Error (Se) Observations

Pr > t 0.0250 0.0001 0.0500

Std. error of parameter 33.33 2.45 30.30

0.83 50.00 70

Required: a. b. c.

Write the multiple regression model. What does R Square mean? Provide a 95 per cent confidence interval around the number of parts parameter.

65. The Owen Company has the following cost data pertaining to the production of small desks: Units Produced 150 120 210 190 140

Direct labour Costs £1,600 1,500 1,750 1,700 1,600

Overhead Costs £2,800 2,570 2,910 2,850 2,600

Required: a. b.

Plot the preceding direct labour costs and overhead costs using the scatterplot method. Overhead costs should be on the vertical axis. Compute the fixed and variable components of the overhead costs using the high-low method.

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Chapter_24_11e 66. Machine hours and electricity costs for Wells Industries for a year were as follows: Month January February March April May June July August September October November December

Machine Hours 2,000 2,320 1,520 2,480 3,040 2,640 3,280 2,800 1,600 2,960 3,760 3,360

Electricity Costs £ 9,200 10,500 6,750 11,500 14,125 11,000 12,375 11,375 7,750 13,000 15,500 13,875

Required: a. b. c. d.

Using the high-low method, develop an estimate of variable electricity costs per machine hour. Using the high-low method, develop an estimate of fixed electricity costs per month. Using the high-low method, develop a cost function for monthly electricity costs. Estimate electricity costs for a month in which 3,000 machine hours are worked.

67. Koch, SA., believes their electricity costs are affected by the number of machine hours worked. Machine hours and electricity costs for the past year were as follows: Month January February March April May June July August September October November December

Machine Hours 300 240 580 860 1,040 940 1,140 900 1,240 740 480 380

Electricity Costs £ 6,000 4,250 7,750 9,750 11,250 11,000 14,000 12,250 14,250 7,750 7,000 6,500

Required: Copyright Cengage Learning. Powered by Cognero.

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Chapter_24_11e 1. Using the high-low method, a. Develop an estimate of variable electricity costs per machine hour. b. Develop an estimate of fixed electricity costs per month. c. Develop a cost function for monthly electricity costs. d. Estimate electricity costs for a month in which 500 machine hours are worked using the cost function in requirement c above. 2. A regression analysis was performed to estimate the cost function and the following printout was generated: SUMMARY OUTPUT Regression Statistics

Multiple R R Square Adjusted R Square Standard Error Observations

0.965744 0.932662 0.925928 885.7731 12

ANOVA Significance Df

F F

Regression Residual Total

1 10 11

1.09E+08 1.09E+08 7845940 784594 1.17E+08

138.5044

3.51E–07

Upper Coefficients Std Error

t Stat

P-value

Lower 95% 95%

Intercept Machine Hours

2433.588 9.337889

637.9879 3.814474 0.793445 11.76879

0.003404 3.51E–07

1012.062 3855.114 7.569983 11.1058

Using the results of the method of least squares, a. Develop an estimate of variable electricity costs per machine hour. b. Develop an estimate of fixed electricity costs per month. c. Develop a cost function for monthly electricity costs. Estimate electricity costs for a month in which 500 machine hours are worked using the cost d. function in requirement c above. e. Comment on the goodness of fit of the above cost function. 3. Comment on and compare your estimates for electricity costs with 500 machine hours using the high-low method and the method of least squares. Which one is better?

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Chapter_24_11e 68. The following data were obtained from the books of Thomas Company: Month 1 2 3 4 5 6 The normal equations are

Overhead Costs £14 18 25 12 26 8

Direct labour Hours 3 5 7 4 8 2

ΣXY = aΣX + bΣX2 ΣY = an + bΣX

Required: Use a computer or calculator to prepare the following: Plot the data for overhead cost as a function of direct labour hours using the scatterplot a. method. b. Compute the fixed and variable components of the overhead costs using the high-low method. Compute the fixed and variable components of the overhead costs using the least-squares c. method. Discuss the strengths and weaknesses of the three different cost estimation techniques used in d. parts a, b and c.

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Chapter_24_11e 69. The plant manager requested information to assist in estimating maintenance costs. The following computer printout was generated using the least squares method: Intercept Slope Correlation coefficient Activity variable

10,980 0.95 0.89 Units of production

Required: a. b. c.

Using the information from the computer printout, develop a cost function that can be used to estimate maintenance costs at different volume levels. Estimate maintenance costs if expected production for next month is 40,000 units. What percentage change in maintenance costs can be explained by changes in production volume?

70. SeyChy collected the following data on manufacturing costs and activity cost drivers for two months:

Activity level in units Variable costs Fixed costs Mixed costs Total manufacturing costs

November 3,000

December 7,500

£ 7,500 25,000 11,500 ?

£ ? ? 13,750 ?

Required: a.

What is total variable cost per unit?

What is the total fixed cost?

What is the estimated total manufacturing cost for January if the budgeted activity in January is 6,000 units?

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Chapter_24_11e 71. Machine hours and electricity costs for AMK Industries for the past year were as follows: Month January February March April May June July August September October November December

Machine Hours 2,000 2,400 1,400 2,600 3,300 3,300 3,600 3,000 1,500 3,300 4,200 4,200

Electricity Costs £18,900 21,500 14,000 23,500 28,750 22,700 25,250 23,250 16,000 26,500 31,500 22,250

Required: a. b. c. d.

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Chapter_24_11e 72. The operations manager of Elron Manufacturing requested information to assist in estimating maintenance costs. The following computer printout was generated using the least squares method: Intercept Slope Correlation coefficient Activity variable

7,300 4.2 90 Units of production volume

Required: a. b. c.

Using the information from the computer printout, develop a cost function that can be used to estimate maintenance costs at different volume levels. Estimate maintenance costs if expected production for next month is 20,000 units. What percentage change in maintenance costs can be explained by changes in production volume?

73. Innova, SA., is beginning the production of a new product. Management believes that 500 labour hours will be required to complete the new unit. An 80 per cent incremental unit-time learning curve model for direct labour hours is assumed to be valid. Assume that the exponent b = -0.3219. Data on costs are as follows: Direct materials Direct labour Variable manufacturing overhead

£50,000 per unit £20 per direct labour hour £30 per direct labour hour

Required: a.

b. c.

Set up a table with columns for cumulative number of units showing the cumulative total time in hours using the incremental unit-time learning curve. Complete the table for 1, 2, 3 and 4 units given the individual unit time for the nth unit as 500, 400, 351 and 320 for 1 to 4 units respectively. Set up a similar table assuming a 90 per cent with the incremental unit-time learning curve with the individual unit time for the nth unit as 500, 450, 430, 405 for 1 to 4 units respectively. What is the difference in variable cost of producing four units?

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Chapter_24_11e 74. At the end of April, you were hired as a management accountant for Foxworth Manufacturing. Kim Foxworth, the plant manager, has expressed frustration at the company's inability to accurately forecast total factory overhead using the following formula: Total Factory Overhead= £20,000 + £9X R2= 0.3 where X= Direct labour hours The following printout was generated by the data processing department using observations gathered during the past 12 months: Intercept Regression coefficients: Units Setups Engineering hours R2 Budgeted activity levels for April: Units Setups Engineering hours Direct labour hours

48,000 34 12 5 0.96 10,000 200 50 20,000

Required: Prepare a memorandum to Kim Foxworth that includes the following: a. b. c.

A new cost formula for estimating factory overhead costs. An example of how the formula can be used to estimate costs for the month of April. An explanation as to why the previous formula failed to accurately predict factory overhead costs.

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Chapter_24_11e 75. The plant manager requested information to assist in estimating maintenance costs. The following computer printout was generated using the least-squares method: Intercept Slope Correlation coefficient Activity variable

2 550 1.85 0.84 Units of production volume

Required: a. b.

76. Innova, SA., is beginning the production of a new product. Management believes that 500 labour hours will be required to complete the new unit. A 90 per cent cumulative average-time learning curve model for direct labour hours is assumed to be valid. Data on costs are as follows: Direct materials Direct labour Variable manufacturing overhead

£50,000 per unit £20 per direct labour hour £30 per direct labour hour

Required: a.

Set up a table with columns for cumulative number of units, cumulative average time per unit in hours and cumulative total time in hours using the cumulative average-time learning curve. Complete the table for 1, 2, 4 and 8 units.

Set up a similar table assuming an 80 per cent with the cumulative average-time learning curve.

What is the difference in variable cost of producing four units?

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Chapter_24_11e 77. Rush Company is trying to find an appropriate allocation base for factory overhead. Presented are five months of data: Month January February March April May

Direct labour Hours 10 20 15 30 25

Machine Hours 3 5 4 5 3

Factory Overhead £ 45 75 70 130 80

Required: a. b. c.

Calculate the correlation coefficient between factory overhead and direct labour hours. Calculate the correlation coefficient between factory overhead and machine hours. Should Rush Company use direct labour hours or machine hours for their allocation base for factory overhead? Why?

78. Briefly discuss some of the areas of concern that make cost estimation and prediction difficult.

79. Your company has just performed a least squares regression analysis of the monthly costs of manufacturing a new product. What are some considerations that should be made before making a decision based on the results of this analysis?

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Chapter_24_11e 80. Identify the three different cost estimation techniques and provide a description of the strengths and weaknesses of each.

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Chapter_24_11e Answer Key 1. b 2. b 3. b 4. c 5. c 6. c 7. c 8. b 9. a 10. a 11. c 12. a 13. d 14. c 15. a 16. b 17. a 18. d 19. a 20. d 21. b 22. c 23. d 24. c 25. b 26. a

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Chapter_24_11e 27. d 28. d 29. a 30. c 31. a 32. c 33. c 34. a 35. c 36. d 37. c 38. d 39. b 40. d 41. a 42. d 43. b 44. a 45. b 46. b 47. a 48. d 49. d 50. d 51. d 52. b 53. b 54. c Copyright Cengage Learning. Powered by Cognero.

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Chapter_24_11e 55. d 56. d 57. c 58. a 59. d 60. d 61. d

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Chapter_24_11e 62. a.

In periods of changing prices, unadjusted cost data should not be used as the dependent variable. Assuming that the technology has not changed, labour hours used in doll production can be substituted for labour (£) in developing the cost-estimating equation: Y = a + bX Total labour hours = a constant + (b × # of dolls produced) After solving for total labour hours, the dependent variable can be restated in terms of labour (£) since wage rates in Year 7 have not increased over wage rates in Year 6, and for Year 7: Total labour (£)/Total labour hours = Labour rate per hour This labour rate per hour applied to Year 7 estimates will give total labour costs for Year 7.

Using labour hours: b = (1,150 - 800)/(£2,100 - 1,100) = 0.35 variable labour hours per doll a = 1,150 - (0.35 × 2,100) = 415 fixed labour hours per year Total labour hours = 415 + 0.35 (# of dolls produced) The wage rate for Year 7 is the same as for Year 6. For year 6, £35,000/875 = £40 per labour hour. Total labour costs

= Total labour hours × £40 = 415(£40) + 0.35(£40)(# of dolls produced) = £16,600 + £14.00(# of dolls produced)

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Chapter_24_11e 63. a.

Total cost = Fixed cost + (Variable rate × Output) £400 000 = Fixed cost + (£8 × 30,000) Fixed cost = £160,000

Budgeted variable overhead = (£12 × 40,000) = £480,000 Budgeted fixed overhead = (£15 × 40,000) - £480,000 = £120,000

64. a.

Overhead costs = £75 + £13(setup hours) + £50(# of parts)

Eighty-three per cent of the variation in overhead costs is explained by setup hours and number of parts.

df = 70 - 3 = 67 t is about 2.00 £50 ± 2(30.30) = [£(10.60), £110.60]

65. a.

b = (£2,910 - £2,570)/(1,750 - 1,500) = 136% of DL Costs a = £2,910 - (£1,750 × 1.36) = £530 Factory overhead costs = £530 + 1.36(DL Costs)

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Chapter_24_11e 66. a. b. c. d.

£3.91 [(£15,500 - £6,750)/(3,760 - 1,520)] £798.40 [£15,500 - (£3.91 × 3,760)] Y = £798.40 + £3.91X, or Electricity costs = £798.40 + (£3.91 × Machine hours) £12,528.40 [£798.40 + (£3.91 × 3,000)]

67. 1.

a. £10 (£14,250 - £4,250)/(1,240 - 240) b. £1,850 £14,250 - (£10 × 1,240) c. Electricity costs = £1,850 + (£10 × Machine hours) d. £6,850 £1,850 + (£10 × 500) a. £9.34 b. £2,433.59 c. Electricity costs = £2,433.59 + (£9.34 × Machine hours) d. £7,103.59 £2,433.59 + (£9.34 × 500) e. The coefficient of determination is 0.93. This means 93 per cent of the variation in electricity costs is explained by variations in machine hours. This is close to 100 per cent. The estimates using the method of least squares are better than those using the high-low method. The method of least squares estimates the cost function minimizing the squared difference between the cost function and the observations and uses all data observed. The high-low method only uses two observations, the highest and lowest. Oftentimes, the highest and/or lowest observations are outliers.

68. a.

b = (£26 - £8)/(8 - 2) = £3 per DLH a = £26 - (8 × £3) = £2 Overhead costs = £2 + £3(DLH) Page 34

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XY 42 90 175 48 208 16 579

X2 9 25 49 16 64 4 167

Chapter_24_11e c. X 3 5 7 4 8 2 29

Y 14 18 25 12 26 8 103

Normal equations: (1) 579 = 29a + 167b (2) 103 = 6a + 29b Multiplying (1) by 6 and (2) by 29, we get: 3,474 = 174a + 1,002b -2,987 = 174a + 841b 487 = 161b b = £3.0248 Substituting 3.0248 into the first equation for b, we get: 579 = 29a + (167 × 3.0248) a = £2.5468 The least-squares cost estimation equation is Overhead costs = £2.5468 + £3.0248(DLH) d.

Scatterplot Method: Scattergraphs help identify representative high and low volumes. They also are useful in determining if costs can be reasonably approximated by a straight line. Scatter graphs are simple to use, but professional judgment is required to draw a representative straight line through the plot of historical data. This method is subjective in nature and probability intervals cannot be developed. High-Low Method: This method uses data from two time periods to estimate fixed and variable costs. This is a good method to use when data is limited. It is a subjective method and probability intervals cannot be developed. It is very important that the high and low volumes represent the normal operating conditions of all observations. Again, professional judgment is required to select the appropriate data. Least-Squares Method: This method uses all available data. It uses a mathematical criterion, which provides for an objective approach to cost estimation. In addition, this method can

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Chapter_24_11e provide information on how good the cost estimating equation fits the historical cost data and information needed to construct probability intervals for cost estimates. It also can be used to develop equations that are not linear in nature. This method requires more data points than the high-low or scatterplot methods. 69. a. Total maintenance costs = b. Total maintenance costs = c.

£10,980 + £0.95X £10,980 + (£0.95 × 40,000) = £48,980 79.21% (0.892)

70. a.

Variable cost (£7,500/3,000) Variable cost component of mixed cost [(£13,750 - £11,500)/(7,500 - 3,000)] Total variable cost

£2.50

Fixed cost Fixed cost component of mixed cost [£11,500 - (£0.50 × 3,000)] Total fixed cost

£25,000

£35,000 + (6,000 × £3) = £53,000

a. b. c. d.

£6.25 (£31,500 - £14,000)/(4,200 - 1,400) £5,250 [£31,500 - (£6.25 × 4,200)] Electricity costs = £5,250 + (£6.25 × Machine hours) £13,375 [£5,250 + (£6.25 × 1,300)] £13,375 is the best estimate, but 1,300 is out of the relevant range.

a. b. c.

Total maintenance costs = £7,300 + £4.20X Total maintenance costs = £7,300 + (£4.20 × 20,000) = £91,300

0.50 £3.00

10,000 £35,000

71.

72.

81.0% (0.902)

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Chapter_24_11e 73. a.

Units 1 2 3 4

90% 500 400 351 320

Total Hrs. 500 900 1,251 1,571

Units 1 2 3 4

80% 500 450 430 405

Total Hrs. 500 950 1,380 1,785

0.90 model = £200,000 + (50 × 1,785) = £289,250/4 = 72,312.50 0.80 model = £200,000 + (50 × 1,571) = £278,550/4 = 69,637.50 The individual unit times for the nth unit are given as 500, 400, 351 and 320 for 1 to 4 units.

74. Students' memoranda should include the following: a. New cost formula: Total factory overhead cost =

£48,000 + (£34 × Units) + (£12 × Setups) + (£5 × Engineering hrs) An example of how the formula can be used to estimate costs for April: Total factory overhead cost = £48,000 + (£34 × 10,000) + (£12 × 200) + (£5 × 50) = £390,650

The reason the previous cost formula failed to accurately forecast costs: The previous cost formula had a coefficient of determination of 0.3, indicating that it explained only 30 per cent of the variability of overhead costs. The new cost formula should be a much better predictor of costs for two reasons: (1) More than one independent variable is used, and (2) the coefficient of determination is 0.96, indicating the formula explains 96 per cent of the variability of overhead costs.

a. b.

Total maintenance costs = £2,550 + £1.85X Total maintenance costs = £2,550 + (£1.85 × 10,000) = £21,050

75.

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Chapter_24_11e 76. a.

Units 1 2 4 8

90% 500 450 405 364.5

Total Hrs.

Units 1 2 4 8

80% 500 400 320 256

Total Hrs.

500 900 1,620 2,916

500 800 1,280 2,048

0.90 model = £200,000 + 50(1,620) = £281,000 /4 = £70,250 0.80 model = £200,000 + 50(1,280) = £264,000/4 = £66,000 The difference is £4,250.

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Chapter_24_11e 77. a. X 10 20 15 30 25 100

(X - X) -10 0 -5 10 5

(X - X) 2 100 0 25 100 25 250

Y 45 75 70 130 80 400

X = 20

(Y - Y) -35 -5 -10 50 0

(Y - Y)2 1,225 25 100 2,500 0 3,850

(X - X)(Y - Y) 350 0 50 500 0 900

(Y - Y)2 1,225 25 100 2,500 0 3,850

(X - X)(Y - Y) 35 -5 0 50 0 80

Y = 80

r = (900)/(250 × 3,850)0.5 = 0.91736 b. X 3 5 4 5 3 20

(X - X) -1 1 0 1 -1

X=4

(X - X)2 1 1 0 1 1 4

Y 45 75 70 130 80 400

(Y - Y) -35 -5 -10 50 0

Y = 80 r = (80)/(4 × 3,850).5 = 0.64466

Use direct labour hours because the correlation is 0.91736. The higher correlation indicates that the overhead is more closely related to direct labour hours than machine hours.

78. Several items to be wary of when developing cost estimating equations include: ∙ Data that are not based on normal operating conditions ∙ Nonlinear relationships between total costs and activity ∙ Obtaining a high R-squared purely by chance ∙ Changes in technology and prices ∙ Matching activity and cost within each observation ∙ Identifying activity cost drivers

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Chapter_24_11e 79. First of all, there are some factors relating to the manufacturing of a new product that should be considered. With a new product, data used in the analysis may not be representative of future costs because the process of producing a new product will likely undergo significant changes during the initial year. Also, new products are likely to be initially manufactured at low levels of production due to the preliminary development of the product's market. At low levels of production, variable costs per unit are likely to be higher than they would at normal levels of production. The leastsquares regression assumes a linear relationship throughout the entire range. Therefore, results could be questionable for this reason. In any event, results should be measured against other available knowledge and data for reasonability. The real-world processes generating the data are constantly in a state of change. Consequently, common sense and prior expectations should consistently be applied to the interpretation of any results. One tool that provides assistance in assessment of the degree to which the regression is well-specified is a scatter diagram. A scatter diagram can provide a visual assessment as to the degree to which the data are arranged in a straight line, and are thus suited for regression analysis. A scatter diagram can also direct attention to "outlier" observations, which represent months that are not necessarily representative of typical months of operations. 80. Scatter Diagrams: Scatter diagrams help identify representative high and low volumes. They are also useful in determining if costs can be reasonably approximated by a straight line. Scatter diagrams are simple to use, but professional judgement is required to draw a representative straight line through the plot of historical data. This method is subjective in nature, and probability intervals cannot be developed. High-Low Cost Estimation: This method uses data from two time periods to estimate fixed and variable costs. This is a good method to use when data are limited. It is a subjective method, and probability intervals cannot be developed. It is very important that the high and low volumes represent the normal operating conditions of all observations. Again, professional judgment is required to select the appropriate data. Least-Squares Method: This method uses all available data. It uses a mathematical criterion, which provides for an objective approach to cost estimation. In addition, this method can provide information on how well the cost estimating equation fits the historical cost data and information needed to construct probability intervals for cost estimates. It can also be used to develop equations that are not linear in nature. This method requires more data points than do the highlow or scatter diagram methods.

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Chapter_25_11e Indicate the answer choice that best completes the statement or answers the question. 1. Mrs. Brown's Bagel Company manufactures speciality bagels. The company buys flour in 50kg bags that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the year. The average cost to carry a 50kg bag in inventory per year is £4, and the cost to place an order is £10. The company works 250 days per year. If Brown's lead time is three working days and the average rate of usage is 40 bags per day, the reorder point would be a. 140 bags. b. 120 bags. c. 100 bags. d. 80 bags. 2. If inventory is purchased from an outside supplier, the inventory-related costs are a. ordering and carrying costs. b. setup and carrying costs. c. ordering and setup costs. d. none of these. 3. Mrs. Brown's Bagel Company manufactures speciality bagels. The company buys flour in 50kg bags that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the year. The average cost to carry a 50kg bag in inventory per year is £4, and the cost to place an order is £10. The company works 250 days per year. Brown's economic order quantity is a. 354 bags. b. 447 bags. c. 224 bags. d. 100 bags. 4. Economic order quantity refers to the order size that a. minimizes the size of the order. b. minimizes the carrying costs associated with inventory. c. minimizes total inventory costs. d. minimizes the ordering costs associated with inventory.

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Chapter_25_11e 5. Hapsburg Manufacturing purchases components produced by Little Company in the manufacture of its main product. For the next year, Hapsburg expects to use a total of 20,000 parts. Hapsburg typically orders 2,000 units at a time. The cost of placing an order is £100, and the average annual cost of carrying one unit of inventory is £5. Hapsburg's total carrying cost is a. £100,000. b. £10,000. c. £50,000. d. £5,000. 6. Cozy Stoves produces wood-burning stoves. In order to produce the frames for the stoves, special equipment must be set up. The setup cost per frame is £40. The cost of carrying frames in inventory is £5 per frame per year. The company produces 100,000 stoves per year. Cozy Stoves' total setup costs associated with the economic order quantity are a. £3,953. b. £3,612. c. £3,162. d. £1,778. 7. March Manufacturing uses an average of 150 components per day, although usage can run as high as 175 components per day. If lead time is three days, how much safety stock should March have on hand? a. 75 components b. 450 components c. 510 components d. 150 components 8. Kali Manufacturing uses an average of 2,000 components per day, although usage can run as high as 2,500 components per day. If lead time is four days, how much safety stock should Kali have on hand? a. 10,000 components b. 8,000 components c. 2,500 components d. 2,000 components 9. One of the traditional reasons for holding inventory is to minimize total carrying costs and setup costs. The JIT solution is to a. reduce setup costs. b. reduce lead time. c. use total preventive maintenance. d. use total quality control.

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Chapter_25_11e 10. The reorder point for inventory depends upon which of the following factors? a. The economic order quantity b. The lead time between placing an order and its availability for use c. The rate of usage during lead time d. All of these 11. JIT purchasing is done using a. short-term contracts that emphasize price. b. long-term contracts based on quality, reliability and price. c. short-term contracts based on quality, reliability and price. d. inventory to hedge against stockouts and price increases. 12. Safety stock is an attempt to manage fluctuations in a. inventory price. b. demand. c. lead time. d. all of these. 13. Perch Pro Shops sells an average of 200 lures per day. The lead time required to receive lures from the supplier is four days. What is Perch's reorder point? a. 100 lures b. 200 lures c. 300 lures d. 800 lures 14. Buckner Manufacturing purchases components produced by Cochran Company in the manufacture of their main product. For the next year, Buckner expects to use a total of 30,000 parts. Buckner typically orders 500 units at a time. The cost of placing an order is £40, and the average annual cost of carrying one unit of inventory is £2. Buckner's total carrying cost is a. £1,000. b. £500. c. £2,400. d. £2,900.

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Chapter_25_11e 15. Hapsburg Manufacturing purchases components produced by Little Company in the manufacture of its main product. For the next year, Hapsburg expects to use a total of 20,000 parts. Hapsburg typically orders 2,000 units at a time. The cost of placing an order is £100, and the average annual cost of carrying one unit of inventory is £5. Hapsburg's total ordering cost is a. £1,000. b. £5,000. c. £10,000. d. £500. 16. Hapsburg Manufacturing purchases components produced by Little Company in the manufacture of its main product. For the next year, Hapsburg expects to use a total of 20,000 parts. Hapsburg typically orders 2,000 units at a time. The cost of placing an order is £100, and the average annual cost of carrying one unit of inventory is £5. Hapsburg's total inventory cost is a. £5,100. b. £6,000. c. £10,000. d. £20,000. 17. JIT avoids shutdowns due to materials shortages in all of the following ways EXCEPT a. using total preventive maintenance. b. holding inventory. c. using total quality control to reduce defective materials. d. working with suppliers to ensure the availability of materials. 18. July Manufacturing uses an average of 150 units per day, although usage can run as high as 175 units per day. If July maintains a recommended amount of safety stock and lead time is three days, what is July's reorder point? a. 450 units b. 510 units c. 525 units d. 600 units

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Chapter_25_11e 19. Cozy Stoves produces wood-burning stoves. In order to produce the frames for the stoves, special equipment must be set up. The setup cost per frame is £40. The cost of carrying frames in inventory is £5 per frame per year. The company produces 100,000 stoves per year. The number of frames that Cozy Stoves should produce per setup in order to minimize the total setup and carrying costs is a. 2,828 frames. b. 1,265 frames. c. 894 frames. d. 566 frames. 20. If inventory is produced internally, the inventory-related costs are a. ordering and carrying costs. b. setup and carrying costs. c. ordering and setup costs. d. none of these. 21. The reorder point for inventory is calculated as a. Rate of usage × Lead time. b. (Maximum usage + Average usage) × Lead time. c. (Maximum usage - Average usage) × Lead time. d. none of these. 22. Ordering frequently in small lot sizes minimizes a. ordering cost. b. carrying cost. c. stockout cost. d. all of these. 23. Which of the following is NOT an opportunity cost associated with inventory management? a. Lost sales to customers b. Use of capital tied up in inventory investment c. Cost of expediting d. All of these are opportunity costs 24. Buckner Manufacturing purchases components produced by Cochran Company in the manufacture of their main product. For the next year, Buckner expects to use a total of 30,000 parts. Buckner typically orders 500 units at a time. The cost of placing an order is £40, and the average annual cost of carrying one unit of inventory is £2. Buckner's total ordering cost is a. £120. b. £2,000. c. £2,400. d. £500. Copyright Cengage Learning. Powered by Cognero.

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Chapter_25_11e 25. Big Bus Company produces buses. In order to produce the seats for the buses, special equipment must be set up. The setup cost per frame is £40. The cost of carrying seats in inventory is £5 per seat per year. The company produces 100,000 buses per year. The number of seats that should be produced per setup in order to minimize the total setup and carrying costs is a. 2,828 seats. b. 1,265 seats. c. 894 seats. d. 566 seats. 26. Which of the following is NOT considered an ordering cost? a. Inventory taxes b. Insurance cost on shipment c. Cost of processing an order d. Unloading costs 27. The cost of interrupted production is considered part of the a. setup cost. b. ordering cost. c. carrying cost. d. stockout cost. 28. JIT reduces lead times to meet delivery dates by a. reducing setup times. b. expediting delivery to customers. c. having more inventory available. d. working overtime to fill orders. 29. Buckner Manufacturing purchases components produced by Cochran Company in the manufacture of their main product. For the next year, Buckner expects to use a total of 30,000 parts. Buckner typically orders 500 units at a time. The cost of placing an order is £40, and the average annual cost of carrying one unit of inventory is £2. Buckner's total inventory cost is a. £2,900. b. £1,000. c. £3,400. d. £2,000.

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Chapter_25_11e 30. Brock Manufacturing uses an average of 2,000 units per day, although usage can run as high as 2,500 units per day. If Brock maintains a recommended amount of safety stock and lead time is four days, what is Brock's reorder point? a. 12,000 units b. 10,000 units c. 8,000 units d. 2,000 units 31. Mrs. Brown's Bagel Company manufactures speciality bagels. The company buys flour in 50kg bags that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the year. The average cost to carry a 50kg bag in inventory per year is £4, and the cost to place an order is £10. The company works 250 days per year. If Brown's lead time is four working days, the average rate of usage is 40 bags per day, and the company carries a safety stock of 20 bags, the reorder point would be a. 180 bags. b. 140 bags. c. 160 bags. d. 100 bags. 32. Cozy Stoves produces wood-burning stoves. In order to produce the frames for the stoves, special equipment must be set up. The setup cost per frame is £40. The cost of carrying frames in inventory is £5 per frame per year. The company produces 100,000 stoves per year. Cozy Stoves' total carrying costs associated with the economic order quantity are a. £3,612. b. £3,162. c. £506. d. £316. 33. Placing large, infrequent orders minimizes a. ordering cost. b. carrying cost. c. stockout cost. d. all of these. 34. Enchanted Acres sells an average of 6,000 bags of flower seed daily. The lead time required to receive seed from the supplier is four days. What is Enchanted Acres' reorder point? a. 1,500 bags b. 6,000 bags c. 12,000 bags d. 24,000 bags Copyright Cengage Learning. Powered by Cognero.

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Chapter_25_11e Figure C25-5 Big Bus Company produces buses. In order to produce the seats for the buses, special equipment must be set up. The setup cost per frame is £40. The cost of carrying seats in inventory is £5 per seat per year. The company produces 100,000 buses per year. 35. Big Bus Company produces buses. In order to produce the seats for the buses, special equipment must be set up. The setup cost per frame is £40. The cost of carrying seats in inventory is £5 per seat per year. The company produces 100,000 buses per year. Total setup costs associated with the economic order quantity are a. £3,953. b. £3,612. c. £3,162. d. £1,778. 36. Following is information pertaining to material that is used in the assembly of automobiles: Annual demand Unit cost Cost of placing an order Carrying cost as a percentage of unit cost

4,000 units £25 £600 10%

Required: a. b. c.

Calculate total annual carrying costs for an order quantity of 200 units per order. Calculate total annual ordering costs for an order quantity of 200 units per order. Determine the optimal order size.

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Chapter_25_11e 37. Bernard Company uses 6,000 grams of silver each year to produce jewellery. The cost of placing an order is £2,000. The annual cost of holding one gram of silver is £50. Bernard currently places four orders of 1,500 grams each. Required: a. b. c.

Compute the annual cost of the current inventory policy. Compute the cost that Bernard would incur if it used economic order quantity. Compute the amount that Bernard would save if it used economic order quantity rather than the current policy.

38. The Arizona Company manufactures cactus candy. The company buys sugar used in the candy in 10kg boxes that cost £10 each. The company uses 60,000 boxes per year and usage occurs evenly throughout the year. The average cost to carry a 10kg box in inventory per year is £6, and the cost to place an order is £4. Required: a. b. c. d.

Determine the economic order quantity for the sugar in terms of 10kg boxes. If the company works 250 days per year, on the average, how many boxes of sugar are used per working day? If the lead time for an order is normally five working days, determine the reorder point for sugar. If 100 boxes of sugar are carried as safety stock, determine the reorder point for the sugar.

39. Answer the following questions pertaining to just-in-time inventory management: a. b. c.

Identify key elements of the JIT philosophy. What elements of the JIT approach contribute to reducing materials inventory? Why do proponents of JIT believe inventory is an enemy?

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Chapter_25_11e 40. Nazca Company uses 48,000 grams of silver each year to produce jewellery. The cost of placing an order is £150. The annual cost of holding one gram of silver is £3. Nazca currently places 12 orders of 4,000 grams each. Required: a. b. c.

Compute the annual cost of the current inventory policy. Compute the cost that Nazca would incur if it used economic order quantity. Compute the amount that Nazca would save if it used economic order quantity rather than the current policy.

41. Merrill Manufacturing produces stainless steel sinks. In order to produce the sinks, special equipment must be set up. The setup cost per sink is £10. The cost of carrying sinks in inventory is £1.25 per sink per year. The company produces 50,000 sinks per year. Required: a. b.

Compute the number of sinks that should be produced per setup in order to minimize the total setup and carrying costs. Compute the total setup and carrying costs associated with the economic order quantity. (Round to the nearest £.)

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Chapter_25_11e 42. Evans Company has the following information: Annual demand Order size Ordering cost per order Carrying costs per unit for one year Lead time (maximum 20 days) Maximum daily use Work year

4,000 units 1,000 units £500 £50 10 days 25 units 250 days

Required: a. b. c. d.

Determine the economic order quantity for Evans. What is the annual savings to Evans Company if it was to change from an order size of 1,000 to the economic order quantity? What is the reorder point? What is the safety stock needed to prevent stockouts?

43. What is Just-in-time inventory management? What are the four just-in-time approaches to reducing raw materials inventory?

44. Smart Manufacturing uses an average of 20,000 components per day, although usage can run as high as 22,500 components per day. Lead time required for placing an order is four days. Required: a. b. c.

Determine Smart's reorder point without safety stock. Determine Smart's safety stock. Determine Smart's reorder point with safety stock.

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Chapter_25_11e 45. Briefly explain just-in-time (JIT) inventory management.

46. Describe just-in-time (JIT) inventory management.

47. Describe the traditional inventory management model.

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Chapter_25_11e Answer Key 1. b 2. a 3. c 4. c 5. d 6. c 7. a 8. d 9. a 10. d 11. b 12. b 13. d 14. b 15. a 16. b 17. b 18. c 19. b 20. b 21. a 22. b 23. c 24. c 25. b 26. a

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Chapter_25_11e 27. d 28. a 29. a 30. b 31. a 32. b 33. a 34. d 35. c 36. a.

(£25 × 0.10) × (200/2) = £250

£600 × (4,000/200) = £12,000

EOQ =

£45,500

= 1,385.64 units

37.

Annual order cost = 6,000/1,500 × £2,000 = Annual carrying cost = £50 × 1,500/2 = Total current inventory cost b.

£34,641 Economic order quantity = Annual order cost = 6,000/693 × £2,000 = Annual carrying cost = £50 × 693/2 = Total EOQ inventory cost

£ 8,000 37,500 £45,500

= 693 £17,316 17,325 £34,641

£10,859 (£45,500 - £34,641)

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Chapter_25_11e 38. a. 283 boxes b. 240 boxes 60,000 boxes/250 days c. 1,200 boxes (240 boxes × 5 days) d. 1,300 boxes (240 boxes × 5 days) + 100 boxes 39. a.

Key elements of the JIT philosophy include inventory reduction, reduced production times and increased product quality and employee involvement.

They argue that inventory is an enemy because it causes the incurring of carrying and handling costs, increases production times and hides quality problems.

£7,800

40.

Annual order cost = 48,000/4,000 × £150 = Annual carrying cost = £3 × 4,000/2 = Total current inventory cost b.

£1,800 6,000 £7,800

£6,573 Economic order quantity = Annual order cost = 48,000/2,191 × £150 = Annual carrying cost = £3 × 2,191/2 = Total EOQ inventory cost

= 2,191 £3,286 3,287 £6,573

c.£1,227 (£7,800 - £6,573)

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Chapter_25_11e 41. a.

894 EOQ =

Total setup costs = [£10 × (50,000/894)] = £559 Total carrying costs = [£1.25 × (894/2)] = £559

42. a.

EOQ =

Total costs (1,000 units) = [£500 × (4,000/1,000)] + [£50 × (1,000/2)] = Total costs (282.84 units) = [£500 × (4,000/282.84)] + (£50 × (282.84/2)] = Annual savings

= 282.84 units

£27,000 14,142 £12,858

Daily demand = (4,000/250) = 16 units per day Reorder point = 16 units × 10 days = 160 units

Maximum demand per day Maximum lead time Maximum lead time demand Reorder point without safety stock Safety stock

25 units ×20 500 units 160 units 340 units

43. Just-in-time is a comprehensive inventory management philosophy that stresses policies, procedures and attitudes by managers and those whom they supervise that result in the efficient production of goods with minimal inventory. Approaches to reducing raw materials centre on four elements: 1. Develop long-term relations with limited suppliers. 2. Emphasize service and quality in the selection of vendors. 3. Establish procedures allowing production employees decision freedom to order raw materials. 4. Establish procedures to have raw materials delivered directly to the work stations. 44. a.

80,000 units (20,000 components × 4 days)

10,000 units [(22,500 components - 20,000 components) × 4 days]

90,000 units (80,000 units + 10,000 units)

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Chapter_25_11e 45. Just-in-time (JIT) inventory management is a comprehensive inventory management philosophy that stresses policies, procedures and attitudes by managers and other workers that result in the efficient production of high-quality goods while maintaining the minimum level of inventories. The key elements of the JIT philosophy include increased coordination throughout the value chain, reduced inventory, reduced production times, increased product quality and increased employee involvement and empowerment. 46. JIT uses long-term contracts, continuous replenishment and EDI to reduce (eliminate) ordering costs. Engineering efforts are made to reduce setup times drastically. Once ordering costs and setup costs are reduced to minimal levels, it is possible to reduce carrying costs by reducing inventory levels. JIT carries small buffers in front of each operation and uses a kanban system to regulate production. Production is tied to market demand. If an interruption occurs, throughput tends to be lost because of the small buffers. Yet, future throughput tends to increase because efforts are made to improve such things as quality, productivity and lead time. 47. The traditional approach uses inventories to manage the trade-offs between ordering (setup) costs and carrying costs. The optimal trade-off defines the economic order quantity. Other reasons for inventories are also offered: due-date performance, avoiding shutdowns (protecting sales), hedging against future price increases and taking advantage of discounts. Just-in-time and theory of constraints, on the other hand, argue that inventories are costly and are used to cover up fundamental problems that need to be corrected so that the organization can become more competitive.

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Chapter_26_11e Indicate the answer choice that best completes the statement or answers the question. 1. Tiffany Manufacturing Company produces X and Y with contribution margins per unit of £10 and £90, respectively. Only 200 labour hours and 400 machine hours are available for production. Time requirements to produce one unit of X and Y are as follows:

Labour hours per unit Machine hours per unit

Product A 1 5

Product B 2 1

What is the objective function to maximize profits for Tiffany Manufacturing Company? a. Minimize 10X + 90Y b. Maximize 1X + 2Y c. Maximize 10X + 90Y d. Minimize 1X + 2Y 2. Hassel Company manufactures two different products, X and Y. The company has 100kg of materials and 300 direct labour hours available for production. The time requirements and contribution margins per unit are as follows:

Contribution margin per unit Materials per unit (lbs.)

Product X £4 1

Direct labour hours per unit

Product Y £5 2 2

What is the objective function for maximizing profits? a. Minimize £4X + £5Y b. Maximize £4X + £5Y c. Maximize £1X + £2Y d. Maximize £4X + £2Y 3. Using the graphic approach to linear programming, the solution is usually a. a corner point where two or more constraints intersect. b. where the lines intersect farthest from zero. c. the point farthest from the Y-axis. d. the point farthest from the X-axis.

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Chapter_26_11e 4. Heft Company produces A and B with contribution margins per unit of £40 and £30, respectively. Only 500 labour hours and 300 machine hours are available for production. Time requirements to produce one unit of A and B are as follows:

Labour hours per unit Machine hours per unit

Product A 5 1

Product B 2 4

What is the constraint on labour hours for Heft Company? a. 5A + 1B ≤ 500 b. 5A + 2B ≤ 500 c. 1A + 4B ≤ 300 d. 40A + 30B ≤ 500 5. In the graphic method of solving a linear programming problem, which of the following is depicted on the graph? a. Coefficient of correlation b. Constraint c. Least-squares line of best fit d. Break-even point 6. A linear programming model would NOT include which of the following items? a. Independent variables b. Constraints c. Objective function d. Networks 7. A linear programming model would NOT include which of the following items? a. Independent variables b. Networks c. Dependent variables d. Objective function

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Chapter_26_11e 8. The following information is available for the Johnson Boat Company, which sells two products:

Selling price Variable costs Fixed costs (average) Processing time Vinyl cover used

3- Person Raft (Variable A) £50 £35 £10 2 hours 16 sq. ft.

Kayak (Variable B) £80 £50 £20 4 hours 12sq. ft.

There are 100 hours available in the plant and 75 square metres of vinyl available per operating period. The objective function for this production situation is to a. maximize £15A + £30B. b. maximize £50A + £80B. c. maximize £35A + £50B. d. minimize £15A + £30B. 9. Hassel Company manufactures two different products, X and Y. The company has 100kg of materials and 300 direct labour hours available for production. The time requirements and contribution margins per unit are as follows:

Contribution margin per unit Materials per unit (lbs.) Direct labour hours per unit

Product X £4 1 4

Product Y £5 2 2

What is the equation for the constraint on direct labour? a. £1X + £2Y ≤ 300 b. £4X + £2Y ≤ 100 c. £4X + £5Y ≤ 100 d. £4X + £2Y ≤ 300

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Chapter_26_11e 10. The following information is available for Wilson Trailer Company, which sells two products:

Processing time Vinyl cover used Selling price Variable cost Fixed cost

Trailer A 2 hours 16 sq. ft. £50.00 £35.00 £10.00

Trailer B 4 hours 12 sq. ft. £80.00 £50.00 £20.00

There are 100 hours available in the plant and 75 square metres of vinyl available per operating period. What is the objective function for maximizing profits? a. Maximize £15A + £30B b. Maximize £50A + £80B c. Maximize £35A + £50B d. Minimize £15A + £30B Figure C26-2 Heft Company produces A and B with contribution margins per unit of £40 and £30, respectively. Only 500 labour hours and 300 machine hours are available for production. Time requirements to produce one unit of A and B are as follows: Product A Product B Labour hours per unit 5 2 Machine hours per unit 1 4 11. Heft Company produces A and B with contribution margins per unit of £40 and £30, respectively. Only 500 labour hours and 300 machine hours are available for production. Time requirements to produce one unit of A and B are as follows:

Labour hours per unit Machine hours per unit

Product A 5 1

Product B 2 4

What is the constraint on machine hours for Heft Company? a. 1A + 4B ≤ 500 b. 5A + 2B ≤ 500 c. 1A + 4B ≤ 300 d. 40A + 30B ≤ 500

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Chapter_26_11e 12. The following information is available for the Johnson Boat Company, which sells two products:

Selling price Variable costs Fixed costs (average) Processing time Vinyl cover used

3- Person Raft (Variable A) £50 £35 £10 2 hours 16 sq. ft.

Kayak (Variable B) £80 £50 £20 4 hours 12sq. ft.

There are 100 hours available in the plant and 75 square metres of vinyl available per operating period. Which of the following statements is NOT correct? a. The materials constraint favours kayaks over rafts. b. The time constraint favours rafts over kayaks. c. The material constraint favours rafts over kayaks. d. The objective function favours kayaks over rafts. 13. A linear programming problem has an objective function of 10a + 12b. If the optimal solution provided by the model is to produce and sell 400 units of 'a' and 1,000 units of 'b', the expected profit is a. £1,400. b. £14,800. c. £16,000. d. £40,800. 14. Heft Company produces A and B with contribution margins per unit of £40 and £30, respectively. Only 500 labour hours and 300 machine hours are available for production. Time requirements to produce one unit of A and B are as follows:

Labour hours per unit Machine hours per unit

Product A 5 1

Product B 2 4

What is the objective function to maximize profits for Heft Company? a. Minimize 5A + 2B b. Maximize 1A + 4B c. Maximize 40A + 30B d. Minimize 40A + 30B

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Chapter_26_11e 15. The following information is available for Wilson Trailer Company, which sells two products: Trailer A 2 hours 16 sq. ft. £50.00 £35.00 £10.00

Processing time Vinyl cover used Selling price Variable cost Fixed cost

Trailer B 4 hours 12 sq. ft. £80.00 £50.00 £20.00

There are 100 hours available in the plant and 75 square metres of vinyl available per operating period. Which of the following statements is INCORRECT? a. The materials constraint favours Trailer B over Trailer A. b. The time constraint favours Trailer A over Trailer B. c. The material constraint favours Trailer A over Trailer B. d. The objective function favours Trailer B over Trailer A. 16. Anderson Company manufactures two different products: A and B. The company has 100kg of raw materials and 300 direct labour hours available for production. The time requirements and contribution margins per unit are as follows:

Raw materials per unit (lbs.) Direct labour hours per unit Contribution margin per unit

A 1 4 £4

B 2 2 £5

What is the objective function for Anderson Company? a. Minimize £4A + £5B b. Maximize £4A + £5B c. Maximize £1A + £2B d. Maximize £4A + £2B

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Chapter_26_11e 17. Tiffany Manufacturing Company produces X and Y with contribution margins per unit of £10 and £90, respectively. Only 200 labour hours and 400 machine hours are available for production. Time requirements to produce one unit of X and Y are as follows:

Labour hours per unit Machine hours per unit

Product A 1 5

Product B 2 1

What is the constraint on labour hours for Tiffany Manufacturing Company? a. 10X + 90Y ≤ 200 b. 1X + 2Y ≤ 400 c. 1X + 2Y ≤ 200 d. 1X + 4Y ≤ 400 18. The following information is available for Wilson Trailer Company, which sells two products:

Processing time Vinyl cover used Selling price Variable cost Fixed cost

Trailer A 2 hours 16 sq. ft. £50.00 £35.00 £10.00

Trailer B 4 hours 12 sq. ft. £80.00 £50.00 £20.00

There are 100 hours available in the plant and 75 square metres of vinyl available per operating period. The constraint equation representing the materials available for the production processes is a. 2A + 4B ≥ 100. b. 16A + 12B = 75. c. 2A + 4B = 200. d. 16A + 12B ≤ 75. 19. A linear programming problem has the following objective function: 20X + 40Y + 60Z. If the optimal solution provided by the model is to produce and sell 100, 200 and 300 units of X, Y and Z, respectively, what is the expected return? a. £36,000 b. £28,000 c. £120 d. £24,000

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Chapter_26_11e 20. Anderson Company manufactures two different products: A and B. The company has 100kg of raw materials and 300 direct labour hours available for production. The time requirements and contribution margins per unit are as follows:

Raw materials per unit (lbs.) Direct labour hours per unit Contribution margin per unit

A 1 4 £4

B 2 2 £5

What is the equation for the constraint on direct labour? a. £1A + £2B < 300 b. £4A + £2B < 100 c. £4A + £5B < 100 d. £4A + £2B < 300 21. A linear programming problem has the following objective function: 20A + 40B + 60C If the optimal solution provided by the model is to produce and sell 100, 200 and 300 units of A, B and C, respectively, what is the expected profit? a. £36,000 b. £120 c. £24,000 d. £28,000 22. Tiffany Manufacturing Company produces X and Y with contribution margins per unit of £10 and £90, respectively. Only 200 labour hours and 400 machine hours are available for production. Time requirements to produce one unit of X and Y are as follows:

Labour hours per unit Machine hours per unit

Product A 1 5

Product B 2 1

What is the constraint on machine hours for Tiffany Manufacturing Company? a. 10X + 90Y ≤ 200 b. 1X + 2Y ≤ 400 c. 1X + 2Y ≤ 200 d. 5X + 1Y ≤ 400

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Chapter_26_11e 23. The following information is available for the Johnson Boat Company, which sells two products:

Selling price Variable costs Fixed costs (average) Processing time Vinyl cover used

3- Person Raft (Variable A) £50 £35 £10 2 hours 16 sq. ft.

Kayak (Variable B) £80 £50 £20 4 hours 12sq. ft.

There are 100 hours available in the plant and 75 square metres of vinyl available per operating period. The constraint equation representing the materials available for the production processes is a. 2A + 4B > 100. b. 16A + 12B = 75. c. 2A + 4B = 200. d. 16A + 12B < 75. 24. Anderson Company manufactures two different products: A and B. The company has 100kg of raw materials and 300 direct labour hours available for production. The time requirements and contribution margins per unit are as follows:

Raw materials per unit (lbs.) Direct labour hours per unit Contribution margin per unit

A 1 4 £4

B 2 2 £5

What is the equation for the constraint on raw materials? a. £1A + £2B < 100 b. £4A + £2B < 100 c. £4A + £5B < 100 d. £4A + £5B < 300

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Chapter_26_11e 25. The following information is available for Walters Furniture Company, which sells two products:

Processing time Metal used Selling price Variable cost Fixed cost

Table X 4 hours 30 sq. ft. £200.00 £150.00 £30.00

Table Y 6 hours 18 sq. ft. £100.00 £60.00 £30.00

There are 200 hours available in the plant and 200 square metres of metal available per operating period. The constraint equation representing processing time available is a. 4X + 6Y ≥ 200. b. 4X + 6Y ≤ 200. c. 30X + 18Y ≤ 200. d. 4X + 6Y ≤ 400. 26. A linear programming problem has an objective function of 10X + 12Y. If the optimal solution provided by the model is to produce and sell 400 units of X and 1000 units of Y, the expected return is a. £1,400. b. £40,800. c. £14,800. d. £16,000. 27. The following information is available for Walters Furniture Company, which sells two products:

Processing time Metal used Selling price Variable cost Fixed cost

Table X 4 hours 30 sq. ft. £200.00 £150.00 £30.00

Table Y 6 hours 18 sq. ft. £100.00 £60.00 £30.00

There are 200 hours available in the plant and 200 square metres of metal available per operating period. What is the objective function for maximizing sales? a. Maximize 200X + 100Y b. Maximize 180X + 90Y c. Maximize 50X + 40Y d. Minimize 200X + 100Y

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Chapter_26_11e 28. Hassel Company manufactures two different products, X and Y. The company has 100kg of materials and 300 direct labour hours available for production. The time requirements and contribution margins per unit are as follows:

Contribution margin per unit Materials per unit (lbs.) Direct labour hours per unit

Product X £4 1 4

Product Y £5 2 2

What is the equation for the constraint on materials? a. £1X + £2Y ≤ 100 b. £4X + £2Y ≤ 100 c. £4X + £5Y ≤ 100 d. £4X + £5Y ≤ 300 29. Smith Products Ltd.produces two products. The manufacture of these products is partially automated. Total available labour hours are 400, and the total available machine hours are 600. Time requirements and contribution margins per unit for each product are as follows:

Labour hours Machine hours Contribution margin per unit

Product X 2 4 £5

Product Y 3 2 £4

Required: a. b. c. d.

What is the equation to be maximized? What are the equations that express the constraints? What is the greatest number of units of A that can be produced given the constraints? What is the optimal solution?

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Chapter_26_11e 30. Coffee Ltd.manufactures two different miniature models of furniture, a table and a chair. The company has 500 metres of lumber, 400 machine hours and 600 direct labour hours available for production. The miniature tables and chairs provide £5 and £4 of contribution margin, respectively. The time and lumber requirements to build a miniature table or chair are as follows:

Metres of lumber per unit Machine hours per unit Direct labour hours per unit

Table 5 2 4

Chair 2 3 2

Required: a. b. c. d.

What is the objective function being maximized? What are the constraint equations? Graph the constraint equations. Identify the feasible region. What is the optimal solution?

31. The Adam Laundry has 200 labour hours a week available to use in dry cleaning or laundry. Two thousand centimetres of hanging space are available. The average item that is dry-cleaned takes 3cm of hanging space, whereas laundry items take only 1.5cm of hanging space. The contribution margin for laundry items averages £1.75; for dry-cleaned items, £3.25. Twenty-five items can be washed per hour, whereas only 10 can be drycleaned. Required: a. Determine the objective function. Is it a minimization or maximization function? b. Set up the constraint equations.

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Chapter_26_11e Answer Key 1. c 2. b 3. a 4. b 5. b 6. d 7. b 8. a 9. d 10. a 11. c 12. c 13. c 14. c 15. c 16. b 17. c 18. d 19. b 20. d 21. d 22. d 23. d 24. a 25. b 26. d

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Chapter_26_11e 27. a 28. a 29. a.

Maximize £5X + £4Y

Machine hours: Labour hours:

400/2 = 200 600/4 = 150

4X + 2Y ≤ 600 2X + 3Y ≤ 400

The machine hour constraint limits production of X to 150 units. d.

X = 125 units, Y = 50 units.

Maximize

£5T + £4C

Lumber: Machine hours: Labour hours:

5T + 2C ≤ 500 2T + 3C ≤ 400 4T + 2C ≤ 600

30.

There are three possible corner solutions: (1) (2) (3)

T = 100, C = 0 T = 0, C = 133.333 T = 63.64, C = 90.91

CM = £5(100) + £4(0) = £500 CM = £5(0) + £4(133.333) = £533.333 CM = £5(63.64) + £4(90.91) = £681.84

Produce 91 chairs and 64 tables.

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Chapter_26_11e 31. a.

Objective function: Maximize £1.75(L) + £3.25(D)

Since each laundry item consumes 1/25th of an hour and each dry-cleaned item consumes onetenth of an hour, the constraint equation for hours would be: Hours available: 0.04(L) + 0.1(D) = 200 The constraint equation for space would be: Hanging space: 1.50(L) + 3.0(D) = 2,000

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